E10: Introduction to Treasury

In the world of finance, where questions about the core of a business's operations are abundant, the role of cash stands out prominently. 

We're honoured to have Hesham Moustafa with extended experience in treasury. Hesham was awarded Best Working Capital Management Solution in the Adam Smith Awards 2020. In that capsule, Hesham demonstrates many aspects of the treasury. He explained the role of treasury in business and took us through different creative finance initiatives in the Finance world in the past few years. 

Cash has a critical role in the financial ecosystem. From its significance in reflecting a business's true financial position to its proactive approach in shaping future outcomes, treasury emerged as a dynamic and pivotal aspect of corporate finance that warrants greater recognition and understanding.

Hesham Moustafa highlights that successful treasury operations are about more than just injecting more capital or increasing cash flow. Instead, support from all stakeholders, including banks, is emphasized. Effective cash management results from a well-thought-out capital structure and financial strategy, which ensure a company's financial stability and growth.

Hesham loves to see treasury as the heart of the business, pumping cash flow and liquidity into every aspect. Just as a beating nature sustains life, the treasury function ensures the continuous flow of funds that fuels growth and supports the enterprise.

During the episode, I discussed the choice between vital financial statements — the balance sheet, income statement, and cash flow statement with Hesham. And we agreed that emphasized the criticality of the cash flow statement. A cash flow statement presents the most authentic and accurate reflection of a business's financial health. In his view, financial literacy cannot be comprehensive without accounting for cash flow, making it an indispensable tool even for non-financial professionals.

Hesham also shared his life purpose: to lead a life of meaning by helping individuals at work or in the broader world. He found profound joy in sharing knowledge, whether teaching something new, offering valuable advice, or enabling others to perform better. He firmly believed that extending a helping hand to others enriches one's own life immeasurably.

 He recalled selecting finance as a study of choice because he loves working with numbers. His passion for working with numbers was a driving force that led him to embark on a career in finance. Despite the possibility of an alternative path, he affirmed his contentment with his chosen trajectory.

The conversation circled back to the guest's long-standing commitment to the field of treasury. Hesham explained that treasury uniquely focuses on the future, unlike other roles that dwell on the past or present. The intrigue of shaping future financial landscapes and the challenges it presents has kept him enamoured with treasury for over two decades. He emphasized that while many professionals are acquainted with tax, controllership, and business partnering, treasury still needs to be explored. He elucidated that the treasury department is at the heart of businesses, managing financial risks, optimizing liquidity, and ensuring seamless operations. It is the guardian of a company's financial stability and growth prospects.

Then Hesham shifted the great to share some light on capital structure and financial structure. Often used interchangeably, these terms carry distinct meanings that significantly impact a company's financial health and growth trajectory in a recent discussion. The intricacies of these concepts were unravelled, shedding light on their significance and relevance in the corporate world.

Capital Structure: Building the Financial Framework

Hesham emphasized that capital structure revolves around two pivotal components: equity and debt. Equity signifies the owner's investment, whereas debt signifies the company's borrowings, often from financial institutions. The decision on capital structure is critical, as it determines the proportion of equity and debt, which directly impacts risk, returns, and tax considerations.

Hesham Moustafa underscored that the determination of capital structure is not a one-size-fits-all endeavor. Various factors come into play, including regulatory frameworks of the country, the business's industry, and the company's specific goals. A critical ratio that influences this decision is the debt-to-equity ratio, which quantifies the proportion of borrowed funds compared to equity. The regulatory environment and banking constraints also play a pivotal role in shaping capital structure.

An essential point raised was that the choice of capital structure should be made at the business's inception, considering the company's long-term financial objectives and risk tolerance. Once set, capital structure decisions can impact the company's ability to secure funding, manage cash flows, and achieve its strategic goals.

Financial Structure: Orchestrating Business Financing

Transitioning to financial structure, Hesham delineated its distinction from capital structure. The financial structure encompasses a broader spectrum, encompassing equity and debt and other financing mechanisms and strategies a company employs. This includes trade credit, working capital management, shareholder loans, and other innovative methods to fund operations.

 The role of financial structure in unlocking business potential. For instance, optimizing payment terms with suppliers and customers can provide a strategic advantage by generating more time to pay or accelerating cash inflows. This approach often leads to enhanced relationships and cost efficiencies while simultaneously acting as financing.

The adaptability of capital structure and financial structure 

A crucial takeaway from the discussion was the adaptability of these structures. While capital structure is best defined at the onset of a business venture, financial structure is dynamic and can evolve over time. Businesses should be prepared to adjust their financial structure to align with changing market conditions, growth prospects, and financial goals. Capital structure lays the groundwork, while financial structure orchestrates the tactical execution of financing strategies. Both structures ultimately shape a company's ability to navigate financial challenges, seize opportunities, and chart a path toward sustainable growth.

The different types of financing, such as overdrafts, working capital financing, LCs letter of credit, LGs letter of grantees, IDCs Income document for collection, standby letter of credit, medium-term financing (1 to 3 years), and long-term financing (5 to 7 years). These options depend on the nature of the business, its lifecycle, and the company's cash flow projections. The concept of instalment payments and the importance of accurate cash flow forecasting are also emphasized.

Hesham also highlighted the challenges startups face when dealing with cash shortages. It's noted that negotiations with banks can be tricky due to the absence of financial history. Building relationships with large customers who offer supplier finance programs is suggested to bolster cash flow. He recommends exploring bank finance programs and considering smaller credit lines to build trust.

Hesham Moustafa shared the transformation of treasury practices. It's revealed that technology and automation have dramatically changed the landscape. The advent of electronic payments, mobile banking, and artificial intelligence has revolutionized how treasury operations are managed. The shift from manual processes to digital platforms has made transactions faster and more efficient. Hesham also sees that physical bank branches might become obsolete, replaced by smart branches or completely digital interfaces. However, the essential factor remains the relationship between the treasurer and the bank, where trust, honesty, and effective communication drive success.