Treasury: The case for centralization | Euromoney

Growing companies will inevitably see that they cannot or should not continue operating as they have been. Whether a company has grown organically or as a result of a merger or acquisition, it should consider centralizing corporate treasury functions that are in line with the requirements of the new corporate footprint.

Why Treasury Centralization?

A centralized approach, as practised today, eliminates duplication of efforts across the organization. Each business doesn’t need to have its own traders and trade lifecycle management resources when they centralize hedging and trading operations. 

With streamlined counterparty agreements, the operational burden of managing multiple external agreements and KYC requirements for your own company is reduced. Similarly, centralizing cash management can provide similar efficiencies. 

The relationship between a bank and its partners can be optimized based on the regions in which they transact. By centrally managing bank-to-bank payments, all firms are in control of these transactions, reducing the risk of interest and other claims.

Getting the Most Out of Centralization

As businesses achieve some level of centralization, they can take the opportunity to assess whether they have optimized their operations – in effect, transforming from just business operations to become business partners. The most effective treasuries will consider the following five points:

  1. Identify the firm’s cash between transactional or holistic approaches: Holistic cash management is a complete view of bank balances, short-term liquidity needs (through A/P or A/R, for instance) and long-term cash forecasts allow optimization of banking relationships and enhancement of return on cash through cash pooling and target balance management.
  2. Acknowledge whether one has a complete view of the firm’s financial exposures: Holistic cash management leads to having a consolidated view of exposures. Treasurers can then implement measures to mitigate the risk of their exposures through hedging actions efficiently by netting exposures.
  3. Understand if hedging activities are executed efficiently: Electronic trading of OTC (Over-the-Counter) derivatives reduce execution costs. Solutions such as SWIFT connectivity allow confirmation and settlements to occur automatically.
  4. The ability to use risk management tools to mitigate all potential risks to the firm: Understanding and defining a firm’s risk appetite is the first step to using risk management tools effectively. Once this is accomplished, best-in-class firms integrate their risk policy into their execution systems – exposure limits, trader limits, counterparty credit limits as well as ensure compliance with regulatory requirements.
  5. Consider the time spent on information gathering vs information analytics.

To Conclude

It’s about finding the right fit for your company when it comes to centralizing corporate treasury. A growing multinational footprint may also require you to rethink your approach to centralization over time, especially given its dynamic nature. What is scalable today may no longer be at a later stage.

However, make sure you don’t go all the way in one go. When top executives, local management and affected employees buy into the phased approach, a solid set-up at every step will eventually lead to greater acceptance and success of the company.