Taking working capital from functional to fundamental

How the world’s top corporate treasurers are moving towards a proactive, organisation-wide approach to liquidity management

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No longer simply accountable for providing critical tools to manage cash flow and orchestrating contracts, the role of the corporate treasurer has changed significantly in recent years. Ian Fleming, Managing Director with HSBC’s Working Capital Advisory Group, observes that leading corporate treasurers are seeking continuous improvement in terms of working capital management, looking for ways to weave this into the very DNA of their business.


Key insights

  • The role of treasurers now extends beyond upgrading finance software, boosting cash flows and improving contract terms
  • Today’s treasurers are also tasked with ensuring that the right amount of cash is in the right place at the right time
  • In order to achieve this, it is essential that the corporate treasurer embed a culture of good working capital practices throughout the entire organisation
  • It is no longer enough to simply negotiate purchasing rates down, companies must also consider the payment terms and how that will impact the company
  • An elite treasurer factors in a host of variables such as industry, margin levels, growth pace and geographical econom­ic conditions
  • Benchmarking exercises should be conducted not only against the competition, but also key buyers and suppliers
  • Corporate treasurers must also investigate incentivising good working capital hygiene throughout the entire organisation, not just within the four walls of the treasury
  • By incorporating a more proactive approach to working capital management, the company can cease responding to cash-induced crises and move into a state of constant improvement

The responsibilities of the corporate treasurer have been evolving for several years as companies began looking for better ways to centralise their cash and information. Increasing globalisation combined with recent economic events have put an even greater emphasis on the critical role the treasury department plays in providing the necessary insights to make smart, informed business decisions.

With this, the role of the treasurer has expanded beyond the basics of products and tools that focus on upgrading finance software, boosting cash flows and improving contract terms. While all are critical to a well-run treasury, today’s treasurers are also tasked with improving liquidity management to preserve working capital – essentially ensuring that the right amount of cash is in the right place at the right time. This, of course, requires deeper visibility into company-wide operations, cash and exposure to financial risk.

Financial utopia is reached when the company is generating working capital improvement naturally, and as such this is not a one-off project that stops when the treasury reaches its goals or runs out of time. In today’s fiercely competitive world, the real end-point lies when the company has the optimal mix of disciplines firmly embedded within its culture, processes and protocols, capable of adapting perpetually to a changing economic landscape or corporate events such as entering new restricted markets. However, this perpetual state of improvement remains a relatively unreached nirvana.


Introducing the new corporate treasurer

The key to transforming any treasury from a functional, reactive department to a fundamental driver of working capital lies with the role of the corporate treasurer. Basic treasurers stay in their own departments, concerning their daily activities with products and tools. They run projects to upgrade their finance software to faster, broader packages; they use finance products to boost cash flow such as invoice discounting, and they strive to improve contractual terms.

While all of these activities are valid and necessary, corporate treasurers must implement a critical change in mindset. They must adapt to the changing needs of the company and address working capital challenges up front before they even arise. In order to achieve this, the treasury department must look further than its own four walls, examining the organisation as a whole and educating each and every department on good working capital management and best practices.

It is no longer enough for the purchasing team to simply negotiate contracts down to the lowest possible rate, they must also consider the actual payment terms up front and how that will impact the company. For example, if the organisation secures a 20 per cent discount on a certain product that is generally viewed as good, however if the invoice needs to be settled within 24 hours, this places a burden on working capital. Alternatively, securing a smaller discount but with better payment terms is clearly a much more attractive proposition to the finance department. Transactions are neither good nor bad in terms of pure cash figures, however they are always tied to a timeline and the corporate treasurer must ensure all executives grasp this concept if they are to effectively manage working capital on a perpetual basis.

Similarly, there is a common misconception to suppose there is a standard method of managing working capital. Only by understanding the nature of work the business is engaged in, the margin levels, the growth levels and the econom­ic conditions the company will experience, can a verdict be given on working capital levels. An elite treasurer will factor in all these unique variables.

Comparisons must be conducted with companies that operate under a comparable business model, because different sourcing or selling strategies may have a signifi­cant effect on working capital metrics. Today’s corporate treasur­er needs to be alert to point out potential glitch­es in benchmarking, because companies that are using financial products such as invoice discounting will have different working capital profiles. When there is clarity in benchmarking, then lessons can be drawn.

