Top finance and treasury trends for 2018

Top finance and treasury trends for 2018

As the year comes to a close, the C2FO team shares insights into the top finance and treasury trends for the year ahead.

Capital allocation and a more strategic approach to treasury

“The thing I have been discussing with corporate practitioners for the past year is their ‘Capital Allocation Strategy’ and who should be in control of that,” says Jordan Novak, Managing Director, C2FO. “It is apparent in the days of the activist shareholder that companies are losing control over when and how they put their capital to use.”

Novak cites industry examples, many in the technology industry. Tech investors have increased their pressure on these organizations to introduce dividends, sequentially raise them, and also implement some of the largest share buyback programs in the world.

“On the surface, maybe not a bad idea,” Novak explains, “but many of these companies have to raise debt to fund those activities. One can understand the angst of considering such backward activities – taking on debt (albeit cheap) to flush out the door for (hopefully) a one-time stock price kick.”

Value-add innovations as part of a strategic treasury approach

There’s a renewed focus on innovation within finance and treasury, noted Chad Bruffey, Managing Director, C2FO. “Most organizations have been able to get their arms around the basics and are now expanding their views to look at value-add innovations,” he says. “Dynamic discounting is one that’s on their radar.”

While treasurers have other options, including bank deposits, government funds and top-rated government and corporate bonds, a contraction in the number of options leave corporate treasurers seeking no-risk, guaranteed yield products.

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Counterparty risk concerns increasing for both corporates and their suppliers

Counterparty risk (as it applies here) is the risk a company takes on to have an asset sitting with another party. It has significant implications for both corporates and their large, strategic suppliers.

For corporates, the risk lies in having capital sitting in several financial institutions (FIs), investment houses, and asset management companies around the world.

“Each of these FIs has its own credit rating and parking more and more cash with them can significantly increase the risk of loss to large corporations,” explains Jordan Novak. “Most companies have had to staff a group to manage this counterparty risk. Google, Microsoft, Apple, etc…all have tens and tens of billions around the globe and have specific policies around how much capital can sit in certain ‘risk’ categories.”

In 2017, most of the corporates with large cash piles are approaching or have eclipsed their thresholds with most major FIs. There simply is not enough highly credible places where the cash can be allocated.

“C2FO is one option to reduce short-term cash portfolio and reduce exposure to counterparty risk while using those cash allocations for better yield alternative vehicles,” explains Novak. “In my conversations at AFP, this same concept came up a few times with multinationals that hold a significant amount of Short-Term Investments & Cash Equivalents.”

“For suppliers, consolidation is becoming a problem,” continues Novak. “Large firms are merging more than ever, creating industries that are dominated by two or three players that own 95%+ market share,” he says. This situation creates a counterparty risk problem for suppliers with the asset being Trade A/R sitting on their balance sheet, according to Novak.

“When you have a heavy chunk of your receivables tied up with a single company, the risk of an insolvency taking out your company (or materially impacting it) is high,” he says.

Regardless of the obligor’s credit rating, C2FO can help reduce counterparty exposure for large suppliers.

“In my time in corporate finance, we did not like to see any customer hold over 10% of our receivables at any time,” Novak explains. “Many corporates are now holding a significant portion of some of their suppliers’ AR portfolio. The risk is highest for suppliers of niche markets where there are limited buyers.”

How blockchain, artificial intelligence, and robotic process automation will impact finance roles

One of the best-attended sessions at AFP covered emerging technologies that intersect with the finance role: blockchain, artificial intelligence, and robotic process automation.

Finance roles will need to adapt to the disruption and potential these technologies offer. The key for finance professionals, explains Leslie Chacko, Director, Marsh & McLennan Companies’ Global Risk Center, lies in not allowing the technology to dictate your path, but to approach the changes from a finance strategy first view, then define how these technologies will fit with your goals.

“We tend to worry about the problems we can solve,” says Chacko. “But because this is such a big game changer, there is a tendency to be an ostrich and put your head in the sand. Asking how big the changes will be is the wrong question, he explains. The right question is what direction will it come from and what is the impact.

It’s a good question. At this point, the technologies are still nascent, with risks that are not fully understood yet, such as a lack of standards and governance for AI and blockchain, workforce impacts due to automation, and the cyber risk exposure once these new technologies are introduced.

While these questions are unresolved, benefits of the technologies are clear;  increased productivity, reduced costs, and better decision-making.

Robotic process automation offers potential to automate routine and standard tasks such as transaction processing, invoice and expense collection and organization, payment execution, and other accounts receivable and payable support.

Artificial intelligence can help finance professionals make better and faster decisions based on complex data, but it will still require a highly skilled human workforce to “teach” the AI tool what to look for in the data.

Blockchain and distributed ledger technology can eliminate the need for intermediaries and mitigate the risk of human error. Potential uses for this developing technology include facilitating international payments, lowering the cost and risk of transactions, and enabling automatic payments on fulfillment.

Finance and treasury executives should seek to understand:

  • How these technologies can streamline and simplify finance processes
  • How the technologies support their business strategy and objectives
  • The level of risk exposure for each technology

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