Balancing Innovation with Fundamentals for Lasting Value
In the always-changing world of finance and treasury management, the landscape is constantly changing with new technologies and trends. As a treasurer, you’re inundated with terminology and buzzwords. Yet you may find yourself unsure of how to effectively leverage these tools to drive value for your organization. If you’ve ever felt this way, rest assured, you’re not alone. Are you an experienced treasurer or someone looking to enhance their knowledge of financial management? We extend a warm welcome to TreasuryMastermind.com. Join our vibrant community and become a valued member of a network that prioritizes collaboration, expertise, and the pursuit of excellence in corporate treasury. Let’s initiate discussions and together elevate the art and science of treasury management! “Building a solid foundation is key” It’s essential to acknowledge that building a solid foundation is key before diving headfirst into the latest innovations. AI, automation, and other advancements hold tremendous potential. But they are most effective when built upon a bedrock of fundamental principles. Far too often, treasurers become fixated on adopting the latest technologies without first understanding their business thoroughly. This includes careful documentation operations, identifying inefficiencies, and implementing strategies for improvement. Creative destruction, the process of eliminating outdated practices to make room for innovation, is a powerful tool in this regard. Consider the many reports that consume valuable time and resources without clear utility—a prime target for streamlining efforts. I will always remember a great (and rather simple) piece of advice from a former boss. To whom I asked whether this and this report were really needed. “Stop doing it and see what happens. If nobody comes at you, it means nobody cares.” I followed his advice, which saved me two days of work every week for my team. Of course, I wouldn’t apply it without thinking if I were you. Ask around you before stopping a reporting activity. “Without a solid framework in place, even the most advanced tools may yield limited results” Prioritizing initiatives such as business continuity planning (BCP), staff education and training, and making clear roles and responsibilities within the Treasury function are essential precursors to technological integration. Without a solid framework in place, even the most advanced tools may yield limited results. Once these basic elements are in place, treasurers can begin to optimize their existing processes using a combination of technology and strategic planning. Implementing workflow tools to manage end-user requests, developing key performance indicators (KPIs), and establishing your own BIC for better banking relationships are all steps in the right direction. “Treasurers can unlock significant efficiencies and cost savings” A treasury management system (TMS) serves as the linchpin for many of these optimization efforts, providing greater visibility into cash positions, improving payment management, and facilitating intercompany transactions. Also, by centralizing cash management and leveraging in-house banking capabilities, treasurers can unlock significant efficiencies and cost savings. In the realm of foreign exchange (FX) management, transitioning from direct bank trading to an FX platform offers enhanced pricing, transparency, and security. These platforms seamlessly integrate with TMS systems, further streamlining FX transactions through automation and advanced reporting capabilities. “Treasurers can unlock valuable insights” As treasurers continue to modernize their operations, artificial intelligence (AI) and application programming interfaces (APIs) emerge as powerful tools for enhancing cash forecasting and integration with internal systems. Leveraging machine learning algorithms, treasurers can unlock valuable insights into cash flow patterns and optimize liquidity management strategies. API integration extends the capabilities of TMS systems, enabling seamless communication with other critical systems such as data hubs and ERP platforms. By aligning treasury functions with broader data strategies and automating accounting entries, treasurers can drive operational efficiency and ensure compliance with financial reporting standards. In essence, the journey toward financial transformation requires a strategic approach that balances innovation with basic principles. By prioritizing operational excellence, leveraging technology strategically, and embracing continuous improvement, treasury professionals can navigate the evolving landscape with confidence and drive lasting value for their organizations. To conclude, walk before you can run! Also Read
Benjamin DefaysGuidelines for Transfer Pricing related interests & spreads applied in Zero Balancing Cash Pools – Part 2
