Strategizing Finance Projects: Setting Priorities for Success
This article is written by Cobase In this fast-paced world, effectively strategizing and prioritizing projects throughout the year is crucial for achieving organizational goals and maintaining competitive advantage. Finance teams face the challenge of balancing short-term operational needs with long-term strategic initiatives, all while navigating a constantly changing economic landscape. This article explores how finance professionals can effectively plan and prioritize finance projects over the course of a year, ensuring that resources are allocated efficiently and strategic objectives are met. Understanding the Landscape Before diving into project planning and prioritization, it’s essential to understand the internal and external factors that influence finance operations. This includes regulatory changes, market trends, technological advancements, and the overall strategic direction of the organization. A thorough analysis of these factors provides the foundation for informed decision-making throughout the year. Setting Strategic Objectives The first step in strategizing finance projects is to set clear, measurable strategic objectives aligned with the organization’s goals. These objectives should encompass both immediate operational needs and long-term strategic aims, ensuring a balanced approach to financial management. Objectives might include improving cash flow, reducing costs, enhancing financial reporting accuracy, or investing in new technology to streamline operations. Prioritization Framework Once strategic objectives are set, prioritizing projects based on their potential impact, resource requirements, and alignment with organizational goals becomes the next step. A prioritization framework can be invaluable in this process, helping to objectively assess each project. Common criteria for prioritization include: Agile Planning Approach Adopting an agile planning approach allows finance teams to remain flexible and responsive to changes throughout the year. This involves setting shorter planning cycles, regularly reviewing project progress, and being prepared to adjust priorities as new information becomes available or as circumstances change. available or as circumstances change. This approach ensures that the finance team can quickly respond to unexpected challenges or take advantage of new opportunities. Communication and Collaboration Effective communication and collaboration across departments are essential for the successful implementation of finance projects. Regular updates, stakeholder meetings, and collaborative planning sessions ensure that everyone is aligned on project goals, progress, and changes. This not only fosters a culture of transparency and accountability but also encourages cross-functional cooperation, enhancing the overall success of finance projects. Monitoring Progress and Performance Continuous monitoring of project progress and performance against predefined metrics is critical. This involves setting up key performance indicators (KPIs) for each project, regularly reviewing these metrics, and conducting post-project evaluations to capture learnings and improve future project planning. Regular reviews also provide an opportunity to celebrate successes and recognize the contributions of team members, boosting morale and motivation. Leveraging Technology Technology plays a pivotal role in streamlining finance operations and enhancing project management. Investing in the right financial management software, project management tools, and data analytics platforms can automate routine tasks, provide real-time insights, and facilitate better decision-making. Technology can also help in scenario planning and risk management, two critical aspects of financial project management. Conclusion Strategizing finance projects throughout the year requires a careful balance of strategic planning, agile execution, and continuous evaluation. By setting clear priorities, adopting an agile approach, fostering collaboration, and leveraging technology, finance teams can effectively navigate the complexities of financial management. This not only ensures the successful completion of finance projects but also contributes to the overall strategic success of the organization, driving growth and competitiveness in an ever-changing business environment. 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.
FranklinNavigating the Future: Harnessing Artificial Intelligence in Treasury for Efficient Cash Forecasting and Fraud Detection
In the dynamic landscape of corporate finance, treasurers and finance professionals are increasingly turning to artificial intelligence (AI). In order to enhance their capabilities in cash forecasting and fraud detection. While AI presents unprecedented opportunities, it is essential to recognize its role as a facilitator rather than a replacement for human expertise. This article goes into the strategic use of AI in Treasury functions. It specifically focuses on cash forecasting and fraud detection. While emphasizing the importance of a comprehensive data strategy and the key role of human oversight. 1. The Foundation: Building a Robust Data Strategy Before diving into the realm of AI, treasurers must establish a strong foundation through a well-thought-out data strategy. This involves seamlessly mapping data points from various internal systems to create a unified and comprehensive dataset. The availability of high-quality, reliable data is crucial for the success of AI applications in treasury. 2. Cash Forecasting: Unleashing the Power of “Artificial Imagination” Cash forecasting has traditionally relied on historical transactions and predictive analytics. AI brings a paradigm shift, introducing the concept of “Artificial Imagination”. Unlike mere automation, this term emphasizes the creative and decision-making capabilities of AI. Machine learning algorithms analyse historical data to identify patterns, enabling treasurers to make more accurate predictions about future cash flows. While AI significantly improves forecasting accuracy, it is essential to underscore that it should be viewed as a tool to assist and increase human decision-making rather than a standalone solution. Treasurers should remain vigilant and continue to implement upfront controls, including rigorous validation processes. 3. Fraud Detection: Strengthening Defenses with AI The battle against fraud requires constant vigilance, and AI emerges as a powerful ally in this endeavour. Machine learning algorithms can analyse vast datasets in real-time, identifying anomalies and patterns indicative of fraudulent activities. However, it is crucial to recognize that AI complements existing fraud detection measures and should not replace fundamental controls. Treasurers must continue to implement robust internal training programs to keep their teams abreast of the latest fraud tactics and ensure that AI systems are aligned with the organization’s risk tolerance. Moreover, AI can empower finance professionals to focus their attention on strategic aspects of fraud prevention, such as developing proactive strategies and refining controls. 4. A Strategic Approach: Walking Before Running While the value-add of AI is undeniable, treasurers are advised to adopt a strategic approach, ensuring that foundational processes and workflows are fine-tuned before integrating new technologies. This involves critical self-assessment, aligning with organizational goals, and fostering a culture of continuous improvement. People remain at the heart of this transformation. AI is not a replacement for treasurers but a catalyst for shifting their focus to more value-added, strategic tasks. By automating routine and time-consuming activities, AI allows finance professionals to elevate their roles as business partners, contributing meaningfully to the organization’s success. In conclusion, the integration of AI into Treasury functions is a journey that requires careful consideration and strategic planning. Embracing artificial intelligence (or, as you know now, artificial imagination!) in cash forecasting and fraud detection empowers finance professionals to be more efficient, proactive, and strategic in their roles. However, success hinges on recognizing AI as an augmentation tool and preserving the invaluable human touch in financial decision-making. ALSO READ
Benjamin DefaysTax considerations in light of Transfer Pricing when setting up Zero-Balance Cash Pool arrangements
International companies are taking advantage of group synergy by entering into cash pool arrangements to support a group strategy. This strategy usually includes improved cash management and interest yields on cash. Cash pool arrangements are rarely (or not at all) found between independent parties. Such arrangements may attract the attention of local tax authorities. This will therefore be subject to scrutiny. When local Tax Authorities challenge Cash Pool arrangements, the result may be: ALSO READ Some countries (such as the United Kingdom, Germany, and Australia) have transfer pricing guidance or tax rules on the treatment of cash pooling arrangements. Other countries may lack such guidance or tax rules. Also, a cash pooling arrangement could be treated as something other than a short-term cash pool balance. If, e.g., balances have been outstanding for a long time. Or if the funds are used for a different purpose than that intended. Therefore, there is a risk of re-characterization of the cash pool transactions by local tax authorities. They can consider cash pooling arrangements as a loan or guarantee or a mixed contract with a different result. Transfer Pricing Rules and Tax Guidance in Selected Nations Below is a summary of legal cases in Poland, Switzerland, Denmark, and Norway. It illustrates how various tax authorities may scrutinize and challenge zero-balance cash pooling arrangements. Having consequences from a tax and transfer pricing perspective for companies that enter into cash pool arrangements. These cases, together with the “OECD Transfer Pricing Guidance on Financial Transactions—Inclusive Framework on BEPS,” may support companies in establishing a proper framework. From a transfer pricing perspective, to manage interest remuneration in cash pool arrangements. Having a well-documented and professional rational embedded in cash management agreements between individual group members and the cash pool leader (usually the central Treasury) may abate the drive from tax authorities to challenge the company’s cash pool arrangement; at least it will limit possible challenges and/or discussions. Please note: Cases are presented as case dates, references, and summarized court decisions. 1. Danish Revenue Authorities 2. Norwegian Revenue Authorities 3. Swiss Revenue Authorities 4. Polish Revenue Authorities Importance of Proper Cash Pooling Agreements With growing demand from governments to limit tax evasion or tax avoidance structures, revenue authorities across the globe are more and more discussing and challenging the transfer pricing elements of cash pooling arrangements (both from the perspective of te cash pool leader as well as the participants). Based on the sample cases presented above, together with the “OECD Transfer Pricing Guidance on Financial Transactions—Inclusive Framework on BEPS,” I strongly advise companies that have entered into cash pooling arrangements or are about to enter such arrangements, to ensure proper cash pool or cash management agreements are set up between the participating group members and the cash pool leader (usually central Treasury). Such agreements will require the following elements to be included: Paul Buck is a Treasury Associate with one of our partners, Percunia Treasury and Finance and is available for any project. Fill out the contact form below to get in touch for more information about Paul and his capabilities. Thanks! Notice: JavaScript is required for this content.
Paul BuckA Guide to the Emergence of Instant Payments Globally & How to Navigate Them
This article is written by Treasury Intelligence Solutions In the ever-evolving world of financial transactions, the adoption of instant bank payments has become a catalyst for transformational change in both the corporate and consumer sectors. Today, this transition from traditional payment methods to real-time, 24/7 transactions is reshaping how businesses and individuals navigate the financial landscape on a global scale. This article will explore the evolution of instant payments within the corporate sector and more specifically, how their adoption is impacting the world of treasury and finance. We will begin with exploring the primary benefits associated with their usage before delving into the main use cases that exist in 2024. Next, we will evaluate current challenges that are obstructing the adoption of real-time payments and explore several of the leading institutions and payment systems tasked with real-time deployment across the world. Finally, we will demonstrate how the TIS cloud platform enables corporate treasury and finance teams to adopt real-time payments gradually without abandoning their traditional payments and reporting channels. Instant Payments Revolution: The Benefits Instant payment schemes have been making waves worldwide, offering unparalleled advantages for businesses and individuals alike. When we examine the underlying benefits in the corporate realm, there are several key factors driving their adoption: Speed & Accessibility: The main characteristic of instant payments is their speed. Regardless of the geographical location or the time zone, users can execute transactions swiftly, eliminating the delays and processing uncertainty associated with traditional banking hours. This immediate access to funds offers unprecedented financial flexibility. A service that is available 24 hours a day, 7 days a week. Transparency & Control: Because transactions are usually completed in instantly with very little time between a payment being sent and delivered, both the payor and payee have greater insight to the status of payments compared to methods where it might take a full day, or even multiple days, for funds to be delivered. This has historically been a major issue with the correspondent banking model, with various legacy cross-border payment systems, and even with various domestic payment options, such as checks (cheques) in the USA. Streamlined Operations: The streamlined nature of instant payments simplifies financial operations for both businesses and individuals. Whether it’s receiving salaries, making bill payments, or managing day-to-day transactions, the efficiency of instant payments improves the overall financial management for companies or consumers that leverage them. Cash Flow Management: For enterprise organisations, managing cash flows is crucial. Services like FedNow in the USA, Faster Payments in the UK, and SEPA Instant Credit Transfers (SCT Inst) in Europe all empower large corporations with the ability to transfer funds instantly between accounts. This not only enhances cash flow management but also contributes to overall financial resilience and strategic planning. Use Cases Accelerating the Adoption of Instant Payments In the dynamic landscape of instant payments, various use cases are reshaping how businesses and individuals engage and interact in financial transactions. The swiftness and accessibility of instant payments are paving the way for various applications, enhancing efficiency and responsiveness across different domains. Here are some concrete examples: Business-to-Person (B2P) Use Cases: Business-to-Business (B2B) Use Cases: In general, we can conclude that the adoption of instant payments is revolutionizing financial interactions, offering 24/7 unprecedented speed and efficiency, across diverse scenarios. Whether settling urgent compensation, streamlining business transactions, or facilitating seamless online purchases, instant payments are at the forefront of transforming the way we transact in the modern world. A Global Perspective: Instant Payment Schemes Worldwide As the benefits of instant payments and strategies regarding how best to implement them gain momentum, many countries have embraced real-time transaction systems, contributing to the global shift towards faster, more efficient financial transactions. Beyond the SEPA Instant Credit Transfer (SCT Inst) scheme in Europe, notable instant payment schemes have emerged worldwide. Here are just a few examples successfully incorporated by TIS: FedNow Service in the United States: While the United States entered the instant payments arena later with the introduction of the FedNow Service in July 2023, it represents a significant leap forward. The service, developed by the Federal Reserve, empowers financial institutions across the U.S. to provide real-time payment services, aligning with the global move towards instant transactions. Faster Payments in the UK: The United Kingdom has been a trailblazer with its Faster Payments system, revolutionizing the way individuals and businesses transfer money. Introduced in 2008, Faster Payments enables near-instantaneous fund transfers, providing a model for other nations exploring real-time payment solutions. SEPA Instant Credit Transfer Scheme in Europe: The SEPA Instant Credit Transfer scheme, operational since November 2017, has significantly influenced the European payments landscape. Covering 23 countries initially, with plans for expansion towards all 36 members, “SCT Inst” allows instantaneous cross-border transactions within the Eurozone, setting a precedent for regional collaboration. Faster Payment System (FPS) in Hong Kong: Hong Kong’s Faster Payment System (FPS) is another noteworthy initiative, introduced in 2018. FPS facilitates swift, round-the-clock fund transfers, enhancing financial accessibility and promoting a cashless society. The system has garnered widespread adoption, reflecting the global trend towards real-time payments. FAST Payments in Singapore: Singapore’s FAST (Fast and Secure Transfers) payment system has positioned the country at the forefront of the global instant payments movement. Launched in 2014, FAST enables individuals and businesses to transfer funds seamlessly, reinforcing Singapore’s reputation as a financial hub with cutting-edge payment solutions. PromptPay Thailand: PromptPay was launched in 2016 as a payment system enables customers in Thailand to send or receive Thai Baht funds via digital channels in real time. New Payments Platform (NPP) Australia: The NPP (New Payment Platform) is a new platform launched in 2018 that gives Australian consumers and institutions a new way to make everyday payments. Today, the NPP allows Australians to make low-value payments 24 hours a day in less than 30 seconds. The system operates seven days a week, 365 days a year, with no holiday breaks. The below graphic also offers more insight to various instant and real-time payment schemes in development globally. NOTE: This is not a complete list. Many other instant payment schemes are in development or have been recently…
ChatGPT for Treasury: The Good, the Bad, and the Scary
This article is written by Kyriba ChatGPT, the experimental chatbot dominating the headlines, has some interesting—and, in some cases, dangerous—implications for Treasury management. This blog discusses the good, the bad, and the scary about ChatGPT for Treasury. What is ChatGPT? ChatGPT is a generative artificial intelligence (AI) natural language processing tool created by the San Francisco-based research lab OpenAI. In January 2023—just two months after its launch—the chatbot reached 100 million monthly active users. OpenAI and ChatGPT gained further notoriety by recently partnering with Microsoft for a multi-year alliance valued at $10 billion. At its heart, ChatGPT is very simple. It writes natural language (e.g., paragraphs and articles) using data it was trained on, including various books, articles, and websites. ChatGPT is capable of crafting rather impressive, conversational prose. It can cover everything from blog posts to essays to poetry. These often appear as if they were written by a real person. It’s so efficient that it recently passed a Wharton MBA exam. Google has also taken notice. Even though ChatGPT is not a search engine, it is already being viewed as competition for the online search giant. Google’s management has developed a chatbot of its own. Though in a recent demo, it made a mistake that has already cost the company $100 billion in market value. 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! From a Treasury perspective, here are some interesting applications that Kyriba is monitoring to understand more about ChatGPT for Treasury Management: 1. Payments Fraud Prevention It’s been well documented that AI is being used regularly for both payments fraud and payments fraud prevention. Generative AI has now become the latest tools in fraudsters’ arsenals. Cybersecurity firm Darktrace shared with Fortune’s Eye on AI. Cybercriminals are using natural language AI algorithms to help increase the linguistic complexity of phishing emails. Interestingly, Darktrace reports that the overall volume of phishing schemes it has observed has decreased by 50%. Which in more complex schemes have increased by close to 20%. Unfortunately, this makes sense. Check Point, another cybersecurity firm, noted that using ChatGPT helped it create an end-to-end social engineering campaign. From phishing emails all the way to embedded malware within an email attachment. The result was disturbingly convincing. It is assured to break down the traditional barriers of defense that Treasury and finance leaders have erected to detect fraud. In response, cybersecurity experts all say the same thing: use automated systems to detect and prevent cyberattacks at machine speed. In Treasury terms, this means using AI within our payment processes. This is to ensure payments are compliant with all payment policies and employing AI-driven adversarial networks to detect suspicious payments. The good news is that these tools exist today and can be embedded within your payment software. As well as Treasury and ERP-to-bank connectivity. 2. Treasury Management Systems (TMS) ChatGPT can also be used within a Treasury Management System (TMS), where the user gives instructions to the system using keywords or questions. With a user experience (UX) that has been optimized for natural language processing, the TMS can respond to basic queries such as “Show me global bank balances converted to USD,” or “What is my exposure to the Yen?” to more complex requests, including “What caused the variance in my forecast last week?” or “How many days of liquidity do we have left?”. One example Kyriba is testing is for bank reconciliation, where ChatGPT and similar generative AI tools would identify forecasts based on actual variances and automatically reconcile those transactions that would typically have been manually processed in the cash management module of any TMS. For the daily user, ChatGPT or similar technology could replace mouse-clicking to reach a menu item or open a screen, as well as offer a next level of treasury automation such as robotic process automation (RPA), which is offered by some treasury teams today. For the executive user, the benefits could be even more interesting, as many CFOs and treasurers do not login to TMS or ERP platforms. Yet, they would be more than willing to ask questions of their treasury software. When it comes to ‘workflow’ systems like TMS, ERP and other multi-screen applications that treasury relies on, ChatGPT offers the next level of extreme automation. 3. ChatGPT for Treasury Documentation A challenge for many treasury teams is fully documenting treasury processes and procedures, especially when implementing a treasury transformation inclusive of a TMS. Documentation, how-to manuals, and even “when I’m on vacation” instructions take time and effort to compile. This is typically done manually and is a key reason why treasury system implementations can drag on for months. Formal treasury policies are also particularly challenging. For these policies to be effective, they need to be detailed yet broad enough that they don’t allow employees to find loopholes they can exploit. Regular updates may also be needed as key risks (FX, interest rate, fraud, etc.) continue to evolve. This generally requires a lot of manual work that treasury practitioners would rather avoid. Fortunately, ChatGPT and similar generative AI models can do all the writing for you. Given a minimum amount of information about your policies and the technology platforms that you are using to automate your treasury and payments, the AI model will write your treasury documentation for you. An additional treasury documentation example would be RFPs. “I love writing RFPs” is a phrase that no treasury professional has ever said. Fortunately, ChatGPT can write RFPs for you, from sharing company background and communicating requirements to suggesting questions that vendors can respond to. 4. Use ChatGPT for Treasury Education Services ChatGPT may also prove useful for treasury professionals seeking to expand their knowledge of the profession. Treasury is an ever-evolving field as technology and economic conditions change. And it can often be challenging for…
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
Guidelines 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…
Guidelines for Transfer Pricing related interests & spreads applied in Zero Balancing Cash Pools – Part 1
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 the logical spread similar to that used in core banking operations. This entails ensuring that the spread on current account interest (debit/credit) are 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. 