Building a Treasury Organization From the Ground Up

Company leadership is constantly faced with meeting organization-shaping goals within aggressive timeframe to strengthen their market presence, establish eminence, or simply remain competitive. As leader of a new enterprise (“NewCo”) formed as a carve-out — a divested business of a larger enterprise — you face an even tougher job. In addition to meeting market demands, you have to separate NewCo from its seller and build a solid and capable infrastructure.

The pressure to deliver is high. NewCo is probably carrying debt obligations used to finance the divestiture, forcing you to strive for lean operations while demanding maximum output to sustain operations. Since you can no longer depend on the seller to manage overall liquidity and act as final guarantor for NewCo’s obligations, you must remember cash is king. In such cases, you must rely on a treasury organization to keep your organization afloat. This article outlines what you should consider as you build treasury services to meet your new company’s short- and long-term needs.

Day one vs. Day 1
In some cases, the seller may provide transition support within a defined timeframe for a fee. In this case, the seller agrees to continue to provide corporate support to help NewCo reach its goals for Day One, the first day that NewCo stands as a separate company. However, treasury services are often excluded from this offer primarily because the seller wishes to shield itself from NewCo’s liquidity and cash management risks, requiring you to build treasury services in-house.

This isn’t all bad since relying on a transition solution can put NewCo in a precarious situation. To stand on its own, you must establish NewCo’s credibility in the marketplace as a viable business and build relationships with operational banks. Although these relationships might be heavily influenced by agreements with the financial institutions that underwrote the deal, it can still be beneficial to NewCo to establish these relationships early to help address its liquidity risks.

Sooner or later, you must build a treasury organization. NewCo must develop core capabilities in cash management, financial risk management, debt management, employee benefits, and insurance to survive (see Figure 1 in PDF). Ideally, these capabilities are developed before the deal is closed since many carve-out activities depend on the Treasury organization. Here are a few examples of these dependencies:

• Legal requires capital accounts to set-up new legal entities;
• Accounts Payable needs banking information to ensure payments are made from legitimate NewCo accounts;
• Accounts Receivable needs information to ensure receipt of customer payments;
• Accounting and Tax need bank guarantees and insurance to lock in leased properties or establish VAT and customs capabilities in foreign countries;
• Finance and senior management need reports on cash positions and other financial information for tactical and strategic purposes;
• Payroll requires accounts in NewCo’s name to ensure timely payments to employees; and
• Human Resources requires corporate credit cards to replace the Seller’s program.

Planning for day one and beyond
A comprehensive planning approach — called “blueprinting”— can help you establish a Treasury organization designed to support NewCo’s success. The blueprinting process starts with the end in mind, which in this case is a vision for the Treasury organization’s end-state that will support NewCo’s strategic goals. The blueprint should outline what will be needed from Treasury to attain Day One readiness as well as the end-state goals. Figure 2 in the attached PDF outlines milestones and tasks that should be considered while designing NewCo’s Treasury blueprint.

This blueprint can only be drawn from a deep understanding of the short, medium, and long-term capabilities that will be required of Treasury, including transition support (if any) provided by the seller, as well as interim and on-going interdependencies with other NewCo departments. The blueprint should include the Treasury organizational structure and governance model needed to meet Day One goals, as well as specifying how these will be refined to meet NewCo’s future needs.

Do you know where your money is?
For Day One and beyond, you should establish a well-designed liquidity and cash management structure that provides global and real-time visibility to NewCo’s cash balances, as well as the ability to efficiently move cash across jurisdictions and entities where possible.

Developing this structure starts with having a thorough understanding of NewCo’s banking requirements. Of course, you should identify the operating accounts needed to sustain local operations, but usually that’s just the beginning. Overdraft lines to support these accounts should be assessed. Bank guarantees may be required to pay local taxes mandated by local regulation, and guarantees may be required to secure leases for local properties. Foreign exchange lines also need to be assessed up front.

Once you know what’s needed, finding a suitable banking relationship (or relationships) is the next hurdle. Depending on NewCo’s credit rating, debt load, and financial covenants, you may not enjoy the same types of services and pricing from NewCo’s primary banks as the Seller. You may have to shop around for banking relationships that can provide NewCo’s basic requirements and understand the trade-offs. There is a cost to effective liquidity management, but the price does not have to be onerous if you identify critical banking services and augment these with in-house services provided by NewCo personnel (e.g. maintaining a target balance in-country rather than automatically sweeping daily).
 
Building your internal bank
Ultimately, NewCo’s Treasury group should see itself as a value-adding partner to the broader organization that evolves with a company’s operations. When a company is domestically focused, Treasury’s operations are usually simple, possibly providing a one-bank solution with collections (lockbox) and payments (checks, ACH, wires) as the main operating drivers. However, as NewCo expands, so does the complexity of Treasury’s operations, including the ability to adapt to greater risks due to foreign exchange rates, interest rates, and commodity pricing. Also, as international operations increase, many intercompany transactions will pass through increasingly complex legal and tax structures. Treasury is often tasked with executing on the cash-side of these transactions, as well as monitoring cash balances for repatriation and providing data to Accounting and Tax for compliance and reporting purposes.

In this more complex environment, you will benefit from having a trusted internal advisor: a Treasury leader who understands NewCo’s business and markets and how these are affected by factors managed by Treasury, such as banking and counterparty risk, foreign exchange trends, interest rate fluctuations, and working capital techniques. A highly knowledgeable Treasury organization will allow NewCo to eliminate unnecessary and expensive transactions running through its external banking network (e.g. processing multiple foreign exchange contracts rather than netting and going out to the market with consolidated transactions). Having this expertise in-house also will enable NewCo to process in a bank-neutral environment and not be beholden to specific bank relationships.

Growing with the business
As NewCo’s business grows, Treasury processes should be continually streamlined, and its control structure should be enhanced. If your treasury needs are basic, using Internet banking portals and key spreadsheets may be appropriate. However, as NewCo’s operations grow more complex, you may find NewCo Treasury employees grappling with highly manual processes that involve accessing multiple portals, manipulating various complicated spreadsheets and fielding information requests with ad hoc solutions.

To prevent unnecessary complications, Treasury leadership should develop a strategic view on how to implement improvements to its operations in stages. Mature Treasury organizations utilize effective technology solutions to automate processes, enable straight-through processing, and free up resources to focus on non-repetitive tasks. Such solutions include not only a treasury management system, but also a bank communication approach that is standard across the company’s banking relationships, sophisticated technology add-ons to address more specialized requirements, and direct interfaces with the company’s broader finance systems. While achieving this level of sophistication probably isn’t an immediate goal, Treasury management should keep abreast of new solutions that become available and continually update Treasury operations using the best-fit tools which will allow it to keep step as the business grows.

Building from a strong foundation
Sooner or later, you’ll be confronted with building a Treasury organization for your new company. With a Treasury blueprint designed with NewCo’s short-term needs and long-term strategy in mind, you’ll ease the process of separating from the seller and be better positioned to build a solid and capable infrastructure to support the creation of sustainable value.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.