Five Steps to a More Effective Global Treasury
by Tim Hesler, Kevin Laczkowski and Paul Roche, McKinsey & Company
Demands on the corporate treasurer are changing, and many are struggling to keep up. Here’s where to start.
The rapid shift of economic activity from established markets in Europe and North America to developing ones in Africa, Asia, and Latin America has many CFOs asking treasurers to improve their performance. The pace of growth and regulation has left too many of them lagging behind on even core activities in their home markets: cash management, banking, debt and funding, investments, and risk management for currencies and interest rates. Such shortcomings are only magnified as companies expand into emerging markets,  where even world-class treasury departments struggle to navigate varied banking protocols and diverse languages and customs—and often lack an operating model and infrastructure to connect their activities, portfolios, and risks.
The cost can be heavy. Companies pay incremental interest expenses when they overborrow as a result of inaccurate cash flow forecasting and often lose money when they don’t hedge exposures for currencies and for interest rates, commodity prices, or both. They pay unnecessary taxes when cash moves needlessly through tax-heavy regions. If inadequate controls or segregated financial responsibilities lead to fraud, companies face both financial losses and reputational damage. Those that miss their financial covenants with banks or fail to meet liquidity requirements can find themselves dealing with credit-rating downgrades, a loss of credit flexibility, or even bankruptcy.
In an effort to help corporate treasurers improve their performance in core activities, we surveyed 120 of them over the past year and conducted in- person interviews with an additional 50. Those sources, as well as our experience working with treasurers, have led us to believe that companies should focus on five moves to improve their global treasury function.
1. Centralize the treasury function globally
Historically, most companies have had a treasury department at their corporate headquarters, but it was ‘siloed’, managed only core activities, and often duplicated those of individual business units. As bank communications technology improved and treasury groups added new responsibilities, it made sense to consolidate functions that had been operating independently in different parts of the world.
Many companies did centralize treasury functions at headquarters, supported by a few part-time treasury and finance professionals in developing markets. But most treasuries retain too many decentralized components, and few are as centralized in developing markets as they are in developed ones. Our survey found, for example, that among global companies operating in more than 50 countries, the average number of bank accounts held was greater than 850—considerably higher than the 200 or so we’ve seen at the best performers. One treasurer we interviewed complained that her company didn’t even know how many bank accounts it had overseas. And at one heavy-materials company, analysis of cash balances in 300 accounts held by 25 country locations showed a daily average of more than $80 million in uninvested cash over a three-month period.
The ideal model would centralize policy setting, decision making, and execution—though not necessarily personnel. Consolidating the treasury function under the global treasurer can help by giving managers an aggregate view of their cash flow and risk positions—a view they need to optimize debt and investment portfolios and to minimize taxes and financial risk. Moreover, the operating model and infrastructure that connect a company’s various activities, portfolios, and risks ensure that even regional treasury groups have the quickness and rigor needed to make the most of activities in volatile markets. They can therefore take advantage of local financial opportunities and avoid unnecessary losses. Such a treasury would have to be flexible and well controlled to receive inputs from regional treasuries.