Digital disruption in the Treasury Management System space

There is a digital revolution going on in the treasury management system space, not that you would necessarily know.  For many there is still a stark choice – over-priced, over-complex and over-engineered treasury systems or good old Excel spreadsheets. But the world is changing and as with all things technology, it is happening at a rapid pace.

Globally, larger organisations are well catered for as far as treasury management systems are concerned, and in fact it is a crowded and mature market. The PwC Global Treasury Survey of 2014 showed that 80% of those companies surveyed were using some type of treasury management system. However, as with big ERP systems, the issue for the providers of large, expensive treasury systems is how to offer a cost-effective alternative to the massive SME market without detrimentally affecting their existing market. The challenge is to offer a slimmed down treasury management system without compromising the huge premium that they currently charge.

So where is the competition for these large, expensive systems coming from? The answer is the cloud app revolution which is sweeping the world. Platforms are being developed that aggregate a whole bunch of cloud apps, both financial and non-financial. The really clever bit is the integration of these different apps and bringing it all together through a variety of widgets and dashboards to give a complete, and often unique, view of a company’s position. It’s like a Fitbit for business.

Not only are these cloud app aggregators bringing leading edge technology to the SME market but they are doing so for small monthly fees. The apps cross the spectrum of business tools such as accounting systems, CRMs, social media tools and now treasury management systems. All of this for a few hundred dollars a month.

In the on-line accounting world, Xero is leading the charge in the digital disruption revolution with its New Zealand developed, $50 per month product. Treasury systems will need to follow suit with a much cheaper solution.

By leveraging cloud technology, treasury systems can be implemented for costs palatable to the underserviced SME market. There is an enormous amount of importers and exporters hedging their foreign cashflows with forward exchange contracts and possibly FX options. These companies probably aren’t hedge accounting, even if they are reporting under IFRS, but the impact of exchange rate movements is vitally important to their bottom line.

SMEs require the ability to record, report and value their transactions but just as importantly they want access to tools to help them make better hedging decisions. This is not too different from larger companies except SMEs are mostly using plain vanilla instruments. For a small monthly fee SMEs can benefit from a treasury management system with basic functionality, which integrates perfectly with other cloud based apps. So as we have seen with cloud based accounting systems, the power that was once reserved for large organisations can be put in the hands of a much larger group for a fraction of the cost.

Whether the current treasury management system providers have a solution for the SME market remains to be seen. It maybe that they do not care for this part of the market, however there are parallels with the large and expensive ERP systems which have successfully moved into the mid-market space and are now looking at the next tier down. The conundrum for treasury management system providers will be that SMEs will desire the core functionality of a larger system but without the price tag. The digital revolution for treasury management systems may only be in its infancy but it is set to have major ramifications regardless of the size of organisation.

First published on Treasury Insider (www.treasuryinsider.com)

Some things never change – especially in financial risk management…

It always surprises me with treasury management how much changes and yet how much stays the same. Having been in the treasury game for almost 25 years the basics remain the same – it’s all about risk management stupid. And by risk management I really mean risk minimization. The hedging instruments haven’t changed very much over the years. We still favour the plain vanilla of forwards, swaps and options. Sure the exotic instruments have come and gone and some have learnt the hard way about understanding what you are getting into, but even large organisations favour the simple approach, especially after the events of the last few years.

The basic controls surrounding treasury haven’t changed much either, even if not everyone complies the way they should. No – you can’t do the deal, check the bank confirmation and then provide the reporting as well. And, yes you should have a treasury policy too outlines the rules you have to abide by (identify your exposures and have sensible parameters about when and how much you should cover.)

What has changed though, and not just in the treasury space, is those small and medium enterprises (SME’s) now have access to the same tools and the same technology that larger organizations have, at an affordable price.  Going back not so long, treasury management systems were expensive and the domain of only the very large organizations.