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 1 Many companies are considering or have already adopted Zero Balancing Cash Pools structures to optimize working capital and operating cash. The beauty of Zero Balancing Cash Pools lies in the ability to prevent idle cash from sitting at the operating unit, and automatically funding operating units with cash needs. Consequently, the cash pool leader (often the central Treasury) can manage idle cash centrally while efficiently funding working capital needs. It is essential to emphasize that cash in a Zero Balancing structure is operating cash,representing short term working capital. In this white paper part 1, the importance of setting the right interest rates (both debit and credit) for Zero Balancing structures will be explained; Part 2 discusses the appropriate level of interest spreads to meet OECD BEPS Transfer Pricing guidelines. To come to this, it’s necessary to explain the basics of banking and how they relate to Zero Balancing structures. Core banking explained The primary function of a commercial bank is to attract money from those who have surplus cash and subsequently use those funds to finance those who need money. Banks offer unique bank account numbers where you can deposit money or borrow from (overdrawing a bank account). The bank compensates idle cash with credit interest, usually lower than the “fee” for borrowed money (debit interest). The difference between credit interest and debit interest forms the primary business model of commercial bank. Bank operate on the legal premise that every penny in a bank account is legally owned by the bank; thus, deposited money becomes the bank’s property; It is legally not your money anymore. Effectively you transfer ownership of your money to the bank. This allows banks to redistribute funds by lending them out, as the money in the bank account is legally considered a liability to the account holder. Consequently, every account holder with “surplus cash” in the bank account must regard this as a loan to the bank and an asset on their balance sheet. Obviously, you can freely tap on this asset when needed (e.g. for making payments, etc.). Vice versa, an overdrawn bank account is effectively money that the bank is lending to you and is therefore a liability on your balance sheet. I am using the words “lending to/from the bank” as this is an important subject for tax authorities. I will come back to that later in this white paper (see “Commercial bank interest versus In-House Bank interest”). Understanding the legal aspects of bank accounts explains why the core business model of banks can exist and why depositors may incur losses if a bank faces financial trouble, and eventually files for Chapter 11. Core banking mechanism versus In-House Bank mechanism The business model of a bank elucidates the legal aspects of Zero Balancing structures, as these structure mimics core banking mechanisms. In a ZBA structure, excess cash is legally transferred to the cash pool leader, and overdrawn bank accounts are funded by the cash pool leader. This ensures that all participating bank accounts start each day with a “fresh” Zero Balance, allowing the cash pool leader optimal access to the company’s operating cash. The ZBA structure, by mimicing the core banking mechanism, designates the Cash Pool leader as the “In-House Bank”. Below diagram shows the basics of a ZBA structure where Operating unit A has a cash balance of 500 and Operating unit B has an overdrawn balance of -100. At End-Of-Day, after the ZBA sweeps have been applied, the balances of all Operating Units are zero and the net cash balance of 400 sits with the cash pool leader. Zero-Balancing sweeps and the In-House Bank By default, a Cash Pool leader (referred to asthe In-House Bank) possesses the cash of the participating operating units. However, each sweep between the master account of the Cash Pool Leader and the accounts of Operating units will create either a Liability (credit sweep) or an Asset (debit sweep) for the In-House Bank. This is because the In-House Bank mimics the core banking mechanism. Consequently, the In-House Bank must record all these ZBA sweeps to track accumulated balances per Operating Unit over time. Each sweep must be registered at a unique identifier linked to the operating bank account so that both the In-House Bank as well as the owner of the operating bank account can determine the net transferred balance over time. This unique identifier is often referred to as the “In House Bank account”. Thus, a USD 500 balance in an operating account will be swept at the end of the day to the master account of the In-House Bank, simultaneously recorded as a USD 500 liability in the unique In-House Bank account. Therefore, the bank account of the operating unit must logically be linked to the unique In-House Bank account. It is akin to transferring the End-Of-Day operating balance to “Savings” account with the In-House Bank. In the…
The Importance of Data for Treasurers: Embracing the Era of “Treasury on-Demand”
