Strategic Treasury

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Leveraging Centralisation Regardless of the operating model a company employs, efficiency and effectiveness often require a high level of centralisation and standardisation.

Leveraging Centralisation

Leveraging Centralisation

by Jonathon Traer-Clark, Treasury Practitioner Executive, Global Transaction Services EMEA, Bank of America Merrill Lynch and Bruce Meuli, Global Business Solutions Engagement Executive, Global Transaction Services EMEA, Bank of America Merrill Lynch

Over the past decade, many large corporates have concentrated functions, such as foreign exchange (FX), risk management, and corporate finance, or created structures such as an in-house bank, in order to improve visibility, control and efficiency. Often these developments have been eased or triggered by corresponding innovation in the banking sector, broader improvements in connectivity such as SWIFT, and common standards, such as ISO 20022.

Once established, many companies have further considered how their strategy should evolve in the future and how the visibility, control and efficiency established by centralisation can be effectively leveraged. As treasury becomes more strategic, it is increasingly called on not only to manage cash but also to oversee and govern broader capital sources – such as working capital – across the organisation. Furthermore, while treasury retains responsibility for day-to-day financial operations, corporates increasingly rely on its financial acumen to help determine the most effective deployment of capital.

An appropriate aspiration

All corporates can aspire to leveraging the capabilities and knowledge of treasury more widely across the organisation because of the risk management, efficiency and other benefits it can deliver. However, not all companies wish to extend the remit of treasury: finance may have ownership of working capital and capital deployment and the company may be satisfied with these arrangements.

Not all companies may be ready for treasury to take on a broader role. In some cases a broader centralisation of functions, implementation of global processes and policies and rationalisation of banking partners (and associated technology) may be a necessary first step. This does not mean treasury has to reach a specific maturity before taking on a more strategic role: the ‘tipping point’ will be different for each corporate. Traditional linear maturity models do not reflect reality for most companies, who tend to be multi-dimensional in nature.

A company may have challenges regarding visibility into some bank accounts – seemingly a basic requirement – but has already embarked on sophisticated strategies to use working capital more efficiently. This apparent contradiction in maturity reflects the reality of most organisations: different functions (and country entities) will be at different stages of development in terms of achieving best practice. Often the most advanced areas of the company will be the most important to the business: organisations evolve capabilities as circumstances and the business dictate.

In the technology, media and telecommunications sector, there is a history of rapid mergers and acquisitions (M&A) activity; as a result these companies typically have highly advanced internal M&A capabilities. Similarly, oil and gas companies often have well developed expertise in debt capital markets and hedging because of the nature of their business. Ultimately, best practice must be determined by whatever is appropriate for that company, its competitive environment and the sector in which it operates.

Issues to consider

The extent to which the role of treasury can expand into strategy depends on a number of factors. As mentioned above, some corporates may have a strong finance function that is unwilling to relinquish control. To some extent, expansion of treasury’s role may depend on the personality of the treasurer and whether they take an active or passive approach to their remit. The company’s recent experiences can also have a bearing on future direction and associated prioritisation. It is not unknown for a corporate to experience a temporary shortfall in liquidity and only then realise the importance of working capital management.

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