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The evolution of 'load-balanced' treasury.

Since the early 1990s, industry analysts and publications have elevated the idea of a central treasury to the equivalent of the Holy Grail for treasurers. Staff reduction, more efficient banking relationships, a reduction of idle balances, more accurate cash forecasting and better control over subsidiaries are just some of the proposed advantages that can be measured in the bottom line.

The path towards centralization usually starts with cutting the power and size of local and regional treasuries through a reduction in their banking relationships. This makes perfect sense in Western Europe and the U.S., but companies situated in "difficult" market regions were left alone until a solution could be found. The temporary solution was for the group to include these subsidiaries in a centralized reporting environment.

The problem with centralized reporting, however, is that it is an arduous task for both the subsidiary and the central treasury, so the frequency of reporting is low, usually once a month. Because there is no benefit to the subsidiary, compliance is low, resulting in many subsidiaries not being included--or at the very least, data is collected only for the sake of having the figures for reporting purposes.

Cost Benefits Misconstrued

Often, the result of this poor reporting compliance was to further cut off responsibility from the subsidiaries. By reducing the size of local operations, companies are able to see a direct cost benefit through reducing staff. These cost benefits were used as a justification to increase central treasury size so that they could take care of all the subsidiary's requirements.

The downside of this was the loss of local knowledge: The central treasury can never have the same level of understanding of local customs, favorable national financing options, payrolls and receivables collections. Moreover, in some regions, companies faced insurmountable problems dealing with fiscal and regulatory issues when implementing this approach.

So, how does a company combine a desire to fully centralize, with the reality that its new and growing industrial base requires a regional treasury? The answer is to use a blended approach. Centralize where possible, but plan for the fact that even the largest companies are still struggling to fully centralize their treasuries. Many in the industry understand that this is the most pragmatic solution to the conceptual issue of the corporate treasury, but are at a loss as to how to accomplish it.

Having a better understanding of the reasons for low reporting compliance will help to better understand how to manage a company's treasury operations. Typical reasons include: control issues, which are more significant in newly acquired companies; language and time zone issues, which cause an "out of group" experience for many subsidiaries; or just a general lack of respect for the issues of the central treasury. The central treasury often lacks the time and resources to solve these issues on a company-by-company basis and ends up where it started, consolidating three-week-old cash management data.

A typical Internet-based treasury system will relieve the central treasury system from spreadsheet consolidation, but it may not help with compliance, and the amount of information provided will be minimal. This is really only a distributed reporting system.

Why not just give every single one of your companies their own treasury system?

A true Web-based system should allow subsidiaries not only to fulfill their reporting requirements, but to do their own cash management and liquidity planning. From a technology point of view, what would be required to achieve true, group-wide treasury is a platform allowing a group of companies to manage their own finances as they require.

Fully functional treasury management systems are usually out of reach of most subsidiaries and divisions, but with the advent of Web-based and application service provider (ASP) software solutions, a system can be deployed group-wide for the same cost.

This new concept of a "Load-Balanced Treasury" is the next evolution for treasury. Instead of spending time with reporting, companies in the group are provided with the tools to do real work. The software collects and consolidates all the data as it is entered, regardless of the location, time zone and language.

Local companies, working in their own currency and language, enter all transactions and deals in the transactional currency, providing them with real value in system use. Since this platform provided by the treasury is superior to the ones in use (like Excel) at the local level, group-wide compliance is assured with no extra work.

Rick Beecroft is Area Manager, The Americas & Pacific Rim, for BELLIN Treasury Services Ltd. He can be reached at rick@bellintreasury.com.
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Author:Beecroft, Rick
Publication:Financial Executive
Geographic Code:1USA
Date:Jul 1, 2006
Words:759
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