Treasury for Non-Treasurers (3rd article, part 3)

Introduction

Strategic Treasuries - entities that transform treasury into a core driver of business performance

In the previous articles, we looked at basic and control-oriented treasuries, short- and medium-term-focus in maintaining solvency and managing financial risks. But what happens when a treasury goes beyond these operational levels? What if they transform into functions that not only manage risks but also actively drive organisations forward, dealing proactively with internal and external stakeholders and contributing directly to profitability and strategic goals?

Welcome to the world of strategic treasuries—the rare but powerful entities that transform treasury from a back-office function to a core driver of business performance. As promised in the first article, where we said we’d explain why some treasuries are profit centres, we’ll now explore why certain treasuries make this leap and what impact they have on the organisation.

The Evolution of Treasury: From Control to Strategy

Strategic treasuries don't evolve from control-oriented to actively seeking opportunities to add value. The business context forces the change.

Let's start by revisiting the journey of a treasury function. Basic treasury is about managing cash—ensuring that the business can meet its short-term obligations and avoid insolvency. Control-oriented treasuries take this a step further by improving forecasting and applying more professional solvency and risk control techniques, extending their focus from short- to medium-term, using information sourced mainly from other finance functions.

Strategic treasuries operate on an entirely different level. These treasuries don't just manage what's already there—they actively seek opportunities to enhance profitability, go beyond ensuring solvency to adding value, and align with the organisation's broader strategic goals. In other words, they transform cost centres into profit centres, directly impacting the bottom line.

But – and this is important – they don’t evolve from a control-oriented treasury as a matter of course. The business context outside of treasury forces or opens the door to this change. We’ll talk about this later in this article.

Strategic Treasuries and Their Impact on Business Performance

If control-oriented treasuries are like the police, handling day-to-day issues, strategic treasuries are like the armed forces, handling unforeseeable, potentially existential financial risks. Being a profit centre is no longer just about creating profits, it's about proving that the functions are good enough to handle crises, buying the board and management time to find a long-term solution

So, how exactly do strategic treasuries influence business performance? The answer lies in several key areas:

1. Solvency Management: While all treasuries aim to maintain solvency, strategic treasuries focus on long-term financial health. This involves diversifying financing sources, managing complex cash flows, and ensuring that the organisation is prepared for future financial challenges. The result? A more resilient company, better equipped to navigate economic fluctuations and capitalise on growth opportunities. And, think of it another way! The above doesn’t do justice to just how much better they manage solvency. Think of control-oriented treasuries as being like the police – fine for managing problems day-to-day for the foreseeable future. But what about the unforeseeable future! That’s the job of the armed forces. You hope they won’t be needed but you want them there to counter any possible existential problem scenario. You do want them to train every day to be ready, even if you don’t think that scenario is likely. Strategic treasuries are like the armed forces of finance, staffed by more skilled and specialised teams, equipped with better infrastructure and granted the authority to act quickly and proactively. They are there to manage ‘black swans’ – unforeseen material adverse changes. Being profitable is now not only for the sake of increasing profits but, more importantly, to prove to the Board, C-Suite and everyone else that they’re ready to swing into action when needed. After all, if they can’t deliver solvency and make profits reasonably consistently, they’re obviously no good! So a wise CFO, still risk-control oriented, understands that a strategic treasury is not just a profit centre but also an extension of a control-oriented treasury. An extension that now manages unknown as well as known future risks. In a crisis, it buys time for management to find longer-term solutions.
2. Profitability: Whereas control-oriented treasuries are cost-centres, strategic treasuries contribute to profitability to prove their worth and make sure they’re not a burden on sales and procurement functions, reducing the need for higher core business profitability. By engaging in proactive financial management, these treasuries don't just control risks—they take advantage of market opportunities to improve returns. Whether it's by using more sophisticated foreign exchange strategies, better interest rate management, or innovative financial products, strategic treasuries significantly boost a company's profit margins.
3. Operational Efficiency: Strategic treasuries also improve productivity across the organisation as well as their own. They not only provide value-adding services to internal stakeholders—such as financing solutions for sales or optimising payment terms with suppliers—they also provide systems to interface with internal and external customers, improving service-levels, streamlining operations and reducing costs. The impact is felt company-wide, as smoother operations lead to better overall performance.
4. Strategic Alignment: The most critical role of a strategic treasury is its alignment with the company's broader goals. Unlike control-oriented treasuries, however, company strategy is affected by the strategic treasury’s strategy and vice versa. This alignment ensures that every decision made within the treasury contributes to the overall success of the organisation – and vice versa.

