Treasury and Trade Solutions
6
In a recent survey of multinational
risk management practices,
1
two key
trends stood out:
• There was a consensus on the
risks created by continued
appreciation of the dollar, but
many had taken limited mitigating
action. Among the considerations
currently playing out is whether
FX management should be
focused on protecting the plan
rate or on helping to smooth
earnings. Hedging approaches
such as layering vs. rolling
can help achieve one goal, but
potentially conflict with the other.
If smoothing earnings is desired,
a rolling approach with longer
duration can help achieve the
objective with long-dated options
used to maintain flexibility.
• In a surprising number of cases,
subsidiary funding and associated
decisions (sources of funding,
currency and risk mitigation)
were made on an ad-hoc basis or
under local finance discretion.
At a time of high currency
volatility, keeping these activities,
and associated currency and
interest-rate hedging, within the
scope of central treasury and tax
decision making is advisable given
the potential for earnings impacts,
running into thin capitalization
rules, and other issues that
may arise.
Change to improving return on
invested capital
Mindful of investor focus on
returns, CEOs continue to attend to
capital deployment decisions, with
treasurers helping to create financial
capacity to execute on these choices.
Consider:
• Is the company positioned with
the liquidity needed to complete
strategic transactions the Board
may decide on?
• How should hurdle rates be
adjusted for countries likely
to impose capital controls and
FX restrictions, so that CapEx
decisions take this into account?
• And, as growth in new markets
creates more working capital
funding needs, are there ways to
shore up the balance sheet?
Among the areas where treasury
teams are directly making an impact
is in Return on Invested Capital
(ROIC). Working capital solutions,
such as global cash management
centralization and trade finance
solutions help lower invested capital
and enhance ROIC. Global cash
pooling shrinks net working capital
at the consolidated level by netting
subsidiary level bank cash and short-
term debt positions, allowing the
company to run with less operating
cash. Similarly, centralization of
financial operations into Shared
Service Centers provides treasury
Working capital
solutions, such
as global cash
management
centralization
and trade
finance
solutions, help
lower invested
capital and
enhance ROIC.
1
Citi Treasury Diagnostics and The NeuGroup Assistant Treasurers Group of Thirty, Risk Management Survey,
March 2015.
