I always sum up treasury in six words: the efficient management of financial risk.
As treasurers we spend our lives trying to avoid or mitigate risk to ensure the worst doesn’t happen. But what if it does? What if we run out of liquidity or a government nationalises our major overseas investment?
We treasurers can put in place systems and processes and purchase instruments to manage FX exposures and interest rate risks.
We can ensure liquidity through reporting and forecasting, and putting in place facilities.
The ACT’s ethical code is clear and unequivocal – our duty is to the company… the entity as a whole
But what happens if the forecasting is wrong or omits a risk, or there’s just a risk that we can’t forecast?
What happens to our liquidity and funding if the forecast profitable trading just doesn’t happen?
Every so often mismanagement or adverse conditions can start a cycle of losses, and the business hits a downward spiral.
Contracts are lost, key people leave, customers go elsewhere, suppliers smell risk and their prices go up and terms reduce. Lenders, working capital providers and equity investors get twitchy – the business needs to be turned around.
The treasurer’s position now depends on two things: were you there when the problems occurred or are you a new treasurer just brought in?
If you’re the incumbent, this can be a good or a bad position: and it’s entirely up to you which one. Did you see the crisis coming? What were you doing about it? What were your forecasts and risk management activities based on? Why didn’t you highlight problems to management and, if you did, were you forceful or persistent enough?
The absolute essence of being a treasurer is ethics; it is our sine qua non. If you’re not comfortable with the direction of the business, you are duty-bound to critically appraise plans and strategies, and not just go along with management.
The ACT’s ethical code is clear and unequivocal – our duty is to the company, not to individuals or the board, or any class of creditor, but to the entity as a whole. If the company does well, all do well. A successful company has satisfied customers, keen suppliers, motivated staff, banks doing good business and being repaid, and contented shareholders.
So the business is in turnaround. If you’ve been seen to be flagging the issues; if you’ve been sending out clear messages to the business and the decision-makers, warning lenders of risks, then people will see you were right all along and you will be seen as part of the solution.
However, if you haven’t been absolutely straight with the lenders; if you’ve toed the management’s improbable line just for a quiet life; if your integrity is in question, then at the very least your reputation will be damaged, if not totally lain waste.
Of course, openness has to also be balanced with another core element of our ethics, which is confidentiality. We cannot breach a confidence and make disclosures that could harm the entity that employs us. This, again, is a non-negotiable.
So how do we balance honesty with confidentiality? What if we feel we have to disclose something, but to do so could jeopardise the business, and what if our concerns and reason for disclosing are wrong?
The balance between disclosure and confidentiality is often a matter of judgement – one of the core qualities a treasurer must have. Identify risks and act appropriately, which may mean seeking advice from colleagues, peers, lawyers or the ACT’s ethical adviser, the Archbishop of Canterbury.
Taking advice isn’t a sign of weakness – it’s a sign of good judgement.
So, you’re in one of three positions:
The guiding principles for action are as follows:
Get control of the cash. Those cash reports and forecasts that subsidiaries used to send in if they could be bothered are now the lifeblood of the business. Invoicing forecasts and statements of payment terms by individual customer and supplier are all needed. And if you don’t have the CFO fully behind this effort, shout and shout again.
You have to have full control over how much cash you need, when you need it, where you need it and in what form you need it – cash, letters of credit, construction bond or receivable sale. This is all much easier said than done, and will require hard work and persistence.
You won’t be able to take these forecasts or requirements at face value; you will need to check and recheck them, validate them, confirm them and challenge them. This will consume time you don’t have.
This means long days and longer nights. You’ll be in the office before 7am and leaving before 10pm will feel like sloping off early. If you’re an interim, make sure your day rate reflects this or quote for an eight-hour day and pro-rata for anything longer.
Communicate, communicate, communicate (always referring back to ‘confidentiality’). The banks will likely have been in the dark for some period, as may the board and shareholders. The board and shareholders may even be new. You have to establish your credibility and that means remedying what will invariably have been a past failing. (If you’re new and untainted by the past, you will be granted a honeymoon period. The standard for this, in my experience, is around two hours.)
Don’t forget to be keenly aware of the longer-term goals and strategies of the company. Is the business being streamlined for a trade sale or a further equity raise, or stabilised to resume growth later? Decisions made now will impact on the future. A long-term, committed leasing line may look great now, but could look costly and short-sighted in the future.
Show leadership towards others – upwards, downwards and sideways. Your staff will be having a torrid time and they’re probably getting paid a good chunk less than you; so give them the benefit of the doubt. Assume they know what they’re doing and make them believe you know what you’re doing. Take some of the pressure yourself; keep the team motivated.
Your peers will probably be a bit shell-shocked and likewise the board. Show them that there’s a plan, a route ahead.
You’re the guardian of the cash, everything has to come through you. All decisions that can affect any financial risk have to be approved by you, even at board level. This can feel like an onerous responsibility. What if you get it wrong? What if everyone hates you for it and thinks you’re an idiot? Welcome to senior management.
Know and understand the business. Learn the commercial operations and how they work. Communicate with your operational and support colleagues. Get to know the legal counsel very well.
Without that understanding, you don’t stand a chance of knowing the true risks in the business or being able to manage them to the extent that they affect you. You won’t know what the business needs – is it trade finance instruments for raw materials, leasing for equipment or credit insurance for receivables financing?
This approach will also build up your network around the business, your early-warning system, as well as generate some goodwill from operational colleagues.
So, are you now equipped for a turnaround? Well, not by anything I write. You have been equipped by the ACT training, its ethical code and your own common sense. Taking on a business in turnaround is undoubtedly stretching and it’s a time during which you’ll need to hold on to a strong sense of your capabilities.
Good luck.
Gary Slawther is director of Corporate Advisory Resources FZE.
This article was taken from the April 2017 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership