When Interim CFOs become Sustainability Managers
This article is written by HedgeGo Interim CFOs and their challenges The appointment of an interim CFO often includes the company’s desire to change or transform existing processes and directions. This may involve restructuring the entire company or “just” introducing new systems; in any case, “change” is the order of the day. The deployment of such an interim manager can often take six to nine months. Interim CFOs of international companies are very familiar with areas of responsibility such as risk and change management. This means being able to react flexibly to changing data situations and mediate between all interests. In addition, the added value for the company must be proven quickly and this requires a robust set of tools and flexible processes. The Interim CFO and FX Management Interim CFOs are often very well-trained managers who have to prove themselves in all areas of financial management. The specific depth of FX management is often neglected. In any case, it is important to know the mechanisms of the company, for example the willingness to take or avoid risks – and this applies across parent and subsidiary companies. Rules for risk assessment and treatment cannot therefore be defined from the ivory tower of the Treasury, but require proximity to the actual business and the use cases hidden within it. At the end of the day, the success of FX management will be rewarded with a balance between value-at-risk (the protection of the balance sheet) and cash flow-at-risk (the costs incurred for protection). So how can an interim CFO find pragmatic solutions in a relatively short time that support this goal? Cash, cash and more cash Interim CFOs usually only have a short period of time to optimize FX management processes. This requires smart data (decision data). This is less about providing market prices, which are easy to obtain using standard applications. Decision data from FX intelligence is more about elaborate market assessments that enable well-founded and rapid implementation of cash management processes. Such core tasks include CCT (cash conversion timing), i.e. the optimized conversion of risk currency into base currency. There are a wide variety of approaches here. Some companies prefer quantitative approaches, i.e. converting USD into EUR, for example, when a certain amount is reached. Others fix the conversion on certain days of the month to support other processes. But there are other adjustment wheels that should not be neglected. Just as important as CCT is the optimization of payables through improved timing of payments, i.e. BTP (Best Timing Payables). Our FX intelligence has proven that the expenditure of base currency to pay claims in foreign currency can be reduced by up to 2% per year. In one of our cases, this form of active management was able to pay the entire treasury department. Systems that provide early warning of changes in the FX market are also very useful. For example, a PMA (Pressure Map) gives good interim CFOs time to prepare for upcoming actions. This is less about long-term “predictions”, which in most cases do not work, but rather about short-term forecasts based on the latest forecasting technology using machine learning. Interim becomes sustainable Despite the often short duration of interim CFOs, sustainable results can be achieved through the use of good FX intelligence. It is important to note that FX decision data has nothing to do with the execution of specific security mechanisms. The “execution” is carried out with professional payment providers, and FX intelligence serves as a preliminary stage, as qualitative input for decision-making. However, FX intelligence requires a sustainable change in existing processes, away from rigid “no-brains” and towards intelligent, flexible systems that fundamentally improve cash management. Of course, the effort involved should not be underestimated, especially the human component that has “always done it this way” and resists change. First steps So what would be the first steps of an interim CFO towards improved FX management? Every action begins with an analysis of existing processes and use cases. Is there financing with FX components, so-called inter-company loans? Is cash conversion controlled quantitatively or qualitatively? What do contracts with suppliers that are influenced by FX look like? Is there an early warning system, an FX intelligence that automatically provides the decision data that enables rapid action? Are all exposures known? All of these questions must be answered before implementing FX decision data. Interim CFOs often do not have much time, but this should not involve a lot of effort in FX management, which would certainly be ensured by using FX intelligence. More information on this can be found here . Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in Treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
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Understanding the Differences in Treasury Teams & functions: Middle East vs. Europe and the US
In the intricate world of corporate finance, the structure and setup of treasury teams can vary significantly depending on the region. From the oil-rich landscapes of the Middle East to the regulatory frameworks of Europe and the dynamic capital markets of the US, each region has distinct characteristics that shape how treasury functions operate. Understanding these differences is crucial for multinational corporations looking to optimize their financial strategies across diverse markets. The Middle East: Navigating a Unique Financial Terrain The Middle East presents a unique financial landscape characterized by its regulatory environment, corporate governance structures, and economic dependencies. In this region, the regulatory environment is notably complex due to the presence of multiple financial regulations across different countries. For Treasury teams, this means a heightened focus on compliance to navigate these varied regulations effectively. A distinguishing feature of the Middle Eastern financial landscape is the influence of Islamic finance. Some companies may need to adhere to Sharia-compliant financial practices, which prohibit earning interest and promote risk-sharing This affects treasury operations significantly, influencing investment choices and financing activities to ensure compliance with Islamic principles. Corporate governance in the Middle East is also unique, with a significant number of family-owned businesses and state-owned enterprises. Family-owned businesses often exhibit centralized decision-making, where treasury functions are closely knit with the core leadership. This can lead to a more streamlined, albeit less flexible, approach to treasury operations & liquidity On the other hand, state-owned enterprises, particularly in sectors like oil and gas, have distinct reporting structures and strategic priorities, often driven by national economic policies. Given the region’s economic and political volatility and heavy reliance on oil revenues, treasury teams in the Middle East place a strong emphasis on liquidity management. Ensuring sufficient liquidity to navigate market fluctuations and manage foreign exchange and commodity risks becomes a top priority. This also involves risks around currency devaluation and repatriation due to exchange control regulations that are in place in some of these territories. This risk management focus is essential to mitigating the impact of global market dependencies on local economies. Europe: A Harmonized Yet Diverse Financial Environment In contrast, Europe’s treasury teams operate within a relatively harmonized regulatory framework, thanks to the European Union’s unified regulations. This harmonization facilitates streamlined compliance and reporting, allowing Treasury operations to function more smoothly across multiple countries within the EU. However, the General Data Protection Regulation (GDPR) imposes strict data protection requirements, impacting the handling of financial information and necessitating robust data governance practices. European corporate governance exhibits a diverse mix of ownership structures, including family-owned businesses, publicly traded companies, and multinational corporations. This diversity necessitates varied Treasury practices tailored to different governance models. High transparency and detailed financial reporting standards are hallmarks of European corporate governance, demanding meticulous financial stewardship from treasury teams. One of the key focuses for European Treasury teams is optimizing cash flow and working capital management. Operating across multiple currencies and jurisdictions, these teams must adeptly manage cash flows to ensure liquidity and minimize currency risks. Additionally, Europe is at the forefront of sustainable finance, with increasing emphasis on green finance initiatives. Treasury teams are increasingly tasked with integrating sustainability into their financial strategies, aligning with broader environmental and social governance goals. The US: A Dynamic and Technologically Advanced Financial Landscape Across the Atlantic, US Treasury teams navigate a dynamic regulatory and corporate environment shaped by landmark legislation like the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Act. SOX compliance requires stringent internal controls and financial reporting for publicly traded companies, while the Dodd-Frank Act imposes regulations on financial transactions and risk management. These regulations drive US Treasury teams to maintain rigorous financial oversight and robust risk management practices. Corporate governance in the US often emphasizes shareholder value, influencing treasury practices to support stock performance and dividends. The US market features a blend of large public corporations and innovative private companies, particularly in sectors like technology and finance. This blend fosters a dynamic treasury environment where accessing and optimizing capital markets for funding becomes paramount. US Treasury teams are also at the forefront of technology integration, leveraging advanced tools and automation to enhance efficiency and data analytics. The adoption of fintech solutions and blockchain technology is transforming Treasury operations, enabling real-time financial management and improved decision-making. Common Threads in a Globalized World Despite these regional differences, there are common trends shaping Treasury teams globally. Digital transformation is a unifying theme, with increasing adoption of digital tools and technologies to improve efficiency and data analytics in Treasury operations. Globalization also necessitates managing cross-border transactions and risks, driving Treasury teams to develop strategies that can navigate diverse financial landscapes. Moreover, talent development is crucial across all regions. Developing skilled treasury professionals who can adeptly manage complex financial environments is a priority for companies worldwide. As the financial landscape continues to evolve, the ability to attract and retain top talent will be a key determinant of success for Treasury teams globally. Insights from Treasury Experts We thought it would be valuable to get perspectives from Treasury professional, Nena Koronidi, who is also Treasury masterminds board member Nena Koronidi, Strategic Corporate Finance and Treasury Advisory, Family Office Advisory The majority of businesses in Middle east do not adhere to Sharia compliant financial practices and they choose to use between conventional or Islamic finance depending on their needs and associated costs. With regards to Islamic financing, the most significant challenge is the increased documentation and the rollover of the loan (e.g. tied with a commodity transaction in a commodity Murabaha financing case); the rest is the same as conventional. In conclusion, while the structure and setup of treasury teams in the Middle East, Europe, and the US are shaped by distinct regional characteristics, they are united by common challenges and opportunities in a globalized world. Understanding these nuances is essential for multinational corporations aiming to optimize their financial strategies and navigate the complexities of international markets. Also Read Notice: JavaScript is required for this content.
Foreign Exchange Risk: A Comprehensive Guide
This article is written by Kantox Foreign exchange risk, also known as currency risk or FX risk, refers to the potential for financial loss or gain resulting from fluctuations in exchange rates. This risk is particularly relevant to businesses engaged in international operations. Understanding and effectively managing foreign exchange risk is crucial for maintaining profitability, cash flow stability, and overall financial well-being. In this comprehensive guide, we will delve into the concept of foreign exchange risk, explore its various types, examine its causes, delve into measurement techniques, and provide strategies for effective risk management. What is Foreign Exchange Risk? Foreign exchange risk can be defined as the potential losses or gains due to changes in currency exchange rates. It arises from the volatility of global currency markets, where exchange rates fluctuate based on various factors such as supply and demand dynamics, economic indicators, political events, and market sentiment. Businesses that engage in international transactions, whether importing or exporting goods and services, are vulnerable to foreign exchange risk. Importance of Foreign Exchange Risk Management Foreign exchange risk management is crucial for several reasons. Firstly, it helps businesses and individuals mitigate potential financial losses caused by unfavourable currency movements. Secondly, effective risk management enhances cash flow predictability and facilitates better budgeting and financial planning. Lastly, by managing foreign currency risk, firms can maintain competitive pricing, improve profitability, and discover potential growth opportunities by embracing more currencies. Types of Foreign Exchange Risk Transaction Risk: Transaction risk refers to the potential loss or gain arising from foreign currency fluctuations between the time a transaction is initiated and the time it is settled. It primarily affects businesses engaged in importing or exporting goods and services, making cross-border purchases or payments. Translation Risk: Translation risk, also known as accounting risk, arises when a company consolidates the financial statements of its foreign subsidiaries or affiliates into the reporting currency. Fluctuations in exchange rates can affect the valuation of assets, liabilities, revenues, and expenses denominated in foreign currencies. Economic Risk: Economic risk, also known as operating risk, stems from the impact of currency fluctuations on a company’s competitive position, market share, and profitability. It affects businesses with significant international operations, as changes in exchange rates can influence export demand, import costs, and the competitiveness of products in foreign markets. Causes of Foreign Exchange Risk Market Forces: Supply and Demand Fluctuations in exchange rates are primarily driven by supply and demand dynamics in global currency markets. Factors such as interest rate differentials, trade imbalances, capital flows, geopolitical events, and investor sentiment can all contribute to shifts in currency valuations. Economic Factors: Inflation, Interest Rates, and GDP Economic indicators, including inflation rates, interest rates, and gross domestic product (GDP) growth, can significantly impact currency values. Higher interest rates relative to other countries can attract foreign investors, leading to currency appreciation. Conversely, lower interest rates may lead to currency depreciation. Political and Regulatory Factors Political stability, government policies, and regulatory changes can have a profound impact on foreign exchange rates. Elections, geopolitical tensions, changes in trade policies, and capital controls are examples of political and regulatory factors that can influence currency values. Measurement of Foreign Exchange Risk Volatility and Standard Deviation: Volatility measures the degree of fluctuation in exchange rates over a specific period. It is calculated with the standard deviation of currency returns, a statistical measure that, quantifies the dispersion of exchange rate movements around their average value. Higher volatility indicates greater foreign exchange risk. Value at Risk (VaR): Value at Risk is a risk measurement technique that estimates the potential loss an entity could incur due to adverse exchange rate movements. It helps quantify the maximum loss with a specified level of confidence over a given time horizon. Scenario Analysis: Scenario analysis involves assessing the potential impact of specific events or scenarios on exchange rates. By simulating different scenarios, firms can evaluate the potential outcomes and associated risks. Sensitivity Analysis: Sensitivity analysis involves evaluating the sensitivity of an entity’s financial performance to changes in exchange rates. By analysing the impact of different rate movements, firms can identify vulnerabilities and develop appropriate risk management strategies. Strategies for Managing Foreign Exchange Risk Hedging Techniques: Forwards, Futures, Options, and Swaps Hedging involves taking offsetting positions in financial instruments to minimise the impact of adverse currency movements. Common hedging instruments include currency forwards, futures, options, and swaps. These instruments allow businesses and individuals to lock in exchange rates or establish predetermined exchange rate ranges to protect against volatility. Natural Hedging: Natural hedging refers to managing foreign exchange risk by matching revenues and expenses in the same currency. This strategy is applicable to businesses operating in multiple countries or individuals with diverse income and expenditure streams. Diversification: Diversification involves spreading business operations or investment portfolios across different countries and currencies. By diversifying, firms can reduce their exposure to a single currency and potentially mitigate the impact of adverse exchange rate movements. Netting and Offset Arrangements: Netting involves offsetting payables and receivables denominated in the same currency. Companies with significant intercompany transactions or subsidiaries in different countries can utilise netting arrangements to reduce foreign currency risk. Best Practices for Foreign Exchange Risk Management Establishing Risk Management Policies Firms should develop comprehensive risk management policies and guidelines that outline the objectives, strategies, and processes for managing foreign exchange risk. These policies should be aligned with the finance leader’s overall risk appetite and business objectives. Regular Monitoring and Reporting Ongoing monitoring and reporting of FX risk exposure are critical. Firms should regularly assess their risk positions, monitor market developments, and maintain systems for timely and accurate risk reporting. Continuous Education and Training Staying informed about developments in global currency markets, risk management techniques, automation technology and regulatory changes is essential. Continuous education and training enable firms to adapt to evolving market conditions and enhance their risk management capabilities. Future Trends and Challenges in Foreign Exchange Risk Management: Automation Advancements in technology, such as automation, are transforming foreign exchange risk management. Automated currency management systems, make it possible for treasury professionals to handle any…
Optimize Your Cash Forecasting with AI
This article is written by Kyriba Imagine a world where manual processes and guesswork don’t bog down forecasting. Instead, your forecast is created easily using real-time data and predictive analytics. This is the potential of artificial intelligence (AI) in modern financial operations; this is the power of AI in cash forecasting. AI’s ability to process vast amounts of financial data in real-time, predict cash flow trends, and provide actionable insights is already changing the game for Treasury teams. These advancements enable organizations to navigate economic volatility with unprecedented precision and confidence in the accuracy of their forecasts. Traditional Cash Flow Forecasting Methods Contribute to Liquidity Gridlock Cash flow forecasting is a cornerstone of treasury management. Traditionally, the process has relied heavily on historical data, manual data entry, and complex spreadsheets, requiring Treasury teams to spend considerable time consolidating data from multiple sources, which leads to inefficiencies and inaccuracies. Cash Flow Forecasting Challenges: Imagine a world where manual processes and guesswork don’t bog down forecasting. Instead, your forecast is created easily using real-time data and predictive analytics. This is the potential of artificial intelligence (AI) in modern financial operations; this is the power of AI in cash forecasting. AI’s ability to process vast amounts of financial data in real-time, predict cash flow trends, and provide actionable insights is already changing the game for Treasury teams. These advancements enable organizations to navigate economic volatility with unprecedented precision and confidence in the accuracy of their forecasts. Traditional Cash Flow Forecasting Methods Contribute to Liquidity Gridlock Cash flow forecasting is a cornerstone of treasury management. Traditionally, the process has relied heavily on historical data, manual data entry, and complex spreadsheets, requiring Treasury teams to spend considerable time consolidating data from multiple sources, which leads to inefficiencies and inaccuracies. Cash Flow Forecasting Challenges: The time-intensive nature of these traditional methods means that treasury teams are often operating one step behind and with increasing volatility in the market, that can be detrimental to future growth. Staying ahead of the curve demands a more efficient, accurate, and dynamic approach to cash forecasting–one that AI is uniquely positioned to deliver. By leveraging AI, organizations can become better equipped to handle economic uncertainties and make informed decisions. The shift from simple forecasting to a broader liquidity planning approach involves surrounding traditional cash flow forecasts with real-time data from diverse sources. This expansion allows organizations to formulate a true enterprise liquidity strategy, helping them understand and manage liquidity risk while ensuring financial stability and resilience. It All Begins with a Data Strategy A critical component of AI in cash forecasting is having a robust data strategy in place that specifies how a company collects, stores, manages, and analyzes its data. Key Questions Finance Teams Need to Ask When Building a Data Strategy: Having the right data strategy is a game changer and an essential first step for integrating AI, and real-time insights, into your cash forecasting. By tapping into real-time data processing, treasury teams can craft a full picture of their company’s liquidity and thus are better equipped to make quick, informed decisions, and optimize their liquidity performance. Additionally, introducing real-time data into the cash forecasting process helps mitigate risks, something any CFO would be happy to hear. Through scenario planning and sensitivity analysis, companies can gauge how changes in the economy, environment, and customer behavior might impact their financial position, allowing them to tweak their strategies, hedge against risks, and stay one step ahead. Connect All Data Sources to Activate the Full Benefits of AI Once a data strategy has been established, the next step is connecting all of your data sources to a single source of truth, a.k.a., a data lake. By ensuring seamless integration and communication between banks, ERPs, applications, and data trading platforms, you provide the fuel AI uses to leverage intelligence capabilities effectively. This approach is specific to your organization, which means that the outcome is hyper-relevant and extremely context-rich. With a data lake in place, AI tools can quickly analyze vast amounts of integrated data. This provides context-rich insights that enhance the precision of your forecasts and make it easier to achieve financial stability and business resilience. Leveraging AI for cash forecasting and liquidity performance management has enabled organizations to achieve remarkable outcomes: $1.04M average net interest benefit from 47%+ reduction of idle cash $55M average free cash flow per $1B revenue from Supply Chain Finance program 87% reduction in overall risk impact with BI-enabled exposure management Source: Kyriba Value Engineering Analysis of 341 Corporations Top Applications of AI in Cash Forecasting The integration of AI in cash forecasting extends beyond basic financial management, offering solutions that are as varied as they are impactful. Some key applications where AI is making a significant difference are: These applications enhance the accuracy of cash flow forecasting and broaden the scope of overall financial strategy, making it more powerful and responsive to both internal and external changes. By harnessing AI, organizations can both improve their immediate financial forecasting abilities and strengthen their strategic planning capabilities to set themselves up for future success. Just Scratching the Surface In a recent webinar, Kyriba’s Viena Swierczek, Solution Engineer, and Lisa Husken, Value Engineer, highlighted how AI, especially as it relates to cash forecasting, refines existing processes and paves the way for groundbreaking approaches in financial management. “AI is not just about automating existing processes,” Lisa Husken, Kyriba Value Engineer, said. “It’s about enabling entirely new ways of thinking about financial strategy and execution.” “We are just scratching the surface of what AI can do in the financial sector,” Viena Swierczek added. “The next few years will be crucial in defining how deeply integrated AI becomes in our everyday decision-making processes.” This forward-thinking perspective invites finance leaders to consider the broader opportunities of AI beyond immediate operational improvements. Also Read Join our Treasury Community Treasury Mastermind is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill…
