The evolution of 'load-balanced' treasury.

• Author: Beecroft, Rick

Since the early 1990s, industry analysts and publications have elevated the idea of a central treasury to the equivalent of the Holy Grail for treasurers. Staff reduction, more efficient banking relationships, a reduction of idle balances, more accurate cash forecasting and better control over subsidiaries are just some of the proposed advantages that can be measured in the bottom line.

The path towards centralization usually starts with cutting the power and size of local and regional treasuries through a reduction in their banking relationships. This makes perfect sense in Western Europe and the U.S., but companies situated in "difficult" market regions were left alone until a solution could be found. The temporary solution was for the group to include these subsidiaries in a centralized reporting environment.

The problem with centralized reporting, however, is that it is an arduous task for both the subsidiary and the central treasury, so the frequency of reporting is low, usually once a month. Because there is no benefit to the subsidiary, compliance is low, resulting in many subsidiaries not being included--or at the very least, data is collected only for the sake of having the figures for reporting purposes.

Cost Benefits Misconstrued

Often, the result of this poor reporting compliance was to further cut off responsibility from the subsidiaries. By reducing the size of local operations, companies are able to see a direct cost benefit through reducing staff. These cost benefits were used as a justification to increase central treasury size so that they could take care of all the subsidiary's requirements.

The downside of this was the loss of local knowledge: The central treasury can never have the same level of understanding of local customs, favorable national financing options, payrolls and receivables collections. Moreover, in some regions, companies faced insurmountable problems dealing with fiscal and regulatory issues when implementing this approach.

So, how does a company combine a desire to fully centralize, with the reality that its new and growing industrial base requires a regional treasury? The answer is to use a blended approach. Centralize where possible, but plan for the fact that even the largest companies are still struggling to fully centralize their treasuries. Many in the industry understand that this is the most pragmatic solution to the conceptual issue of the corporate treasury, but are at a loss as to how to...