In more recent years we have seen a number of mid-tier systems come to market, many of which are saas (software as a service) solutions giving access to valuations, smart reporting and increasing the controls around the foreign exchange and interest rate management.

No longer can organizations argue that spreadsheets are their only option. Sure spreadsheets are great but we all know the issues with them – lack of controls, key man risk, backups, corruption of data, the list goes on. But everyone uses them for the flexibility and there is still a place for them when it comes to specific reporting reqirements. However now that there are systems like Hedgebook available, “SME” sized organizations have access to the tools that will allow then to record, report and value their treasury transactions and can manage their treasury exposures with the same technology and confidence that much larger organisations can – at an affordable price.

Because there’s one other thing that hasn’t changed over the years and that is financial markets are volatile and so knowing your position with confidence is the most important part of good risk management – and that won’t change either.

Richard Eaddy is the CEO and founder of Hedgebook and the Managing Director of ETOS Ltd, specialists in treasury outsourcing services. Richard has worked in the corporate treasury risk management industry for more than 20 years. He has held senior roles in large corporate treasury departments in both New Zealand and Europe, provided treasury risk management advice to major corporations and for the last ten years has headed up the largest treasury outsourcing company in Australasia. Richard can be contacted at richard.eaddy@myhedgebook.com.

 

Hedgebook interviewed on Radio New Zealand Business 22.11.11

Hedgebook’s Richard Eaddy is interviewed on Radio New Zealand’s business programme on how Hedgebook can help New Zealand importers and exporters better manage currency volatility.  Click here to listen: Hedgebook interview on Radio New Zealand 22.11.11

Navigating these stormy economic waters

Many exporters confuse foreign exchange management with trying to predict where the currency is going. The reality is that no one knows where the currency is heading today, tomorrow, next week or next year. In the current volatile times it has got a whole lot harder, especially for exporters who are not just grappling with the volatility but also with a currency which against most of our trading partners is close to historical highs.

So if you can’t predict where the currency is going what can you do to better manage your exposure to the daily fluctuations in the currency, which are no doubt seriously impacting on most exporters’’ profitability.

There are certain disciplines that any exporting company needs to know about that is dealing in foreign exchange. For many of these companies it has the biggest impact on the profitability of the organisation. How many times have we heard that if the currency goes above 70 cents or 80 cents or 90 cents I am out of business but how many comapnies also know what their true position is.

The first thing you need to know is what are my exposures, what are my expected foreign denominated cashflows that i can forecast with some certainty over the next month, next year or longer if you can accurately forecast out that far. You then need to think seriously about what exchange rate am I profitable and at what level am I not making any money.

Next you need to think about how am I going to cover these future foreign exchange flows. What are the products that i can use and who is going to provide these products to me?

Most are aware of forward foreign exchange contracts which can be used to lock in an exchange rate for a future date. If you aren’t at least using forward foreign exchange contracts then you should be. Converting the funds when they arrive in your bank account is unlikely to be a long term successful strategy (especially in the current environment) and it is also likely you aren’t getting the best exchange rate on conversion from your bank.

If you are still dealing with the local branch of your bank you should talk to your Relationship Manager about dealing directly with the banks fx dealers to ensure you are getting the best pricing possible. Remember you can negotiate both the margin the bank is charging you and the ultimate price the fx dealer is quoting. This is especially important when transacting fx contracts out into the future. If you are dealing with more than one provider then even better as this puts some competitive tension into the pricing.

You might want to also consider fx options. Options are like an insurance premium on your future fx receivables. An option gives you the right, but not the obligation, to transact at an agreed rate. Whilst often deemed to be expensive they should be a consideration as part of your overall fx management. In the current environment with the kiwi having been in an uptrend for some time forward exchange contracts has been the best strategy, however at some stage in the future the kiwi will be in a downtrend and when this is well established options would be a worthwhile consideration.

Banks are the obvious ones to sell you fx and options but there are also numerous reputable fx brokers around who provide good rates and good service. In days gone by the banks have not serviced small to medium sized businesses as well as they could but in recent times this has changed and they are generally very focused on servicing this sector much better.

Consideration should also be given to having some sensible parameters around how much cover is appropriate to have in place given the accuracy of your cashflows, competitive situation and other relevant factors. You may need some outside expertise to provide this and there are a number of independent advisors who will put together an appropriate treasury risk policy.

The last piece in the puzzle is being able to record, report and value your fx transactions. Most still use spreadsheets to do this but we all know the downside of using them. It is a well documented fact that most financial spreadsheets have at least one error in them and the risk of not recording a deal correctly is too big to take for most organisations. More and more Directors of companies are looking to move away from the reliance on spreadsheets where possible as the risks associated with fx are too high to take the risk of missing a deal and the potential cost.

But it isn’t just the risk of using spreadsheets it is also having access to the best possible information to make the best possible decisions. Spreadsheets will tell you where you are now but they won’t tell you where you are heading. It is always important to know what your current position is based on the cover you have in place but what about your total position based on the cover you are still to take. Are you still profitable at this level? Or what happens if the currency goes up another 10%, what does that mean for the profitability of the company? Should you lock in everything now because you can’t live with the currency moving higher?

These systems exist and they are inexpensive, especially if compared to the risk of missing a deal or not knowing what your true position is. Like any business decision, the better the information the better the outcome.

For most exporters fluctuations in the currency is a daily topic of conversation and many are grappling with the historical highs we are currently facing. There is no crystal ball to tell you where the rates are going from here but there are some common sense measures that in the medium to longer term can be put in place to ensure the ongoing viability of your business.

Richard Eaddy – CEO, Hedgebook.

– A related article by NTZE can be found on the NZTE website (http://j.mp/s68o7k)


Making business easier…

Well Hedgebook is officially underway. That feels good.

Isn’t it great when a good idea comes to fruition. Heaven knows most of them don’t…And as they say, its often the simple ideas that turn out to the the best ones. Hedgebook certainly fits that mold.

We’re about making it easier for organisations to manage their treasury function.

For those of you who, like me, aren’t an accountant, treasury is a catch-all term for the tasks that combine to “maximise a firm’s liquidity and mitigating its operational, financial and reputational risk”.

More specifically, we help organisations manage their foreign exchange contracts and interest rate swaps to ensure you are able to make sound, timely financial decisions. That sounds a like worthy goal.

For years we’ve all been relying on ‘that spreadsheet’ locked away on someone’s hard drive, never really sure whether it is up to date or whether we are looking at the right version. As Kiwi’s we tend to be a bit “she’ll be right” about things like this. Perhaps we’ve not really thought about it, or perhaps there just hasn’t been a decent alternative.

But as a country of exporters and importers, for whom navigating the stormy waters of currency fluctuations can mean life or death for some businesses it really is time we took this a bit more seriously.

Enter Hedgebook. Finally, an easier and more secure alternative to spreadsheets.

The truth is, we’ve actually been around for a while. At least the stuff under Hedgebook’s bonnet has been. The engine that powers Hedgebook has was developed by some very clever people a few years back and in various incarnations it has been put through its paces by numerous customers around the world.

So why has it taken so long to get Hedgebook to market? That’s where the “cloud” comes in. The cloud is having a profoundly positive impact on businesses in so many ways. In our case it is allowing us to bring “enterprise-level” software to the market at a price that makes it a viable option for all sizes of business. Now the rest of us can afford the powerful tools that large corporates have been using for years.

So here we are. Hedgebook. Treasury management in the cloud. In the small but important world of treasury management it’s a big deal. We’d like to think it’s a game changer.

That’s not to say we are finished. Far from it. Hedgebook is a constant work in progress and we already have big plans for improvement and the first people we will be taking guidance from is our users.

It is going to be an exciting ride.

Richard Penny is the Market Development Director for Hedgebook.