Key Performance Indicators for Corporate Treasury
Corporate Treasury is a critical function within an organization, responsible for managing cash flow, risk, financing, and forecasting. To ensure the efficiency and effectiveness of these operations, it is essential to monitor specific Key Performance Indicators (KPIs). This article outlines the most important KPIs for each of the four pillars of Corporate Treasury: Cash Management, Risk Management, Corporate Financing, and Forecasting. 1. Cash Management Effective cash management is vital for maintaining liquidity and ensuring that the company can meet its short-term obligations. The following KPIs for corporate treasury are essential for evaluating cash management performance: 2. Risk Management (FX, Interest, and Commodity Risk) Managing financial risks associated with foreign exchange (FX), interest rates, and commodities is crucial for protecting the company’s financial health. Key KPIs for this pillar include: Also Read 3. Corporate Financing (Short and Long Term Debt) Managing the company’s debt structure is crucial for maintaining financial stability and optimizing capital costs. The following KPIs are essential for corporate financing: 4. Forecasting Accurate forecasting is essential for strategic planning and decision-making. The following KPIs are critical for evaluating the forecasting process: Conclusion By closely monitoring these KPIs, corporate treasury departments can ensure they effectively manage cash flow, mitigate risks, optimize financing, and enhance forecasting accuracy. These KPIs provide valuable insights and enable informed decision-making, contributing to the overall financial health and stability of the organization. Recommended Reading Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Choosing the Right Financial Strategy: Intercompany Netting Vs. In-House Banking
This article is written by GPS Capital Markets If you seek to optimize your organization’s financial obligations across subsidiary entities, understanding the concept of intercompany netting is essential. This method involves offsetting mutual payables and receivables among different entities within the same group, aiming to minimize the actual funds transferred between parties. When you master the intricacies of intercompany netting, including its operational processes, advantages, and limitations compared to alternative solutions, you’ll be in a better position for long-term decision-making. By comparing intercompany netting with in-house bank solutions, you can assess which approach best aligns with their financial objectives and operational requirements. Our guidance aims to support organizations in evaluating the suitability of intercompany netting within their financial framework. By analyzing the benefits and considerations associated with this method, businesses can make informed decisions that optimize their financial management practices. Key Takeaways: Understanding the Concept of Intercompany Netting Understanding the concept of intercompany netting requires comprehending its fundamental principles. These principles involve offsetting and consolidating financial transactions among subsidiary entities. This intricate process entails reconciling balances, managing transactions, and effectively accounting for fluctuating FX rates. By maintaining precise transaction management, organizations can streamline their financial procedures and diminish the number of individual transactions, ultimately resulting in cost savings and operational efficiencies. Balance reconciliation is critical because it preserves transparency and accountability within the intercompany netting process, ensuring all parties involved maintain alignment on financial positions. The management of FX rate fluctuations necessitates continual monitoring and timely adjustments to mitigate currency risk exposure and ensure precise financial reporting. Proficiency in these principles is vital for optimizing intercompany netting practices and cultivating stronger financial relationships within a corporate group. How Intercompany Netting Works An understanding of Intercompany Netting involves a detailed examination of the intricate netting process facilitated by tools such as FXpert among subsidiaries. This process enhances visibility, streamlines reconciliation efforts, and ultimately optimizes cash flow management within the organization. Using tools like FXpert enables subsidiaries to offset payable and receivable amounts within the company effectively. This approach facilitates the consolidation of intercompany transactions, thereby reducing the volume of individual payments that must be processed. Through automation and standardized procedures, FXpert ensures precise matching of invoices and payments, resulting in fewer discrepancies and facilitating smoother financial operations. The integration of FXpert in intercompany netting not only simplifies the reconciliation process but also equips organizations to enhance their management of cash flows across various business units. Overview of the Netting Process The process of netting involves the utilization of specialized tools to consolidate financial obligations among subsidiaries efficiently. These tools are designed to centralize netting activities, produce netting statements, and facilitate coordination with both internal and external vendors to ensure smooth intercompany transactions. By implementing these tools, companies can streamline the reconciliation process, minimize delays in payments, and decrease operational costs associated with intercompany transactions. The centralization of netting activities provides a comprehensive overview