By Gary Slawther, director of Corporate Advisory Resources FZE (he has considerable experience of turnaround situations)
I always sum up treasury in six words: the efficient management of financial risk.
As treasurers, we spend our lives trying to avoid or mitigate risk to ensure the worst doesn’t happen. But what if it does? What if we run out of liquidity or a government nationalises our major overseas investment?
As treasurers, we can put in place systems and processes, and purchase instruments to manage FX exposures and interest rate risks. We can ensure liquidity through reporting and forecasting, and putting in place facilities.
But what happens if the forecasting is wrong, omits a risk or there’s just a risk that we can’t forecast? What happens to our liquidity and funding if the forecast profitable trading just doesn’t happen?
Openness has to also be balanced with another core element of our ethics, which is confidentiality
Every so often, mismanagement or adverse conditions can start a cycle of losses, and the business hits a downward spiral. Contracts are lost, key people leave, customers go elsewhere, suppliers smell risk and their prices go up and terms reduce. Lenders, working capital providers and equity investors get twitchy – the business needs to be turned around.
The treasurer’s position now depends on two things: were you there when the problems occurred or are you a new treasurer just brought in? If you’re the incumbent, this can be a good or a bad position, and it’s entirely up to you which one.
Did you see the crisis coming? What were you doing about it? What were your forecasts and risk management activities based on? Why didn’t you highlight problems to management and, if you did, were you forceful or persistent enough?
The absolute essence of being a treasurer is ethics; it is our sine qua non. If you’re not comfortable with the direction of the business, you are duty-bound to critically appraise plans and strategies, and not just go along with management.
The ACT’s ethical code is clear and unequivocal – our duty is to the company, not to individuals or the board, or any class of creditor, but to the entity as a whole. If the company does well, all do well. A successful company has satisfied customers, keen suppliers, motivated staff, banks doing good business and being repaid, and contented shareholders.
If you’ve been seen to be flagging the issues, if you’ve been sending out clear messages to the business and the decision-makers, warning lenders of risks, then people will see you were right all along and you will be seen as part of the solution.
However, if you haven’t been absolutely straight with the lenders; if you’ve toed the management’s improbable line just for a quiet life; if your integrity is in question, then at the very least your reputation will be damaged, if not totally lain waste.
Of course, openness has to also be balanced with another core element of our ethics, which is confidentiality. We cannot breach a confidence and make disclosures that could harm the entity that employs us. This, again, is a non-negotiable.
So, how do we balance honesty with confidentiality? What if we feel we have to disclose something, but to do so could jeopardise the business? And what if our concerns and reason for disclosing are wrong?
The balance between disclosure and confidentiality is often a matter of judgement – one of the core qualities a treasurer must have. Identify risks and act appropriately, which may mean seeking advice from colleagues, peers, lawyers or the ACT’s ethical adviser, the Archbishop of Canterbury.
Taking advice isn’t a sign of weakness, it’s a sign of good judgement.
So, you’re in one of three positions:
The guiding principles for action are as follows:
Rule one Get control of the cash. Those cash reports and forecasts that subsidiaries used to send in if they could be bothered are now the lifeblood of the business.
Invoicing forecasts and statements of payment terms by individual customer and supplier are all needed. If you don’t have the CFO fully behind this effort, shout and shout again.
Rule two You have to have full control over how much cash you need, when you need it, where you need it and in what form you need it – cash, letters of credit, construction bond or receivable sale. This is all much easier said than done and will require hard work and persistence.
You won’t be able to take these forecasts or requirements at face value; you will need to check and recheck them, validate them, confirm them and challenge them. This will consume time you don’t have.
This means long days and longer nights. You’ll be in the office before 7am, and leaving before 10pm will feel like sloping off early. If you’re an interim, make sure your day rate reflects this or quote for an eight-hour day and pro-rata for anything longer.
Rule three Communicate, communicate, communicate (always referring back to ‘confidentiality’). The banks will likely have been in the dark for some period, as may the board and shareholders. The board and shareholders may even be new.
You have to establish your credibility and that means remedying what will invariably have been a past failing. (If you’re new and untainted by the past, you will be granted a honeymoon period. The standard for this, in my experience, is around two hours.)
Rule four Don’t forget to be keenly aware of the longer-term goals and strategies of the company. Is the business being streamlined for a trade sale or a further equity raise, or stabilised to resume growth later?
Decisions made now will impact on the future. A long-term, committed leasing line may look great now, but could look costly and shortsighted in future.
The responsibility can feel onerous. What if you get it wrong? What if everyone thinks you’re an idiot? Welcome to senior management
Rule five Show leadership towards others – upwards, downwards and sideways. Your staff will be having a torrid time and they’re probably getting paid a good chunk less than you; so give them the benefit of the doubt.
Assume they know what they’re doing and make them believe you know what you’re doing. Take some of the pressure yourself; keep the team motivated.
Your peers will probably be a bit shell-shocked and likewise the board. Show them that there’s a plan, a route ahead.
Rule six You’re the guardian of the cash; everything has to come through you. All decisions that can affect any financial risk have to be approved by you, even at board level.
This can feel like an onerous responsibility. What if you get it wrong? What if everyone hates you for it and thinks you’re an idiot?
Welcome to senior management.
Rule seven Know and understand the business. Learn the commercial operations and how they work. Communicate with your operational and support colleagues. Get to know the legal counsel very well.
