Navigating the shifting treasury landscape

The turmoil of the past several years, from COVID-19 to an economy in flux, has created significant shifts within the treasury landscape. Now more than ever, digitizing treasury operations has become critical, leading corporate leaders and business owners to consider new tools to implement working controls, support corporate decision-making and enhance flexibility in day-to-day management.

Finding a starting place can be complex and overwhelming, especially for companies that are used to old-school methods and are still in the early stages of digitization. However, embracing digital transformation can lead to exciting changes in strategy and business models, giving companies increased control over working capital and a way to leverage valuable insights into the future.

This summary is guided by the insights of Braden More, head of treasury management for Capital One; Dave Robertson, global head, treasury solutions for PMC Treasury; Tom Adamon, business director at Capital One; and Tom Hunt, CTP, director of treasury services and payments at AFP.

Digitizing treasury helps companies to grow safely and efficiently. Companies can leverage digital applications, like robotic process automation (RPA), machine learning (ML) and artificial intelligence (AI), to explore opportunities and help minimize potential damages and protect their business in a way that's flexible and adaptable. However, there are many factors leadership should consider while searching for new digital treasury solutions.

The state of the market today holds great potential for corporate growth and development. However, as there are many opportunities of which firms can take advantage, from leveraging capital to exploring global markets, it becomes difficult to assess the ideal digitization processes and the associated strengths and weaknesses. With so many options available, firms should evaluate each avenue accordingly and weigh them against implementation costs and protection benefits to help minimize execution risk.

Opportunity: access to capital

Access to capital is often a priority for treasury operations, with North American mergers and acquisitions tracking at a notable high over the last year, according to a 2022 report. This is an important takeaway in a post-COVID-19 climate, indicating a resurgence in the market after years of uncertainty. With deal value, both actual and estimated, reaching heights not seen since the end of 2018, the future may be bright for those looking to raise capital or engage in M&A activities. Companies looking to increase funding can use digital tools to strategize how and when to take the necessary strides. 

Access to capital is always accompanied by a focus on returns; firms need to drive value quickly, and when this occurs, treasury needs to be prepared to act. Which strategy makes the most sense—like soliciting new funding, hedging risks or adapting banking infrastructure—will depend on both the circumstances surrounding firm needs and treasury's ability to strategize. 

Of course, there are ongoing risks in this space of which companies should be mindful. There's still a chance for further pandemic effects to dampen growth as the economy moves into another winter season. In addition, there is a strong likelihood of a recession within the next 12 months, which may create additional headwinds for companies looking to increase funding.

Opportunity: global markets and supplies

In the 1960s and prior, world GDP and world merchandise trade were roughly on par with one another, leading companies to largely focus domestically. 

However, that has changed dramatically as the market has evolved in the past several decades. With GDP rising steadily at a level far outpaced by merchandise trade, companies may consider pivoting to a global approach to supply and sales. Treasury needs to consistently work to understand foreign markets and exchange risks to deliver payment and banking capabilities that achieve firm needs worldwide. 

Danger: interest rates & inflation

COVID-19 has contributed to various economic issues, but interest rates and inflation are two of businesses' most significant challenges. As the Fed continues to raise interest rates and inflation—driven by factors like pandemic stimulus packages, global supply chain issues, price gouging and political tension impacting trade—reaches new highs, treasury teams will have to make precise, measured moves to avoid unnecessary risk.

Investing extra cash wisely—and safely—is key, as is managing exposure to rate increases for those borrowing. While not all industries face inflation-related challenges, those that do need to understand the intricacies, know how to model them and make educated choices as to risk management strategies. 

Danger: foreign exchange volatility

Foreign exchange rates can play a sizable role in treasury action, and unfortunately, the period since the start of the pandemic has demonstrated significant variability comparable only to the 2008 economic downturn. As political instability, the war in Ukraine and supply chain strains affect the value of currency, volatility will likely continue to be an ongoing challenge. The right digital tools can help forecast scenarios and guide decision-making to minimize impacts, but risk-averse companies may need to go above and beyond to avoid losses. 

