The Value of Transitioning to a Centralised Treasury

As 2010 unfolds, treasurers will continue to see increased demands put on them to find ways of gaining better control over cash and maximising liquidity. Putting into place centralised systems that establish automated processes and promote connectivity is essential to meeting these elevated expectations, as they can work to unite disparate data sources and systems. Doing this can help corporations to gain access to free cash flow by facilitating better integration, visibility and collaboration across the enterprise.

In today’s still unsteady financial environment, with rising costs, volatility of risk and increasingly expensive financing, treasury centralisation offers some important advantages. Some of these advantages include:

  • Promoting efficiencies and reducing costs.
  • Improving cash management and forecasting.
  • Improving risk management and compliance.
  • Gaining better visibility and control.

Reducing Friction

In 2010, the need for corporations to remove the friction points that cause inefficiencies through the financial supply chain will drive them to find solutions that can facilitate communication, data transfer and transparency across the entire ecosystem of suppliers, buyers, banks and other trading partners. Whether a corporation is a highly centralised organisation or a distributed structure, the evolution of a centralised treasury is likely to encompass areas such as:

  • Risk-based collections.
  • Payment processing and execution (i.e. payment factories, SWIFT connectivity, ePayments and cheque printing).
  • On-demand foreign exchange (FX) exposure management.
  • On-demand money market access.

We saw an example of the benefits of reducing or removing transactional friction last year when some of our customers initiated efforts to centralise and improve their management of banking relationships and services. This was often driven by a need to improve and optimise liquidity and working capital, as well as manage counterparty risk. In some cases this resulted in a significant reduction in bank relationships being managed at both a global and local level. In other cases the benefits were seen in overall transactional cost reduction, improved straight-through processing (STP) and much greater control due to transparency and consistent use of process and procedures.

Using a Shared Services Centre Approach for Centralisation

One option for corporations that is becoming increasingly popular is to use a shared service centre (SSC) model for treasury management. By migrating the entire treasury function to one centralised location, companies can see significant advantages, such as reduced operating costs, improved quality of services and standardised operations and business processes.

Treasurers must be able to determine what their cash demands are at any given moment in time. As such, they need to have a good grasp of their cash flows and the ability to accurately schedule a transfer. By moving to a SSC, the resulting centralisation gives treasury the visibility and transparency that organisations need in order to profitably manage their cash and liquidity. With a SSC, it is much easier for treasurers to gain a holistic picture of what flows they have across their operations as well as visibility of short- or long-term debt, and investments.

On a strategic level, establishing a SSC promotes consistency, common discipline and best practices across a business, regardless of how expansive and diverse its operations. It also enables companies to invest in world-class technologies for visibility and reporting – and ensure their optimal use enterprise-wide.

Promoting Efficiencies Through Technology

By using one system, with a single database underlying it, treasurers can achieve centralisation while still maintaining local contact with business units and local markets. Applications that can automate treasury functions are an essential ingredient of achieving centralisation within the treasury. Strategic technology plays a fundamental role in helping corporations attain the quest for efficiency by helping treasurers to centralise and aggregate information, optimise processes such as payment flows and perform detailed risk management analysis.

In order for a treasury platform to be a true strategic solution, it must be capable of supporting companies as they evolve through significant events, such as mergers and acquisitions or corporate restructuring. A ‘one size fits all’ approach for treasury management systems is therefore not effective for most companies. Instead, systems that can offer flexibility and ease of interfacing are key to ensuring the initial investment can be adapted when future needs arise.

The latest service-based offerings delivered via the internet that can help companies to adopt the services they need based on their priorities, are becoming increasingly popular. These applications are cost-effective, quickly implemented and allow corporations of any size to reap the benefits of treasury management technology.

Improving Cash Management and Forecasting

A key challenge of maintaining a decentralised approach to treasury is producing a complete view of an organisation’s cash position and exposure to risk on a timely basis. For example, different parts of the business involved in treasury will frequently have different systems and dissimilar ways of recording and reporting information. The large amount of time needed to bring together all of this information routing from diverse sources can make it difficult for treasurers to construct a current picture of global cash or risk positions. As a result, corporations are usually only able to produce this information on a monthly or even less frequent basis, making it difficult to form accurate and strategic decisions.

Cash forecasting is another top challenge for organisations as, in many cases, forecast information derived from different parts of the business is prone to wide variations and different assumptions in the way it is constructed. Not only is the underlying data frequently unreliable, but it can also be quite complicated to combine this information in a coherent and consistent fashion.

A more reliable and transparent approach to forecasting is to centralise the function by using a single system to combine information derived from disparate systems or allowing business users from across the company to input data into a common channel. While forecasting remains a complex issue, centralisation is an important step to increasing a company’s ability to better use forecast information for liquidity and finance planning.

Improving Compliance and Risk Management

Corporations that are operating in different locations with disparate business practices, controls and systems are often challenged by trying to ensure that the business is adequately protected against error and fraud and that policies and procedures are being observed uniformly. Treasury management solutions can help by establishing consistency of data and processes throughout the organisation and thereby promote compliance with initiatives like the single euro payments area (SEPA) and Sarbanes-Oxley (SOX).

Operating in a centralised treasury environment can also serve to reduce risk and limit exposure related to FX management. In fact, organisations that trade across borders and currencies can benefit measurably from centralised process and tools that can help them to manage FX exposures and react to interest rate fluctuations in a timely manner. Business units that choose to convert currency locally could potentially be causing significant FX risks to the organisation that are not easily quantified. If a corporate treasurer doesn’t have all the right information in one place, the probability of risks going unmanaged increases and the quality of decisions made based on this information may be compromised. However, by managing the process centrally, FX positions can be offset, the cost of FX spreads can be reduced, and treasurers will be able to gain a global view of risk.

Conclusion

Centralising the treasury is a fundamental way in which a company can equip itself to bring together various operations and subsidiaries and rationalise costs, particularly when acquiring new businesses through mergers and acquisitions. Today, each part of the business is constantly being challenged to demonstrate how it adds value to the organisation as a whole and treasury is no exception. Centralisation is a key step to bringing greater value and effectiveness to the treasury by lowering debt-related costs, increasing return on investment, providing expertise to business units, reducing financial risk, limiting exposures and ensuring liquidity across the group. Furthermore, a prime way organisations are working to centralise treasury is through establishing SSCs, which can be a strong value generator in terms of promoting transparency of data and increasing a company’s control over processes and information.

Few companies, whether centralised or decentralised in their business approach, are in the position of having a single version of one enterprise resource planning (ERP) system across the enterprise. A new merger or acquisition can often bring another ERP system and it can take months, maybe years, to migrate to a common platform. A better way to approach this is to implement dedicated treasury management systems that can support the centralised treasury function. Treasury management solutions can even be integrated with a corporation’s banks, either by connecting with the banking applications or through SWIFT, and also interface to internal systems including an ERP or other applications. Centralisation is truly a cost-efficient and effectual way of supporting the treasury over the long-term.

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