Guerilla Treasurer

The snowy days seem catch motorists off guard year after year here in the north. Bizarrely, the same seems to happen to companies with currency risks. Let’s get real: neither should be a surprise.

From the Secret Guerilla Treasurer Academy

I recently read in the papers how the CEO of a multinational corporation explained away the weak results of the company with surprising exchange rate losses due to the strength of the Euro compared to US Dollars. I happen to know that the Treasury team of this particular company is highly professional and they have the latest and greatest systems for managing financing risks. So the surprising exchange rate losses most likely did not come from lack of professionalism or lack of technology.

This company is not alone in wresting with currency risk management. Nothing really seems to have changed in this respect in the 20 odd years I have been closely following the currency markets: currency risks still seem to surprise companies.

If the Treasury is professionally managed and the systems are working, the cause of the trouble should be easy to track: it must be something with the business units. The treasury can only act on the information they receive about business risks. The problems are almost exclusively caused by insufficient communication. This is manifested by:

• The business units and the treasury understanding currency risks differently
• The business units not recognizing their currency exposures

Understanding the Risks

As daft as it may sound, accounting can sometimes prevent functioning currency risk management. Without sufficient instructions and control, the business units easily see currency risks as accounting-based, i.e. the exposures being created only when a currency-based invoice is sent or a supplier invoices for a currency-based purchase.

If a company has defined that a currency exposure to be covered is created already at the pricing stage of products, the hedging should be based on sales budgets. If a business unit construes the exposure to be created only at the invoicing stage, we have all the required ingredients for surprising currency risks.

In my earlier entry Guerilla Treasurer Mindset; Part 3, I gave an example of a business unit that was being lead royally astray because there was no understanding of when a currency exposure is really created.

Recognizing the Risks

During my Treasury career, I often visited the business units to discuss currency risks and consult the business units about managing them. During this time I learned that if one really wants to get something done, just offering advise is not enough: one must also listen to the other side. Only by listening can the Treasury create instructions that business units are guaranteed to understand.

In the late 90’s, I was visiting a business unit on the East Coast of the US. This particular unit had not only US operations, but also some exports to Germany. These exports created yearly roughly USD 20 million worth of currency flow. I had been lecturing to the CFO of the business unit about our corporate policy of avoiding currency risks. He was nodding and assuring me everything was in order.

I had assumed that the underlying currency in the export deals was USD as the business unit had not made a single hedge. During the discussions it became evident that the trading was done in DEM. When I asked why the unit had not hedged its exposures, the response I got was memorable:

”We don’t have any exposures. When our German customers pay the invoices in Deutschmarks, our bank automatically exchanges them into Dollars.”

After I recovered from my initial shock, we analyzed the situation thoroughly and the business unit then started systematic currency exposure hedging.

One needs to remember that even is something is crystal clear to the Treasury, it might not be so to the business units. Since it is the responsbility of the Treasury to manage company-wide currency risks, the Treasury must make sure all links in the chain understand what the this is about.

From the Secret Guerilla Treasurer Academy

Consensus seeking…

During a development project, issues will emerge that divide the opinions of the participants. Frequently, these issues have little to do with the overall success of the project. Yet, reconciling all the differences often brings the project to a stand-still.

A Guerilla Treasurer avoids this trap by appointing an internal dictator who decides things at the end of the day, even if everybody does not quite agree. The dictator has the final say on how the subsidiary company kick-offs are organized, what is the final wording of the treasury policy and working instructions, what system is deployed, etc.

Trying to achieve consensus in everything is one of the most effective ways of bringing a project to a standstill. Therefore dictatorial powers are required; however, the dictator should be an enlightened one. She should be able to distinguish issues where seeking a consensus is sensble and ones where it is not required. Furthermore, a good dictator does give logical reasons for her decisions and seeks wide buy-in to keep the troops happy. Perhaps most importantly, a good treasury project dictator listens to dissenting voices — throttling them is not the way to go.

From the Secret Guerilla Treasurer Academy

Do not expect things to happen…

My first job was as a delivery boy for a local florist; I shared the job with a schoolmate of mine. We took care of the deliveries every other day for the first week, then came the weekend. The following Monday I expected my mate to have the shift and to take care of things. He expected me to be on shift.

Since neither one of us showed up for work, we both got fired.

Expecting things to happen by themselves is the mother of all muck-ups. This tendency has ruined many a good initiative.

Cash forecasting development projects involve a large group of people from different background. That everyone understands the reasons behind the initiative and what is expected of them, is of utmost importance for the success of the project. The only way to achieve this is active communication.

