Agustin Mackinlay (00:00)
How are treasurers coping with volatile times? What combination of technology, hard skills and, why not, emotional intelligence is needed for members of the treasury team to make a contribution towards enhancing the value of the firm? Welcome to CurrencyCast! My name is Agustin Mackinlay. I'm the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure to welcome Alexander Ilkun.
founder and chair of the Baltic Treasury Association. Alexander, a warm welcome to you and thank you for joining us in this episode of CurrencyCast.
Alexander Ilkun (00:41)
Thank you, Agustin. It's a pleasure to be here. Thank you for the opportunity to speak today.
Agustin Mackinlay (00:46)
All right, Alexander, let's start by having you introduce yourself to the audience.
Alexander Ilkun (00:52)
Thank you. So I am a founder and chairman of the Baltic Treasury Association, the association to bring the treasury professionals together, share the experience, break the silos and elevate the recognition of the profession here in the Baltic region. Also a founder and a consultant at Clearbox, the treasury consulting and outsourcing company based in Latvia, helping companies to improve.
and transform the treasury functions and automate where possible as well.
Agustin Mackinlay (01:26)
Well, that looks really interesting. Alexander, let's start with some general views on treasury management, a guest at CurrencyCast recently told me, look, Agustin, every business is different, but treasury is pretty similar. So we do three things, technology and cash and liquidity management, and financial risk management. Alexander, do you agree broadly with that view?
Alexander Ilkun (01:56)
Yeah, I do agree with this assessment. I also feel quite often when speaking to corporate treasurers that we pretty much do very similar things. And I like to bring Pareto principle here 80-20, right? 80 % is the same, 20 % is different. Maybe it's something that is company-specific, organisation-specific, right? But typically corporate treasurers, 80 % of what we do is quite similar and transferable.
In terms of the areas that we cover, I like to I think about treasury as having four pillars, cash management, risk management, corporate finance, and debt and capital markets. These are four different areas of expertise that we may develop in treasury. All of this is empowered and enabled by treasury technology today.
Agustin Mackinlay (02:52)
All right. I'll come back to this in a second, but really interesting, the 80-20 view there. Alexander, when we consider, let's start with treasury technology, when you consider investments in treasury technology, here's our approach at Kantox, we tell treasurers, I think that you have infinite resources at your disposal. Then...
arrive at a delta or a variance with what you are doing right now and try to quantify that among others in terms of protecting profit margins and from there you arrive at a return on investment. What is your approach when you advise clients in say medium perhaps to large companies about investments in treasury technology?
Alexander Ilkun (03:44)
Yeah.
Agustin Mackinlay (03:44)
How do you make that investment
decision, in other words?
Alexander Ilkun (03:47)
Yeah, absolutely. It's an interesting analogy about the infinite resources. I typically look at this as what the perfect world would look like. That's what I'm trying to imagine. Hey, imagine Utopia. What does it look like for you? You can know it from your prior experience, right? Because you've worked somewhere and you've transferred that experience over to new company. You can learn it from your peers, publications, conferences.
There is a lot of information out there that is available. You can also engage a consultant to help you and audit your treasury function to see where your improvements are. But essentially you define, hey, what does good look like? Where would you like to get to? And then as you also say, you assess where you currently are in terms of your processes, technology, people as well, their development of their skills, and you formulate how you get from
Place A to place B, right? How do you get from start to not exactly finish, but a checkpoint, right? Because the finish, it's always developing, right? So how do you move from there? You define the priorities as you do that. Now, in terms of return on investment and building a story around why you have to do a particular improvement or an implementation of the system, this is where it becomes tricky.
Because in my experience, sometimes you have quantifiable things, which are fairly easy to deal with. Cost reduction, savings of manual hours, you can quantify that and look, compare that against the investment that you make in the technology process improvement, et cetera. Now, what is more difficult is where you don't have a baseline, right? For example, things like improving the error rate in the process, the rework effort.
Agustin Mackinlay (05:40)
Right.
