Timothy O'Keeffe

ABN AMRO’s Timothy O’ Keeffe explains the challenges faced by corporate treasuries and recommends ways on how to achieve a more centralized and automated flow of information and investments.

Desperately Seeking Solutions
Treasurers require solutions which are standardised, automated and will streamline processes and give greater control over dispersed cash positions in multiple currencies and multiple locations through centralisation. Their objective is to unlock trapped liquidity from the working capital cycle by gaining optimal use of their total cash portfolio and to improve service and execution by working in partnership with a provider who has the necessary capability and capacity to fulfill the role of providing optimal solutions across cash, liquidity and investments without increasing costs or increasing stated levels of risk.

The achievement of these goals will allow freed liquidity to be used for more dynamic, strategic investment purposes or alternatively to achieve more efficient intercompany funding capabilities or maybe even to pay down and reduce debt. This would have the impact and benefits of increasing and enhancing revenues and also achieving significant cost reductions in a controlled, risk managed environment. This is in addition to achieving efficiencies in the payments and account receivables worlds and ensuring compliance and an understanding of various regulatory, compliance, legal and tax issues which could potentially impact the tactical and strategic decision making process.

Changing Focus and adding Value
Over the last 30 years the treasurer’s role has changed from being simply a transaction executor and facilitator to a fully functioning strategic command centre which adds value to the entire working capital cycle through the creation of process integration which has created a sophisticated approach to tactical and strategic delivery. Effective treasuries deal with the processes and control of cash, liquidity and investments within defined structures, and the ability to understand and deliver a more coherent treasury structure deals with information flows around those transactions. Internal and External Pressure – The Corporate Treasurer’s Challenge
The treasurer is constantly being challenged by internal and external forces which create the environment in which they operate.

Externally there are the events of which they have little or no control. These would include regulatory incompatibility, interest rate volatility, currency risk and declines in turnover. These define the context and provide the framework of the structures within which the treasurer will have to work. This would include basic account structures, investment mandates, and country specific requirements. This will drive the decisions on how and where they will operate and their expectations around what can and cannot be delivered. Internally they are being challenged by the corporate objectives and market trends which define how they will utilize the structures. These would include pressure on pricing and margins within their own business, competitors, a requirement for global cash optimization and global use of funds and which components of the structures could be more efficiently outsourced to allow the treasurer to focus on the more strategic aims and ambitions of the company and achieve higher levels of shareholder value.

A Complex Undertaking
Managing working capital, whether locally, regionally or globally is an immensely complex undertaking. Operating cash balances are generated and utilized in multitude of ways the monitoring, managing and measuring of these flows to ensure that there is a seamless cycle takes up much of the treasurer’s time. The ultimate solution is one which creates a single consolidated position which the treasurer can view as a single number within a single base currency. The key benefits of this structure would be increased interest earnings delivered as a result of a natural offset of credit and debit balances either through the use of notional pooling structures or via automated physical concentration. Cost reductions and efficiency through the use of automated services would also release the administrative burden from the treasury office and mitigate risk through the reduction of operational interface which would eliminate human error and resolution activity.

The Route to Rationalisation
Once information flows have been identified and qualified then the treasurer needs to decide on the route of rationalisation. To build this roadmap they will need to take a long look at their internal structure and define the sort of treasury they are today and the form of treasury they would like to be tomorrow. The following would require clarification around defining what is in scope and what is out of scope. Within the working capital mandate this would include identifying those activities around funds and FX flows, actual cash balances, the direction and form of cash flows, accounts payable and receivables, supply chain opportunities and the associated risks around taxation such as intercompany lending, withholding tax and other associated risks. The evolution towards the centralizing of treasury and payments has been a key trend over the last 20 years. From the initial shared service centers of the largest MNCs the trend towards consolidation, centralisation, control and cost effectiveness is viewed as offering the greatest level of opportunity with regards re-engineering the cash management structure for nearly all treasurers.

Decentralised to Centralised
From a decentralised approach to cash and liquidity management to a centralised cash and liquidity structure requires a focus and determination to implement and execute that requires nerves of steel but is also reliant on a partnership approach which encompasses technology, stake holders and a bank to provide the services.
Key challenges to implementing centralisation tend to be corporate business/finance structure & internal opposition to change, deciding on “right” model & tools, understanding and achieving clarity on costs/benefits – impact of cut-off times, value dating, and fees and the potential tax impacts of structures. There are also other issues such as the ability for global bank partners to support centralisation and a requirement or desire to retain support/help from local banks. However, centralising cash control remains a priority. Compliance and risk controls have been the main drivers for last few years specifically around understanding the cash flows. Local country regulations are on the major determining factor for the success of centralization: ensuring access to liquidity “in the right amount, in the right place, at the right time”; reducing “high” levels of global surplus cash; maximising cash yields; improving view into local business performance/early warning on issues; simplifying the entire cash collection process and easy access of data on a global basis.

