Leading Practices in Treasury: Strategies for Unforeseen Challenges

Speaker A: Hello and a warm welcome to the open Treasury Podcast. Your go to source for the latest news and analysis in corporate cash and treasury management. This show is brought to you by ctmfile.com and the Treasury News Network where Treasury professionals learn and share the information that matters most. Welcome to the final episode of the Leading Practices in Treasury Podcast series, a six episode exploration of key treasury topics based on the second ebook in the professional development series created by Strategic Treasurer as a respected treasury consulting company and CTM File your go to source for Treasury News. The ebook, also titled Leading Practices in Treasury, is packed with practical guidance and targeted insights in into core areas of the treasury function. Listeners can access the ebook or its audiobook version by visiting StrategicTreasurer.com throughout this podcast series, we've examined key themes from the ebook. In this sixth and concluding episode, we turn our uh, attention to strategies for unforeseen challenges. Hi, I'm Pushpendra Mehta, your host and once again I'm joined by Paul Galloway, Senior Director of Advisory Services at Strategic Treasurer. Paul, welcome back. Thank you for helping us unpack this key area of Treasury.

Speaker B: You're welcome. I really enjoy doing this push.

Speaker A: Thank you Paul. Preparing for unforeseen challenges is a critical responsibility that the Treasurer is entrusted with. Bracing for unexpected events is in its essence a strategic organizational exercise. The treasurer must protect the organization's cash and liquidity with continued vigilance and analytical foresight to anticipate and better prepare for unforeseen developments. Paul, let's begin with a foundational question. Is there a list of strategies treasury teams can take to be prepared for unforeseen challenges?

Speaker B: There is, there are some key areas that I'll talk about. I'll uh, start with threat assessment monitoring. I think this is an area that is real important to an organization to understand what are the potential threats both inside and outside the organization. Threats via, uh, processes, procedures, the ability for someone to access a system or effectuate a payment where the organization can have a financial loss. So I think that's really an important piece. We do a lot of assessments for organizations. You know, it can be broad in nature or real specific such as payment security assessment, but we do treasury assessments brought across the organization. Payment security can be part of that assessment or by itself. Really important to do the assessment and to continue to monitor what's going on within the organization. So it's not a one and done when it comes to data or information. Use of history can really help a company with forecasting, also with detecting anomalies and if something out of the ordinary is happening compared to what you expect, could be an indication of potential fraud. So you want to make sure that you follow up with these anomalies. It may be nothing, but it could be something so you can't ignore it. Using history will help you. You want to give your team margin. And what I mean by that is the ability for them to do more. The way you do that is through the use of systems or technology to help take manual processes and automate them and increase the efficienc within your organization, which frees up time of your treasury team members to do other things within the company, which could be monitoring, forecasting or other strategic activities that are really becoming more and more critical to the company. The other is around visibility to data and information. When you have a, uh, connection that's made between your banks to a system where you can aggregate and collect information can be extremely valuable, especially from an analysis, forecasting, reporting standpoint. But it can also help create efficiencies elsewhere in the organization through reconciliation through your accounting that can connect to these systems. It can feed data with accounting GL accounting information as well that can help you with these processes tied to systems outside treasury itself. It can also help you on the communication side of things, especially when unexpected things arise. So it's that anomaly thing I was talking about before. It may be something that you weren't anticipating to happen, but it happens. Sometimes things happen within organization that are outside the visibility of the treasury team. Perhaps there's activity that's occurring that may be unexpected, but it could be something that's unexpected and potential fraud. So communication, I think is uh, really important as well.

Speaker A: Well, that was an incredible overview, Paul. Thank you for sharing it. When it comes to preparing for unknown challenges, the first step is often said to be threat assessment and monitoring. What should treasurers be doing to assess and monitor for unforeseen challenges?