Executive summary A Zero Balancing structure mirrors the core activity of a bank. Therefore, managing a Zero Balance Account (ZBA) structure requires a corporate treasury to operate an In-House Bank. This In-House Bank must apply Arms-Length interest to balances in its In-House Bank accounts as well as to InterCompany Lending and Depositing/Investing, both debit and credit. To comply with OECD BEPS Transfer Pricing regulations, Arms-length must adhere to a logical spread similar to that used in core banking operations. This entails ensuring that the spread on current account interest (debit/credit) is further from the reference rate than the spread on InterCompany Lending/Depositing. This white paper discusses, in two parts, the background and guidelines of setting Transfer Pricing related interest spreads in Zero Balancing Cash Pools. Read the Part 1 of this White paper: Guidelines for Transfer Pricing related interests & spreads applied in Zero Balancing Cash Pools – Part 1 Are you an experienced treasurer or someone looking to enhance their knowledge of financial management? We extend a warm welcome to TreasuryMastermind.com. Join our vibrant community and become a valued member of a network that prioritizes collaboration, expertise, and the pursuit of excellence in corporate treasury. Let’s initiate discussions and together elevate the art and science of treasury management! PART 2 Current Account Interest versus Lending/Deposit Interest Now that we have explained the background why an In-House Bank with In-House Bank accounts is required for ZBA structures, and why we should apply interest to the In-House Bank accounts, let’s have a look at different types of interest. I will look at different types of interest for commercial banks and how that is linked to interest applied by an In-House Bank. In general, commercial banks calculate current account interest on the basis of risk and balance commitment. This means that a commercial bank will apply different interest rates; for credit interest, the commercial bank will look at the time that idle cash will sit in the bank account and what is the risk (or freedom) is the accountholder to withdraw the balance. For debit interest, the commercial bank will assess the time and amount that an overdrawn balance will exist, as well as the risk that the account owner will (or can) get the overdrawn bank account back to a positive balance. However, when both credit balances and debit balances will exist for a longer time, commercial banks will offer different solutions with more favorable interest rates. But the favorable rates will usually come with restrictions. In the case of a credit balance, banks may offer better interest rates if the account holder maintains a certain positive balance in the account for a certain period of time. Banks can also request account holders to transfer the positive balance to a separate account from the bank in order to apply the more favorable interest rate. In financial terms we call this “time deposits”. The interest rate of a time deposit will depend on the amount, tenor and the revocability of the transferred balance. The higher the amount, the longer the tenor, the lower the revocability, the higher the credit interest. Conversely, for a debit balance the banks may offer better interest rates when the account holder agrees on an amount that is needed to cover for the overdrawn balance. These agreements usually include conditions that stipulate how long the amount is needed, when will the amount is needed to be paid back and whether the amount can be reused again after paying back. In financial terms we call this “loans”. Obviously, banks can offer a range of similar interest-bearing products that can be tailored to the specific needs of a customer or of the bank. All is based on the core banking model as explained in the first chapter of the white paper. The bank business model is based on the difference between debit and credit interest. Time and risk, but also the level of balance will determine what interest rate a bank is willing to offer to account holders. Also, the balance sheet of a bank may set guidelines for the interest rate settings. A bank with too much risk on the balance sheet (or a certain mismatch between the assets and liabilities) may cause a bank to decide to offer higher credit interest rates than competitors. This is to attract additional cash. To further reduce the balance sheet risk, a bank can also increase debit interest to discourage accountholders to overdraw their accounts or to reduce (outstanding) loans. Vice versa, banks that are “overfunded” (meaning they have too much cash / liabilities on the balance sheet) may consider lowering the credit interest to discourage customers cash balances and lowering debit interest to encourage customers to take more loans. Calculation of Current Account Interest Commercial banks view current account balances as uncommitted cash and as such cash that can be withdrawn instantly by the account holder (high risk). To support that, commercial banks use a reference rate (usually based on overnight rates) and apply a relatively large discount spread on credit balances and a relatively large uplift spread on debit balances to calculate the applied interest on daily current balances. With this approach, commercial banks incentivize account holders to convert non-current larger balances to more committed cash balance (= time deposits). This means that banks will apply a relatively small discount spread on committed cash deposits. In the previous chapter I was referring to “time deposits”; the longer the tenor of committed cash deposits (1 month, 3 months, 6 months, 12 months), the smaller the discount spread on cash deposits (and thus a higher interest yield). Vice versa, banks apply a relatively small uplift spread on committed loans; various committed loan types with various tenors will get different smaller uplift spreads. In general, the following sample schedule shows the relationship between applied interests on various types of cash flows: Reference rate Inter Bank Offered Interest Rate – Overnight Lending/borrowing Applied spread (indicative sample) current account credit balance -/-200 Basis point current account debit balance +/+ 500 Basis…
Paul Buck