Regulation Compliance: The Case for Centralised Cash Management
For many years, treasurers have sought to obtain greater visibility of cash flow across the corporate’s operations. The greater the geographic reach of a company, the greater the barriers to accessing accurate and timely cash flow information. Nevertheless, it is a fundamental prerequisite of treasury management that there is sufficient information on cash flows for the correct short- and medium-term investment and funding decisions to be taken.
Treasurers at multi-national corporates have, in the past, taken steps towards gaining more visibility – and hence control – of cash management wherever possible. Due to time-zone restrictions and the difficulties of operating a 24-hour cash desk, they have relied on technology to provide visibility and control of cash management processes across the organisation, rather than attempt centralisation of execution.
As this article will demonstrate, many corporates have achieved a highly automated approach. But the advent of Sarbanes Oxley made a significant difference, in making the pursuit of centralised control of cash management a regulatory imperative rather than a question of best practice. The fact that the CEO and CFO must now sign off quarterly financial statements in the US and beyond is already having an effect on cash management in many large multinationals. Under Sarbanes Oxley, corporates are finding that the only viable approach is to implement a single process for cash management globally, that provides visibility of the cash position centrally, and transparency of consolidated positions.
Particularly in the current climate, it’s better to be safe than sorry. The ability to drill down to the details of any item provides both regulatory reassurance and a level of control that enables the treasurer to utilise his time more efficiently. This article outlines the benefits of a centralised approach to cash management and looks at how technology is helping treasurers at leading multinationals exert greater control.
Barriers to achieving centralised control of cash management are manifold. Tax, regulatory and timezone problems are common to almost all MNCs, as is the absence of inter-operability of the systems used in across operating units. When data is held at different locations and in disparate databases, the challenge of accessing the details becomes daunting. For absolute certainty – and visibility – transaction details must be stored in the same system that the consolidated numbers are reported in. Equally importantly, any solution that supports cash management operations across the organisation has to be web-based to be cost effective to roll out around the world. It is important to remember that no system can make up for failures in internal process. Cash management should be an automated process that is controllable from the center to ensure a single process globally.
By opting for a single, enterprise-wide cash management solution, adopted by all subsidiaries, a corporate is able to make cost savings through a reduction in system support. The average multi-national operates a myriad of disparate systems, acquired as the company has grown. The cost of maintaining such diverse legacy systems, all of which need to interface to one another, is huge. Operationally, there are high overheads associated with staffing costs and maintenance contracts. Often the systems are difficult to integrate and do not deliver the level of STP ideally required. Standard issues include dealing in many different banking formats, creating bespoke interfacing between systems and coping with a continuous series of upgrades. If companies manage to reduce costs and improve the transparency of processes and cash flows then complying with the demands of legislation such as Sarbanes Oxley are not as draining as might first appear.
Naturally this myriad of disparate systems and standards not only poses problems with regards to cost, but also has a major impact on control and risk. In a decentralised operation, cashflow forecasting, for example, may not even exist as part of a reporting process. Forecasts are sometimes submitted in differing formats using different approaches to collating data, resulting in unreliable financial data, hence highly inaccurate figures. The effect of this can be frightening as, on a broader scale, the CFO or treasurer cannot be confident in the forecast financial figures they are quoting. In light of the recent corporate scandals, organisations are keen to avoid this situation.
Lucent Technologies adopted Trema’s solution in order to consolidate treasury information flows and establish an in-house banking model designed to reduce cost and improve operational efficiency. They decided on a new business model comprising of an in-house bank allowing the central treasury to act as an internal bank for the business units. This would reduce banking fees, minimise the number of external bank accounts and achieve a higher degree of bank independence. The key driver was to achieve maximum profitability and greater transparency to increase control but also to help comply with regulation.
A centralised approach is the best way to combat these issues. By ensuring that all subsidiaries are operating from a single database, using a common system and procedures, central treasury is able to not only rationalise processes and reduce cost, but also to take control. Through ensuring that all financial data is held in a relational format, central treasury can have complete visibility and feel confident that the data they are working from is clean and dependable and feel confident that they can comply with the standards required by Sarbanes Oxley. Lucent’s Senior Treasury Manager, Frederick Schacknies recognised the that part difficult economic times and industry requirements played in the decision to centralise Lucent’s treasury, he says: “In these difficult economic times, we are investing in more strategic initiatives that will have very real long-term benefits to our business.”