Alexander Ilkun (05:41)
So how do you quantify that unless you had a system beforehand that really tracks these things? This is where it becomes more difficult, although possible, because this is where you can exercise judgment and you can say, I think we make like 5 % of errors and it takes this much time to work through those issues. Now, where he gets to really tough
area is dealing with qualitative assessment or dealing with processes that didn't exist before. And this is where you may be challenged, especially in implementing larger and going through larger projects, implementation of your treasury management system, for example.
Agustin Mackinlay (06:17)
Right.
Alexander Ilkun (06:28)
What's the benefit of having a system that is essentially a single source of truth for treasury? What is the benefit of being able to calculate your fair market value, return on your investments independently from your bank? So how do you quantify that? It's a little bit more challenging, but if you know where you're going to, again, going back to that point, if you know where you're going to,
if you know how the good looks like, and if you are able to substantiate your story with external experience as well, that is where you can develop this learning platform. You can develop this need for that improvement or that implementation.
Agustin Mackinlay (07:14)
Yes, really interesting. Now I take two points there from what you say. First, this idea that some of the gains are quantifiable, some are not. We see that all the time in our own assessments with clients, The return on investment in terms of currency management automation.
But what about the benefits of automation? Sometimes we leave that to the client to make themselves that assessment. Another point.
Alexander, when I need to come back to you, to what you said, these four pillars of treasury management, I feel that you are maybe, correct me if I'm wrong, but thinking in terms of silos here. I say this because we, so for example, when I asked that to all treasurers, right, that come to the show, is it...
possible to really isolate those functions, for example, liquidity management and foreign exchange risk management. Tell me how do you view the links between the areas?
Alexander Ilkun (08:18)
Mm.
Yeah, that's a great point. And that's one thing in my work at the association and as a consultant as well. One thing that I really preach for is breaking those silos. So it's great that you bring up the point. Now, the different pillars doesn't mean that they are silos or they are completely independent. It only means that they might require a slightly different skill set.
to effectively and efficiently execute those functions. Now, there definitely are links between them. And as you touched on cash management and risk, so let's start with that one. Ultimately, you can say that everything in treasury comes down to cash. hey, everything that happens in treasury ultimately hits your bank account as an inflow or as an outflow.
Agustin Mackinlay (09:11)
Thank
Alexander Ilkun (09:18)
Right, so from risk management perspective, right, what you are really interested in is quantifying and being able to say how much cash will you have at some point in the future in a particular currency to meet your outflows, to meet your obligations? How much will you have in your parent entity that may have external obligations, right, that may have taxes to pay, that may have...
dividends to pay, right? It may have corporate bonds that it needs to settle. So how do you get all of that back into that parent entity from your subsidiaries if you are a multinational? So risk management comes as an area that is very closely interlinked with that subject because you will most likely have your cash dispersed across the organisation in different currencies as well.
Agustin Mackinlay (09:48)
Right.
Alexander Ilkun (10:12)
subject to volatility of foreign exchange, right? And you need to be able to forecast and predict how much you will get back in that at some point in the future from those entities. And you have to protect yourself from volatility using the risk management skills that you will have. they are all of these pillars. They are absolutely interlinked. I totally agree with you.
Agustin Mackinlay (10:38)
Absolutely. We just produced a report on the links between cash and liquidity management and foreign exchange risk management. And maybe there's one area that really, really touches on the two is swap execution, right? When you need to adjust your hedging position to the settlement on the underlying commercial transactions. And that's a field, by the way, that is ripe for automation, a really interesting area.
there are sometimes unseen links between, say, for example, working capital management and foreign exchange risk management. So, for example, when you sell in the currencies of your customers,
experience tells us that you're lowering the credit risk in those accounts receivable. And perhaps even more interesting when you buy in the currencies of your suppliers, perhaps you can get extended paying terms, which leads us to the topic of foreign exchange risk management. And in fact, as I told you in a previous conversation, one of the reasons why we wanted to
interview you had to have you on the show was about because you wrote a really really interesting post on LinkedIn a couple of weeks or a month ago and it was on the topic of for example a euro based company that is on the contracting side is forcing suppliers to use the euro right and
What you said there, if I remember well, was that's going to lead to more volatile pricing. Alexander, explain to us a little bit more what you mean by this.
