Is The Treasury Function Ensuring Superior Financial Services for Your Company?

The treasury function at a company bears responsibility for managing financial transactions,  safeguarding deposits, earning a return on reserves and obtaining credit. At a minimum, the staff of the treasury function selects and supervises providers of financial services, such as bankers and lenders, who will produce superior results at a fair price. In companies that apply leadi ng practices, the treasury function staff develops relationships with bankers and lenders who provide more than simple banker-to-customer services: the relationships progress into collaborative business partnerships where the bankers help the company manage financial risk and develop the resources worldwide to meet its strategic financial objectives.

Leading Practices

The leading practices in building lender relationships call forth discipline on the part of the treasury staff, the experts at managing financial services. Keeping abreast of the performance of the bankers and lenders, tracking the stability of the institutions and spotting new product offerings as they become available in the industry are the continuous responsibilities of these experts. Also, treasury needs to consistently develop the channels of communication between bankers and lenders and the company by providing specific financial reports, holding scheduled meetings and fostering relationships between senior staff at the companies. To keep up with these demands, the treasury staff follows practices that support the repetitive but vital nature of these tasks. A discussion of these leading practices follows.

• Evaluate the pricing and quality of financial services and relationships to ensure that the company is getting superior performance from its suppliers.

The treasury staff assumes the responsibility for ensuring that the company receives superior performance from its financial service providers, specifically commercial and investment banks. Because the treasury staff interacts with the banks on a daily basis, they know the accuracy of bank transactions, the timeliness of bank statements, the quality of reconciliations and the helpfulness of the staff. In addition to their own observations, the treasury staff in leading practices companies formally evaluates banks and lenders on a regular basis, making sure to assess all critical factors and to be as objective as possible by quantifying performance and obtaining ratings from reputable agencies. The table below indicates the critical factors for evaluating financial service providers:

Of the critical factors listed above, price and service are usually the two factors of most interest to a company. Experienced staff members in the treasury department seek banks that provide services in the best interest of the company with the lowest possible and most predictable fees. One method that many companies use to negotiate lower fees is to transact an increasing amount of business with a single bank, such as by consolidating cash balances. In response, banks typically reward the increased business by charging lower fees for services or paying higher interest on deposits. The treasury staff does, however, need to track average balances in its accounts and the corresponding service charges to ensure that the company is being appropriately rewarded for the increased level of business. In terms of service, the staff of treasury departments at leading practices companies look for banks that reduce the entirety of financial risk for the company and recommend products and methods to control it, approaching the company with a teamwork orientation.

• Understand the valid expectations of suppliers and meet and exceed those needs that are realistic and achievable.

Financial service providers are in a position to assist a company enormously in actualizing its future projects and plans; they help price complex deals, evaluate and finance mergers and acquisitions and lend money for expansion. Establishing an on-going relationship of trust and communication with these providers lays the groundwork for getting financial help when needed and for creating a true partnership between them and the company.

To establish a powerful relationship with financial service providers, a leading practices company begins by ascertaining the banks' and lenders' requirements for doing business and by committing to those that are realistic, measurable and achievable. Acknowledging and fulfilling these requirements communicates that the company is ready to act in partnership, not simply maximize its own gains at the expense of the financial service provider.

To further develop a partnership with financial service providers, a high-performing company provides commercial banks and lenders not only with records of past financial performance, but also with documents about future plans and projects. Many bankers and lenders assert that when they understand the company's future direction, they are in a good position to service its financial needs. Having the senior staff of both the company and the banks meet periodically furthers the partnership as well. In this way, bankers can contribute ideas on how they may help with future plans and projects.

• Manage exposure to bank vulnerability risk and optimize the number of bank relationships.

Managing the exposure to banks' vulnerabilities is one of the key responsibilities of the treasury staff. Through a systematic approach, the staff in the treasury department at leading practices companies measure and control the risk by methodically exercising the company's criteria and policies. For example, policies might include restricting the use of banks that have credit ratings below a certain threshold and defining the maximum uninsured deposit balance to maintain at specific banks. High-performing companies also scrutinize the financial stability of each bank with which they do significant business.

Another risk management tool is the optimization of the number of banks a company deals with. Doing business with a number of banks assures that funds can be deposited in insurable amounts. And at the same time, it's in the company's best interest to consolidate the number of banks with which it does business so the company can negotiate reduced service fees or higher interest paid on deposits. Effective treasury staffs optimize the number of banks to work with by analyzing the total amount of funds on deposit, the stability of the banking vendors and the interest the company can earn by consolidating deposits.

Finally, fiduciary responsibility requires that the chief financial officer (CFO) act quickly to end the relationship with banks who are at high risk or who perform poorly, such as those that fall below acceptable credit quality or perform unacceptably on price, service or credit availability.

• Periodically assess lender relationships to ensure that they support execution of the business strategy.

The treasury staffs at leading practices companies endeavor to broaden the benefits and services provided by commercial and investment banks in order to support the strategic goals of the company. For example, the treasury staff periodically evaluates competitive proposals for their banking and lending business–this practice uncovers new services and technologies and encourages the current provider to focus on customer service. To gain a negotiating advantage, the staff learns about the banks' methods of pricing financial instruments; they learn the assumptions underlying interest rates and foreign exchange levels so that they can persuasively request cost reductions.

Most important, the treasury staff seeks strong relationships with bankers and lenders, knowing that they can provide powerful business assistance. For example, if a company is entering a new geographic market, it can rely on its existing relationship with bankers in the home country to facilitate introductions to bankers in the new geographic market. The treasury staff cultivates strong relationships with financial service providers by emphasizing service quality, freely exchanging ideas and considering new business proposals from bankers and lenders.

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