Banking Structure Redesign: An Opportunity for Cash Optimisation, Securitisation and Savings
By Anne Catherine Sailley, Manager Treasury EMEA, Steelcase International
A treasury manager is key to the growth and financial success of a business. It is their responsibility to build a banking structure that enables the business to operate with a minimum of idle cash, to aggregate its liquid funds around the globe, to take the opportunity to automate treasury functions, to secure payments processes and systems and to stay focused on fundamental strategic questions.
In order to aggregate the use of cash, many companies start by implementing physical cash pooling between existing bank accounts. This means that each subsidiary collects and disburses cash through local bank accounts. At the close of each business day, the net funds’ positions are physically transferred to the main parent company account. From there, the net position is either invested, if there is excess cash, or funded through a centralised credit facility.
The movements of money between legal entities of a company are generally treated as intercompany loans. Treasury conventions signed between participants define inter-companies’ relationship frameworks and ensure the legal entities are indeed at arm’s length. The conventions also include interest calculations and FX risk management. The conventions also require accounting process considerations because daily transactions occur between entities.
In addition, it is vital that legal and tax teams validate the parent company and its legal-entity structures due to tax implications.
At this point of banking-structure optimisation, some corporates believe they are not ready to carry out a complete redesign in this area. They therefore opt to keep their existing local relationships and adapt them to those of the parent company.
This is a steady-state solution with no disruptive risks as local teams continue to work within local privileged and historic banking relationships, while the treasury department manages the overall liquidity.
However, it is a compromised solution with limits:
- Idle cash due to earlier cut-off to transfer cash between different bank systems.
Cash pooling between different banks’ partners is intraday cash pooling, not zero balance. The cash is pooled up or down according to an earlier cut-off and any later customers’ collections are pooled up a day later.
- Lack of controls
Tight controls are in place for main entities but, despite secondary processes, there are fewer control mechanisms in place for smaller entities. For example, their payments files are modifiable and are not encrypted and there may be no respect for segregation of duties.
- Multi processes
The complex system of multiple banking administration is further compromised by multiple e-banking platforms. Local platforms don’t always have all controls in place, such as ID address and dual-administration ability.
- Lack of treasury and accounting tasks optimisation.
Unfortunately, there is nothing unusual about a compromised, or sub-optimal, organisation, but such businesses should set themselves higher goals. Higher optimisation is achievable only by a concentration of activities with one, single-bank partner and straight-line flows inside the sole bank.
Concentration of bank activity with one partner results in more efficient and resilient processes, reduction of idle cash, a lower level of working capital, robust cash control environment (such as secure payments connection via SWIFT or a direct host to host, data encryption, digital signatures, a unique e-banking platform with robust controls), improvement of FX management, fitness to execute daily tasks, and better leverage technology for treasury analytics.
In addition to process and security improvements, there are other time and costs savings that can be achieved through methods including: cost of capital on idle cash, reduction in bank fees from fewer banking partners and e-banking platforms, economies of scale with transactional volume, time savings in cash and relationship management, and increased automation of recurrent treasury tasks.
When considering a banking partner to best handle its cash management, a company should ask itself two fundamental questions: are its objectives met by the potential banking partner, and can the bank meet the company’s requirements? There should also be a clearly defined structure that reflects the business’ present and future needs from both a treasury and tax point of view.
During a global re-engineering project, key questions should be taken into consideration:
- How can cash be mutualised between companies and between currencies?
- How can the number of bank accounts numbers be reduced? Is it mandatory to keep local bank accounts for each entity? What are the commercial implications of not using local banks?
- How can treasury processes be automated to enable the team to focus on other strategic decisions for the company?
- What controls should be put in place to ensure a secure and efficient environment?
- What processes should be centralised?
Such a project requires not only treasury expertise but also cross-functional representatives with a good understanding of systems and processes, accounting skills, legal and tax knowledge, and an understanding of regulatory compliances. The core team must include representatives from Tax & Legal, Finance Systems, Accounts Payables team, General Ledger team, Procurement, and Treasury.