Alexander Ilkun (12:19)
Yeah, absolutely. Thank you for referring to that LinkedIn post. I think that's one of the things that I see when I speak with entrepreneurs and treasurers here in the Baltics. We do charge our customers a lot in euro and those customers may be based in a country that is not a euro user.
Could be Poland, could be Sweden, could be Norway, could be any other country outside of the EU that doesn't...
Agustin Mackinlay (12:51)
So you're talking
really from your personal experience. That makes it even more interesting. Go ahead.
Alexander Ilkun (12:57)
Yeah, sure. So I think one of the things that I hear often when I ask a question, hey, do you have foreign exchange risk? People say, no, we don't because we charge everyone in euro Right. And then I ask, OK, where are your clients based? And that's when I hear that they are based in the countries that do not use euro. And therefore, I ask the question, well, how do you I think your customers are making the purchasing decision?
And it can be extended to your vendors as well. If you negotiate a Euro contract with a Swedish based supplier, they will be converting into their home currency most likely. So what happens is on your books, you don't have the exposure, but essentially you, by doing this, you outsource the pricing or purchasing decision to another party. And instead of tackling
Agustin Mackinlay (13:36)
Yeah.
Alexander Ilkun (13:54)
the volatility and the uncertainty of foreign exchange in your own company by having the visibility and taking the risk management action, you leave it to another party to take that action. Which can come at the worst possible and the least opportune time for you, right? If you're pricing your goods or services in Euro and let's say Swedish Krona,
suddenly depreciates, right? You may find yourself in a position where your price is no longer competitive for the local market, right? And maybe it wasn't competitive to start with. Maybe you underpriced in the past because you priced in euro and now you're overpriced and you haven't changed anything in terms of your own pricing, but the foreign exchange markets, they changed that whole composition and may lead
to that purchasing decision to be made by the customer that is not in your favour.
Agustin Mackinlay (14:55)
Absolutely. Look, it goes really at the heart of what we call at Kantox embracing currencies, selling the currencies or taking ownership, let's put it like this, taking ownership of the foreign exchange risk management process. But to what end? To embrace currencies, namely to sell confidently in the currencies of the customers and confidently also buy in the currencies of your suppliers because
Alexander Ilkun (15:08)
Mm.
Agustin Mackinlay (15:24)
As you said, the foreign exchange risk doesn't suddenly vanish, right? It needs to be managed in this particular case that we discussed by those suppliers, which led us to think in terms of what we call FX sensitivity in the following sense. If you're a business that has a lot of weight of FX in terms of
of the business operations and you have relatively low profit margins, then FX is going to become a strategic consideration. And if you leave that foreign exchange risk management, in this case, to your suppliers, well, guess what? You're going to have to face markups and that is going to affect your profit margins. And here's the paradox. Instead of making you
less sensitive to FX, well you become more sensitive because your competitors, of course, are not going to make that mistake. Also, really an interesting point, Alexander, and really I was absolutely so impacted by that LinkedIn post of yours.
Alexander Ilkun (16:36)
I think I just wanted to add here as well one thing that you said about sensitivity and being more sensitive. I wouldn't say like if you outsource that complexity of FX risk to another party, it's not making you more or less sensitive to FX movements. But what is happening is that the difference is forecastability and your ability to take action, right? So
This is where the decisions that are made by others are maybe more sudden, more immediate, maybe unwelcome or unexpected by yourself, right? If you're not tracking those as exposures, right? And therefore, it doesn't leave you any room to adapt your business, to adapt your strategy. You essentially become reactive,
at that point. As opposed to working in the currency of your vendors, in the currency of your customers, right? If you have that exposure on your own books, then you're able to see what that exposure is. You're able to quantify that. Once you quantify that risk, you can take the risk management action, right? But you also can transfer some of the risk.
