Embry-Riddle Aeronautical University embraces treasury technology

 Embry-Riddle Aeronautical University embraces treasury technology

By Jorge Caraballo, Treasury Analyst, Embry-Riddle

Introduction

Treasury operations are in a relatively early evolutionary stage at many North American universities – despite the fact that these institutions face just the same liquidity and financial risk management challenges as confront similarly-sized corporates. They rarely use specialist technology – such as treasury workstations – to support their critical treasury operations.

Embry-Riddle Aeronautical University provides one of the relatively small number of exceptions, through having established a discrete treasury function within its controller’s office to focus on its cash management operations. Further, it has researched and implemented the kind of mission-specific treasury management technology that is today most usually seen in the corporate environment. Embry-Riddle is now enjoying the cash forecasting, reporting, research and control quality benefits that strong supporting treasury technology can bring.

Most universities offer courses in the application of technology to practical business. Embry-Riddle’s treasury operation has put the underlying systems theory into practice.

The background

In common with all large American universities, Embry-Riddle Aeronautical University operates a finance operation that is comparable in size and complexity with substantial commercial corporate organisations. Our total financial assets (as reported for fiscal 2012) are approximately US$ ½ billion. We are generally cash rich, and we run a short term portfolio of liquid investments of approximately US$ 118 million, comprising government securities (~$ 48.5 million), repos ($ 42.7 million) and required balances with banks ($ 28.0 million). Our endowment is $ 95.6 million. We have long term debt of $ 159.5 million, and a small amount of short term debt.

Embry-Riddle’s domestic and foreign operations are based in the US dollar, and treasury operations are centred on cash management. The university follows a cautious and conservative investment policy, both for its surplus cash and for its endowment portfolio. Cash is invested in high quality mutual funds and other investments based on government securities and top rated counterparties and issuers.

Since the first onset of the global financial crisis in 2008, it has been a critical priority for universities to understand how their cash is being allocated, and to understand accurately their forecasted cash requirements. At the same time, it has been necessary to maintain strict budget discipline, and to analyse the value of significant capital expenditures before they are given the go-ahead. The requirement for investment in enhanced cash management has been generally counterbalanced by prudent budgetary restrictions.

The establishment of the Embry-Riddle treasury function

About two years ago, our senior vice president and chief financial officer, Mr Eric B. Weekes, identified the value of establishing a professional treasury operation within the Embry-Riddle finance department, to improve the quality of the organisation’s cash management and control performance. Mr Weekes was formerly the treasurer of the OGE Energy Corporation in Oklahoma City, a $3 billion energy company, and this experience led him to see the benefits that a discrete treasury operation could bring in the academic environment. As we were to discover, building – and especially professionally automating – a treasury function is quite an unusual organisational change and development in the academic sphere.

I was hired to develop Embry-Riddle’s treasury function, reporting both to the CFO and to the controller.

The treasury technology project

One of the first strategic projects assigned to treasury was the selection of treasury technology to support secure, transparent and professionally effective operations. In the present financial environment in the academic world, it is generally quite demanding to secure a budget for a significant capital project such as the licensing of a treasury workstation, and it was as a direct consequence of our CFO’s previous track record in commercial industry treasury that we were able to do so.

Our first step in the project was to investigate the treasury technology in use at other leading American universities, and I contacted about sixty major institutions to find out what they were employing, and with what priorities, and objectives, and with what benefits achieved. The results were really quite surprising, revealing a significant gulf in universities’ approach to treasury and treasury technology compared with the corporate world’s – despite the fact that both groups manage significant cash flow volumes, and have substantial levels of financial and operational risk exposure.

We found that very few universities were managing their treasury operations on anything more powerful and robust than spreadsheets, and very few indeed were forecasting cash. Whereas the corporate treasury world has now mostly supplanted spreadsheets with workstations and treasury management systems, the US academic world seems to be largely content to rely on spreadsheets for record keeping, management reporting and decision support for the treasury component of finance. In academia, knowledge of corporate treasury operations in the outside world seemed to be very limited. Our CFO’s corporate business experience was our catalyst for investing in specialist treasury technology, to provide us with a base for effective cash management and forecasting. This really proved to be quite an unusual step for a university finance operation to be taking.

In outline, we were seeking a technology solution that would eliminate the spreadsheet based risks that are related to manual data entry errors and of calculation process errors, and we were additionally seeking to radically reduce the human resource efforts needed to operate our spreadsheet based solution These are of course the key technical issues that drive corporations to move away from spreadsheets to a more robust and better controlled supporting technology, and it was soon clear that exactly the same change drivers were in operation at Embry-Riddle treasury.

Eventually, our research led us to identify three specialist treasury workstation vendors whose products generally addressed our requirements, and so we issued an RFP based on the AFP model to this group, and also to our relationship bank.