Initially treasury centralisation discussions will be around what has already been achieved and then move on to identifying the priorities that must be achieved going forward. At a minimum these would include efficiency, security, control, re-engineering for value, reduction of cash flow gaps within payment/collection cycles. This will create the mission statement of what the company is looking to achieve and will set the agenda for the level of service that new technology and the banks must be able to supply. From this point clarification around the scope can be defined. This would involve a review of local cash management structures and trade services to see whether these should be part of the review based on their relationship to centralised payables and receivable models and an understanding of local buying centers and where trade decisions are being made.

More esoteric information can then be compiled around values, volumes, frequency and types of transactions whether payments, collections, FX contracts and investments. In effect the level and degree of centralisation will be defined by the needs of the treasurer and the pain points that they wish to overcome. Most companies will readily admit to wanting to achieve the following: reduce overall/operational costs; reduce errors and amount of paper flow through automation; outsource some or all of its accounts payable functions; streamline and automate the payment process so as to improve back office productivity; lower overall transaction costs and reduce processing time to improve service levels; enhance internal security and control; forward payment/invoice details directly to the payee via several media to allow easy application of funds; interface electronic delivery channels with internal back-end systems for complete financial systems integration.

The ability to implement is reliant on a banking partner to whom the transactional components can be outsourced. At the same time the accounts receivable side of the business can also be reviewed to specifically reduce costs in the matching or invoice invoicing process, reduce processing cycles and costs resulting from a growing number or too many discrepancy errors, leading to greater and better visibility of cash flows which will lead to the following benefits: maximising the benefits of cash as a resource within the business; use the Treasury function to generate incremental economic value; fund short positions with group-generated liquidity; full mobilisation of liquidity on a real-time basis across regions and jurisdictions; information reliability and access to real-time balance and transaction information in any geographical area; create a single cash position in the major traded currencies; strong relationships with financial partners to exploit market opportunities; maximising tax efficiencies.

A Partnership Approach and Building Blocks
A strong partnership approach to cash and liquidity management demands the following requirements: accurate, complete and real-time information, forecasting, advisory and risk management tools ; a safe haven for your deposits and credit lines; flexible, global concentration services, coupled with competitive investment options; a partner bank with a strong track record, a global network and a commitment to investment in technology and e-commerce; most liquidity service providers will offer cash flow management services liquidity concentration services (sweeping and pooling), and investment management services that include overnight and term investments, money market funds and customised investment portfolios. A best-in-class liquidity services provider should offer: a commitment to developing a business partnership that goes beyond transaction and liquidity services; an adequate capital base to safeguard your liquidity; market presence in the form of clearing capabilities, client mass and transaction volumes; consistent market leadership and continued differentiation; a strong internal liquidity management process; a good technology base and information technology investment commitment; a consultative and innovative approach to complex solutions; a strategic direction aligned with your own objectives; access to an efficient operations and implementation team with a proven track record; best-in-class client service.

Providers of services to corporate treasurers need to understand conversion cycles and working capital needs in order to design solutions that maximise returns and ensure access to cash or credit as needed. They need to be able to provide broad investment options which allows the treasurer to mix and match a full suite of products to maximise aggregate returns, individual liquidity requirements, risk appetite, investment guidelines and cash maturities. Convenient investment tools need to be made available in order to enhance operating efficiency and ensure that all cash is fully invested in an automated and active manner. Which means that there needs to be a convenient access channel for maximum control and flexibility, offering real-time balance and account information as well as investment, trade and reporting capabilities via online portals and treasury workstations.

Investments – Decision Time
Once the cash and liquidity structures are up and running in a fully automated, centralised manner achieving efficiencies of scale and freeing up cash from the liquidity pool then the treasurer can now start to focus on the strategic decisions around investment or funding choices. Unless clearly stipulated most companies tend towards the conservative or even cautious approach with key requirements hinging on risk/return, security and capital preservation and protection. The decision making process is one which is founded on a series of steps balanced by internal and external factors which could impact the investment choice.Fundamentally the requirement is one highly dependent on the requirement to convert any investments to cash with a minimal level of risk of loss.

Conclusion
By achieving objectives around automation, centralization and standardization treasuries have become an incredibly dynamic force within the corporate arena. With new technologies, distribution channels and more sophistication around understanding cash, liquidity and investments their role can only expand. However, as their role and responsibilities expand so too does the level of risk exposure, which will exponentially lead to ever more regulatory scrutiny on their activities. In the long run this is where treasurer’s will find themselves drawn into the heart of financial decision making but ensuring that risk, compliance, regulations and tax impact have all been given due consideration.