US mid-sized companies growing internationally often leave it to their offshore subsidiaries to make treasury management decisions on a local basis. These decisions can relate to important functions, including local banking relationships, short-term investment and funding, foreign exchange hedging, and working capital management practices.
CFOs and treasurers of mid-sized companies acknowledge that local decisions on corporate treasury issues are not necessarily to the benefit of the company as a whole. Leaving these responsibilities outside of the corporate treasurer’s view has its hazards, including reduced cash control, higher funding costs, and cash maintained at banks with inadequate risk ratings, or investments in financial instruments with uncertain risks.
The challenge for these companies has been to find viable solutions, lacking the dedicated treasury teams and costly treasury workstation technology available to large multinationals. Finding a banking partner can also be a challenge, as several of the five or six global cash management banks focus more on servicing larger companies.
Technology Making it Possible
Technology is changing the way, with leading global banks delivering capabilities that enable mid-sized companies to cost-effectively centralize their global treasury management. Using these services, companies can optimize cash yields by sweeping and consolidating daily cash positions across international bank accounts – even if the accounts are spread around different countries and financial institutions. Interest optimization solutions (or ‘virtual pooling’) enhance cash yields without even requiring centralizing transfers, when the company maintains its international accounts at the same global bank.
Multi-currency notional pooling solutions allow companies to balance short-term financing and investment needs of cash-rich and cash-poor subsidiaries operating in different currencies. Automated liquidity tools allow companies to invest subsidiaries’ surplus cash in approved instruments and, in case of cash shortfalls, allow subsidiaries to draw on centrally negotiated funding lines from relationship banks.
For the cash manager, web-based global information delivery systems available from banks provide detailed, up-to-date information on global cash positions. As important are analytical support tools that enable this information to be used for enhanced cash positioning and cash forecasting – when the company may have myriad bank accounts across many different countries and currencies. Traditional treasury workstation technology facilitates all this, but is often out of the budget reach of mid-sized companies. Here again, banks are delivering tools to mid-sized companies that enable them to achieve much the same results more affordably.
Mid-sized Companies Have an Organizational Advantage
By nature of being smaller, faster-growing organizations, mid-sized companies are often organizationally well positioned to enhance treasury management practices. Compared to large multinationals that may need to coordinate changes across huge international organizations, mid-sized companies typically have greater flexibility to implement improved financial practices and structures as they grow internationally. They are able to implement change more quickly and with less internal resistance.
Help is also forthcoming from banking partners focusing on servicing mid-sized companies on a global basis. These are the same global banks that have for long banked mid-sized companies and have the global networks to meet their growing international requirements.
Taking Action
Centralized management over global treasury functions is an essential element of the financial health of any company that operates on an international scale. CFOs and treasurers who are serious about becoming more efficient and competitive are well served to review and fine-tune their global treasury management structures on a regular basis.
Of course, every company needs to approach the challenge based on its individual situation. The countries and currencies a company operates in will drive these strategies. For instance, country-specific legal requirements, tax considerations and local customs will require different responses.
Finally, it is of course important to work with a banking partner that has the capability and client strategy to deliver global treasury management solutions to mid-sized companies. As a start, CFOs and treasurers should ask their bank for practical help in thinking through these issues and understanding the options available for their global treasury management.
The next article in this series will review some of the key differences in banking and treasury management practices between regions and practical tools that mid-sized companies can use to enhance their global treasury management.