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Automating Enterprise and Treasury Management


Treasury management systems are often partially automated, which impacts the success of enterprise risk management. Here's how the two can be linked.

Just as a chain is only as strong as its weakest link, systems are only as fast as their slowest integrated process. Treasury management systems (TMS) are often only partially automated, given difficulties in full automation. And organizations are finding such systems are not an ideal part of their larger operation.

This lack of automation creates challenges for treasury management systems, as well as treasury professionals. But it compounds exponentially if the TMS was either not integrated or only partially integrated with a corporate enterprise risk management (ERM) system, which provides the required underlying business data to identify risk exposures.

Real World Applications

A practical example of the challenge for corporate treasurers is the increasingly popular – but problematic – strategy of implementing cash flow forecasting methodologies to improve visibility into future multi-currency cash positions. This can help identify natural offsets and opportunities for more effective liquidity and currency risk management.

The operational advantage of this is clear and this had led many U.S. companies with significant FX exposures to adopt this strategy. And as global emerging markets are often a growth sweet spot for SMEs this is a particularly challenging aspect of this type of geographical expansion.

The challenge is that many of these companies also rely on manual inputs as part of the forecasting process. This slows down ERM – whose entire utility is based upon providing real time (or as real time as possible) snapshots of risk and other risk reporting.

Automation issues in TMS clearly impact the effectiveness of ERM. Worse is when there are omissions of risk measurement within TMS. After all, running the risk of misrepresenting risks is a less serious issue than simply not reporting on certain exposures altogether.

A surprisingly common example is intercompany netting, where all the subsidiaries in a corporate group make payments to – and receive payments from – a clearing house or netting center for net obligations due from other subsidiaries in the group. In the U.S. today it is still a minority of companies that cover intercompany netting within the TMS. That's despite intercompany netting being one of the first steps to driving treasury efficiency.

Intercompany flows are often a source of noise when treasury is trying to consolidate its true liquidity exposure because of manual reconciliation and settlement between subsidiary companies. Even when a company has deployed intercompany netting – which is the first step towards creating an in-house bank for managing FX risk centrally – it often doesn’t include all the intercompany flows.

The Move Toward Solutions Through Fintech

The good news is that automation solutions are coming online. Some offer holistic solutions, and others are single product fintechs. Some of these fintech organizations offer ideal solutions, but companies need to be aware of the risks of engaging with start-up fintechs. Even if costs appear to be low there are often hidden real costs in the form of monetary fees, as well as other risks.

Fintechs often offer very low costs which, while not labelled as introductory offers, can often be ramped up quickly in the following years as these start-ups begin to chase profitability rather than user growth. Non-price risks include longevity issues: the failure rate of these companies is high. In addition, companies need to consider that the management time and expense of migrating corporate TMS and/or ERM systems to third parties is significant.

Robust due diligence of potential fintechs is essential, to ensure that the partner is likely to exist in the medium term. The management team’s ability to manage scalability is a large determinant of the startup’s ability to grow without causing service issues.

Pulled and Pushed

That’s the push factor; the pull factor is that CFOs and CROs are demanding increasingly granular reporting and often that is within a real time “dashboard” approach. In this respect the C-suite is responding to the direction of regulation – both financial and accounting standards continue to extend deeper into the management and reporting of corporate risk.

That’s on the compliance side. There is also a growing awareness that real time management of risks – particularly up to date snapshots of amalgamated risks across the entire corporate structure – can provide efficiencies. For example, the management of risks within silos – or subsidiaries – can often lead to the risks being managed individually, whereas amalgamating risks can show a net position. If the corporate contains natural hedging of risks within its entire area of operations then the management of a net position can be much cheaper than managing the gross exposures of multiple areas.

Ultimately, organizations will only achieve optimization through a foundation of net, corporate-wide risk reporting in real time.

Treasurers therefore need to work closely with CIOs to audit current systems, identify weaknesses or omissions (ie, partial automation processes), and come up with new holistic digital solutions. However, the key for these updated treasury management systems is to be able to speak with other areas of the financial infrastructure – particularly ERMs.

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