A Guerilla Treasurer takes this into account in his or her project. Because of this, she or he:

• clarifies what the meaning of the project is to the top management and describes how the management is the internal sponsor of the initiative
• sets clear ground rules and working instructions to the business units in a language the business unit representatives can relate to
• continuously follows the development of the forecasting and immediately acts upon errors or problems
• keeps improving cash forecasting even after the initial project has ended

I wish you all a happy holiday season and great New Year! I’ll return early January.

From the Secret Guerilla Treasurer Academy

A Treasury policy without work instructions is like a list of cake ingredients without the actual recipe. You know that you need eggs, flour, sugar, and baking powder, but without the recipe you are not likely to be able to bake a decent cake (unless you happen to be a pastry chef, but few treasury professionals are).

During my corporate treasury days, I came across some business units that had come up with truly imaginative ways following the corporate treasury policy. In one subsidiary country, the general manager had outsourced currency risk management to a consultant whose job was to eliminate the effects of currency exposures to the unit’s operation.

Our CFO, being a crafty sort of fellow, smelled a rat and asked me to investigate what this consultant was all about. What I learned was nothing short of flabbergasting.

All currency-based transactions where accounted for at the previous month’s closing exchange rate. The consultant then promptly proceeded to sell currency-based receivables whenever the the spot rate was better than the previous month’s closing rate. If the spot rate did not exceed the closing rate, this “consultant” simply left the position uncovered. This way the consultant always managed to show a profit and the consultant had gained a reputation as somewhat of a guru at the operating unit.

The only slight problem with this neat little arrangement was that it had bugger all to do with ensuring the profitability of the business. It was, in fact, a pure hoax. I did manage to convince the consultant to start looking for new victims (err, clients) but quite a bit of damage had already been done.

How could this have happened? The business unit had nobody who had any understanding of currency risks. Guided by just the treasury policy, they knew that they had to cover currency exposures, but they had no clue what that really meant. The policy must be supplemented by practical worki instructions if you want to avoid situations like this.

The most important point of the treasury work instructions is to describe in detail what following the treasury policy actually means.

Sometimes the issue is not the lack of work instructions. Sometimes the business units simply do not understand why the policy must be followed. It can be hard for the business unit to understand why it must cover its US dollar exposure when everybody knows the dollar is going to get stronger — even the paper says so. Or why should the business unit fork its hard-earned cash over to be managed by the treasury; they could use the extra cash as a buffer against surprise expenses.

This is precisely why the work instructions should contain not only practical instructions but also some motivational information to the business units — reasons why they should actually do as they are told. This motivational section describes what is the purpose of systematic currency hedging and company-wide liquidity management.

The average corporate treasury development project goes something like this: the treasury gets allocated funds from the management to improve risk management and promptly decides to acquire a shiny, new Treasury

The State of Treasury Budgets

Management System (TMS).

The first six months goes by in a blur in the RFI/RFP/RFQ merry-go-around. When a decision finally gets made, the next three months are spent in the negotiating table with the chosen vendor wrangling about contract terms. The next eighteen months are then spent on a step-wise implementation of the system.

The whole project ties up the treasury’s development resources for several years and costs an arm and a leg.

Does the company get its money’s worth?

If the homework has been done properly and several basic things are in order, the answer is an emphatetic “maybe”. The project could have been much more productive, but that is a topic for another blog entry.

Quite often, however, this approach is simply barking up the wrong tree. If the basics are not in order, the investment into a new system is a waste of money and resources.

The key task of a treasury is to manage the financial risks — such as liquidity and currency risks — of the company. The risks are caused by the cash flows of the operative business. The treasury needs to have reliable, real-time cash forecasts and FX exposure reports. Otherwise the situation is GIGO (garbage in, garbage out) no matter how expensive and fancy the treasury systems as such are.

So what would a Guerilla Treasurer do? He would start by putting the basics in order.

The beauty of the whole thing is in the fact that the basics are relatively easy to put in order and it does not even have to cost very much — all the company needs to do is put its B2T (business-to-treasury) process in order. This, however, requires attention and willingness to look at things differently from the treasury.

The first prerequisite is that the operating units understand what is expected of them. This, in turn, requires the  treasury to understand the needs of the operating units and create instructions and policys in a language actual human beings can understand.

The second prerequisite is having appropriate tools; if the tools are built for the needs of the treasury only, there is a considerable risk that the operating unit people find them too hard to use.

In a true cliff hanger spirit, I will break here and save my step-by-step recipe for putting a company’s B2T process in order for the next several  installations of my blog.