The first step many corporates take when moving towards a centralised operation is to streamline the number of external banking relationships and reducing the number of operational bank accounts. By creating cash pools or notional pools in each region a treasurer is able to take the opportunity to dramatically reduce the number of banks they deal with. Rather than maintaining several banks in every country in which the organisation is active, they can form strategic relationships with key global banks that offer coverage in all required locations. This not only considerably reduces cost in terms of fees, but also gives the advantage of obtaining better rates due to increased volumes, while minimising operational overheads, as fewer bank workstations and corresponding internal infrastructure are required. It is this benefit of standardisation and cost efficiency that is used to persuade the subsidiaries to support a centralised treasury system.
If a corporate is to really reap the benefits of centralised cash management, simply rationalising the number of bank accounts isn’t enough. In order to truly centralise and effectively cope with the sudden focus of activity that results, many corporates put in place a payment factory and in-house bank solution and where necessary multi-lateral netting, allowing financial payments, and payables and receivables, to be consolidated and managed centrally.
The in-house bank is typically a group treasury that offers banking services to their subsidiaries like FX dealing, bank accounts, cash management, pooling, loan facilities and makes all payments on behalf of the subsidiaries, with the ultimate goal to operate accounts in the most streamlined and / or cost effective manner. By managing all payments centrally, the in-house bank is able to convert expensive cross-border payments into domestic ones, potentially reducing banking costs substantially. Combine this with an automated payment factory, which controls and tracks all internal and external accounts, and suddenly a corporate is able to not only save costs, but also control and track where the cash is in real time.
An example of the successful use of an in-house bank is Philips, the Dutch electronics giant, which has implemented Trema’s cash management solution and has also introduced an in-house bank. The in-house bank manages all inter-company payments, removing the need for costly external payments and third-party netting services, as internal payment instructions are simply debited or credited at the in-house bank. This further reduces the number of external banking relationships required. Through the introduction of the payment factory and in-house bank, Philips has been able to eradicate more than 400 interfaces previously maintained between the organisation and its banks. Although a reduction in costs was a key driver for the project, a key benefit of centralisation is Philips’ ability to have greater transparency and control paving the way for Sarbanes Oxley.
Centralised cash management can work in a number of ways. If the battle is political, not all subsidiaries need to relinquish their powers, it is still perfectly feasible for them to retain control over local operations and maintain local bank relationships if required. However, central treasury has complete visibility over all activity and can decide exactly how much control each subsidiary is allowed. Web-based technology enables the subsidiaries to enter, approve and monitor their own payments, view in-house account statements and integrate local accounts payable systems with the central treasury quickly and cost-efficiently.
Centralised cash management means that cash within the organisation can be made to work as effectively as possible. Transparency across all accounts means that cash can be pooled each day to ensure it is working as effectively as possible, either paying off debts or being invested in the market, making idle cash a thing of the past.
The CFO and treasurer can take comfort in the benefits such a model can afford and be confident that the forecasts they receive are based on accurate data and standardised processes. Risk is better managed and exposures can be hedged and unnecessary losses reduced. A dashboard view into the underlying data means the CFO or treasurer can view and analyse reports from their desktops, with the ability to drill down if further information is required.
With such clear benefits, one would be right in wondering why more corporates haven’t made more headway in adopting a fully centralised approach. Corporates face a number of barriers and the process can be lengthy and time consuming. Centralising control of cash management is no small task and corporations often face opposition and barriers from within the organisation. Subsidiaries often cannot be persuaded to accept a centralised treasury – local issues and politics are a massive barrier for the parent company. If the system is effective, the money spent is easily recuperated through the savings that the system brings.
However, investing in technology is only 40 per cent of the battle towards efficiency. The remaining 60 per cent relies on internal support, education and combating internal politics. In order for an organisation to realise all of the benefits inherent in centralised cash management, the entire company needs to work in partnership. Parent companies often experience great difficulties with subsidiaries being reluctant to break ties and connections with local banks. Time needs to be spent prior to implementation, aligning procedures and devising common processes – providing a framework on which the system is built. Once the system is installed, training is imperative and without IT support, the project can be doomed. The key is that the right people are involved in the project from the start and that it is implemented with the support of each and every sector within the organisation.
There is no doubt that Sarbanes Oxley is easier to comply with if the organisation is structured under a centralised approach. In today’s complex environment it seems that corporates are keen to improve transparency and control and if it helps with regulations requirements then all the better.