Ask the Expert

Positioning your treasury department for the economic recovery

Most observers agree that the recent financial crisis increased the importance of the corporate treasury department. As keepers of the cash at a time when cash is king, treasury managers have assumed more of a leadership role, providing support across business units. In fact, the crisis has accelerated the trend of treasury managers acting as high-level advisers within their companies. But what happens when the economy begins to right itself? Will the role of treasury managers change — and how should they respond to the next stage of the economic cycle? To find some answers, we turned to Lynne Walker, Senior Vice President and Treasury Management Sales Executive at First Tennessee Bank.

Lynne, what changes are you seeing in the economy today, and how are treasury managers responding?
We're emerging from the economic downturn. Projections are for moderate economic growth of around 2% for 2011. Our clients are optimistic about the economy but very cautious due to conflicting signs. Manufacturing is leading the recovery, with industrial production and capacity utilization rising. On the other hand, housing and employment — which typically lead a recovery — remain drags on the economy. That's creating a lot of uncertainty, along with the situations in Japan and the Middle East.

Is the recession having a lingering impact on the treasury function?
Companies are still conserving cash and looking to spend wisely on a more informed basis. Cost reduction, an extreme focus in recent years, has been largely addressed but remains on the agenda. Also, for treasury managers, cash forecasting and planning remain critical, as they are expected to continue to provide a lot of information across departments or divisions.

Have early signs of recovery altered liquidity management?
On the cash investment side, the mantra continues to be "short, safe and liquid." We've seen investment policies tighten up, with more companies opting for vehicles such as Treasury securities, money market funds, brokered CDs and the like. And that isn't changing much. Companies typically aren't investing out past six to nine months. They want to keep cash available for capital investments and potential acquisitions.What about on the debt side? How are companies addressing the potential for rising interest rates?Some companies are locking in fixed rates and executing different swap strategies. One hedging tool we're seeing more companies use is the interest rate collar, which allows them to prevent floating borrowing rates from exceeding a certain level while foregoing savings if rates fall below a particular floor level.

Any other ways treasury managers can maximize returns on cash these days?
Procurement presents a huge opportunity. Companies ought to take all the discounts their vendors offer. A 2% discount for payment in 10 days may represent a higher return than a company could get keeping that cash in a bank account for a few more days. Similarly, taking advantage of rebate programs by using purchasing cards and automated payable services can turn the accounts payable function into a revenue generator for the company.

What are some key challenges that treasury managers will face during the recovery?
One of the many challenges is staffing. As companies were cutting costs during the crisis, treasury department staffing became very lean, even as responsibilities were expanding. Treasurers able to do so may want to look into tapping into the very strong pool of talent available today.Another major challenge is the increasing globalization of business. For treasury managers, this means learning new transaction methods, from both a payables and receivables standpoint. Treasury managers also need to become well versed in managing the special risks associated with doing business overseas, including credit and country risk.

What other guidance would you offer to treasury managers as they position their departments for the future?

Some of my recommendations include:

  • Continue to train yourselves as well as your staffs.
  • Simplify and automate where possible. That means centralizing your treasury system, dealing with fewer banks and bringing cash and transaction information to a central point as quickly as possible.
  • Document policies and procedures, including payables processing and receivables processing procedures and how you calculate your daily cash position.
  • Rely on your bankers for education on the latest payment system technology and associated risks.
  • Seek further education through industry associations and peer groups.
  • Review bank pricing on a consistent, periodic basis, including pricing on debt, deposits and other cash management services.
  • Cultivate more than one financial services relationship. Many companies learned a painful lesson during the recent financial crisis by only having one source for capital and/or other critical financial services. When that source became impaired, they had to scramble to find an alternative.

For more ideas on how to prepare for economic swings, contact your First Tennessee Treasury Management Sales Officer.

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