Banking Structure Redesign: An Opportunity for Cash Optimisation, Securitisation and Savings

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:

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:

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.

When selecting a banking partner, companies should consider:

The final decision in any treasury banking restructuring will not only impact cash management aspects (such as geographical coverage, high and constant efficiency in banking operations and costs) but also can have an impact on the company’s strategy (including capacity to finance growth, commercial relations, innovation and advisory ability). A dynamic and forward-thinking treasury department is vital to a company’s success - and if treasury demonstrates its value, it will secure a seat at the table as the company executes its business strategy.

Such restructuring offers businesses a great opportunity to explore innovative solutions and alternatives to traditional cash pooling. These include:

Any new banking structure will impact a company’s future as a result of the focus on technologies, processes and people. If the amount of time a local treasury team needs to manage liquidity can be reduced, then personnel can concentrate on value-added tasks. This, in turn, means that the treasury function can shift from playing a purely operational role to having a key strategic purpose.