• andy chuks Treasury Operations
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    Treasury Operations in Financial Institution Issues and Problems
    07 August 2010Comment
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    • JP Williams Common Challenges Facing Treasury Operations
      Technology is key to many areas of treasury that practitioners may struggle with today: daily cash management, liquidity, counterparty exposure, and bank administration.
      What have the events in the financial markets over the past 12 months taught us thus far? If nothing else, it's that the old adage still reigns supreme: cash is indeed king. The collapse or acquisition of several financial titans around the globe, the changing face of Wall Street, the liquidation of well-known and long-standing retailers, the skyrocketing costs of capital, increasing market volatilities, government bailouts and takeovers?the list reads like a best-selling ?financial doomsday? novel and the end of free market economics as we know it. Unfortunately, it's the reality that we all must face now and perhaps for some time to come.
      Much of this market turmoil directly influences treasury minute-to-minute. Treasury's core function and responsibility is to safeguard the assets of a company and manage the cash resources (i.e. liquidity) to support the operations of the company's principal business. Hence, why treasury has been, and continues to be, one of the most challenging, dynamic and critical roles today: it's one area in nearly all organisations considerably impacted and potentially causing its collapse the fastest. And the vast majority of this responsibility relates to the management of cash and liquidity; all other functions (risk management, forecasting, fee analysis, etc) support the preservation of capital and maximising cash on hand/cash flows/returns.
      Anyone sitting behind the desk of the treasurer these days may seem like a 'glutton for punishment'. It is akin to a game of dodge ball, except rather than just one ball coming at the treasurer, there are several approaching from most every direction, many of which cannot be seen. And the larger the organisation, the increased likelihood for more balls hurled in the treasurer's direction, each representing one of the many challenges treasury faces on a daily basis. The current financial crisis and rapidly changing market conditions around the world affect the speed at which they are approaching and the magnitude of the potential impact.
      How can treasury and finance professionals manage' The most influential course of action is preparedness; however, the unknown represents a major impediment to achieving this ready state. Thus, the statement -You don't know what you don't know? can have devastating consequences, if not lethal ones. Ignorance is no longer bliss.
      Treasury has long been faced with many operational challenges contributing to this unknown. Today, not being able to overcome these hurdles can have a more detrimental effect than previously experienced. Although not complete, the following represents those operational components that, when achieved, can greatly improve the performance and ongoing results derived from each treasury-related function across most every organisation:
      - Visibility.
      - Access/timeliness/speed of information.
      - Completeness of information.
      - Workflow management.
      As the size and/or scope of an organisation's operations increases, the ability to overcome these challenges can become a more daunting task. Taking this thought a step further, these components need to be analysed and applied across three pillars of any organisation: people, process and technology. Whereas the complexity to apply these principles mandates dedicated resources, analysis and project planning far beyond what any one article or white paper can describe, the concepts can be introduced to some key areas of treasury many practitioners may struggle with today: daily cash management, liquidity, counterparty exposure, and bank administration.
      Daily Cash Management
      Having control of cash and implementing effective cash management strategies has long been considered best-practice, but in light of current events, it has become mandatory practice for most. The first area where most struggle, and thus represents an initial goal, is to achieve real-time (or near real-time) visibility into cash balances locally, regionally and globally across all banking relationships. This would ultimately be reported in local currencies (if a global company) and perhaps also translated to a native currency.
      Next, being able to capture all relevant transactions impacting cash today, tomorrow and beyond is instrumental to forming a more strategic programme: the advent of a cash flow forecasting methodology and payment factory to capture the timely and complete cash flows enterprise-wide. In addition, the ability to analyse the cash held/associated with all legal entities and operating units to ultimately establish an in-house banking structure and perhaps track intercompany loans can be a natural progression for those multi-entity organisations. The impact of such a programme can be considerable: freed-up cash, lower costs of funding, higher investment returns, etc.
      Layering a structured, consistent workflow with defined cut-off times, approval procedures, protocols, reconciliations, etc, represents another challenge to effectively managing cash yet one that can be overcome. Standardising workflows locally, regionally and globally allows any organisation regardless of size to more effectively manage decentralised operations in a more controlled environment and from a centralised point.
