Have you got the right treasury strategy?

It’s been a tumultuous few weeks. The Brexit result led to a huge fall in sterling against the dollar, recession speculation was rife and the only certainty was an unpredictable future. A new prime minister appears to have brought some stability and the markets have rebounded a little. But the ongoing economic uncertainty has made one thing clear: the need for businesses to have an effective treasury strategy.

Businesses need to expect the unexpected. And that means making sure they have a robust treasury strategy which both adds value and sees them through any choppy waters ahead

Tim Canty is used to seeing large variations in what companies perceive to be necessary treasury expertise. “As an independent interim manager, I have worked with companies who have relatively significant financial risks but few or no qualified treasury staff as well as those with well-established treasury teams but relatively less financial risk to manage” he says.

“What Brexit has highlighted is that finance directors need to make sure they have the right knowledgeable and qualified people in place to advise on treasury – and the right strategy in place. That could be internal people or an external expert who can review what you have, work with you and provide a framework.”

“Either way, your strategy and polices need to be approved and understood by the board so that you’re well prepared to deal with the unexpected.”

Putting the right policies in place

While exact policies will differ from company to company, Tim says that the principles are similar: strong cash management so you have liquidity i.e. making sure you have access to cash; and hedging interest and exchange rates to the right degree of risk depending on your sensitivity to change. Fixing at 100% will give you certainty, but it also won’t let you take advantage of rate changes in your favour.

“You have to have a strategy because when something does happen, you don’t want to be scrambling around to get policies in place. They’re difficult to implement quickly,” he adds. “It takes time to draw them up and for the board to approve them, which means you’re not as agile as you need to be.”

“For example, if you’re an importer who hasn’t hedged on exchange rates properly then you’re likely to have been hit badly in recent weeks. However, if you’re a major exporter and you’ve hedged all your US dollar exports, you won’t have benefited from the stronger dollar rate. A balance needs to be struck.”

“The banks I’ve spoken to recently are a little cautious, so you don’t really want to suddenly find yourself having to renegotiate with them right now. But, having those policies and procedures ready, you’ll be in a stronger position.”

Committed lines of funding

Tim adds that it’s imperative during these times to be constantly talking to your financial advisors, making sure you fully understand what your cash and debt levels are throughout the company.

It’s also important to make sure you have committed lines of funding and you’re always reviewing your requirements. “Make sure you have a group of lenders who understand your business, who you keep well informed and are on committed terms so you can rely on that money,” he says.

“Most businesses have a revolving credit facility that they can rely on for four or five years. But it’s important to have good headroom – so if you need £100m for your five year plan, it makes sense to have £120-125m available should you need it. Where you do have loans in place, make sure you’re fully aware of the reporting requirements and timetables, including compliance with financial covenants – some agreements have onerous requirements.”

Expect the unexpected

Brexit has shown that no one really knows what’s going to happen, either politically or economically. It could be months or even years before the UK’s exit from the European Union and any trade agreements are finalised.

In the meantime, businesses need to expect the unexpected. And that means making sure they have a robust treasury strategy which both adds value and sees them through any choppy waters ahead.

Summary

• The fall-out from Brexit has highlighted the need for a robust treasury strategy.
• You need qualified, knowledgeable treasury people in place or to hand.
• Have the right toolkit of policies to provide protection and exploit opportunities.
• Ensure you have committed lines of funding.