Building a More Strategic Treasury: Practical Tips

I like reading business books. They can be inspirational and help set broad principles that can guide the business. "Built to Last" by Jim Collins and Jerry Porras is like that. One chapter, for example, speaks about BHAGs (Big Hairy Audacious Goals) that can propel companies to accomplish more than they might have thought possible.

But the challenge of these books is that, in my experience, much of business feels more like hand-to-hand fighting in the trenches than landing a spaceship on the moon. The advice in these books doesn't tell me how to deal with the actual challenges I have in my role and what practical steps I can take to be successful. I found a book like "The Hard things about Hard Things" by Ben Horovitz much more useful in dealing with the reality of leading a company.

In the same vein I see a lot of articles exhorting treasurers to be more strategic, to be greater strategic partners for the business. But I see relatively little real practical advice how to actually make that happen. A lot about data and systems and technology transformation but few actionable suggestions for day-to-day roles, that can help one make the leap to a true value-added partner for the business.

So I thought a set of short articles with action-oriented suggestions would be valuable. As Forge aHedge is a commodity hedging system trying to help treasurers and risk managers accomplish this very goal our examples are predominantly commodity focused. However, the suggestions can easily be extrapolated to other facets of treasury and risk management. Your feedback and own suggestions are appreciated.

Tip 1: Get involved before the contract is signed:

Treasury shouldn't discover a commodity or FX exposure after procurement has committed to it.

Often contracts have embedded financial risks that can get missed. For example, a company might buy a wind turbine only to discover in the many pages of the contract the price was tied to the price of copper, so effectively inheriting an unexpected direct copper exposure.

More indirectly, you may have suppliers who just pass on higher commodity input costs, again exposing you to commodity related price risk. For instance, Proctor and Gamble have a stated policy of not hedging commodity input price risk but relying on their pricing power to manage this risk through “natural hedging” (See Why Procter & Gamble doesn't hedge commodities — and the case for natural hedging).

The same occurs in FX. I remember a long fight with Microsoft who significantly increased prices one year and told me it was due to exchange rate movements in the Aussie Dollar. Being in markets I showed them that the change in exchange rates over the year didn’t justify their level of increase. (I didn’t expect to win but no self-respecting markets person would not have taken a stand.) If you are purchasing items in an implied foreign currency and only become aware of the exposure after the contract has been signed it can be costly to have to hedge if the market has moved against you in the interim.

So the tip is get involved before the contract is signed. It can be valuable to help procurement identify contracts that may contain explicit or implicit financial risk and call you in to help understand, negotiate or mitigate the risk.

You certainly don’t want to review every contract, so here is a sample checklist of questions procurement can use to trigger a call with you:

• Is the price linked to a commodity or index?

• Is the contract denominated in a foreign currency?

• Can the supplier pass through commodity, energy or FX changes?

• Are there caps, floors or price-adjustment formulas?

• Do purchase and customer pricing reset at different times?

• Are there minimum-volume or take-or-pay commitments?

This tip is a relatively small operational change but it moves treasury from:

“How should we hedge the exposure you've given us?”

to:

“Before we sign the contract, let's understand the risk we're dealing with.”

and that small but meaningful change, to me, is what becoming a strategic partner actually looks like.

Next tip: Don’t report simple exposures; show business consequences.