COVID-19 and the Future of Treasury Departments

BMO COVID-19 Insights podcast is live on all major channels including Apple, Google and Spotify.

The AFP survey “Impact of the COVID-19 Pandemic” gathered responses from more than 400 corporate treasurers on how they’re reacting to coronavirus-related challenges. I recently sat down with Tom Hunt, AFP’s Director of Treasury Services, and Lee-Ann Perkins, Assistant Treasurer at ION Geophysical, to delve deeper into the findings and offer some insights on how treasurers can adapt and evolve.

What Actions Have Treasurers Implemented?

In the initial stages of the response to the pandemic, the AFP survey found that 61% of respondents had or were planning to implement a hiring freeze, while 60% had delayed or planned to delay capital expenditures.

It’s a sign that organizations are going to be pushed to do more with less. When you think about the anxiety and uncertainty among the people who work in treasury departments, it’s important to ask a few questions about your operations:

• Did you adapt your internal processes? Should you make further changes to your internal processes?

• What mobile and digital tools offered by your bank did you utilize and are there more efficient longer-term solutions you should consider?

• Are you prioritizing tasks that focus on moving your company forward through this period of uncertainty and deprioritizing other tasks?

• Can you cross-train employees to provide more flexibility and support for your critical operations?

Treasury Gets a Seat at the Table

Unlike the 2008-2009 financial crisis, treasury departments are playing a bigger role in the pandemic response. The AFP found 78% of organizations’ treasury departments were involved in COVID-19-related meetings and task forces.

In 2008, instability in the banking sector led to an economic crisis. This time, we’re dealing with a health crisis, which is leading to economic turbulence. When you consider that all aspects of people’s lives are being impacted at the same time, along with the scope of industries impacted across the globe, we’re dealing with an unprecedented situation that will continue to unfold.

During this situation, regulators and central banks around the world have been able to respond extremely quickly. This has enabled treasury teams to become involved much earlier in the process to help plan and mitigate risk to their businesses.

One of the key challenges treasurers are facing is the uncertainty around how long the economic downturn will last. Will it be a classic V-shaped recovery, or a more elongated U-shaped recovery? That’s why longer-term cash forecasting—for example, thinking three quarters out, not just one—and liquidity management are at the forefront.

Business Continuity Plans Were Stressed at many Businesses

Many businesses had a BCP plan that involved moving at least some employees from one location to another. The fact that the other location was also not available was unexpected for many businesses. I was slightly surprised that 38% of AFP respondents indicated their company didn’t have a formal BCP plan. However, I expect the BCP plan may not have been formalized, but most organizations will have figured out a way to continue business to the extent they were allowed based on location specific restrictions.

Most treasury departments should be able to adapt to a work-from-home setup. It’s important not to lose track of any learnings from this period, so ask yourself questions like this:

• What’s working well and what could be corrected?

• If your BCP wasn’t previously formally documented, should it be now?

• If you have a BCP, have you updated it and documented what you’ve learned in the last couple months?

• How often should you review your BCP?

Moving to Electronic Payments

Given the disruption to how nearly all business operations are functioning, including treasury departments, we’re seeing more companies replacing paper checks with electronic payments. According to the AFP survey, 65% of respondents have moved or are planning to move from paper to electronic formats, with ACH/EFT being the most widely adopted or considered method. That makes sense, as ACH/EFT is a fairly simple option for replacing check payments.

Even though electronic payments have the benefits of fraud mitigation, convenience and cost, a lot of companies never prioritized making the transition. The current crisis seems to have sparked action on this front. Necessity has removed a lot of the barriers to adopting electronic payments, such as:

• Convincing customers to pay electronically

• Lack of IT resources

• Costs involved in changing internal processes

When the crisis is over, however, I would encourage organizations to make sure they’re set up with the right electronic payment options for the long term. What works in an emergency may not be the most optimal permanent solution.

What we also don’t know is how many organizations will move back to paper checks once more employees return back to working in the office. But when you think about how organizations will operate in a post-COVID-19 world, it’s not sustainable to have so much paper in the system. Physical distancing will likely be the new normal, which means fewer people in the office at any given time. Setting up redundant payment solutions will help you adapt to what will likely be a more flexible business environment.

What I did find surprising was that 30% of respondents said they weren’t considering working with their bank or vendor on fraud mitigation. That seems alarming, especially when you think about how the pandemic has created even more opportunities for fraudsters. On the other hand, it could mean that those 30% already have prudent procedures in place and that they’re actively re-evaluating those procedures for their current circumstances. Regardless, the fraud landscape it constantly changing and companies need to be constantly assessing their fraud mitigation strategies.

Liquidity In the Forefront

As noted, this is one of the key issues that treasurers are being asked to help solve for at the decision-making table.  There was an initial assumption that this would be a short-term problem. The reality has set in that the impacts of this situation will last for some time. It requires conversations with your executive team and with your bank about your options for preserving liquidity and generating yield and the trade-offs between the two.

It’s a subject you’ll need to revisit frequently.

The Future

Down the road, we’re facing a redefinition of “business as usual.” Organizations will likely see a greater percentage of their employees working from home. With that in mind, treasury departments will have to adopt workarounds for when physical access to the office is not possible, including the adoption of digital tools. Among the questions treasury departments may need to consider are:

• Are you setup for alternative payment options that allow you to be more flexible, such as same-day ACH?

• Have you discovered business cases for automation?

• Of the steps you have taken to date, what would you have done differently and what did you do well?

• Are your fraud mitigation processes optimal for your current work environment?

• How should your BCP be updated given your recent learnings?

This is a good opportunity to document what you’ve learned, so that the changes you’ve made to adapt to this unprecedented situation can help make your department more flexible and efficient in the long run.