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Treasury Management’s Rising Complexity Needs a New Approach

by internationaldirector

Written By: Darren Morris – Corporate Finance

Treasury departments in global companies operate under increasingly difficult conditions in which they are required to manage cash balances, borrowings and investments across different geographies and businesses. Additionally, each country in which a company operates has its own set of regulations, and it is essential that these be followed in every respect. This complicates the task of treasurers even further.

Managing risks and building checks to prevent fraud becomes a challenge when substantial sums of money need to be moved between different bank accounts, many of which may be located in countries across the world. Corporate treasurers also need to devise internal controls and procedures to ensure that the reports they generate reflect the current position and are accurate.

Treasury departments can improve their performance by concentrating on several key areas.

Determine whether the treasury function should be centralised.

Is it advisable to concentrate decision-making at the head office, or should the treasury function work in a decentralised manner? This question has no simple answer, and the best approach is to retain certain activities at the corporate office while allowing local treasury department representatives to handle matters that may require an immediate decision.

Centralising all treasury functions can be difficult. Large companies operating across dozens of countries with manufacturing facilities in multiple international locations cannot possibly handle every aspect of the treasury role at head office. It is normal for a multinational company to have hundreds of bank accounts. A local presence is essential to effectively monitor these. Treasury representatives at different geographic locations also serve another very useful purpose; they can keep abreast with local regulations and shifts in policy in different countries in a much better manner than an official sitting at the corporate head office.

Play an active role in providing accurate cash-flow forecasts.

Producing periodic cash-flow reports is a traditional activity of the treasury department. But current-day corporate treasurers need to view this practice in a different manner. The CEO and board require accurate cash-flow forecasts to determine investible surpluses to enable them to plan for future expansion and investment. The treasury department has the responsibility of monitoring bank balances, borrowings and investments at a company-wide level. But they need to consolidate this data in near real-time so that it can be effectively used and also compared against cash-flow forecasts.

One of the strategic benefits that a treasurer provides is to improve the specific timing and accuracy of when cash flows are to be realised. A treasury department that builds up a reputation for furnishing accurate and timely cash-flow forecasts will prove invaluable for top management when the company’s expansion program is being planned. Fortunately, projecting cash flows is fairly simple. But it does require a systematic approach that involves a set of activities that must be followed assiduously. A critical issue is to get buy-ins from unit or division heads. The treasury department needs to visibly demonstrate that it is adding value to a business unit. This will ensure that it gets their cooperation.

Preventing fraud

A recent survey conducted by Strategic Treasurer, a consultancy specialising in treasury operations, finds that corporates view fraud and cyber fraud as important issues, and that treasuries and executive management are paying more attention to these areas. But many companies still need to address basic issues related to fraud prevention. The survey, which began in the fall of 2015 and was completed in January 2016, covered more than 300 respondents from North America, EMEA (Europe, the Middle East and Africa) and Asia-Pacific. It found that 57 percent of firms have no control framework, either at the treasury or company level. The survey also revealed that 36 percent of frauds were committed by current or former employees.

Source – Strategic Treasurer survey

Source – Strategic Treasurer survey

When survey respondents were asked about the measures that they had instituted to prevent frauds by employees, their responses revealed a lack of attention to this issue. Checks were not carried out for 12 percent of employees. Even worse, background checks were not conducted for 58 percent of temporary workers and 69 percent of contractors.

A need to adapt to changing requirements

Many global companies are seeing greater growth from emerging economies. The established markets of North America and Europe are either stagnant or expanding slowly. This trend has made a treasurer’s job more demanding. The focus on currency and interest risk management has increased as has the need to hedge exposure to commodity prices. There is also a requirement for treasurers to stay in touch with current developments in risk management and fraud control. In many instances, a practice that was regarded as cutting edge previously may currently be inadequate.

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