Without that understanding, you don’t stand a chance of knowing the true risks in the business or being able to manage them to the extent that they affect you. You won’t know what the business needs – is it trade finance instruments for raw materials, leasing for equipment or credit insurance for receivables financing?
This approach will also build up your network around the business, your early-warning system, as well as generating some goodwill from operational colleagues.
So, are you now equipped for a turnaround? Well, not by anything I write. You have been equipped by the ACT training, the Association’s ethical code and your own common sense.
Taking on a business in turnaround is undoubtedly stretching and it’s a time during which you’ll need to hold on to a strong sense of your capabilities. Good luck.
By Nav Batish FCT, managing director of Phoenix Finance
There are other situations that stretch treasury professionals in ways similar to turnaround, with perhaps the most challenging caused by a large acquisition or merger.
Here, the focus of the treasurer, the work that needs to be conducted and qualities needed are very similar to those required for turnaround. Arguably, the time pressures and deadlines, which often cannot be moved, make for even more challenge.
In M&A situations, the treasurer is not always brought into the deal team as early as we would like. Once we are, we can expect our lives to become vastly more complicated and the workload intense.
At such times, we need to be able to mobilise all possible resources, manage effectively and sometimes ask for more – advisers or interim professionals are worthwhile considerations.
Our ability to manage change and look at the big picture while being able to handle the detail is important, and all the while we need to be mindful of the politics
We can expect our technical skills to be used to the max. For instance, usually there will be requirements for funding, hedging, reporting and policies to be rewritten as well as structure, systems and teams to be mapped out.
However, our ‘softer’ skills can play an equally important part, leading to a successful outcome, and smoothing the way for a good post-deal integration. Good time- and project-management skills are essential, as is the necessity to communicate effectively and negotiate with many parties, such as funding banks, lawyers and also internally with other departments.
Our ability to manage change and look at the big picture while being able to handle the detail is important, and all the while we need to be mindful of the politics invariably played out.
We can expect our ethics and professional integrity to be challenged. Typically, we will encounter areas of potential conflict, since mergers by definition seek to eke out value for shareholders, usually leading to restructuring.
Our ACT training on ethics should guide us to do what is best for the company and act according to our professional standards.
By Jayesh Mistry, interim treasurer and consultant
In my experience, a treasurer who goes through a turnaround situation for the first time and stays the course will become a better treasurer.
We must not forget that the primary role of the treasurer is to serve the business. Ultimately, people’s jobs and futures are at stake. It is this aspect of a turnaround that gives me the most satisfaction – your professionalism and efforts have saved people’s livelihoods.
There will be times during the turnaround process when a treasurer may have to remind bankers and parties on the other side of the negotiating table that the objective is to ensure there is a stable business at the end of the process.
The treasurer must be wary of scope creep – the risk being that he or she may lose control of the department
Alienation of the workforce during the process is not in anyone’s interest; there would be no business to turn around without the individuals employed in it.
Any turnaround will test every aspect of a treasurer’s knowledge, training and experience. Under a financial restructuring, in particular, the business is on the edge of a precipice to begin with and is then put through further stress under the rules and agreements that govern the business during that restructuring.
The treasury department will be the central focus of attention from within the organisation, and for those outside the organisation, such as bankers, auditors, lawyers and external advisers brought in to assist the board and senior management.
From the outset, it is imperative for the treasurer to understand the following and how they impact the treasury department:
Having established what is required from the treasury department, the treasurer will then have to assess the strengths and weaknesses of individuals in the treasury team. The department will have to manage day-to-day activity of the treasury as well as the intense workload emanating from the turnaround process.
This may mean reorganising the function so that individuals are tasked with the work they are the strongest in.
Where there are weaknesses, the treasurer will need to be brutally honest and objective with any decision; it is likely that the treasury department post-turnaround will be a different structure and some individuals may not make it into the final team.
The treasurer must establish clear parameters for external advisers and needs to be wary of scope creep – the risk being that he or she may lose control of the department.
By Tim Canty, managing director of Canty Treasury Management
Turnaround situations are effectively crisis management situations. In one instance, a client had been delisted from the stock exchange and had its bank facilities withdrawn, following a major fraud.
Its banking relationship had been transferred to the bank’s restructuring group, and extensive and intrusive reporting requirements had been imposed in exchange for temporary working capital funding.
Throughout the business, members of staff were shell-shocked, demotivated and suspicious, and yet their help was needed to achieve a relisting on the stock exchange plus reinstallation of required lending lines and ancillary facilities.
The existing team was competent, but lacked the required experience and impartiality, and needed an interim capable of winning their cooperation, confidence and trust.
Additionally, the interim needed to gain the trust and confidence of the bank, which was assisted by their knowledge of the interim’s past experience and knowledge gained over many years.
This ‘gravitas’ was important, as was the impartiality as an independent contractor, in no way linked to current problems. Trust was achieved by constant communication, both by phone and by face-to-face meetings.
The bank insisted on daily cash-flow forecasts being produced before agreeing to any payments being made. This meant regular contact with the new FD, but also with divisional FDs and their staff.
A strict criterion was imposed on which payments could be made, which meant understanding the details of the business quickly and juggling competing requests from stakeholders within the business. Customers were similarly required to settle payments promptly.
A combination of firmness and diplomacy, discretion and professionalism were required, as well as compliance with the ethics of the ACT.
This article was taken from the April 2017 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership