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The result of this visibility problem is that they get treated as a cost centre, with all the attendant pressure on minimising expenses and resources.

Under these conditions, a Treasury cannot give optimal service. Is there a different way to organise Treasuries in order to get the best from them?

A profit centre may not be the answer. Normally, the core business of a corporate is not making money on financial transactions.  This is what financial services companies do.

If a corporate wants to be in financial services, it would mean a refocusing of the core business, investment in qualified personnel, system support and appropriate processes – especially with regard to risk.

In a service centre model, Treasury charges for the services it supplies to the members of the group.

This places a value on Treasury activities and generates an income for the department, which can be invested in human resources and proper system support.

If Treasury adds value to a subsidiary’s business processes, the subsidiary will be prepared to pay for the services it receives.

There are some exceptions. A profit centre model makes sense if the funds raised are used to generate sales.

It is often used for the sale of high value goods such as cars, where the manufacturer helps the purchaser with financing either through loans secured in the product or through leasing.

The financing department therefore often makes a significant contribution to the overall profit of the company.

The main services that a treasury service centre can offer are described below:

Bank communication - Many subsidiaries have their own connections to local banks that service them. It is more efficient for Treasury to centralise this task and charge the subsidiaries a fee for each bank they connect.

The total cost for the central connectivity will be less than the individual connections due to the elimination of duplicate interfaces.

Thus Treasury earns more from the subsidiaries than the cost they have for the central connection.

Payments - Centralised payment processing can reduce the overall cost of payments in several ways:

Routing - Payments are routed to the accounts from where it is least expensive to make payments.

Netting - Payments between subsidiaries can be netted internally, saving on external bank fees and reducing the loss of float when monies are being transferred between bank accounts.

Volume discounts - Treasury is presented with a more accurate view of the cost of making payments, along with overall banking costs and relationships, and can therefore better negotiate going forward.

Fewer FX transactions - Expensive FX transactions can be avoided or pooled, resulting in fewer, larger FX transactions with reduced spread.

Treasury charges the subsidiaries a fee based on the number of transactions and banks the subsidiary deals with.

It becomes a straightforward exercise for the subsidiary to compare Treasury’s charges with the local costs of making payments on their own behalf.

Cash management - By establishing an in-house bank, a company centralises the liquid funds and excess cash available across all subsidiaries and uses it to fund other subsidiaries.

The subsidiaries no longer need to manage their daily cash, but instead can rely on Treasury to manage the cash levels for the whole group optimally.

Treasury generates profits by taking deposits from the subsidiaries with surplus cash and then lending it to subsidiaries with deficits.

Treasury then places or borrows the net position at better rates than the individual subsidiaries as they have economies of scale.

Furthermore, Treasury can hold less spare cash than the sum of each subsidiary, allowing it to free up cash that can be invested in other parts of the company at a superior rate of return.

The subsidiaries still have to help by providing accurate cash flow forecasts, however, so that Treasury can optimally manage the cash levels for the group.

Often the total number of bank accounts held by the corporation is reduced when centralising cash management, leading to a permanent reduction in bank fees.

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