by Greg Zabikow, Assistant Treasurer, Evraz Inc NA
This article outlines Greg Zabikow’s experiences at one of the companies in which he has worked, specifically looking at the road to treasury centralisation. While the path may be long and bumpy, he explains that by creating a clear vision of the final destination, and making the journey rewarding with milestones along the way, it is possible to transform treasury from an operational centre to a strategic force within the business.
A challenging start
The company was run on a highly decentralised basis which created a variety of treasury and cash management challenges. Cash was held in lower tier entities which could not then be used to fund deficits in other entities, raising the amount and cost of capital whilst limiting the opportunity to earn a return on investments. Company headquarters could not easily determine cash balances and counterparty risk across the business. We therefore made the decision that we needed to centralise cash in order to leverage surplus cash balances to reduce debt, establish greater visibility, and control. However, in a decentralised business in particular, we recognised that it was important not to try to initiate a major transformation without first demonstrating the value that a change of approach could deliver. Consequently, we took a phased approach to centralisation, respecting the group culture and business organisation, in order to prove how we could add value.
Reaching the first milestone
As a first step, we wanted to achieve greater visibility and control over cash globally and across major currencies without changing existing banking structures but still taking advantage of more competitive interest rates. We also needed to ensure that any cross-entity flows would not be treated as dividends nor attract withholding tax. Furthermore, with a strongly decentralised culture, we did not want to affect individual entities’ bank account structures initially. The solution was therefore to establish a multicurrency notional cash pool. We established a Netherlands-based structure covering 26 currencies with a notional overlay account per currency. At 11am CET each day, the balances in each overlay currency account were converted to euro at a market rate. Surpluses were then used to offset debt or invested in a money market fund. The structure was backed by a parent company guarantee.