5 Steps Your Treasury Department Should Take During an Acquisition – November 04, 2021

Posted by Kevin Meehan

A critical component of any acquisition is ensuring business continuity throughout the integration, therefore easing the burden on your employees and allowing your business to realize deal synergies. The treasury function plays a critical role in that continuity. Understanding the current and future state of the treasury department, and focusing on strategy, liquidity and execution are five key areas to address during an acquisition.

1. Develop an Understanding of “Current State”

The first step to business continuity is fully understanding the operations of the company you just acquired. While financial details are disclosed during due diligence, internal processes often are not discovered until the acquisition is complete. Following a transaction, treasury leadership should seek to obtain a complete understanding of the acquired company’s treasury department.

Cash and Credit Considerations
Without an understanding of the current state of the treasury department, leadership cannot adequately plan for the people and processes of the combined business. Operating bank accounts should be top of mind when analyzing the treasury situation. In particular, identify the following items related to the acquisition’s operating bank accounts:

  • Cash on hand
  • Payroll accounts
  • Check writing accounts
  • Location of cash (onshore/offshore) and the balance in each account

Cash quantity, cash location and disbursement accounts are vital aspects to ensuring liquidity and controls. In addition to the operating banking footprint, treasury leadership should work to understand the accounts payable and accounts receivable balances with the respective vendor payment and customer collection terms. These are critical components of managing liquidity for the combined business. Another source of liquidity — credit — should be evaluated in terms of the following:

  • Outstanding balances
  • Approved credit limits
  • Expiration dates of any credit lines
  • Debt covenants
  • Maturity and payoff schedules
  • Hedging strategies and existing hedge contracts
  • Payment terms
  • Modeling the acquisition’s impact on debt covenants, liquidity and working capital

With a proper understanding of the outstanding credit, credit terms and the impact of the transaction on credit, your treasury department can have a pulse on the combined business’ capabilities to access the credit markets.

Technology’s Role
Your treasury department should also leverage technology whenever possible to make the transition smooth and secure. Consider Enterprise Resource Planning (ERP) tools, treasury management systems, online banking portals, and more to aid with security and controls. Identify who has access to online bank portals and are allowed to set up or approve payments, and identify those who have access to physical tokens, digital tokens, mobile tokens and other one-time passwords used to authenticate users in the online banking portal. Update any change in control and legal documentation promptly to ensure timely access to bank accounts and other necessary systems.

Process and Flow
Finally, treasury leadership should analyze processes, personnel and any “in-flight” initiatives at the acquired business. For a cohesive treasury function in the future, leadership must account for process discrepancies, suboptimal processes, bottlenecks, and key cost and efficiency drains at the acquired business. While this analysis occurs, strive to continue operations at the respective businesses operating separately.

2. Develop a “Future State” Vision

After gaining an understanding of the current state, planning for the future state treasury function can begin. Alignment on a strategy and vision with goals and objectives supported by the executive team are the main components of a successful integration plan. Treasury leadership must first decide upon the consolidation strategy. Where does it make sense to combine operations, and which operations remain separate? Common consolidation considerations include:

  • Roles
  • Strategic banking partners
  • Bank account consolidation
  • Credit lines, borrowings and other credit sources
  • Technology

Consolidation can be a catalyst for sizable cost and operational efficiencies but presents risks within the treasury department and the broader business if not carefully thought through. In conjunction with the consolidation strategy, treasury leaders should identify the interconnections between the businesses. The interconnections present an opportunity for quick wins, which can lead to more transformative change later. Finally, leadership must sign off on the future state vision and be informed (and in agreement) with any major changes to it.

3. Produce a Strategy/Roadmap

Now that the future state vision is defined and approved, it is time to turn that vision into an actionable strategy and produce a roadmap. There are many key features of a successful strategy and roadmap, including:

  • Defining deadlines
  • Identifying stakeholders for accountability
  • Determining Key Performance Indicators (KPIs)

KPIs for treasury integration can include technology consolidation savings, the number of bank accounts closed, percentage of invoices paid on time, operational cost savings from process improvement and more. KPIs, in conjunction with defined objectives and deadlines, are powerful ways to track the success of the integration. 

When limited resources are available, your treasury department should first prioritize the highest dollar value cost savings. For acquisition-heavy companies, time is of the essence to pursue synergies before the next acquisition. In addition, during this time treasury leaders should not overburden their new and existing employees with extensive process changes. Generally, we recommend planning one workflow redesign at a time unless absolutely necessary.

Finally, establish a communications plan to communicate integration status, updates, etc. with leadership and members of the treasury department. As with the future state vision, it is important again to gain leadership sign off on your roadmap.

4. Manage and Optimize Liquidity

The combined business will have entirely new liquidity requirements. A business’s liquidity derives from three factors: cash inflows, outflows and existing sources of liquidity. Treasury leadership must first trend out expenses, and ultimately operating cash flow needs to account for the increased obligations of the combined business. The Cash Conversion Cycle (CCC) is equal to the sum of the Days Inventory Outstanding, Days Sales Outstanding and Days Payables Outstanding metrics. CCC provides a barometer to the business’ cash flow. Components of the CCC over which the treasury function has direct influence are Days Sales Outstanding and Days Payables Outstanding. Companies can implement various strategies to shorten Days Sales Outstanding and lengthen Days Payables Outstanding to improve their cash flow, but first it’s important to consult industry benchmarks to identify and prioritize poor-performing metrics.

Expanding or restricting credit terms allows a firm to attempt to manage collectability. Enacting a stringent credit review process up front to assess the customer's ability to pay can greatly improve collectability as well. Other times it’s a good idea to begin relationship-wide credit risk assessments for multi-entity customers. After an acquisition the credit risk a client may pose to the post acquisition consolidated firm may be substantial. For customers with past due, open AR balances over 30 days, consider contacting them to share any changes in communication preferences or process to ensure invoices and customer statements arrive at the correct destination. Businesses can see many positive outcomes, not just improving their Days Sales Outstanding, from placing credit holds on past due customers. Businesses can also choose to offer discounts to incentivize customers to choose early payment. By offering a discounted invoice for early payment, a business can reduce its Days Sales Outstanding and improve operating cash flow.

To improve (increase) Days Payables Outstanding, negotiate more favorable payment agreements and ensure outstanding invoices are paid according to terms. For cash flow reasons, a business may wish to not pay an invoice until it is due. Identify these cases and ensure the payment process includes a review of accounts payable aging report.

5. Execute

Once the roadmap is finalized, it’s time to execute, monitor and adjust plans as necessary. By tracking deadlines, KPIs and keeping stakeholders accountable, leadership should have a strong sense of the status of the integration. While integration is the top priority, the treasury department should use this acquisition to produce a model for future acquisitions.

Plan to templatize and adjust the process from successes and failures of the current integration. Treasury leaders should also plan the ongoing support model throughout the acquisition. Knowing when to lift and shift or transform the process is vital to achieving operational efficiencies. During an acquisition, the available internal capacity is typically very low — making it often wise to bring in contractors to fill the void and bring much-needed support and experience to the treasury department in a difficult time.

Acquisitions are extremely demanding, and they will test the capabilities and resolve of an organization and its people. They are also opportunities for transformational business change. Take advantage of the open mindset throughout the organization to redesign processes and pursue change that will have a lasting impact on the success of your future treasury department.

Contact John Cavalier at jcavalier@cohenconsulting.com, Jason Zeman at jzeman@cohenconsulting.com  or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.