Speaker B: I, uh, briefly touched on this earlier. So you need to prepare yourself for the unexpected. So I go back to the old Donald Rumsfeld speech where he's like, you know, I know what I know, I know what I don't know and I don't know what I don't know. It's that I don't know what I don't know. It's that unexpected thing. So having a state of mind that something unexpected may happen. When it does happen, you won't be so shocked, you won't be unprepared, but you need to have a plan, so you need to have reasonable preparedness. Is a way to put it. Make sure that you understand what you want and what you need to do to get things done. When an unexpected challenge comes by, you also need to have an eye on your organization's liquidity challenges. What are the needs? Do you have a forecast in place? Is there something that can unexpectedly arise that causes the organization to have a large call in cash that wasn't anticipated? Do you have the right liquidity levers in place to pull in the instance where you need to execute on a transaction? Perhaps that's ma transaction. A lot of times treasury team is the last to know because it uh, tends to be material non public information. When it comes to mergers and acquisitions, it's very tightly held. Only people that really have a need to know know anything about it. You don't want to know about it within the organization until you need to know. So sometimes those unexpected things can come up within the organization, have an impact on liquidity or demand or call on cash. You also need to make sure that your policies are kept current. Great, if organizations have policies in place, but are they being reviewed? Do they get updated periodically? And you need to do it because things change, the organization changes, it grows, maybe it shrinks, it changes its business profile. New regulations are in place, new compliance requirements in place. The organization is just not the same as it used to be. So you need to make sure that policies are keeping up with all these areas so that you have the ability to react to something that is unexpected by having a guide or documentation of a guide that helps direct what you should do. You know you want to have a playbook, right? Something happens, what do I do? It's anticipating that unexpected even though you don't necessarily know it. But trying to anticipate for those what could impact cash flow or demand on cash will help you be more effective. The other thing is that uh, you can diversify your risk so it could be tied to your third party partners, maybe in particular your banks. Maybe you've grown big enough that you have more than one core bank that you lean on rely on for various reasons. So the share of wallet becomes more important. Being able to diversify risk across banks can help an organization be prepared for unexpected times and get support from the banks in terms of credit facility or revolver or line of credit or issuance of debt. So your banking partners can be really important. Another thing is establishing early warning signs for these potential risks. If you have something that raises a red flag or a yellow flag, maybe it's caution, maybe it's, hey, it's a red alert. You need to react now. Either way, having some early warning signs will help you to either prepare or mitigate potential risk of something that could harm the organization or create a lot of angst around getting cash, raising cash, or having cash available for the company to deal with with potential issues. So it's kind of taken this step further. It's using your business intelligence. Tools like AI Machine learning can help you detect anomalies in the data, the information that's coming from your systems that can inform you in many ways. It can inform you not only with your short term cash position, it can also inform you strategically as an organization. So this could have an impact on not just cash forecast, but your budget, your FP and a team, how your C suite makes decisions. So it has broader impacts within the organization. So using those tools to detect anomalies can have impacts downstream, near term and downstream on a long term basis.

Speaker A: Well, uh, appreciate your discerning perspective, Paul. Let's move on to a closely related element, paying attention to history. How can historical data and information help treasury prepare for the unforeseen? Paul?