      The facets of daily cash management in the context of what is described above represent a significant component to liquidity, as is the ability to capture all operating cash flows (accounts receivable (A/R), accounts payable (A/P), payroll, etc), financial cash flows (from debt, investment, foreign exchange (FX) transactions, etc) and all credit facilities (used/unused, etc). Without delving deeply in ratio analysis and the cash conversion cycle, identifying, capturing and consolidating the required inputs to produce one view of 'total liquidity' still remains a challenge for most. The inability to achieve the complete and/or timely picture of total liquidity leads to a decision making process that is inefficient and perhaps falls short of the expected results (higher funding costs, lower returns, etc).
      Counterparty Exposure
      Identifying the counterparties that your organisation transacts with on a daily basis in and of itself may be an overwhelming and time-consuming exercise, especially if considering the credit worthiness of those counterparties on the buy-side and sell-side of the business, as well as all direct financial counterparties. However, evaluating all of your customers, suppliers, insurance companies, financial institutions, etc is a necessity given the chaotic financial landscape today. The degree to which treasury resources are tasked with this job varies, but most are responsible for understanding the exposures their companies have with the financial counterparties they transact with daily: FX trading, investments, cash concentration, credit facilities, etc. The ability to measure all the exposures and in real time, as well as manage to policies and limits (typically set by executive management and/or the Board of Directors) is high on the priority list.
      Collectively determining these exposures and analysing in conjunction with cash and liquidity positions contributes to the next 'wrinkle': evaluating these positions to determine their impact on debt covenants/loan guarantees. Having a forward view (i.e. forecast) and comprehensive information can help alleviate a potential covenant breech, the effects of which can be costly to the company in many regards (cost of credit, negative effect on principal operations, etc).
      Bank Relationships/Administration
      For much of this 21st Century, there has been a general acceptance and drive to consolidate banking relationships as quickly and extensively as possible, and perhaps even moving toward one global bank. Counterparty risk took on a whole new meaning from September of last year. Not only was the responsibility and challenge to safeguard assets and manage/adhere to investment policies growing exponentially, but also now even idle cash was at risk.
      This more recent concern adds to the ongoing challenges of administering operations with banking partners: opening and closing accounts, fraud mitigation strategies, tracking signatories, defining/monitoring limits, approval workflows, maintaining documentation, regulatory compliance, etc. As with most every facet of treasury operations, the more banks/accounts/geographic distribution, the much more complex and challenging the job becomes.
      Today, treasury professionals are demanding a better system for bank administration beyond Microsoft Excel and/or Access. The ability to globally research signers, add/replace/update, automatically generate confirmation letters and consolidate/attach supporting documentation are at the top of the list. Not only does it promote efficiency and increase controls, but also aids in regulatory compliance (i.e. Sarbanes-Oxley Act of 2002, etc).
      Overcoming the Challenge
      As mentioned, the challenges described herein require further analysis and application in the context of people, process and technology. However, it is noteworthy to focus on the latter point: the failure to recognise the importance of embracing technology and the profound impact it has on operations across most every treasury function will limit your potential for growth and efficiency, but more importantly can expose serious risks. It is almost impossible to achieve the visibility, completeness and timeliness required in today's fast-paced and constantly changing environment without leveraging technology - getting the right information to the right people at the right time is crucial to today?s decisions and planning for tomorrow. Yesterday's news is just that; in most cases, the ship has sailed and playing 'catch-up' will not suffice. Fear of the unknown should be a driving force to improvement.
      There are a multitude of treasury technologies to leverage, including but not limited to treasury management systems/workstations, risk management systems, investment analytics/performance, trading portals, bank account administration, etc. Some are offered as best-of-breed; other solutions may be more of an all-in-one. In any case, many can use the Internet and be deployed in a more affordable and flexible model.
      Those that leverage the power of the Internet offer the most intriguing value propositions: anytime, anywhere access in a controlled environment increasing the speed of information and visibility across the enterprise. The problems that have plagued too many organisations for too long (poor judgment, lax controls, minimal oversight, limited visibility, stale data, incomplete reporting, untried risk mitigation techniques?) can be controlled more effectively and perhaps eliminated altogether.
      Treasury: the Strategic and Value-Added Partner
      For much too long, the value and expertise of the treasury profession has been overlooked. However, the events and circumstances of the past 12-15 months exemplify/demonstrate just how critical the discipline of treasury is to most every organisation regardless of industry, revenues or geography.
      Now more than ever, it's time to identify and embrace today?s challenges and those that lie ahead, seek out the tools (i.e. technology) most appropriate for your specific operations and align closely with the needs and/or functional/process gaps. Many potential partners are available (consultants, vendors, suppliers, etc) to dedicate resources and craft solutions to meet current requirements and achieve longer-term goals.


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