After analysis of the various RFP responses plus follow-up demonstrations and meetings, Embry-Riddle settled on GTreasury as our technology solution provider. We were generally impressed by GTreasury’s operational platform, and especially in its capabilities in cash management and forecasting; we could also see the potential value of its database for our reporting and research purposes. Importantly, its pricing was also attractive.

Automated treasury operations at Embry-Riddle

We implemented the GTreasury solution, and have now enjoyed the benefits of automated treasury operations for over a year. On a daily basis, the system helps us to track cash balances and volumes effectively and efficiently, instead of struggling with spreadsheets to enter and verify the data. We are able to perform a quick check at the start of activities each morning, so that we can see the expected outflows; they can be subsequently monitored against the actual cash movements in a controlled way.

In implementation, we did encounter a data conversion issue with the historical cash flow history that we were holding, and we worked with our vendor to research and resolve this problem. It turned out to be a consequence of our historical data being held in spreadsheets in a technically odd way, which would have been very difficult to unscramble. To resolve this, we decided to start from scratch and accumulate three months of operational history in the new system’s database, and we then cut over to use this information as the base for live cash forecasting going forward. This proved to be an effective solution, and we are now very happy with forecast performance, based today on a substantial accumulation of dependable historical data.

We prepare two cash forecasts, one with a weekly time horizon for our CFO, and one with a two-weekly time horizon for the controller. For the forecasting processes, we employ a simple model, using averages on a rolling day-to-day basis; we have found it to be very reliable. We have measured that the forecasts are in practice accurate to within plus or minus 2% (forecasted cash versus actual cash positions) – and our treasury policy allows a 5% tolerance. The tolerance limits have only been breached once, and that was a consequence of an unexpected and large cash flow, as the result of a capital expense payment that had not been forecasted. Generally, we now need to perform very little manual adjustment in the cash management workflow.

Today’s forecasting environment compares very favourably with the previous situation, in which we had to enter numbers and formulas into Excel manually. The ability we now have to view transactions at a very granular level is extremely beneficial, and it really helps us when forecasting Embry-Riddle’s data. In the past, forecasting had been a very taxing – and a very tedious – exercise, involving the use of a set of mutually-interdependent spreadsheets, with a very high risk of error. In contrast, we are now fully confident in the quality of our cash visibility, and in our estimates of future requirements.

Forecasting is as important to Embry-Riddle as it is to companies: all of us need to be able to track and analyse any variances between the actual cash movements and the forecast, and to initiate any necessary remedial action. This was virtually impossible with our spreadsheet solution; today, it is a routine part of our daily treasury operation.

Our research activities have been significantly improved, and we can now use very straightforward point-and-click operations to find transactions that require investigation, verification or inclusion in an analysis for a management report. It is very helpful for the investigation process that the system uses the same technical language as the bank. This contributes significantly to the speedy resolution of irregularities, for example in sales tax issues.

Finally, I should briefly outline some of the other areas in which Embry-Riddle treasury is benefitting from the use of a treasury workstation. The GTreasury system provides us with a powerful automated solution for accurately and effectively managing all of the usual cash management business activities found in North American treasuries, including cash receipts (essentially, student tuition fees), payroll, ACH debits and credits, lockbox deposits and internal money transfers.

Future developments

We are now running efficient cash management and forecasting operations at Embry-Riddle, and are enjoying the planned – and cost effective – benefits in treasury operations and the related research through the application of appropriate technology.

We are now looking to further develop our usage of the system. One extension will be to automate the posting of accounting journals into the university’s general ledger, Oracle Financials. This would eliminate the human efforts and potential errors of a manual solution for this interface.

A further possible development we are evaluating is to automate the reconciliation of our master account, plus our four ZBA (zero-balanced) bank accounts, which are used for accounts payable, federal revenue, payroll and student refunds. This would eliminate the related manual activity, and would also improve the level of treasury control being achieved.

Discussion on the adoption of treasury technology in the academic world

As I mentioned at the start of this case study, we were really surprised to find how low the present level of treasury technology adoption is among US universities. The academic world is of course facing very much the same challenges as the corporate world in terms of liquidity, financing and financial risk exposure management, and it follows that it ought to be able to derive the same cost effective performance benefits from prudent investment in supporting technology as is generally realised by corporates. It does seem strange that the two environments do not communicate more about what are in fact common problems, and which have common solutions, as I have explained. Today, it does not require astronomical investment levels to implement workstation technology that will help to radically improve treasury and finance performance quality.

One particular function that seems to be quite lacking among university treasuries is the tracking of forecast versus actual cash movements. We have found this analysis to be especially beneficial, as it enables us to pinpoint areas which need improvement in our forecasting workflow; it is therefore straightforward to initiate the necessary changes to optimise forecast accuracy.

At Embry-Riddle, we are happy to enjoy the benefits of a professional treasury operation, supported by professional treasury technology. We warmly encourage our university peers world-wide to do the same, through enhancing their visibility and control of one of their most precious resources, cash.

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