Speaker B: Yeah. You know, if you have ever looked at your 401k statement from your provider and then you have returns, there's always a disclaimer that history, uh, doesn't, you know, indicate what the future is going to be. However, it can inform you and you know, that can be true for any organization. But looking at history does kind of tell you trends. And so a lot of TMS providers that have advanced forecasting capabilities, they use machine, uh, learning AI to help forecast. They need at least 24 months of transactional data in place to help with the forecasting piece. So history helps inform what the future may look like. Now there's probabilities around what that looks like. And I always go back to, you know, anytime that I've given presentations around corporate finance, I've done this at, um, conventions and I've done this in college classrooms for graduate students. And what I've always told them about forecasting is the one thing I know for sure is that once I set the forecast, I know it's wrong. And it's that concept of, well, how wrong am I? I use golf terminology to help explain this. You know, I want to be in the fairway. I don't want to be in the rough on one side or the other. I want to be in the fairway somewhere and I want to understand what the probability of, hey, I land in the fairway, wherever that lands, what's the probability of Me going off in the future, what might that look like in terms of my next shot? I go off, what's the probability of that happening? Well, history can help inform you for what the future might look like. The question is, is how far off is it going to be? So going back to the use of artificial intelligence and machine learning to help you, it can help you make these predictions and lower the amount of risk around. Oh, the fairway is not as narrow as it used to be. It's wider now. And it's wider because I've mitigated risks around assumptions associated with what the future might look like. Historical data can be very helpful. So you gotta be able to understand what the data is telling you. You might have to massage it. You might have to take out certain data points that influence the data or the forecast in a negative way. You may have to replace them. It takes some work. But the bottom line is, is that history can help you. And going back to, uh, what I talked about earlier with regards to fraud, it can also help you detect anomalies that could potentially be fraud so an organization can react quicker, utilizing history to inform the current state and state down the road. So do your scenario analysis. Make sure you massage the data. Get good, clean data, take out the data points that are negatively impacting how the future might look and replace them with informative information so you can make better predictions, reduce the risk of going outside the fairway.

Speaker A: Uh, thank you for such a nuanced viewpoint, Paul. While treasury may not know what crisis or disruption may be on its way, one thing is certain. Treasury will need to respond swiftly and strategically to help the organization navigate it. To do this effectively, treasury will need margin. How do you create the margin a Treasury team needs, Paul?

Speaker B: Yeah, I kind of just touched on this a little bit earlier, so I'll dive into it a little bit deeper this time. So in order for Treasury Department to act accordingly or quickly or strategically, they need to have more margin in place to be able to react to the disruption. And so when we say margin, we have more capacity or time to attack a challenge or a disruption or a problem that's occurring. If they don't have the ability to be nimble and to be able to react quickly, that could be a problem for the organization. So that typically treasury teams are stretched thin. And if they are stretched thin, they're unable to complete that strategic work that many companies are relying on for decision making. The mission, the strategy of the company. Treasury is starting to help inform that. Well, if you don't have margin in place makes it difficult for the treasury team to effectuate on what the treasurer, the cfo, the CEO of the organization want. So you need to make sure you got some bandwidth to do that. So what is it you have to do? Well, you need to drive out inefficiencies, you need to eliminate manual processes. Typically this is done through the use of technology and automation. This will help provide that additional, uh, valuable time in the case of a disruption or a challenge that comes up. This will also allow for the treasury team to be more strategically focused and answer the call from your C suite folks when they're looking to make strategic decisions. It can be really helpful in a time of crisis to have that extra bandwidth and have the team work together collectively to address the disruption and the challenge.

Speaker A: You've given us a lot to think about there. When disagreeable or unforeseen events occur, timeliness matters. It's important to know that visibility into the organization's liquidity enables treasury to move quickly when unexpected challenges arise. So how do you get visibility to data, uh, and where does it help?

