Getting to Grips with Financial Data
From a market observer’s viewpoint, it is probably true to say that there is no such thing as a typical multinational corporate (MNC). The world’s largest commercial enterprises exist in different industry verticals, serve different markets, manage a huge range of operational functions and processes, and have very different organisational structures.
From a treasury and accounting viewpoint, the picture is different. There is much more consistency between MNCs operating in widely different vertical industries. Although the exact titles and terminologies may differ, the world’s largest commercial enterprises each have a chief finance officer, a treasurer and a corporate finance division, and they commonly share a number of other features.
They each have a range of operating divisions and departments that have (often separate) direct relationships with the external financial services industry – accounts receivable, accounts payable, accounts reconciliation, credit control, purchasing, currency dealing, payroll and pensions to name but a few.
The finance division centrally manages the transaction processing and banking for other departments sited at different global locations. Some may be profit centres generating income for the enterprise, others may be cost centres and some may be both.
Not all financially active departments share the same accounting processes or systems. This diversity is sometimes the result of business mergers or acquisitions, where the procedures and technologies in place in constituent institutions has never been fully integrated and standardised across the merged enterprise, or where designated parts of the enterprise are deliberately operated as autonomous subsidiaries.
Similarly, financially active departments are often geographically dispersed, and indeed some functions may be replicated, providing near-identical local services in numerous countries. Because of these regional financial activities, large corporations necessarily maintain multiple banking relationships, generating many cash flows in many currencies.
This typical financial landscape has always produced great complexity for the corporate treasurers. Simply to maintain operating liquidity and to forecast working capital requirements for every cost and profit centre across the enterprise, a great deal of financial information needs to be obtained and synchronised from every relevant internal department, as well as from every external bank and financial services provider.
In more recent years, responding to regional financial regulations and compliance requirements and more sophisticated accounting standards and best practices, treasury accountability has been extended, and has become subject to more intense scrutiny in many areas of financial reporting. The treasurer now faces a daunting range of challenges.
Multiple banking relationships are now necessary not only because the enterprise is represented and operational in different geographies, but also in order to spread financial risk across different service providers.
Cost is a big issue. The global marketplace has produced increased international competition for every industry vertical, meaning that efficiency of operation and optimisation of operating costs is an ever more critical topic. Corporates are very sensitive to the cost of financial services, and particularly to the cost of high-volume services such as payments processing. The large corporation requires the financial agility to move business activity between different banks, so ensuring that the enterprise receives competitive services and the best available commercial terms. At the same time, every banking relationship has an internal maintenance cost to the customer enterprise, so a balance has to be struck – the enterprise requires enough banking relationships to ensure that financial risk is spread and regional operations are efficient and competitive, but no more than that. The business overheads of setting up a new banking relationship or of consolidating existing relationships are not trivial.
Sometimes, the established corporate-to-bank service profile is impacted by external events. The progressive implementation by the European financial services industry of the single euro payments area (SEPA) is a current case in point. The European payments business was already highly commoditised, with many banks within each country offering very similar payments services at similar prices. SEPA extends this commoditisation to both domestic and international payments moving anywhere within the eurozone. Over the next two years, as the SEPA financial services community is completed, corporate treasurers with European business operations need to review their eurozone banking relationships. Are any of these relationships now redundant, such that they can be safely consolidated down to fewer suppliers, or maybe down to just one? With the eurozone taking this further step towards complete financial union, does exposure to single market risk mean that corporate investments currently placed in the eurozone should be split, such that a percentage is moved to a market outside the eurozone?
As well as large financial community issues such as SEPA, external changes in the financial systems of individual countries can affect treasury reporting. Cash management and cash flow forecasting are already complex enough, with many transaction sources across the enterprise and many bank balances to manipulate. Worse still, depending on the currency and country, transactions of a similar type can be processed at very different speeds. In the Nordic countries, for example, some classes of transaction will be processed in near real time. Elsewhere, similar transactions may take three or four days. And initiatives such as UK Faster Payments will accelerate the processing of similar classes of sterling domestic payments from three days down to two.
After the treasury team has calculated the actual and likely movement of funds into and out of the global enterprise – and it often requires a sizable and costly team to collate realistic and defensible numbers from many sources via a diversity of media – decisions can be taken on funds management. This leads to another stream of questions and decisions. Float is a cost to the business, so how much float should they allow, and where should it be placed in order to guarantee operating liquidity and to provide sufficient contingency? What instructions need to be given to which banks regarding netting and pooling of balances? How much to invest, for how long and where to secure the best return? How much to borrow, and which credit line from which lender offers the lowest cost? Or is it less expensive to borrow available currency balances from elsewhere in the enterprise? At what rate through which bank? Which currency contracts need to be drawn down? Which new currency contracts need to be ordered, and from which bank?
The effectiveness of the flow of treasury-initiated transactions and instructions which result from these decisions depends entirely on the accuracy of, and the time-stamp on, the operating data upon which the decisions were based.
Challenges in obtaining and managing financial information across the enterprise are common to treasurers in most if not all multinational corporates. In too many companies, accurate calculation of cash positions is at best possible only some days in arrears. There is so much data to gather and synchronise from so many internal and external sources. Data arrives in different formats from different systems, and has to be ‘normalised’ into central systems-of record – too often by manual re-entry. All manual data processing is costly, slow and subject to human error. Yet the treasury is the hub of corporate financial management – critical to enterprise profitability, business intelligence and financial reporting.
Treasury data management must become more efficient, more secure and much more real time. It has the potential to achieve this because the technology already exists. So does the business case for the necessary investment.
MNCs are experts in their core business operations. They have invested millions of dollars in optimising the efficiency of their operations. The focus of their IT investment strategy is upon their core engineering or manufacturing or retail operations. Production lines and supply chains are automated. The associated financial data chains frequently are not.
Although critical to their business performance, treasury operations are not the core business of the corporation. Treasurers can make a good case for the latest application technology to manage cost and profit centres, to apply the latest accounting and reporting solutions, and generally to maintain a good standard of automation within the treasury and perhaps across the central finance division, but resources to evaluate and repair the big problem of efficient financial data movement across the global enterprise are too often absent or in impossibly short supply.
There is a tendency to assume that resolution of this problem belongs to the external financial services industry. Online standardisation of corporate banking services will certainly help, and many banks are separately striving to achieve customer service improvements in this area, but the reality is that global standards that might satisfy all of the multi-banking service requirements of the global corporation will not materialise any time soon. If they ever arrive, they will in any case only solve a part of the corporate financial data management issue.
In practice, the forward-thinking, cost-conscious and revenue-orientated corporation has to resolve the problem itself. The sooner the better. Solutions are available from business process integration vendors today, and in many cases the demonstrable time to return on investment is almost unbelievably short. In many large corporates, the treasury itself is a significant profit centre, generating major revenue into the consolidated profit and loss account. The time has come to maximise treasury revenue and minimise treasury costs by providing the treasurer with the same priority for data processing automation and integration that the rest of the enterprise enjoys.