of outstanding obligations across various business units, enabling well-considered choices. Enhanced collaboration with vendors is achieved through automated communication and data sharing within the netting system, which promotes transparency and accuracy in financial transactions. Adopting such tools optimizes the netting process, leading to increased efficiency and control in managing intercompany relationships. Comparison: Netting vs. Without a Solution A comparison between the utilization of Intercompany Netting and the absence of a structured solution underscores the challenges that organizations encounter when managing intercompany transactions efficiently. Integrating treasury management system vendors can significantly enhance operational efficiencies, optimize cash flow, and alleviate operational challenges associated with intercompany transactions. Intercompany Netting presents a streamlined method for offsetting intercompany payables and receivables within a corporate group, thereby reducing the number of actual payments and simplifying reconciliation processes. Conversely, without a structured solution, organizations often grapple with manual matching, time-intensive processes, and an elevated risk of errors. By automating the netting process through specialized Treasury management system vendors, firms can attain real-time visibility into their intercompany balances, resulting in enhanced forecasting accuracy and superior decision-making capabilities. Ultimately, the adoption of Intercompany Netting practices can transform cash management procedures and bolster overall financial well-being. Benefits and Drawbacks of Intercompany Netting Understanding the advantages and disadvantages of intercompany netting is essential for organizations seeking to enhance their financial operations. While this approach offers benefits such as improved efficiency, cash pooling, and decreased disputes, it is necessary to acknowledge the potential drawbacks, including increased administrative tasks and complexities in reconciliation. Efficiency stands out as a significant benefit of Intercompany Netting. It simplifies the settlement process for intercompany transactions and reduces the volume of individual payments needed, which can result in notable time and cost savings for companies. Furthermore, the consolidation of cash management through cash pooling allows organizations to optimize the utilization of liquidity. Conversely, implementing and maintaining the netting process requires a higher level of administrative work, encompassing activities like managing various counterparties and ensuring adherence to accounting standards. Additionally, reconciling multiple transactions across different entities can present challenges due to the intricacies involved, demanding meticulous attention to detail. Considering Intercompany Netting vs. In-House Bank Solutions When deciding between Intercompany Netting and in-house bank solutions, organizations should consider several factors, including the operational structure, the discipline in financial processes, and the centralization benefits a robust netting center provides. Intercompany Netting facilitates the settlement of obligations within a group of companies by offsetting payable and receivable positions. This process improves efficiency by reducing the volume of external transactions required, thereby lowering banking fees and transaction costs. Conversely, In-House Bank Solutions utilizes a centralized entity within the organization to oversee intercompany transactions effectively. This method enables tighter control over cash positions and enhances visibility into overall liquidity management. Both alternatives offer unique benefits that should be assessed based on the specific requirements and priorities of the organization. Is Intercompany Netting the Right Choice? The assessment of whether intercompany netting is a suitable option for an organization involves examining its efficiency, enhancements in visibility, and the level of transparency it provides in financial operations. Comparing the advantages with the potential disadvantages plays a crucial role in guiding the decision-making process related to the implementation of an…
Benchmarking Your Treasury Department: A Strategic Approach
In the complex world of corporate finance, maintaining an efficient and effective treasury department is crucial. Benchmarking your treasury operations against industry standards and best practices can provide valuable insights into improving efficiency, reducing costs, and enhancing overall performance. Here’s a comprehensive guide on how to benchmark your treasury department effectively. 1. Identify Benchmarking Objectives To begin, clearly define the purpose of your benchmarking initiative. Are you aiming to improve operational efficiency, reduce costs, enhance risk management, or achieve another goal? Defining the scope is equally important—identify the specific areas of your treasury operations you want to benchmark, such as cash management, risk management, or liquidity management. 2. Select Key Performance Indicators (KPIs) Choosing the right KPIs is critical for meaningful benchmarking. Consider the following: 3. Gather Data Internally Start with a thorough internal audit to collect accurate data on your current performance. Review historical data to understand trends and assess how your treasury operations have evolved over time. 4. Identify Benchmarking Partners Select appropriate benchmarking partners for meaningful comparisons: 5. Collect External Data To get a comprehensive view, gather external data through various means: 6. Analyze and Compare Data Conduct a thorough analysis to identify performance gaps between your treasury operations and those of benchmarked organizations. Use root cause analysis to understand the underlying reasons for these gaps. 7. Develop and Implement Improvement Strategies Create actionable plans to address identified gaps. Consider adopting best practices observed in top-performing organizations and invest in technology and tools that can enhance your treasury operations. 8. Monitor and Review Benchmarking is not a one-time effort but an ongoing process. Regularly review your performance against benchmarks to ensure continuous improvement. Establish feedback loops for constant adjustments and enhancements. 9. Utilize Benchmarking Services and Tools For a more structured approach, consider leveraging benchmarking services and tools: Example Resources for Benchmarking Several resources can aid in your benchmarking efforts: By systematically following these steps, you can benchmark your treasury operations, identify areas for improvement, and adopt best practices to enhance your department’s performance. Benchmarking not only provides a clear picture of where you stand but also paves the way for strategic improvements that can lead to significant operational gains Recommended Reading Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
BEC: A Cybersecurity Challenge for Businesses
This article is written by Trustpair In 2023, it was revealed that an investment firm in Boston lost $1.25 million in a business email compromise (BEC) cybersecurity scam. Using a spoofed domain name, fraudsters impersonated directors and instructed a financial company to misdirect funds from the victim company’s account to a bank account controlled by the scammers. BEC in cybersecurity: what is it? BEC is also known as business email compromise. In the cybersecurity world, it is a method of fraud that involves getting access to an email address or spoofing an email address to bypass security and either gain information or defraud business of funds. How does BEC work? BEC scams work in different ways. Generally, a fraudster can hack into an email or use malware to navigate company networks and infiltrate email threads. Once the fraudster has access to the email threads using malware, an attack may not occur until much later. They may spend some time observing email chains to see which employees are in charge of money, invoices, transactions, and more. Additionally, they may pick up on words or trends that employees use in emails. This is so that later down the line if they are to send an email on behalf of an employee, they can make it seem genuine. Once they have gathered the information they need, the fraudster may ask for payments to be made to accounts which they control. Alternatively, fraudsters may use a spoofed email address of a fake company that is very similar to the email address of a senior figure in the company. From there, they may make demands to those in charge of payroll to redirect funds to a different account. Reported BEC scam losses have increased by 58% since 2020. What are the types of BEC? What are BEC examples? Facebook and Google The most renowned example of a BEC cybersecurity scam was in the form of a vendor email compromise (VEC) attack on Facebook and Google between 2013 and 2015. The organizations lost around $121 million between them. Fraudsters impersonated Quanta Computer which both giants have done business with. The scammers used the fake company under the same name as Quanta Computer, false invoices, fake contracts, and letters to confuse the organizations and dupe them into paying out tens of millions to accounts run by the scammers. One Treasure Island The nonprofit based in San Francisco fell victim to a business email compromise attack in 2021. Hackers gained access to the bookkeeper’s email. Using spoofed email addresses, they inserted themselves into the email chains and pretended to be figures involved with the nonprofit. They then found and adjusted an invoice from a member organization that had been sent to the executive director of One Treasure Island. The new invoice contained altered wire transfer instructions to a bank in Texas. The organization lost $655,000 in the fraud attack. BEC red flags Here are some of the red flags of business email compromise and ways your business can prevent it… By being aware of these methods and how you can combat them, your business can avoid: Grammatical errors If an email from a senior member of staff is littered with simple grammatical errors that they wouldn’t usually make, this should raise suspicions. If you aren’t sure that it is legitimate, you should ring the employee or go and see them to double-check before making any transfer or payment. Time sensitivity If a member of your team receives an email or a text message from another colleague requesting an urgent transfer this should raise alarm bells. It may be that a sender describes a serious situation such as they need their salary paid early to help with a family medical bill or that a vendor needs to be paid quickly into a new account to secure their business. These are social engineering techniques that are used to complete BEC attacks. Either go and see the member of staff or ring them to check this is genuine. By making the situation urgent the fraudster hopes that you would either overlook usual procedures to help them get it done or forget about the correct process. Employees should be educated about the red flags of fraud such as business email compromise and to always step back from the situation and think logistically about it. Unusual requests An unusual request that a member of staff may be asked to do involve: Suspicious email addresses A type of business email compromise involves phishing emails. By using a deceptively similar email address to what staff members already use or an incomplete email address, fraudsters may try to get staff to redirect funds into an account controlled by them. BEC prevention methods Training For both unusual requests and suspicious email addresses using phishing techniques, ensure that staff are well educated on these methods. They should also be trained on how to spot the fraud and what steps to take if they find themselves in such a situation to ensure security. Additionally, training should also be provided on what to do if employees get caught out by a fraud attempt. Use a fraud prevention platform Another prevention method for BEC cybersecurity attacks is to invest in fraud prevention platform tools. For example, Trustpair’s software blocks the financial implications of business email compromise. The platform can do this thanks to ongoing account validation. The system blocks suspicious transfers and raises red flags when risky data changes are noticed. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Intercompany Transactions Guide: Meaning, Management & Strategies
This article is written by Nomentia Intercompany (IC) transactions (or intra-group transactions) are heavily used in the operations of multinational corporations, where financial exchanges between entities within the same corporate group occur frequently. While these transactions offer operational flexibility and efficiency, they also present unique challenges in terms of efficient accounting processes, compliance, and financial reporting. In this blog post, we’ll dig into the intricacies of intercompany transactions and explore strategies for effectively managing them. There will also be a bonus case study on what optimized intra-group payment setups can look like. But first, let’s have a closer look at what IC transactions actually mean and how they work. The meaning of intercompany transactions Despite there being various types of intercompany/intra-group transactions, they can generally be defined as transactions that occur between different entities within the same parent company or corporate group. These transactions can involve the transfer of goods, services, or financial assets between subsidiaries, divisions, or other affiliated entities within the organization. Types of intra-group transactions Intercompany transactions can be categorized into three main types based on the direction of the transaction and the relationship between the entities involved: The categorizations help to understand the directional flow of transactions and the dynamics within the corporate group. Each type of transaction serves specific business objectives and requires careful consideration of factors such as pricing, documentation, and compliance with local regulatory requirements. Examples of intercompany transactions When it comes to the actual transactions themselves, various examples are relevant for finance, accounting, and treasury teams. They illustrate how diverse the nature of intercompany transactions is and how crucial they are for multinationals to function properly. The most common examples of intercompany transactions include: Each intra-group transaction requires a slightly different approach, varying stakeholders, documentation, or compliance. It can be very challenging for companies to manage them efficiently and transparently. How does the intercompany transaction process work? To provide more clarity about the actual work that goes into each example of IC transaction, you can look at the related processes that consist of several steps involving various stakeholders within the organization along the way. How these tasks are divided highly varies in each organization. Yet, you can usually see that the process looks similar to the one below: 1. Identification of intercompany transactions Companies need to identify transactions that occur between different entities within the same corporate group. These transactions may include sales of goods, provision of services, loans, transfers of assets, royalties, or other types of financial exchanges. 2. Recording transactions Once identified, intercompany transactions are recorded in the accounting records of the participating entities. Each transaction is recorded at fair market value, which is the price that would be agreed upon by unrelated parties in an arm’s length transaction. 3. Elimination process The transactions need to be eliminated in consolidated financial statements to avoid double-counting. When the parent company prepares its consolidated financial statements, it combines the financial results of all its subsidiaries into a single set of financial statements. To ensure accuracy, intercompany revenues, expenses, assets, and liabilities are eliminated during the consolidation process. 4. Intercompany pricing One of the critical aspects of intercompany transactions is determining the transfer price, which is the price at which goods or services are transferred between related entities. Transfer pricing is crucial for tax purposes and to ensure that each entity within the corporate group is fairly compensated for its contributions. 5. Documentation and compliance Companies must maintain proper documentation of intercompany transactions to comply with accounting standards, tax regulations, and transfer pricing rules. This documentation typically includes intercompany agreements, invoices, pricing policies, and other relevant records. 6. Tax implications IC transactions can have significant tax implications, especially when they involve entities in different tax jurisdictions. Tax authorities scrutinize the transactions to ensure they are conducted at arm’s length and that transfer prices are set in accordance with regulations to prevent tax evasion and profit shifting. 7. Risk management Managing risks associated with intercompany transactions is crucial. Companies need to ensure compliance with regulations, mitigate transfer pricing risks, and maintain transparency in their financial reporting to avoid legal and financial repercussions. It is clear that IC transactions play a vital role in the operations of multinational corporations, facilitating the efficient allocation of resources, sharing of expertise, and coordination among different entities within the corporate group. Simultaneously, it’s a time-consuming process that requires many steps, stakeholder management, and documentation. Let’s zoom in on the documentation aspect further, since that’s where companies can optimize processes in particular. Documentation is a critical part of managing IC transactions Traditionally, intercompany transactions are documented through various means to ensure proper record-keeping, compliance, and transparency within the corporate group. Some common documentation methods include: Even if this documentation process sounds labor-intensive, there are ways to make it more efficient, by adopting dedicated tools, for example. Other improvements and strategies we’ll discuss more in detail below. Strategies to optimize intercompany transactions Optimizing the documentation and other labour-some tasks related to intercompany transactions involves implementing efficient processes and leveraging the right technologies. Some of the most common strategies to optimize intercompany documentation include: Create efficiency with standardization Establish standardized templates, formats, and procedures for documenting intercompany transactions to ensure consistency and efficiency across the organization. Automation through technology Utilize accounting software and enterprise resource planning (ERP) systems to automate the generation of invoices, recording of transactions, and reconciliation processes. To take it a step further, you can connect these systems to a treasury management system to fully integrate the processes with all entities’ banks. Automation through technology typically reduces manual errors, saves a lot of time, and improves data accuracy and transparency. Establish a centralized repository Maintain a centralized repository or digital database to store all intercompany agreements, invoices, and documentation. This ensures easy access to relevant information and facilitates better compliance monitoring and auditing access. This can also be done with dedicated technology. Implement electronic signatures Implement electronic signature solutions to expedite the approval and execution of intercompany agreements and other documents. Electronic signatures…