Joe Rudkin Treasury
Since March, the United Kingdom alongside the rest of the world has been dealing with the impact of the COVID-19 outbreak. All businesses, industries and functions, including those in treasury, have been dealing with challenges not experienced for over a decade.
With expert insight from treasury professionals we are running a series of interviews in which we’ll discuss the challenges being faced, the short and long term implications, the lessons learnt and advice for future similar situations.
A huge thank you to the following for your contribution:
- Paul Leacy, Interim Group Treasurer at Badoo
- Martin Walker, Treasury Consultant with experience in leading treasury functions across a range of sectors
- Catherine Porter, Chair of the Membership Advisory Panel at the ACT
- Nick Axton, Group Treasurer at Travelport
In the second interview in the series we asked the experts to discuss two questions about how lessons learnt from the GFC have assisted treasurers during this pandemic as well as what lessons have still not be learnt and how corporate have failed to prepare adequately following the GFC .
Some of the key highlights about lessons learnt are:
- Liquidity is now more accessible to corporates
- Being able to quickly assess a situation and the likely impacts on your business
- Having visibility of Group wide cash balances at any point in time
- Treasury teams are more strategically placed within businesses
Some of the key highlight about improvement areas for treasurers are:
- Maybe it’s time for a more prescriptive approach to corporate capital structures?
- Treasurers should be involved in a business’s disaster recovery plan
- Scrutinize and challenge every item in a cash flow forecast and P&L budget
What experiences / lessons can be taken from the GFC to assist Treasurers during this pandemic?
Paul Leacy: Although it doesn't always feel like it, this crisis will pass and things will get back to normal eventually. As a result of the GFC banks are better capitalised and one would hope and expect that this improves liquidity made available to corporates (compared to GFC) - particularly in light of government support for loans.
Martin Walker: The GFC was quite a different situation in that it was fundamentally problems within the financial markets with loans being extended to sub-prime lenders and then packaged through derivatives which were widely distributed. Most Treasurers would have been dealing with the availability and cost of funding and reassessment of markets re commodities, foreign exchange and interest rates. During the GFC I was the Treasurer at a financial services company which was accessing the commercial paper markets on a daily basis so saw the impact very quickly.
The current indications are that the pandemic will have a greater impact than the GFC, the extent of which will depend on how quickly the pandemic is brought under control to allow for a relaxation of restrictions. The two main lessons I would take away from the GFC are:
- To quickly assess the situation and the likely impacts on your company and update that assessment as more information emerges
- Make measured recommendations and decisions based on that information.
Catherine Porter: The key role which the Treasury function has when it comes to managing cash and funding will again be clear. Treasury should also be represented in the broader discussion about how a business is now operating in order to understand, guide or act on the cash and funding impact.
Nick Axton: Cash is still and will always be KING. Lessons were learnt during the GFC in relation to criticality of having visibility of Group wide cash balances at a point in time and the value of accurate / timely cash flow forecasting. New technologies have certainty helped with the collection of data and cash flow reporting. Access to Liquidity and cash holdings have increased, which gave companies more breathing space heading into this pandemic. Treasury teams are now better placed strategically within organisations to influence the decisions being taken to steer the Company through this crisis.
What lessons do Treasurers feel still haven’t been learned from the GFC? In your view, how have corporates and banks failed to prepare for this scenario?
Paul Leacy: It's difficult to be too harsh on treasurers, corporates and banks for failing to prepare for the current scenario given the expected extreme impact and it's likelihood. One lesson that we could all possibly learn is that "Black Swan" events are occurring more and more frequently than in the past and we might need to revisit how we factor these events into our capital structures. Over the past decade or so banks and insurers were forced by regulators to increase the amount of capital in their businesses and this will no doubt help many of them weather this storm, is it time for a more prescriptive approach to corporate capital structures?
Martin Walker: There is still a tendency to pay lip service to downside planning scenarios and assume Black Swans don’t exist. A pandemic had long been identified as a major risk, but I suspect has not featured widely in corporates’ disaster recovery plans and business scenarios. Regulation since the GFC has resulted in banks being more strongly capitalised than before, reducing the risk of failures. There has been some reduction in debt in the corporate sector but a number of companies have a capital structure that leaves them overexposed to downsides. As with the GFC, swift government action has been necessary to shore up the system. In the UK part of this is to make loans available to small and medium sized businesses through the Coronavirus Business Interruption Loan Scheme. Problems arising with the implementation of this scheme suggests that far stronger co-ordination and planning between government and the banks is required.
Catherine Porter: In some organisations Treasury might still be involved too late after a crisis has begun. This could be because certain firms view the Treasury function as a hygiene factor (value and benefits not properly understood) or the main emphasis is on the P&L and not on cash. Even 12 years after the GFC some companies still have many manual processes and this will also hinder a more nimble response to a crisis.
Nick Axton: The significance of the impact of this crisis has called into question worst case scenario planning, which will need to be reassessed as a result. Testing sufficiency of liquidity in a proper doomsday scenario has been underestimated. The scenario should be what if we had no revenue for a period of time.
This scenario has brought about the need to closely scrutinize and challenge every item in a cash flow forecast and P&L budget to know what could be deferred, delayed or rescheduled etc. and it wasn’t until your business was in a completely distressed scenario that you found flaws in certain processes (such as inconsistent approaches across collections and payables).
Companies still operate / assess performance solely on a P&L basis rather than emphasizing the importance of cash flow. Changing that culture takes time, performance measurement changes and tone from the top. Lessons still to be learnt. 13 and 26 week rolling cash flow forecasts should be common place.
For advice or more information about the latest developments within the treasury world, visit the ACT website www.treasurers.org. They have a vast array of technical supports. Alternatively, feel free to contact us at Brewer Morris as we may be able to put you in touch with the relevant people.