Treasure at the end of the chain


The treasury is responsible for two basic functions: management of cashflow; and associated financial risks. By understanding the role that treasury plays in a company, the supply chain practitioner can leverage the treasury’s expertise to improve the supply chain. This is particularly true as treasuries are adopting a more strategic role, where they can have greater impact on operational as well as financial processes. Lars Hubinette, Global Head – Research & Infrastructure, Cash Management, at Standard Chartered Bank, explains.


While physical supply chains manage the movement of raw materials from suppliers to manufacturers, distributors and finally to end-customers, the financial supply chain is the movement of money that flows in the opposite direction.


Historically, for most companies, success has been determined by how well they collaboratively manage the process of moving goods through the physical supply chain. Recently however, the speed and efficiency of the financial supply chain has become an increasingly important indicator of success.


The efficiency of a supply chain largely depends on how well the supply chain practitioner interacts with different business partners in the supply chain. These business partners can be both internal and external parties, and often their roles and responsibilities are unique for each company. As such, it is necessary for the supply chain manager to understand the roles and responsibilities of each partner, and how best to use their expertise.


One of the business partners in the supply chain is the treasury. This article explores how the treasury and the supply chain are connected, and how the supply chain practitioner that understands the role of the treasury can utilise this knowledge to improve the supply chain.
Supply chain and treasury – what’s the connection


Fundamentally, corporations are involved in two types of business transactions: buying and selling products and services. The treasury is normally the part of the company’s structure that deals with the financial implications of the cashflows and associated risks from these business transactions.



While all treasuries may perform some common generic functions and activities, its role tends to vary from company to company. The actual processes and mandates that a treasury may perform depend largely on the size, culture and policies of the company. It is crucial that supply chain practitioners understand the treasury’s role in their company as this affects their own responsibilities in creating the supply chain procedures and processes that deal with the financial aspects of the supply chain.


If the role of the treasury is not clearly understood, there is a risk of the company failing to define key financial procedures and processes in the supply chain; and creating duplicate and inefficient financial procedures and processes.


One real-life example of the importance of the financial procedures is the company that was offering its customers 30-day payment terms but was actually posting days sales outstanding of 47 days. 9.1 of the 17 days overdue payment days represented issues directly related to the finance department (reference: ‘Improving Shareholder Value Through Total Working Capital Management’, REL Consultancy Group).




Changing role and structure of the treasury
All treasuries have two basic functions:



    • Managing the cash surplus or deficit of the cashflows; and


  • Mitigating the financial risks associated with these cashflows.


In addition to these two functions, a treasury often has other responsibilities such as carrying out regulatory and compliance directives and funding and investment mandates, which are defined in the treasury’s policies.


In recent years, the role for some treasuries has expanded to become more strategic. This is a result of the growing realisation by companies of the importance of the financial supply chain and the centralisation of cash management structures. This effectively means a tighter integration between the company’s business operation and the treasury. In some companies, the treasury has become an integral part of the business; driving business opportunities, profits and sales.


A correlation exists between the complexity of physical supply chains and the complexity of the financial supply chain. A treasury is very seldom developed in tandem with supply chains. As a result of today’s global supply chains, a company may have very a complex supply chain but not have an advanced treasury function to support operations from a financial perspective.
How to leverage the treasury in the supply chain
To efficiently handle the financial aspect of the supply chain, first, it is essential that information about cash movements is properly transferred to the treasury. Second, the treasury needs to have access to the bank accounts and balances in order to act on this information, so that it can offset positive and negative balances and invest or fund the balance efficiently.


If this is done successfully, this can lower the cost of capital, which is very important for the supply chain as it requires substantial amounts of working capital to function.


In addition, the treasury will be able to use supply chain cashflow information to efficiently mitigate any foreign exchange risk, and even counterparty risk in certain situations, on a company-wide basis. The treasury can use its established bank relationships and advanced methods and calculations to enter into the right hedges to make it cheaper for the supply chain to hedge these risks.


By passing this information to the treasury, the supply chain practitioner can be confident that the financial risks are properly taken care of, and can then focus on improving the supply chain.


In order to leverage the treasury to achieve these benefits for the supply chain, the following two areas are important:



    • Cashflow forecasting: In order to effectively manage the cashflow and risks, reliable cashflow forecasting is needed. This will drive the control, liquidity management (short-term debt and investment) and hedging of future forecasted positions.


  • Centralisation and automation: To efficiently transfer information between the supply chain and the treasury, the information flow needs to be centralised, standardised and automated. This will ensure that timely information about the cashflows is available and will improve cashflow forecasting and balance information. This will often include integration between different systems such as enterprise resource planning and treasury management systems.


In addition to the above tasks, more advanced treasuries are shifting their focus to take on a more strategic role. This means that instead of ‘fire-fighting’s and solving ‘yesterday’s ’s problems, they are now anticipating problems and initiating improvements.


Following are some of the ways in which treasuries can provide additional improvements to the supply chain.



    • Improve the cashflow process: The treasury can take an active role to build company-wide purchase-to-payments (P2P) and customer-to-cash (C2C) structures to improve the current company’s cashflow practices and processes. Shared financial service centres may be used to create company-wide structures for the P2P and C2C processes, which would include electronic invoice presentment and payment, automated account receivables reconciliation and other automated and standardised solutions.


    • Provide trade finance expertise: The treasury can build up expertise in trade finance to support the supply chain process. By understanding the supply chain credit conversion cycle and risks the treasury can structure facilities to achieve suitable financing. This might include facilities and instruments such as LC, documentary collection, export and import financing and receivable services. With the treasury’s established bank relationships, the practices in trade finance can be further improved.


  • Drive through working capital improvements: The treasury can examine the whole finance and working capital cycle of the supply chain and  find improvements to optimise the working capital across organisational boundaries. An example of this would be using a method of supply chain financing that uses an arbitrage between the supplier’s and the buyer’s credit cost, to provide suppliers with cheaper financing based on the buyer’s credit rating, where the funding is basically secured against the buyer’s payables to the supplier. By exercising better control and visibility over supply chain transactions, the treasury has greater cash and credit flexibility, which allows financing and factoring to be done at many more points in the supply chain. Often the biggest gains in working capital improvement programmes can be achieved by improving operational processes, whereby the treasury can provide insightful guidance and support on the financial aspects of these processes. Typical improvements achievable by focusing on working capital include improvements of up to 40% of the billing delays, 35% of credit notes issued and an improvement of 30% of the day sales outstanding (reference: ibid, REL Consultancy Group).


Although the treasury may have different roles and responsibilities in different companies, the treasury’s responsibilities play a crucial part in the success of the supply chain. As the treasury’s role is expanding to include strategic initiatives in working capital management, the supply chain practitioner can use the treasury’s expertise and support to improve the supply chain both from a risk and working capital perspective.