Agustin Mackinlay (17:32)
Mm-hmm.
Alexander Ilkun (17:53)
Again, not in perpetuity, right? Because no forward will give you perpetual fix, right? But you buy yourself time to understand what is happening in the market to figure out, hey, can I accept this risk in my profit margin without raising prices? Do I need to manage the relationship with the customer to understand their purchasing power, right? To understand if I'm able to raise prices.
Agustin Mackinlay (17:58)
Right.
Alexander Ilkun (18:21)
to see what is happening in the local market in terms of your competition. It just gives you time to adjust your treasury strategy as well as the business strategy if necessary.
Agustin Mackinlay (18:34)
That's right. We go beyond so-called FX headwinds and into the business part of the job, right? Which is something that we like to emphasise a lot as well. Alexander, in your work as a business manager, business consultant, you said that one of the goals, I'm quoting you is to optimise and automate processes, working with individuals to improve.
Alexander Ilkun (18:44)
Alright.
Agustin Mackinlay (19:01)
Also their emotional intelligence skills. So there are two questions here. The first one, of course, tell us more about this. And then maybe I'll come back with some of the links with financial risk management. But first, tell us a little bit more what is implied by this.
Alexander Ilkun (19:22)
Yeah, absolutely. I think especially nowadays with technology advancing so fast, and we know AI, right, is now the buzzword. There are also a lot of articles about people being laid off, right, because they are getting replaced by AI, etc. Now, when it comes to treasury function, I don't quite see that happening. And I
do not necessarily see that happening in the future as well. My feeling that AI is going to change how we work, and technology in general is going to change how we work if we are able to adapt to it and improve our skill set. So what technology does nowadays, it removes the monotonous manual work crunching the numbers, copy pasting the numbers from place A to place B. ⁓
allows us to the processes quicker, faster, so that we can spend more time analysing what the data actually tells us and working with that data. Now, where emotional intelligence comes into play, as people in treasury and treasury teams are typically very lean,
Right. We do not have an abundance of people doing a lot of stuff. Right. We typically have quite small teams in corporate treasury. So the way I see it happening, technology frees up valuable time for people to focus more on the analysis as well as working with others. Right. Because we in treasury, we do not work in silos. And that's one of the things that I've seen throughout my career, more and more treasury teams have become project managers.
Treasury teams more and more opened up and have begun working with other stakeholders and become true business partners to the businesses as well. And guess what? Emotional intelligence is very important when it comes to working with people. Because emotional intelligence gives you the necessary skill sets to first of all understand your own emotions and how they affect your decision making and your behaviour.
Agustin Mackinlay (21:18)
Yep.
you
Alexander Ilkun (21:38)
But also understand the emotions of others and how do you work with other people? How do you create a cohesive and efficient, effective team? How do you make sure you generate that buy-in? How do you create a story that resonates with people so that they can see immediately what's in it for them? So emotional intelligence becomes more and more important as technology helps us to
shift our focus to these value added tasks. Now, another thing that is important for treasury quite often, especially in FX risk management, we see a lot of volatility from time to time, right? And this is where volatility may lead to some panic led decisions, right? Where, ⁓ currency collapsed 10%, let's hedge now, right? And guess what?
It collapsed and then it bounced back 7%. And you hedged at the worst possible time, locking in your loss and then losing extra on the bounce back. So emotional intelligence gives us the necessary skill sets to regulate the emotions, understand what's driving us, minimise the chances of amygdala hijack and decisions based on panic, based on impulse.
Agustin Mackinlay (22:34)
Yes. Right.
Alexander Ilkun (22:59)
It gives you the ability to achieve this level-headedness in treasury decision-making, which is of paramount importance because what we do impacts the financials of the company.
