Why The Treasury Department Is Critical To Business Success

The treasurer at the local cricket club is frustrated, once again, at the monthly management meeting. The clubhouse has been vandalised and the roof is leaking, but the committee is voting to invest in a new ball dispenser as that's what their young hotshots' parents are asking for.

The treasurer keeps telling them that if the clubhouse continues to run into disrepair, they won’t be able to attract enough members to stay afloat and bar takings will continue to dwindle. It was agreed, six months ago, that the long-term goal to focus on was to make sure the clubhouse was as hospitable as possible in order to encourage more members and therefore more finances.

The rest of the committee finally agrees and focus on the wider goal is achieved. That’s a successful meeting for the treasury department.

And, away from the village green, this frustration is felt by corporate treasurers in the boardroom of city businesses too.

The Historical Importance Of The Treasury Department

A successful treasury department is a sign that a business is successful in wider terms. This is despite the fact that the treasury department might not be able to shape the success of the business in isolation. This doesn’t detract from the fact it’s still an important marker for business performance.

Also, as essentially being the holder of the company’s purse strings, the treasury can strangle a business’ success if cash flow is mismanaged and the balance between short term needs and long term goals is not achieved.

Whilst other departments can focus on the here and now, as a treasurer, you need to help make those live goals achievable but also instinctively feed the wider, longer term business goals.

This means the treasury department needs to work closely with the Head of Finance, Directors and board level employees or investors. There may be times where the treasury is counted upon to think objectively and advise accordingly when the pressure is on within the operation side of the business and short term goals are clouding a decision maker’s judgement.

Paradoxically, just as common might be the need to remind those same decision makers that, yes, we are working towards this long-term goal, but failing to meet another short term objective due to not releasing a little liquidity (or another financial implication) could cause more harm further down the line.

It’s the equivalent of a new, junior employee learning why they are doing some work for free when their manager’s manager has ordered it because she knows a big contract is just around the corner.

But the Treasury is simply reminding the board of their long term goals and short term requirements.

The Increasing Demands On Treasury Departments In A Turbulent Economy

This level headedness is probably becoming a more and more valuable skillset to have in your business as the UK and world economy becomes more and more turbulent. Following the global credit crunch of 2008, we have technically undergone the worst economic period since the Great Depression. It’s just that the banks weren’t allowed to fail this time round.

And this meant the wheels of finance have kept turning. And whilst they have been kept turning, we have reached if historical trends are anything to go by, the time for another economic bust.

But if we haven’t yet reached the peak of financial freedom enjoyed pre-2008, how will companies cope once the next crash comes? And what might cause that crash?

Understanding and addressing these questions shows why the treasury department is critical to business success.

Political Challenges

Not only are we operating in a different economy to the one which existed, in real terms, before the crash, we are living in a very politically different world. One which is divided and unstable.

Of course, this might well settle down over time and it’s unlikely we will see the turmoil which consumed the world following the Great Depression (the rise of outright fascism and eventual outbreak of WWII); but the political landscape is very divisive.

Lurches to the right and then back to the centre, or even all the way over to the left, lead to an unstable market. For a more specific example, at the time of writing, here in the UK a disastrous set of General Election results for the in-power Conservative party has led to a hung parliament. Party leaders have been left scrambling to retain control through the pursuit of a deal with the Democratic Unionist Party (DUP) that should allow them to prop up a minority government for the full 5 years.

During a closely contested campaign trail, the Conservative government consistently campaigned for more austerity in a bid to balance the books, whilst their biggest opponents, the Labour party, pledged that the country would spend its way through the tough times ahead. With a majority government now likely, it is not yet known whether a Conservative government is to continue its hard-line austerity policy.

However, what is clear, is that it is often the macro economic decisions made by Government that filter down to influence every aspect of the economy we are operating in.

Treasurers are left with the difficult task of anticipating, planning and mitigating any risks arising from the constantly shifting political landscape and the ramifications these changes bring about.

Financial Changes

In particular, the political landscape can have a direct effect on the financial state of play which industries find themselves in.

Depending on how the new government of 2017-2022 approaches Brexit and how upcoming planned elections across the European Union alter how the EU, in turn, deals with Britain, could have a major effect on the financial world.

Treasurers need to be aware of medium term implications such as: Which of its existing markets will the business be able to operate in come 2019 and beyond? How will the business manage its labour force if reliant on freedom of movement? Likewise, if any distribution centres and supply partners are on the other side of a stricter border than the current business model operates under?

And, then, what is the effect on credit accessibility and liquidity for you and your investors? What will the knock-on effect be within the business?

On the flip side to this, will part or all of the above present new opportunities and can treasury and finance departments make sure the business has the resources to capitalise?

More Specific Challenges: Like Lease Accounting

These political influences on the economy and the market are in some way a fact of life. Governments change and the market has to adapt accordingly. Brexit is just a bigger, concentrated version of that.

What’s interesting is that business transcends political upheaval and needs to look after itself. That is never truer than in examples such as IFRS 16’s new lease accounting standards.

In the time that the political world has undergone a bout of populism amongst the electorate, lurched left and right, and come as close to WWIII as the Cold War ever did; and the global economy has undergone the biggest housing and credit crash in a lifetime, dusted itself down and carried on as though nothing has happened: there have been ongoing, self-policing changes like the new lease accounting rules and regulations.

The IASB and FASB have spent a decade drafting and devising a new way to account for lease agreements on company balance sheets and other reports. This is in response to growing investor concerns that companies were not truly representing the value of the leasing liabilities and associated costs in their financial statements

Finance and accounts departments could, essentially, keep many lease agreements off balance sheet and make company figures, particularly liabilities, look more favourable to investors, lenders or buyers. This was happening at the same time as the leasing industry was seeing exponential growth.

As credit tightened following the 2008 crash, it’s understandable that more and more businesses - just like domestic individuals in their private life - turned to leasing in order to access the assets they needed.

In essence, if you could not access enough credit to purchase that fleet of company vehicles for your sales reps/the equipment for your new regional office/the new Airbus for your newly acquired transatlantic route to take more Brits to Rio 2016 and the FIFA World Cup 2014: why wouldn’t you have leased them?

The cumulative effect is a distorted financial reporting world and that’s why the accounting standards boards have taken action.

The fact that deciding on how to decide on what to do took over a decade shows you just how monumental the change is to lease accounting standards.

And the impact on your business may well be huge as a result. Treasurers need to be aware that there are implications from IFRS 16 (the new lease accounting standard) which impact:

• Cashflow
• Balance Sheet
• Key Financial Metrics
• The Focus of Company Resources
• Time and Manpower Enormously
   

If you’d like to find out more about just how big the lease accounting changes are and how they will affect your business, follow the link below:

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