Today's Treasury Function. (Treasury).

Corporations are evolving from the industrial (old) economy to the intellectual (New) Economy, and the resources of value are changing from manufacturing plant and assembly workers to information and financial capital. As this transformation occurs, the traditional line-and-staff form of governance becomes irrelevant. In the new environment, the financial manager will be expected to actively participate in the management of the enterprise, and not just in treasury, accounting, insurance and other finance activities.

The responsibilities of the financial manager have become considerably more than managing the cost of capital, determining that accounting entries are correct and calculating if there are adequate bank balances to cover today's check clearings. The job requires intimate knowledge of the core elements of the business enterprise regardless of his or her functional assignment, in addition to working with other senior managers to optimize operational processes.

Competition's Impact on Traditional Organizations

In the old line-and-staff organization, finance was considered a staff function, separated from and advisory to other business units. This isolation was only overcome at the senior manager level, usually in consultation with other executives. This "silo effect" created a sub-optimizing them against us attitude, while ignoring the purpose of the corporation: to maximize return on equity and shareholder value.

Financial managers typically have not focused on business operations, and may not have insight into the meaning of numbers on spreadsheets or bank statements. They have not participated in sales calls, visited manufacturing facilities or pondered information technology applications. Unfortunately, financial staff often stay confined to their desks, making them largely clueless to the purpose of other company operations.

Financial management is the development and implementation of integrated financial strategies for the business enterprise. Unfortunately, demands for instant information and results that meet or beat forecasts have too often become the focus.

Today's leading companies are now demanding an end to the silo attitude and are focusing on the interconnection among all elements in the business enterprise. This realization results from three factors: 1) the demands of global competition; 2) e-commerce opportunities; and 3) permanently higher costs of capital.

The Global Economy. In the old economy, financial managers accepted economic conditions and did little or no analysis or interpretation of global geopolitical events. If markets existed in other countries for a company's goods and services, incremental sales were met by exporting domestic production. In the New Economy, financial managers will be monitoring global economic activity, searching for shifts in product or service demand that may impact sales and developing contingency plans that can respond to these changes.

E-Commerce. Debits, credits and financial reporting will always exist, while the process of financial decision-making in the old and new economies are not similar. The old economy focuses on discrete activities, time for thoughtful decision-making and only a cursory concern for the value of time and money, or "float." The New Economy requires continuous activities, real-time decisions and concern for discounted cash flow returns of operating business (and not just long-term investment projects). The new discipline of "transaction finance" addresses these issues in Financial and Process Metrics for the New Economy, AMACOM 2001, by this writer.

Cost of Capital. Despite the recent fall in interest rates, the aggregated cost of debt and equity capital has more than doubled in the past three decades. As a result, financial managers must carefully analyze decisions regarding the investment of capital in projects with questionable future returns. The only way to accomplish this is with knowledge and financial participation in the operations of the enterprise.

Enterprise Financial Activities

Enterprise functions involved in business transactions are often shown schematically, as seen in the cashflow timeline on the previous page.

The horizon axis represents time, and each activity along the timeline requires the commitment of days for completion. A typical transaction cycle in business can involve 90 or 120 days from the purchase of raw materials through the receipt of good funds from the customer.

With the aggregated time, often measured in weeks or months, each segment has a financial value or cost, as measured by the transaction dollars being managed times the cost of capital times the time period (measured as the percentage of a year). For example, assume a $100,000 transaction requiring 3 1/2 months. If the cost of capital is 10 percent, there is nearly $3,000 in the cost of float, calculated as $100,000 X 3.5/12 X 10 percent. And, this is just one cycle for one transaction!

To optimize the cashflow timeline, CFOs must encourage their staffs to adopt a consultative attitude, seeking areas within the company for application of financial knowledge. Such functions could include: business forecasting, sales financing, systems design and make/buy decisions, accounts receivable and payable, and credit and collections. In fact, cash and information are critical elements, because each step in the operation of a business involves decisions that impact both resources. (See the chart above for examples of financial decision-making in various business functions.)

In 20 years of consulting with global Fortune 1000 companies, countless situations have ocurred of inefficiencies and inappropriate financial practices in these "non-financial" business functions. Many organizations permit managers, supervisors and even clerks to have some financial "authority" without either the specific delegated responsibility or an understanding of important financial concepts.

Such decisions often occur on the spur of the moment, in order to move a transaction along to its completion. However, success for the function -- such as closing a sale -- may actually be a mediocre result for the organization if the financial component of the deal is a nominal gain or a loss. Estimates of financial inefficiencies in U.S. business are an annual $30 billion, according to Sagner/Marks data. Clearly, the profession must actively pursue opportunities to improve business processes and restore competitive performance.

New Economy companies will continue to focus on business activity groupings that optimize the only resources that cross all organizational functions: finance and information. And financial managers must begin to accept the idea -- regardless of functional domicile -- that they are their enterprise's experts for managing its financial assets.

James S. Sagner is a senior managing principal of treasury consulting firm Sagner/Marks, and can be reached at 914.686.2732.

Financial Functions in the Cashflow Timeline

Collection Functions

Organizational Function         Representative
                               Financial Actions

Sales and marketing      Pricing decisions
Billing                  Invoice generation
Credit and collections   Credit policy


Organizational Function         Representative
                               Financial Actions

Sales and marketing      Sales financing
Billing                  Invoice review
Credit and collections   Late payment scheduling
                         and pursuit

Enterprise Functions

Organizational Function         Representative
                               Financial Actions

Information systems      Job runs with a
Global business          finance element
                         International
                         transactions

Organizational Function         Representative
                               Financial Actions

Information systems      Technology procurement/
Global business          negotiation of terms
                         Review of sovereign/
                         country risk

Disbursement Functions

Organizational Function         Representative
                               Financial Actions

Purchasing               Purchase of materials
Payables                 and components
Human resources          Early payment of invoices
                         Payroll mechanisms

Organizational Function         Representative
                               Financial Actions

Purchasing               Vendor selection and
Payables                 price negotiation
Human resources          Analysis of cash discounts
                         Direct deposit promotion