In the rapidly changing landscape of finance, treasurers face a need for real-time information and efficient decision-making. To meet this demand, the concept of “treasury on-demand” has emerged, making it necessary for treasurers to dematerialize and digitize their operations to enhance resilience. In this digital era, data has become the lifeblood of effective treasury management, making it essential for treasurers to adopt a data-driven mindset and prioritize the quality and utilization of data over technology alone. Building a Strong Data Foundation for Treasury on Demand Treasurers must recognize that strong data serves as their best line of defense against risk. Traditional, low-tech treasury practices pose significant risks to any company, as they are prone to errors and lack the agility needed to navigate today’s complex financial landscape. The digital transformation of treasury operations is vital, as it enables treasurers to free themselves from mechanical and repetitive tasks while minimizing the potential for mistakes. The key to achieving this lies in intelligent automation, which streamlines processes and enhances efficiency, ultimately empowering treasurers to make more informed decisions. Data: The Core Element of Digital Transformation In the pursuit of digital transformation, it is crucial to understand that data takes precedence over technology. Although technology plays an integral role in scaling and utilizing data effectively, the quality of the data itself acts as the foundation, often referred to as the “digital asset.” Many companies mistakenly place excessive reliance on technology, erroneously assuming it to be the primary driver of success. However, true success lies in the ability to comprehend and communicate about data. Data literacy is rapidly becoming a vital skill in the 21st-century, enabling individuals to ask the right questions and actively participate in data-driven conversations. 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! The Value of Data and Effective Decision-Making Data holds immense value only when accompanied by actionable insights. Before harnessing data to solve problems and make informed decisions, it is crucial to fully comprehend the underlying issues. Then explore how data can provide solutions. However, it is equally important to differentiate between the data that can be obtained and the data that is truly valuable. Wasting time and resources collecting irrelevant data hampers progress. To avoid this trap, treasurers should consistently ask themselves, “If I had the data, what could I do?”. This question helps focus efforts on acquiring the most meaningful and impactful data. Fostering Data Literacy and a Data-Driven Mindset Organizations today are inundated with data, evident in the proliferation of reports and dashboards. To navigate this data-rich environment, treasurers must evangelize and champion data literacy throughout their organizations. Data literacy empowers individuals to interpret and communicate insights effectively. This enables them to leverage data as the world’s most valuable asset, as proclaimed by The Economist. Embracing powerful analytics and data mining as essential skills facilitates a better understanding and utilization of data. Helping treasurers extract meaningful insights and drive positive business outcomes. Unlocking the Potential of APIs and Real-Time Data Exchange While many treasuries still rely on scheduled, file-based systems for data exchange, the emergence of APIs offers a transformative solution. APIs enable seamless data exchange between software applications in real time. It eliminates the need for scheduling and provides treasurers with immediate access to critical information. Embracing APIs and real-time data exchange enhances the agility and responsiveness of Treasury operations. Thus enabling treasurers to make informed decisions quickly and efficiently. Leveraging Data for Growth and Performance In the pursuit of data-driven treasury management, the ultimate goal is not simply to extract as much data as possible. But rather to leverage data strategically to drive growth. To reduce waste, enhance customer satisfaction, and improve overall company performance. Effective data utilization requires treasurers to adopt a storytelling approach, transforming data facts into actionable insights that resonate with stakeholders. By effectively communicating the value derived from data, treasurers can drive organizational buy-in and foster a culture of data-driven decision-making. Treasurers must recognize the significance of data as they navigate the evolving financial landscape. Embracing a data-driven mindset, prioritizing the quality of data, and leveraging technological advancements such as APIs and analytics are essential steps towards achieving real-time treasury operations. By harnessing the power of data, treasurers can empower their organizations. They can also enhance decision-making, and drive long-term success in the digital age. In summary, embracing “treasury on demand” necessitates prioritizing data, fostering data literacy, and leveraging technological advancements to achieve real-time treasury operations. By doing so, treasurers can navigate the evolving financial landscape with agility and resilience. RELATED TO TREASURY ON DEMAND