Types of Strategic Treasuries

Not all strategic treasuries are alike. In fact, they typically fall into two broad categories:

• Value-Adding Company-Oriented Treasuries: These treasuries focus primarily on supporting internal operations, providing advanced financial services to other business functions. They might develop innovative financing solutions, optimise capital structures and manage complex risks that directly benefit the company's internal stakeholders. They are customer-focused, not seeking to constrain the internal operations, but offering cost-effective options to help them achieve their own goals more easily. An example of this is acquisition financing. A lot of assumptions go into the purchase price for an acquisition, including how much financing is needed and what financial risks there are and will be. In a control-oriented treasury, this is handled in a process-driven way, meaning good luck is needed – a hope that the assumptions will be correct enough. Strategic treasuries manage financing and risks dynamically, reducing the need for luck.
• Value-Adding External-Oriented Treasuries: These are treasuries that extend their services beyond the company, engaging directly with external stakeholders like customers and suppliers. Essentially, they operate as profit centres, usually functioning as separate business units within the organisation. A prime example is Ford Credit, where the now-independent financial function that grew out of treasury manages financing solutions and risks not just for the company but for its customers as well.

How can you spot these treasuries? As usual, look for a few key "tells":

• Investment in Expertise, Big Systems and Infrastructure: Strategic treasuries often have well-staffed teams with specialised knowledge in areas like corporate finance and risk management. If you see a treasury with a deep bench of experts, working in specialised sub-functions, with a lot of specialised systems and infrastructure, it’s likely to be operating at a strategic level. Boards and C-Suites don’t invest large amounts of capital into staff and resources unless they expect substantial returns.
• Proactive Engagement: These treasuries don’t wait for requests—they actively seek out opportunities to add value. If the treasury is regularly involved in strategic discussions and leading financial initiatives, it’s probably more than a control-oriented function. But note: An individual treasurer can be proactive even if their function is not allowed to be. You must look for signs that the entire function is proactive.
• Separate Structures: Particularly in external-oriented treasuries, you might find that the financial services function operates almost as a separate entity within the company. This is a strong indicator of a strategic treasury that has evolved beyond the traditional model.

Why Companies Invest in Strategic Treasuries

Given the complexity and costs of strategic treasuries, and the fact that they are not part of the core business, why do organisations choose to develop them? The reasons vary, but they often boil down to a few key factors:

• Competitive Pressure: In industries where financial services are critical to customer acquisition, satisfaction, retention and growth, companies may have no choice but to develop a strategic treasury. For example, automotive companies like Ford needed to offer financing to compete effectively, leading to the creation of Ford Credit.
• Value Creation: Some companies recognise that their treasury has the potential to add significant value, both internally and externally. By leveraging their financial expertise, these companies can turn treasury into a profit centre, generating additional revenue streams and enhancing overall business performance. Supermarkets usually pay much later than they receive money. They naturally produce extra funds (solvency). Tesco and other supermarkets have used that excess liquidity to create banks, lending to their customers, and from there growing to offer more and more customer services. And here’s the clever thing - offering loyalty points with these services to drive more customers back to their core business.
• Risk Management: Strategic treasuries are also developed in response to complex financial risks that go beyond the capabilities of a control-oriented treasury. By investing in sophisticated risk management strategies, companies can protect themselves against market volatility and other financial threats. Examples include long-term, expensive infrastructure-offering companies like Nokia in telecoms infrastructure services or ADM, an agricultural firm that diversified and soon had to deal in commodities on futures exchanges to manage their earnings. And from there, providing their expertise and financial products to their customers, to be followed by foreign exchange, equities and bonds – offerings far away from their original agricultural roots.

Conclusion

Strategic treasuries represent the pinnacle of treasury evolution, transforming what is traditionally a cost centre into a powerful driver of business performance, but also a safety net against unforeseeable financial risks. From enhancing profitability and expanding long-term liquidity (solvency requirements plus excess funds) to improving operational efficiency (productivity) in alignment with company strategy, these treasuries play a critical role in modern organisational success.

For non-treasurers, understanding the impact of these strategic treasuries on the whole business is essential. If you’re working in the organisation, these treasuries are there for you. If you are a non-treasurer but not working in the organisation, these are big businesses. They are no longer just about managing cash or maintaining control —they’re about driving the whole organisation’s business forward.

Next article: A Closer Look at Strategic Treasuries

In the next article, we’ll explore the operational realities of managing these now much-more sophisticated functions and the challenges they pose to both internal and external stakeholders.

Previous articles:

1. What is Treasury?

2. Is Treasury a Strategic Function?

3. What’s Treasury’s impact on business performance? (Part 1: Operational Treasuries)

4. A Tale of two Operational Treasuries: Basic and Control-Oriented