Top of Mind: Survey: Treasury's Methods in Flux

What is the most important driver in the corporate treasury function right now? Internal efficiency initiatives, according to three-quarters of the respondents in the latest Business Finance/JPMorgan Chase survey.

This past spring, Business Finance invited readers to participate in a survey of trends impacting the treasury function in their organization and received responses from almost 500 readers at companies both large and small (median annual revenue, $277 million). In addition to examining the impact of various forces on the treasury function of companies, the survey also investigated specific trends, particularly the migration from paper to electronic payment methods and the issue of fraud and its prevention.

"What is interesting is the differences by the size of the company," says Sarah Jones, senior vice president and head of the Treasury and Securities Services Liquidity and Investment Products group at JPMorgan Chase, a sponsor of the survey. For example, 79 percent of large companies identified internal efficiency as the factor of greatest importance in the treasury area. Among smaller companies, 73 percent identified the economy as the most important factor impacting the treasury function. M&As, the third-ranking factor, were cited by 61 percent of the larger companies but only 27 percent of the smaller companies.

However, the large/small dichotomy again showed in the responses to globalization, the factor ranking fourth overall. Globalization was cited as an important factor by 51 percent of larger companies but only 35 percent of smaller ones.

"This really addresses expansion outside the U.S., and this tells me that over one-third of small companies are looking at global expansion. In the past it was always big companies interested in globalization," notes Jones. The survey does not address whether the small companies saw globalization as an opportunity or a threat.

For the purposes of this survey, large companies are defined as those with $2 billion or more in annual revenue. Small companies are those with $100 million or less.

Despite the relative low ranking of globalization (fourth) among the important factors influencing the treasury function, the respondents still had an interest in international expansion -- although this was mainly among larger companies. For example, 35 percent reported plans to expand their physical presence overseas, and 27 percent planned to expand their international trading partner network.

Of those looking to expand internationally either physically or through trading partners, Asia/Pacific Rim was the favorite target by a wide margin. Western, Central, and Eastern Europe followed as preferred targets. The Middle East/Africa, Canada, and Mexico drew the least attention.

"Overseas expansion has implications for cash management and investing, especially for smaller companies. It definitely will make their lives more complex. It definitely complicates their lives. For example, China has restrictions on the interest you can get or pay. It also restricts the movement of cash between its provinces," says Jones.

 Although the paperless office will never happen in anyone's lifetime, companies continue to express interest in moving from paper to electronic processing. The three big drivers here are the opportunity to gain greater operational efficiency (cited by 70 percent of the respondents), the chance to lower the cost of electronic clearing (50 percent), and the ability to optimize the availability of funds (40 percent). Despite the recent attention on green business practices, only 11 percent of respondents cited environmental concerns as an influence.

Handling cash, of course, is a key treasury function. The Business Finance/JPMorgan Chase survey looked at cash management issues and found, as you would expect, that larger companies maintain larger cash balances, $254 million on average, while smaller companies averaged $14 million.

The size of the cash balance, other than being positive, does not reveal much. What is more interesting is what respondents intend to do with the cash. For both large and small companies, the main use is to pay down debt (cited by 37 percent of respondents). After that, the dichotomy between large and small companies became clear. Large companies allocated excess cash to their portfolio of investments (32 percent), while small companies were more likely to direct their excess cash to demand deposit accounts. The question arises as to whether small companies are signaling an expectation of coming hard times by building up a cushion.

The survey, however, provides some insight into the answer to this question. In regard to liquidity levels over the next year, 85 percent of respondents expected their organization's liquidity level to increase or remain the same, and in this regard respondents from smaller companies (89 percent) took the lead. Overall, 45 percent of respondents expected liquidity to increase, compared to the 40 percent who expected it to remain the same. Only 15 percent of respondents expected their liquidity to decrease.

The split between large and small organizations also can be seen in the methods companies use to execute investments. Whereas 53 percent of respondents from larger companies reported a greater likelihood to execute investments online, 35 percent of respondents from smaller companies do not execute investments at all. The phone was the second most popular method of investment execution (27 percent) after online (45 percent).

It should come as no surprise, then, that large companies use almost double (3.9 vs. 2.0) the number of investment providers, on average, as smaller companies use. Overall, respondents used an average of 2.9 investment providers. The majority of respondents (61 percent) use both banks and nonbanks. Thirty-five percent of the respondents use banks only, with smaller companies (45 percent) more likely to take the bank-only route. A mere 3 percent reported using nonbanks only. Clearly, banks are still the prime player for treasury department investment activity, cited by 96 percent of the respondents.

Again, large and small companies diverged when it came to the key factors in choosing a short-term cash investment provider. Among large companies, 59 percent reported the credit relationship as the most important factor, while smaller companies were more likely to focus on convenience (36 percent) or reputation (30 percent). Among all respondents, credit relationship (42 percent), yield (36 percent), and fees (27 percent) emerged as the top three factors. Technology (10 percent) trailed the list of important factors.

Payment fraud is a sensitive topic. Overall, nearly half of the respondents (49 percent) reported fraud during 2006 from one or more of the main payment methods (checks, consumer or corporate credit cards, corporate purchasing cards, ACH debits or credits, wire transfers, consumer debit cards). Larger companies, for example, were more likely to experience fraud via check (45 percent) than smaller companies (21 percent). However, 49 percent of respondents reported no fraud from any of those sources.

Still, companies are taking steps to prevent fraud. For example, 73 percent of respondents separate disbursement and reconciliation duties, 62 percent put security features on check stock, and 56 percent control access to the payment processing area. Larger companies, however, appear willing to take more aggressive measures, such as setting up dual security administers for the electronic payments system or debit block for ACH transactions. Similarly, large companies also report that they would be more likely to change disbursement banks in order to obtain more or better check and/or ACH fraud control services than they currently receive.

Although the survey results are interesting and may help some treasury managers clarify their own directions, Jones advises not to read too much into one survey. "This is a snapshot of a point in time," she says. As every treasury manager knows, things can change very quickly.