I recently read an interesting report in the November 2011 McKinsey Quarterly that highlights the increasing complexities of managing the treasury function of a business and focuses on 5 key areas that should be given attention, no matter what size or type of business you are.
The article delivered a timely reminder that the costs of inadequate focus on this important function can be extremely costly for small and large businesses alike. “Companies pay incremental interest expenses when they overborrow as a result of inaccurate cash flow forecasting and often lose money when they don’t hedge exposures for currencies and for interest rates…”
Now clearly you don’t need to be a McKinsey analyst to work that out, however too many businesses still take something of a laissez faire approach to the task of managing their currency and interest rate exposure.
The 5 areas the McKinsey report focuses on are:
- Centralise the treasury function globally
- Strengthen governance
- Enhance treasury-management systems
- Increase the accuracy of cash flow forecasting
- Manage working capital in developing markets
Points 1 and 5 may only be relevant to organisations with a global footprint, however the other three are extremely pertinent to any business carrying currency and interest rate risk, and can all be improved through the introduction of a tool such as Hedgebook.
Hedgebook’s reporting module allows for stronger governance, enabling the implementation of robust procedures through the provision of good information, while bringing much greater visibility to policy management and adherance.
The same reporting gives decision makers much greater visibility of projected cashflows, while also modeling their sensitivity to market fluctuations, making forecasting much simpler and more accurate.
The McKinsey report was particularly harsh on organisations who still rely on spreadsheets to manage this mission-critical business function. It found that a staggering number of businesses, including large multinationals, are still relying on error-prone spreadsheets.
“A single error in a single cell can ripple through an entire model, leading managers to borrow instead of invest, to hedge incorrectly, and to forget to fund operating accounts or make debt payments.”
The report identified cost as one of the most-stated barriers to investing in a treasury management solution, but went on to point out that the cost-benefit stacks up every time when you consider the potential cost of a single mistake.
“At one North American utility company a simple spreadsheet error for energy auction bids led managers to enter into nonreversible contracts the company didn’t need – a mistake that cost it half of its operating earning for the quarter.”
This may well be an egregious example, but with many businesses living and dying by their success in navigating a volatile currency market, a subscription to a tool like Hedgebook looks a small price to pay for confidence.
The original McKinsey article can be read here (note you have to register to view)