A Guide to Treasury Centralisation

Most large corporate treasuries have been trying to move to a more centralised structure for a number of years, but the current turbulent economic conditions make it increasingly necessary for corporations to have visibility and control over their cash. Advances in technology have made it possible for corporations to streamline treasury operations that, as a result of increased globalisation, had become decentralised across a number of countries and operating units.

But the aim to improve efficiency, cost control and forecasting that once predominantly drove moves towards centralisation has been joined by a more pressing concern – that of risk control. With sovereign debt problems in Europe, volatility in the global stock markets, increasingly stringent financial sector regulation, new capital adequacy requirements and the financial difficulties at some banking institutions, visibility and control of cash have never been more important.

Today’s treasurers are focused on a wide range of risks, including liquidity, currency and counterparty risk. For example, managing liquidity risk has become a more important element in overall risk management strategies. The risk that a company will run out of cash from insufficient revenues, excessive expenditure or the inability to access funds from financial institutions is much more tangible in the current period of constrained cash supply.

Currency risk, which arises when the price of one currency changes against another, is a major concern due to the previously unseen volatility in the markets, and corporations must ensure their currency positions are hedged adequately. Dealing with counterparty risk has also taken on greater importance as corporations need to ensure not only that their banking partners are stable and committed to their business for the long term, but also that their myriad suppliers will remain in business. Now, more than ever, corporations need to know that they are dealing with the right partners.

For all of these reasons, the visibility and accessibility of cash is vital. At the same time, the technology to enable treasury centralisation has become more sophisticated and more affordable. These two factors will drive further centralisation.

Benefits of Centralisation

A centralisation project should enable corporations to optimise liquidity management through streamlined payments processes and automated reconciliation processes. By grouping payments into a single batch, for example, only one debit and one authorisation are needed for each payment within the batch. Groupings can be based on day, region or other classifications that suit an individual corporation’s approach. This grouping can simplify reconciliation, lower costs, improve internal processing and reduce operational risk.

Many corporations choose to set up payments, collection factories or shared service centres (SSCs). By harmonising processes, the corporation can achieve uniformity in distribution channels, file formats and standards. Moreover, such an approach delivers end-to-end connectivity with clearing systems and payments facilities in a consistent and low-cost way. Corporations benefit from increased straight-through processing (STP) rates and increased oversight of local subsidiaries.

Other elements of a centralisation project include payments initiation, whereby a financial institution can provide corporations with remote access to the direct debit systems of other countries. Such an approach reduces the cost to the corporate of collecting payments, means funds can immediately earn interest and delivers peace of mind to the payee.

Reporting in a centralised treasury delivers clear insights into global cash positions, fast and efficient reconciliation and improved analysis of operations. Tools are available to review cash positions, account balances, transactions, accrued interest and available credit. Corporations can receive information at end of day or intraday and can access such information over bank (agnostic) channels.

Liquidity optimisation is also improved via centralisation, with automated cash balancing whereby corporate and subsidiary accounts are swept into a master account. Surplus cash can be invested or net debit positions can be funded. ING, for example, organises cross-border cash balancing in several currencies and can manage different trigger times. By providing cross-border cash balancing on an intraday basis, the bank enables its corporate clients to benefit from liquidity on a same-day basis.

Centralised treasuries can also benefit from multi-currency cash pooling, which offsets credit and debit balances on a multi-currency basis between various legal entities, eliminating the need to convert or swap currency positions. Multi-currency cash pooling provides a means for corporate treasury to centralise control of its decentralised cash positions worldwide. It is also an ideal instrument to manage inter-company funding requirements eliminating the need to perform foreign exchange (FX) and/or swap transactions.

Cash flow efficiency can be achieved via netting, a process aimed at organising and simplifying the settlement of inter-company and third-party transactions on a fixed periodic schedule. The netting system reduces cash flows to just one payment to or from each of the group companies in the required currency. The simultaneous settlement of inter-company and third-party payments produces significant savings in the cost of remittances while eliminating float among the participating group companies.

Policies and Procedures

There is no ‘one-size-fits-all’ when it comes to treasury centralisation. Whether or not centralisation is appropriate depends on the type of business, degree of subsidiary autonomy, organisational state and geographical spread. Corporate culture and local payments practices also come into the equation.

What is certain, however, is that for any centralisation project to succeed a corporation must have a consistent policy and procedures in place – it is not sufficient to centralise solely because the technology exists. A centralisation project must be run from the top down, with the commitment of senior management, from the chief executive officer (CEO) downwards, to ensure its success.

A clear mandate for centralisation from top-level management will ensure that the vision of any centralisation project will filter down and engage the entire organisation. If there is no clear mandate, the subsequent factors that ensure successful centralisation projects, such as IT and organisational set up, will be doomed to fail.

In a centralisation project, global business units will have to cede some autonomy in order for the company as a whole to benefit. The possibility of conflict between head office and local business units is ameliorated if strong board level support is present; if not, a centralisation project is in for a bumpy – and expensive – ride.

This is not to say that local treasury expertise should be overlooked. A centralisation project has to acknowledge and take into account.

Step-by-step Centralisation Process

Once the board-level support for a centralisation project is in place, the corporate – with assistance from its bank – should start with an inventory of readiness. This involves a study of the company’s sector and the benefits centralisation is likely to deliver. ING, for example, then organises a series of workshops at which representatives from the bank, and sometimes from outside organisations, will give their insight into centralisation.

Another preparatory step is to harmonise terms, agreements, systems, formats and standards across treasury operations. Corporations will find that their banking partners have a wide range of technical solutions. If a corporation enters into a centralisation project focused only on the technology and tools, and does not pay enough attention to corporate culture and having a clear centralisation policy and mandate, then the project is unlikely to succeed.

One of the very first steps in a centralisation project is account opening. A simplified account opening process, along with structured and disciplined implementation and customised assistance, will help corporations to start on the path to centralisation. For example, ING has developed an international account opening form, which can be used by all branches. The form, which is digital, can be tailored to clients’ needs. The result is reduced paperwork and a quicker account opening process.

During a centralisation project, clients should be assigned a dedicated, single point of contact with their financial institution in order to ensure the smooth and seamless implementation of a centralisation project. The most effective way to centralise is to take a joint approach with your banking partner, with the aim to establish a structured, disciplined and predictable implementation process across all of the company’s operations.

Conclusion

Treasury centralisation is a complex, long-lasting project that involves commitment from both the corporation and its financial institution partner. These are tough times for corporations: the visibility of cash and improved risk oversight that centralisation can deliver are vital to business operations today. By working in partnership with a financial institution, corporations will be able to successfully navigate the turbulent economic times we all face.

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