Treasury’s Challenges Over the Next 12 Months

What should the treasury department be looking for in the next year?


The Federal Reserve continues to insist interest rates will rise, perhaps before the end of this year.

While many debate the timing of any rate hike, few debate that rates will rise from their historic lows which will challenge both corporate and banker. In a recent published document JP Morgan believes fed funds rates could be around 160 basis points by year end 2016. This rate (and its impact on corporate borrowing rates) will be over 10X higher than today’s fed funds rate. At that level it is possible for some companies with variable rate debt to experience a doubling of their interest expense under a “do nothing” scenario. Bankers will experience higher interest income, but may find they have to pay more for their funds, impacting their net interest income. Result: Nobody will be happy.

Since higher interest rates can become embedded in other market rates (e.g. currencies or commodities), higher interest rates can be expected to drive greater volatility in these other market rates too.

Considering this challenge and others in 2016, such as those below, the cost of a “mistake” could prove more costly when dealing with questions like “how much liquidity is enough” or “how much risk is too much”.

Challenges in 2016

  • Rising interest rates (makes borrowing more expensive. Solution: Borrow less, invest more?)
  • Returning value to investors – greater demand for stock buybacks or dividends means less cash “left over” to meet operational or CAPEX needs. Solution – enhance operating cash flows, reduce idle cash balances?
  • Understand market exposures – weakness of non USD currencies vs. USD makes certain flows worth less. To date many companies have missed financial goals due to FX volatility. Solution: Set up enterprise wide reward program (operating unit, treasury) to identify then eliminate or hedge “excessive” exposures?
  • Banking relationships – impact of Basel III may cause both sides to rethink price / performance goals. Solution: rethink products, services and prices in light of regulatory and market pressures?
  • Compliance – new rules and tougher language in credit agreements could mean treasury spends more time reconciling or reporting rather than negotiating or planning / forecasting. Solution: expand use of technology to manage routine work?
  • Global visibility – while technology can be a useful tool to manage liquidity and risk in a timely manner there is anecdotal evidence to suggest that technology to date has been oversold and underutilized. Solution: expand use of treasury technology outside of treasury to allow integration of sources with uses of funds?

For corporate treasuries and those in the “C” suite these challenges could become a steep set of obstacles to overcome in light of past practices highlighted in several surveys. For example a recent 2014 AFP survey indicated Treasury will be assuming a broader more strategic role; yet, only half of treasuries have the metrics needed to measure “success”

While the survey’s results highlight an expanding role I would argue that:

  • Surveying treasury about its own importance introduces a bias
  • Lack of metrics will make it more difficult to execute these broader and desirable responsibilities.
    • “Winter is coming” as they say in “Game of Thrones”. The last time there was a rising rate environment was 10 years go. Is treasury prepared with the proper mix of resources?
    • Lack of KPIs will constrain the building of an (objective) business case for resources in light of 2016’s external and internal challenges. (i.e. how will treasury be able to assume its broader role and can they do it alone?).
    • If one is unsure of the value of change why change or expend effort this year or next.

Bottom line – Companies should want a good plan, well executed, but without in integrated set of KPIs few will be able to properly mix profitability (from business units) with liquidity and risk so treasury can match sources of funds with uses, a mix that has been shown to build greater shareholder value. 


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