Agustin Mackinlay (23:12)
Absolutely. Look on that topic, the biases that we are confronted to, I think this is one of the most incredible stories in FX risk management over recent months, and Look, I read reports every day, dozens of earnings reports from companies. And you see...
that over the last month there's been huge losses due to the failure of protecting the company's exposure on the revenue side with Brazil especially, right? Because the Brazilian real has almost 15 % interest rate. So that creates a very high cost of hedging. And that forward rate bias has led so many treasurers to sit back,
hope for for the best. And what has happened is that not only the real continued to weaken but the central bank further raised interest rates so you would have, you'll have a situation when you procrastinated and guess what it's even a lot worse and a lot more expensive. And I think here's where correct me if i'm wrong or if you see it in a
in a different way, but technology does allow people to take stock of those biases, right? If you know that you have the tools with, among others, real-time API connectivity to delay hedge execution in the face of those unfavourable forward points, so you are safe in the knowledge that...
Alexander Ilkun (24:39)
Mm.
Agustin Mackinlay (24:55)
Look, there are tools out there. I don't need to procrastinate. But this is where I think those biases can hit you at the worst moment.
Alexander Ilkun (25:08)
Right. I think it brings me back to one of the associations events, the first one that we had in March that was actually focused on FX risk management. one of the topics that we covered there was effective and efficient risk management program. How does it look? Right. And one of the things that I really
focus on when implementing FX risk management programs is that it is consistent, structured, repetitive, right? And it has this continuous monitoring loop. So I would say what is of paramount importance is that you build a process that reduces the chance of a biased decision, right? That takes into account
what is happening out there in the external markets, right? That takes into account the hedging costs or hedging benefits, if you're lucky, right? And that's so that you are able to make a decision based on ⁓ the parameters that are out there and essentially ⁓ say, okay, we are bringing down the risk from this level to this level, which is below our limits.
and you're able to quantify what that risk reduction is and at what cost, at what benefit, right? So that you can then explain to your FP &A teams, your CFOs, why they see a particular impact in a FX gain loss line. Now, as you can hear from my answer, I still haven't touched on automation, right? And how automation helps with service biases. And that's because...
⁓ Once you, it's once you have the ⁓ risk management program in place, right, which is structured, which is regular, then you start thinking about, okay, how do we automate that process to reduce the necessity for the person to make a decision, right? Because essentially after performing risk management function for so many years in my career, I realized, look, I actually do not make decisions.
Agustin Mackinlay (27:14)
Right.
Alexander Ilkun (27:25)
from one once to the other, all of my decisions fall within a particular algorithm. And that's what you can automate. Now, the important thing with automation, if you build it properly, you should reduce the process variability. So the process should stay the same. So that should be greatly reduced. And then another component, if you build the automation process properly, it should remove or reduce biases.
Now the problem here is you can build a fully automated and very biased process as well. Right? So that's where it's important for you to take a look at the, at the process and say, okay, where are the potential biases? How do we make sure we take them out and build a process that is as objective as possible. Right. And then you repeat that process from one month to the next, the one period to the, to the next, and you monitor the results.
If the results are in line with your expectations with what you said your risk management goal is, which typically is reduction of variability in your FX impact, then that's great. Your FX program works.
Agustin Mackinlay (28:41)
But that's really interesting. It reminds me that as you make the connection with the biases that we all face, one way to try and control the impact of those biases in foreign exchange risk management that we always are keen to apply is look at your pricing parameters. Do you
update prices very frequently or do you price for just a campaign period and have the ability to reprice at the onset of the following campaign? Or do you want continuity on pricing over say a number of campaign periods? That's what leads us, in our opinion, mostly to those different hedging programs.
I'm trying to make the connection with what you say on biases and that's also a way to remove some of those biases. Alexander, I told you that I read a lot of those reports by companies. Here's Germany's Merck citing a high degree of uncertainty in forecasts due to decisions of the US administration.
And of course that brings us a little bit into the topic of volatility, uncertainty and especially perhaps the less than stellar visibility of your cash flows in terms of financial planning. What do you see here? And again, is there a contribution in terms of automation to be made?