Speaker B: That's a great question. You know, access to data kind of comes in a variety of ways. Some organizations are tied to the bank portals, downloading information into spreadsheets. It's very manual, it's not automated. Super inefficient. It takes some time to get clear visibility to what's going on. So having the timely access to data and information collectively in one spot to help the company react quickly or respond quickly, especially when a, uh, challenge is in front of them. So we think about this in terms of cash investments, debt and liquidity. Having the optimal level of cash in the organization is really important. If you don't have visibility to what your current cash position is, some be very difficult for treasury to be really optimizing and they could run into shortfalls or too much cash Shortfalls means you're requiring uh, liquidity levers. You're potentially pulling cash out of investments or tapping revolver or line of credit to access cash quickly. This is not optimal for an organization to be doing that on a regular basis. So you could be paying interest when you're tapping credit and revolvers. You could be losing interest when you have to sell out of an investment. And so you lose return on your cash, you pay more in interest expenses and the organization is less uh, efficient. Other areas would be around debt and so anything about debt that's more a longer term view, but the reality is that debts being raised for different purposes, it may be general in nature, which can be used for operational needs of the company, or it could be more directed towards something. Maybe it's for an M and A transaction or something else to drive the growth of the business. But the debt's in place for a reason. You need to make sure that you understand what your current position is within the organization. If you have a challenge that arises, I can give you an example of this. So debt capacity or the ability to raise debt can be really helpful to an organization in the time of financial crisis. And so in 2008, 2009, we had the financial crisis. They called it the Great Recession. I lived through that when I was on a corporate development team. And we stopped M and A activity and solely focused on raising capital. It was a stressful time. I can't begin to tell you how many analyses I did on all kinds of capital funding that we had potential availability to. You know, we finally did raise debt. We had capacity, we were able to do that. The company I was with, an, uh, insurance company, we were the first insurance company in the market to raise debt during the Great Recession. We had a couple weeks later we did a follow on equity offering. We raised enough capital that our C suite leaders are no longer distracted by what's going on with the balance sheet. Are we at risk because they shored up the balance sheet? The analysts quit asking those questions that were distracting to the company and not allowing them to do the strategic things they need to do. So visibility is super important. I kind of talked about the liquidity side earlier. You know, understanding what your cash position is and what's going on with the future helps you manage that liquidity level. Making sure that you have optimized, you have access to liquidity when you need it. So you're not having to pull out of investments too soon or tap lines of credit or revolvers that will cost you additional interest expense. You want to make sure you're optimally doing those things. You want to utilize those things when you need them, but you shouldn't be utilizing them, um, on a consistent, regular basis. So this requires leveraging technology to really manage this. It's the ability to get the bank information into a central location that can automatically do this, provide you the information that you need to make decisions. Artificial intelligence and machine learning I talked about earlier, these business tools can help you do analyses. It can help you with reporting, can help you with decision making. And then one of the other things that you need to consider from an uh, automation standpoint is that you're doing daily auto reconciliation that should be A feed from your treasury system to your reconciliation system. Every day you're taking those prior day transactions, you feed into your system, you reconcile them bank to book, do it daily. You'll be able to see if there's something there that looks fishy, looks funny, could be fraud, allows you to follow up on, follow up on it quickly. So these are things that I think are really important when it comes to visibility.

Speaker A: Paul, we've discussed threat assessment and monitoring, we've discussed the importance of historical data and information creating a margin. We've also discussed visibility. Finally, let's talk about the importance of communication. How does communication help with unforeseen challenges?

Speaker B: Communication can be super valuable. The ability to have those conversations or provide information to the right people at the right time, I think is really important. So open lines of communication, uh, I think it's a necessity to having stability during times of uncertainty so things can be handled quickly, efficiently and direct and accurately. If you don't have open lines of communication, you won't achieve any of that. During times of uncertainty. Treasurers need to communicate early and often this is something that they need to do. From C Suite, the finance team to bankers to treasury team, you need to communicate across the board and you need to do it early, you need to do it frequently. Another area is around being proactive in your communication. So proactively communicate to your senior management team, providing information that can be really valuable to them in times of uncertainty, information that they can provide to their boards that will help them make decisions and uh, well informed decisions versus them coming to you and being more reactionary. Being proactive can help with better decision making. So communication, open lines of communication and the frequency at which you do that I think is really important.

Speaker A: So Paul, the actionable takeaways you've recommended in this episode will help treasury teams be better positioned to handle unexpected challenges when they inevitably arise. That wraps up today's episode. Paul, thank you for your sharp analysis and valuable input to our listeners. Thank you for being part of today's conversation. If you liked what you heard, please don't forget to subscribe and share this episode with others who might benefit. We'll be back soon with more tragedy focused conversations. Until then, stay informed and stay engaged. Have an incredible week. Thank you. This podcast is provided for information purposes only and statements made by CTM file or guests on this podcast are not intended as legal, business or consulting advice. For more information, visit ctmfile.com.