Strategic Treasury

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Treasury Centralization - an essential guide for corporate treasurers There are a variety of reasons why companies decide to centralize their treasury operations, which would typically include cash management, financing, investment and foreign exchange, including both routine activities and strategic management. The factors which bring the most significant benefit, and therefore the most compelling value proposition, will depend on the nature of the business. This article by Andrew Woods, Group Vice President at SunGard, identifies some of the most important factors in regards to treasury centralization. It also provides a list of challenges that can be met through the decision to centralize a treasury operation, and how treasury centralization can achieve this.

Treasury Centralization

– an essential guide for corporate treasurers

by Andrew Woods, Group Vice President, SunGard

There are a variety of reasons why companies decide to centralize their treasury operations, which would typically include cash management, financing, investment and foreign exchange, including both routine activities and strategic management. The factors which bring the most significant benefit, and therefore the most compelling value proposition, will depend on the nature of the business, but some important factors typically include some of the following.

Identification of cash and risk

One of the key challenges of maintaining a decentralized approach to treasury is the difficulty in producing an overall view of the company’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 different ways of recording and reporting information. This can mean that it can take a long time to construct a global cash or risk position when combining information from different sources. Consequently, this information is often only produced monthly or even less frequently. It is impossible to make strategic decisions without access to timely, accurate information which is particularly significant during periods of economic volatility.

Access to financing and liquidity

Once a global view of the company’s position has been obtained, treasury can act on this information to optimize liquidity across the group. With credit becoming expensive and less readily available, companies need to find ways of accessing capital rather than relying on external borrowing. By centralizing treasury, and establishing an in-house bank to support local business unit requirements, companies can leverage group positions more effectively: for example, cash surpluses in one part of the business can be used to finance deficits in another.

Reducing the need to borrow externally by seeking out cash within the company is an important benefit of centralizing treasury, but where financing still needs to be obtained, it is likely to be more cost-effective and less problematic to seek funds at group level rather than business units borrowing locally, often with a lower credit rating and higher rate of borrowing. Furthermore, with tighter credit conditions, the least attractive lending from a bank’s perspective is an unsecured loan. By centralizing treasury activities, there is a greater opportunity to seek alternative funding methods such as asset-based finance and receivables securitization.

Cash flow forecasting

Forecasting is a challenge for most organizations except perhaps those with consistent, recurrent revenue streams. 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 then be extremely difficult to combine this information in a coherent and consistent fashion.

By centralizing this function, using a single system to combine information derived from other systems or allowing business users from across the company to input data through a common channel, a more reliable and transparent approach to forecasting can be achieved. While forecasting remains a complex issue, improvements in this area, in which centralization is an important first step, increases companies’ ability to use forecast information for liquidity and finance planning.

Operational efficiency and control

Working in different locations with disparate business practices, controls and systems creates challenges when trying to ensure that the business is adequately protected against error and fraud and that policies and procedures are being observed consistently. This is particularly problematic for companies which report under Sarbanes-Oxley or similar corporate governance requirements, but shareholders of all firms are scrutinizing financial management practices to satisfy themselves that these are best-in-class. In challenging times, operational efficiency is increasingly being considered a source of improved return on equity so this issue is elevated from day-to-day management to one of strategic importance.

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