Amplify Efficient Treasury Practices with Netting

A netting centre incorporated across your organisation can allow for the best method of creating a single cash flow, to or from each participant, which increases intercompany efficiencies. There are four types of netting processes analysed in this article: bi-lateral netting; multi-lateral netting; re-invoicing; and netting in conjunction with an in-house bank (IHB). Figure 1: […]

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Date published
September 27, 2013 Categories

A netting centre incorporated across your organisation can
allow for the best method of creating a single cash flow, to or from each
participant, which increases intercompany efficiencies. There are four types of
netting processes analysed in this article: bi-lateral netting; multi-lateral
netting; re-invoicing; and netting in conjunction with an in-house bank (IHB).

Figure 1: Before

Most organisations will begin by settling their
obligations with each entity through multiple cash flow transfers. Not only is
this workflow inefficient and costly, the company loses visibility on currency
shortfalls, which leads to increased FX trades. By introducing a netting system,
currency exposures are adequately monitored and consolidated. This allows for
internal borrowing to be the first method of settlement (economically cheaper
than external borrowing).

Figure 2: After

Using a netting
system, each participant pays or receives a single currency balance to or from
the netting centre. This centralises the control and monitoring of all cash
flows, which is essential to the treasury department.

Types of
Netting

Depending on the complexity of your organisation, one of four
netting methods may be deployed (bi-lateral netting; multi-lateral netting;
re-invoicing; and netting with an IHB).

Forward Looking

Many
operations are in dire need of a netting system to manage the input of
intercompany transactions, interim netting rates, trades, and trade rates. The
benefits that are delivered to a corporation with a netting solution are:

Netting is
fundamentally a very simple process once the required structure and protocols
are established. 

When looking for a sophisticated solution, make
sure robust reporting is available. Also ensure your company can establish
different payment methods – such as single euro payments area (SEPA), Federal
Reserve Wire Network (Fedwire) and automated clearing house (ACH) – that
security persists throughout the application with sophisticated controls around
what entities versus the clearing house can see, and intercompany activity can
be imported manually or through file upload.

Regardless if your
objective is to forecast hedged cash flows in conjunction with intercompany
invoices, create a lending programme, or simply use the solution as a third
party disbursement structure, a netting centre has numerous intrinsic advantages
that will substantially increase your company’s profitability while centralising
treasury operations.
 

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