In order to effectively benchmark against the competition, companies should start by looking at the basic metrics such as days inventory outstanding, days payable outstand­ing, days sales outstanding, and a combination of those, which is the cash conversion cycle. However, the perspective then widens, and organisations should examine the broader context such as margin. How much flexibility does the business have? It is clear that with a smaller margin, it is more important to use working capital to manage the free cash flow you are driving from the business. In which sector or geography does the company you are benchmarking against operate? These are all mitigating factors that should be examined in order to allow for more accurate and informative analysis, and businesses with a more generous cash situ­ation may need a renewed focus on these areas. To some extent the larger the cash pile, the less inclined that company will be to have a cash culture because people stop worrying about nickels and dimes when the organisation is well capitalised.

However corporate treasurers shouldn’t just compare against competitors. It can also be helpful to look at the days payable out­standing and days sales outstanding of top buyers and suppliers too. This in­formation can be leveraged when negotiating with these partners. How do your current terms compare? Are your payment terms significantly shorter than your suppliers? Buyers hungry for liquidity may be anx­ious to seal quick deals, offering shorter payment terms in exchange for a reduced price. This is just one rea­son why the corporate treasury will find it useful to conduct a benchmarking exercise regularly, not just when warn­ing lights start to flash.

Corporate treasurers must also investigate incentivising good working capital hygiene, because if company ex­ecutives are not rewarded or evaluated on their approach to cash management and company liquidity, their focus may wan­der. If the incentives are wrong, the company runs the risk of remaining reactive in its approach, only improving working capital practices when a crisis occurs or when there is a top-down directive. If companies take a proactive approach to incentivise good working capital practices and fix key performance indicators, then it can move into a state of constant improvement. The treasurer must be constantly thinking of new ways to highlight the need for better working capital management.


Conclusion

Outstanding treasurers are visible outside their departments, driving improvements in every corner of the organisation. But above all, the corporate treasurer takes responsibility for ensuring the whole company’s mentality, extending even beyond the firm’s borders. They must examine the company’s eco-system of suppli­ers, even to third-tier suppliers, to make sure it is optimised and stable.

This concept of a corporate treasurer is a far cry from the spreadsheet-fixated character found in the textbooks, however it does represent the reality of things to come. In order to embed working capital management into the DNA of the business, it is essential that the corporate treasurer gains the support of the entire organisation, rather than simply focusing on the treasury team itself. And while this is clearly a challenging exercise, it also offers huge re­wards for anyone prepared to take it on.


Question time with Bart Ras, Global Head of Business Development, Global Trade and Receivable Finance with HSBC


Most corporate treasurers stay in their own department. What is wrong with that?

An effective corporate treasurer can be an agent of change in sales and procure­ment. I will go further. The treasurer must get involved in those departments to change their mindsets. At first the reaction of sales and procurement teams might be, “Are you lost?” but when the treasurer demonstrates his value, the questions will stop.


What can treasurers bring to sales and procurement?

They can bring a new perspective. In the traditional model, sales managers want to sell more, and procurement teams want to pay less. It seems contradictory. A treasurer can help both parties in the transaction see that their goals are not so mutually exclusive. For example, it may not be true that the sales teams want to sell at a higher price. They might want to sell at a larger volume. There may be an issue with payment terms. The treasurer can help both sides to negotiate.


Can all firms benefit?

I think the involvement is compulsory. In a company, both sales and procurement need to understand the needs of the fi­nance department in order to know what the company is trying to achieve. You can’t start to think about pursuing external goals without having everything aligned internally. The treasurer can ensure companies have that internal alignment.


What about other departments?

The treasurer can have a huge im­pact on supply chains. There is no doubt that supply chains can offer a genuine competitive advantage. Treasurers can bring their insight into issues such as just-in-time delivery. Companies order­ing goods from China are now looking to have backup supply chains from Turkey or even close to home. Treasurers can help the supply chain team develop a strategy that improves customer ser­vice, optimises inventory and maximises working capital.


What advice do you have for treasurers?

You need to engage with colleagues across your company. It is no coincidence that successful companies have treas­urers who have broken down the silo mentality. It really is a pre-condition for strong business performance.

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