CFO Studio Magazine with Alison Cornell

36 WWW.CFOSTUDIO.COM Q1 2017 CFO 2 CFO D uring the last global economic downturn, many companies were caught unprepared by the speed at which events impacted their business. Many CFOs asked questions like, What is our current cash balance globally? In which financial institutions are these balances invested? and, What is our counter-party risk? Companies with centralized treasuries typically had better visibility and information relating to these questions. However, decentralized treasuries deliver other benefits for many companies. Will a centralized or decentralized treasury function be best for your company? That depends on the nature of the business. Factors such as global geographic footprint, the similarity of business operations across geographies, andmanagement’s philosophy all weigh in this decision. P ros and Cons Treasurers are responsible for managing a company’s assets and liabilities, financial risks, and banking relationships. For businesses with operations around the globe, managing these components is complex. Some of the benefits of a decentralized treasury structure are: (1) Flexibility, as local operating units or subsidiaries manage treasury in line with local conditions, and the solutions are specific. (2) Knowledge of local markets provides advantages for selecting appropriate debt or investment vehicles, foreign exchange hedging instruments, and banking partners. (3) Local staffmay have more intimate knowledge of local regulations, and business/legal/tax/banking environment. (4) Local staff likely takes pride inmanaging all aspects of the operations. On the other hand, some of the benefits of a centralized treasury structure are: (1) Economies of scale. (2) Rationalization of costs. (3) Standardized cash flow forecasting. (4) Identification of company’s cash balance and risk. (5) Closer control over investment performance and risk. (6) Greater access to financing and liquidity. (7) Ability to leverage banking and other relationships. (8) Local staff can focus on growing the business. A particularly strong argument for a centralized treasury is that such a structure allows integrated payables and receivable solutions to achieve straight-through processing, which can help improve a company’s working capital position. C onsider Specifics A centralized treasury structure seems more efficient, but a key question to reflect upon is leadership’s philosophy toward managing the assets and liabilities of the company. A company’s specific situation, such as degree of international presence, type of business, growth prospects or business cycle, sophistication of ERP system, availability of TreasuryManagement System, and external factors (global/regional financial crises), all play a role. Facilitating the trend toward centralization is technology (more sophisticated treasury workstations interconnected with ERP systems), as well as legislation or regulatory changes (i.e., the Eurozone’s move from national payment instruments to SEPA, Single Euro Payments Area, and easing of controls in several emerging markets), and globalization of markets. However, centralization is not without its challenges. Treasurers need the communication and cooperation of local staff to provide valuable knowledge and information on local rules and regulations. Ultimately, the company that implements a centralized treasury approach will likely be better prepared to manage the risks of the global marketplace. C Financial Risk CENTRALIZED VS. DECENTRALIZED TREASURY: WHICH WORKS BEST FOR YOUR COMPANY? WALTER CIRILLO Treasurer, Novitex Enterprise Solutions, Inc. Learn more about the author www.CFOstudio.com