Danger: increased risk

Fraud and other cybersecurity risks are non-economic factors that should be at the forefront of digitization planning. With 52% of large firms reporting fraud from 2020-2022 , it’s only natural that companies consider prioritizing asset protection.

 With this in mind, it’s essential to focus on the vulnerabilities that exist for many corporate treasurers. Regardless of other priorities, risk management must be part of navigating the current landscape, particularly in design processes, controls, governance and reporting. Bank protection tools can be beneficial to mitigate fraud in this space, providing high-performance tools designed to minimize external risk.

Danger: supply chain disruptions

The current state of the global supply chain is a serious issue across countless industries. In particular, the loss of forecasting insight impacts many companies; due to the unprecedented nature of these disruptions, even treasuries with sophisticated tools in place may struggle to plan accurately. 

With no signs of immediate alleviation, staying on top of industry–specific supply chain data is among the most important steps in the current environment—and one that relies on cutting–edge methodology. Should a company need to restructure its supply chain, treasury should be ready and able to support shifts in banking processes, cash reserves and reporting requirements.

Any improvement seems like a step in the right direction for companies working toward digitization and embracing evolved technologies. But for those with specific goals, one question consistently hovers in the forefront: is what we've done good enough?

It's a fair point; making choices that improve performance and carry the business forward is always beneficial. But when are new infrastructures and practices fast enough, secure enough, efficient enough or resilient enough? As these areas are often subjective, it's hard to know how to best assess treasury performance. While there's no one right answer, corporate treasurers may be informed by the following areas:

• Organization and structure: When a team's structure isn't adequate to support business demands, redundancy, inefficiencies and communication challenges can arise. Revisiting roles is encouraged to ensure all responsibilities are organized in a way that adds maximum value.
• Bank account management: The wrong approach to banking can damage relationships, hamper cash concentration and generate unnecessary fees. Optimizing relationships and implementing efficient pooling and other similar concentration structures can cut costs and improve centralized cash for ultimate efficiency.
• Cash forecasting and visibility: Manual cash forecasting should be a thing of the past, especially in such a turbulent climate. A formalized and automated forecast process helps make it easier to identify surplus cash, optimize cash use and ensure accurate, consistent reports.
• Liquidity management: Visibility is essential to managing liquidity; access to cash and a concentration structure are requisite in helping to maximize opportunities. When required, treasury must be able to manage cash for debt repayment, investment and redeployment of strategic business practices, and this means knowing how to best take advantage of liquidization without delay.
• Policies and compliance: Policies that are in line with current laws and regulations can add an extra layer of protection and accountability when managing cash assets. A lack of compliance measures can cause a host of issues, both politically and legally.

It's critical for CFOs and treasury to evaluate each of these areas relative to current and future demands on company operations. In doing so, companies can better balance a range of needs—like corporate growth, operational efficiencies, financial objectives and operational risk control.

Payment fraud is a growing concern for treasury operations, especially as implementing digital applications continues to grow in popularity. Numerous areas of a business, including areas that deal with cash and sensitive financial information, are at higher risk of attack than ever before.

With asset misappropriation topping the list of the most common business fraud schemes, accounts payable and treasury departments may be at a higher risk of fraud. Because these departments manage the most payments and cash transfers, targeting these areas offers a bigger payday for scammers.

When cash is a concern, treasuries should strive to mitigate fraud on all levels, covering bases across all departments and operations participating in inter-company and third-party transactions. Fortunately, there are steps you can take to mitigate the risk of fraud to your company.

The treasury landscape is evolving faster than ever. Staying up to date with industry trends and technology is paramount in helping to maximize opportunities, facilitating growth, managing time efficiently and mitigating fraud. Learn how to navigate the shifting treasury landscape and stay up to date, no matter what the future of treasury management may hold, with Capital One resources.