Alexander Ilkun (30:13)
Yeah, absolutely. I think where it comes in terms of forecast ability, right, we don't have a crystal ball, right. If anyone could forecast what the FX rates would be, they would be very rich, right. So banks regularly forecast what the FX rates will be. And I think there is a joke that their forecasts are worse than the weather forecasts, right. So again,
And that's the reality. You just can't do it ⁓ even in a stable world, where the world is stable from geopolitical perspective. And nowadays it definitely is not. So forecasting is near impossible. Now, what I like about FX risk management is that it actually leaves little room or little need for forecasting of FX rates.
You are able to take a look what's happening in your books, right? What is already issued in terms of invoices, and then you are able to take action from balance sheet hedging standpoint to reduce the revaluation impact. Where forecasting becomes important is if you're trying to protect your operating margin as part of forecasted cashflow program, right? So this is where you need to forecast
Agustin Mackinlay (31:31)
All right.
Alexander Ilkun (31:34)
your future revenues and expenses with a certain degree of confidence, right? So that you are able to apply for hedge accounting designation and make sure that your program remains efficient and effective, right? So this is where forecasting becomes important. And this is where it really depends on your business model, how much
Agustin Mackinlay (31:37)
Yep.
Mm.
Alexander Ilkun (32:01)
If at all, you will be able to protect your budgeted revenues and expenses in your company currency, in your budget currency. Forecasting in this area is important. It is possible in many industries, not all, right? In many business models, not all. And where I feel the... ⁓
Agustin Mackinlay (32:11)
Right.
Alexander Ilkun (32:26)
the possibility is appearing, is really embedding technology in the process, right? So that you're using the advanced technology that we have today, that you're using machine learning, for example, to forecast into the future to give you that first view of what the future will look like. And then you assess if it makes sense or not, and you adjust your numbers.
based on your knowledge of how the business is going to evolve in the future. So I think this mix of technology and human input is becoming and will become over time more and more potent. And that's where I feel, yes, there is a scare that technology is going to come and take over the jobs.
But I do not feel that this is something that is going to happen on a massive scale in the area of treasury in particular. I feel this is where it's important for people to embrace the technology, know what's available out there and develop their skill set to use the technology that is available in addition to their business knowledge, to their
technical, say finance, treasury knowledge that they have and then together they become this professional that is able to do more and have more impact in the company that they're working in.
Agustin Mackinlay (33:58)
Right. One way we deal with the unavoidable uncertainty of your cash flow forecast in terms of the financial planning is if you want to protect the budget rate, we tell these treasurers is to use a real-time API connectivity to split your exposure, for example, in three equal parts and protect it with a
automated stop loss orders such that the average of those stop losses matches your budget rate. And what happens here is that to the extent that hedging is delayed, while treasurers can profit or take advantage of the information that comes from incoming sales or purchase orders to update their forecasts. And that update is automatically embedded
into the problem. That's one way technology does help.
by
Absolutely. ⁓ Alexander Irkun, Chair and Founder of the Baltic Treasury Association. I think we've covered a lot of ground. We started with Treasury in general, foreign exchange risk management, liquidity management and cash management. We went on to discuss the problems of forecast accuracy and even how emotional intelligence and other soft skills can
help treasures, deal with today's world? And is there something you would like to add, Alexander?
Alexander Ilkun (35:31)
I think I would like to reiterate the message for treasurers and CFOs to look at the treasury processes, to see if they are for purpose, to see if they need to be improved, if they can be automated so that you are able to transition people from working with numbers to
analysing what it means for the business and how they can bring strategic value to the business, how they can, how the treasury professionals are able to play the role of a true business partner, advancing your business model and making your business more successful. And of course, as you do that and as you invest in the process transformation, automation, don't forget
that you need to upskill your employees as well, give them the opportunity to learn, help them with their emotional intelligence skills so that they can work better, more qualitatively with the other stakeholders in the organisation to build that business, promote and advance that business together as a team.
Agustin Mackinlay (36:49)
Well, that's a great way to end our conversation. But Alexander, I'm sure we'll talk another time here on CurrencyCast. And thank you again for joining us today.
Alexander Ilkun (37:02)
Thank you for this opportunity. was a pleasure being with you.
