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Why centralise your treasury needs?

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As businesses grow, their treasury department becomes more complex. A centralisation strategy can bring a number of key benefits for your company.

The business benefits of treasury centralisation

Corporate treasury has evolved in the last decades into a far more in-depth and comprehensive business function that is responsible for more than just transactional activities. Along with this strategic evolution, which places the treasury at the heart of business decision-making, as organisations grow and their global footprint expands, their treasuries become more complex and even routine tasks become harder to manage.

Starting out with centralisation

For this reason, many companies start to investigate centralising their treasury needs, often in tandem with digital transformation that may embrace enterprise resource planning (ERP) and treasury management systems (TMS). The decentralised model comes in all shapes and sizes, in line with the company’s requirements, and can be be better suited for local regulatory and business needs, market conditions and customer requirements.

The right solution for every firm will be different, and may include hybrid arrangements where decentralised and centralised functions co-exist and complement one another.

Treasury centralisation is not an all-or-nothing process, but rather can be implemented progressively over time, in line with the corporate’s organisation and goals. It can range from simple centralisation of cash, interest rates and FX, to creating a hub bank to support standardised flows for all subsidiaries in a payments factory or shared service centre. Eventually, a large multinational may embrace a fully centralised treasury with integrated ERP and TMS solutions and in-house bank or netting structures.

Key drivers for centralisation

Whatever stage the company is at, centralisation isn’t considered just to reduce complexity. There are a wide range of benefits to creating a strong global treasury hub or headquarters, supported by one or more regional treasury centres located in key markets throughout a firm’s footprint.

These centres provide regional treasury expertise and leverage local knowledge of regional banking and financial markets, practices and protocol. As the scale of trade and geographic growth dictates, companies can further enhance this decentralised model with the creation of payment factories and foreign exchange (FX) centres to manage the processing of transactions more affordably.

For companies approaching centralisation, there are key control, risk management and cashflow reasons and economies of scale that drive the transition.

  1. Control: A centralised model will improve control by managing data centrally, whether this is through preventative controls such as authorisation processes in purchasing and sales or detection controls through reconcilations. Centralisation will improve these processes by ensuring that there is sufficient segregation of duties within an organisation.
  2. Cashflow: Cashflow can be improved by visibility of all payment flows within the organisation ensuring that payments are made in accordance with agreed terms. Managing outstanding receivables will ensure that bad debts are kept to a minimum and customers pay on time. By managing cash balances centrally a company can reduce significantly the amount of redundant cash balances within subsidiaries books. The company will also ensure that investments and borrowings are managed by the treasury organisation in line with agreed policies and rates.
  3. Risk management: Risk management can also be centralised in a dedicated treasury team. This ensures that the company can effectively manage foreign currency risk by hedging centrally through approved financial institutions. The treasury team will also ensure that only approved investments, whether they be short- or medium-term cash deposits or long-term strategic investments, will comply with corporate guidelines. The treasury team can also determine the best type of borrowings needed to be employed to meet leverage and shareholder expectations. Operational risk is also a key component to managing fraud, legal and cyber security and can be managed centrally through the deployment of approved IT systems and processes.
  4. Economies of scale: A centralised operation allows companies to standardise processes and realise economies of scale, through dedicated staff for each function and the reduction of disparate IT solutions across the organisation. This will also reduce the amount of duplication within the company, which can, in turn, reduce costs.

Key benefits for a centralised treasury function

Although transitioning to a centralised treasury model is no easy task, the benefits can be significant. It can offer companies a team of on-the-ground experts who know how to navigate the complexities of banking in different regions, with specialised knowledge and skills in your geography of choice. They can help companies bank like a local and find the hidden opportunities that each market offers.

Centralisation with regional treasury centres can also offer critical business advantages:

  1. Improve Working Capital: As companies grow their businesses, the complexity of their cash management needs also increase. By centralising its cash management operations, a company can achieve better management of internal cash flows, liquidity management and therefore its working capital.
  2. Cost Savings: In addition to measurable financial advantages of centralisation, the centralisation, standardisation and automation inherent in shared service centres offer an opportunity to streamline control and management processes in cash management, increase visibility over all company’s internal and external cash flows, re-engineer processes and build in desired efficiencies and controls.
  3. Reduce Banking Relationships: In many cases, the drive for improved efficiency, visibility and reduction in costs will ultimately lead the company to review its banking relationships either globally or regionally. To this end, one key objective will be to reduce the number of banks that support its cash management function.

    These projects often include technological enhancements, such as the implementation of a single ERP system, treasury management system (TMS) connectivity to multiple banks as well as standardisation of message formats across banks, geographies, entities and banking services.
  4. Reduce Long-term Debt: By sharing the same treasury centralisation tools across the business, various stakeholders and legal entities within the organisation can standardise processes and ensure the integrity of controls. Furthermore, by centralising cash and investments, treasury can more effectively manage its capital structure, such as paying down debt at the parent level, or minimising net interest expense by deploying internal cash to fund working capital or capex at the subsidiary levels.
  5. Improve Security, Reduce Fraud: Centralisation can help tackle the issues of cybersecurity and fraud important to any organisation and increasingly important worldwide. Use of a common platform along with standardised processes and controls is one key step. Furthermore, by centralising and digitising sensitive activities such as payments, the organisation can minimise the number of touch points across the business that can authorise disbursements. This enhances control of emerging risks.

Getting started with treasury centralisation

The journey begins with defining the scope of the centralisation and what tools and corporate structures will be needed to achieve this. Companies need to address a number of considerations and regulatory issues that could impact their target model, particularly in choosing the locations for their regional treasury centres. Regardless of whether it’s a hybrid model or full centralisation, a successful implementation will hinge on the treasury’s ability to secure prior senior management buy-in, a well-defined plan, and sufficient resources to implement.

Creating and operating this model can have many benefits for your company, but it is also a sophisticated operation that can bring challenges to doing business across different regions and countries. It helps to have a banking partner with the skills, expertise and presence to help you on the journey.

Whether you need guidance on navigating local policies, culture, regulations or language, with a presence in 64 countries and territories across the globe, HSBC are embedded in local markets, already there to help you at every stage of your journey and ensure the model works for you. Working closely with you, we use our extensive experience to help you establish the right solution for your individual business, ensuring the right level of complexity and scale for your needs.

Further insights

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Regional Treasury Centre Structures

For large multinationals who want more control over cash management, FX and financing activities, a centralised treasury functions could be advantageous.

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