Standardization across the group

One of the key success factors for companies large and small is being able to manage cash flows efficiently and in a targeted manner. In our series of articles entitled "The Cash Management Journey", we examine various aspects of modern cash management and offer in-depth insights into best practices and innovative approaches. In today's article, let's take a look at standardization across the group as a crucial building block on the way to optimizing group-wide cash management. We will show why the consolidation of processes and systems is the key to optimizing cash management structures and minimizing financial risks.

Many of the global factors affecting the economy have changed drastically since the last article in this series. We may have weathered the multiple crises described at the time, but they have ultimately been replaced by equally challenging situations. Geopolitical tensions, wars and increased national debt are just a few of the factors that shape a market environment that is still characterized by a high level of uncertainty. The turnaround in interest rates since then has had a particular impact on treasury departments: yields that were inconceivable for years are once again within reach, which is changing the focus and priorities of the cash management function. At the same time, companies face the challenge of laying the groundwork for making good use of these interest rate gains, without losing sight of the focus of their banking strategy and risk hedging. Regardless of the changes in the general environment, it is clear that strategic and targeted cash management remains as important as ever.  

Given the constantly shifting challenges and priorities of cash management, starting points on the road to efficient cash management are also diverse. One effective tool that can be used at several levels is the basic idea of creating group standards in Treasury, as described below.

In the last article in our series "The Cash Management Journey", we looked at the banking strategy as a central component of effective treasury management. The banking strategy will also play an important role in our deep dive into standardization today. Even today, major corporations still tend to have selected subsidiaries that maintain individual business relationships with banks that are not part of the group of core banks at the corporate level, be it for historical reasons or because of local relationships. As a result, the banking landscape is highly complex: to name just a few examples, payment transaction formats differ from bank to bank, there are numerous communication channels and interfaces, and data transfers are set up and processed individually. For this reason, there is enormous potential in consistently implementing the banking strategy and in reducing the number of bank accounts. By consistently pursuing this approach, you can significantly reduce complexity and efficiently implement the "optimal" banking strategy (see the last article in our series from November 2022: "The right banking strategy").

Standardizing banking can also improve the accounting within a group. With fewer banks, the number of bank accounts can be reduced to a minimum. In addition, a uniform group-wide chart of accounts can be used here. This helps maintain the consistency and comparability of financial data across different subsidiaries and business units. Centralization also makes it easier to prepare the consolidated financial statements, manage the accounts, reduce potential sources of error and accelerate the reconciliation processes.

With a view to fully exploiting the potential, centralization in Treasury must be tackled from a number of different angles. The core dimension is the treasury function itself. By this we mean the classic centralization approach of setting up a group treasury department. Usually, this goes hand in hand with centralized treasury processes, which can be seen as a further dimension. However, this does not necessarily mean that the group treasury department will assume all the tasks of the subsidiaries in the group. Rather, its focus is on the central design, control and monitoring of group-wide processes, starting with the group treasury department. By doing so, you can ensure, for example, that processes comply with increasingly complex compliance requirements or that unnecessary loops are avoided, which in turn increases process efficiency. The third dimension involves the system landscape in Treasury. Once the treasury function and the relevant processes have been centralized or standardized, the system landscape itself can also be given a new structure. This makes it possible to identify and eliminate redundant systems, ultimately enabling the creation of an efficient and streamlined system landscape. 

A leaner system landscape and centralized treasury-related processes in one or a few systems will make it possible to further standardize these systems. For instance, payment transaction formats and procedures can be standardized to minimize processing time and maintenance effort, as well as the risk of payment defaults. And even if third-party systems remain in use – still a common occurrence in the treasury departments of companies of all sizes – a standardized approach will facilitate the efficient setup and management of the necessary interfaces. That way, the treasury department can always respond quickly to any issues and remain fully operational.

Seen from the treasury department's perspective, the advantages of such a lean system landscape are particularly evident in the area of bank communication. We already mentioned the possibility of centrally controlled bank communication leading to the implementation of an optimal, centralized banking strategy at the beginning of this article. Should the group treasury decide to implement a selected treasury management system or payment transaction system (or a dedicated payment transaction solution) as a "single point of truth" for these processes, there are efficiency gains to be realized at various levels. One example is that payment transaction formats can be centrally managed and designed in the system. Especially in the context of the ISO20022 transition (see the article "Road to ISO 20022" in issue 134, July 2023), the flexibility gained in this way offers a decisive advantage. What's more, centralizing approval processes and workflows in a single system makes it possible to consistently meet compliance requirements and efficiently monitor payment transactions. In the same way, the system landscape can be used to bundle external and internal payments and cash management in the form of a payment factory or in-house bank. This can drastically reduce the risk of fraud and sanctions list violations across the entire group, depending on the performance of the chosen system. 

All in all, it can be said that standardizing the underlying treasury processes offers enormous potential for optimization. Leaner processes make for greater clarity and streamline day-to-day use of the systems. Consistently implementing a centralized banking strategy and a uniform chart of accounts yields efficiency gains in a number of areas. Consolidating treasury systems and functions will also benefit security and compliance in payment transactions.

Source: KPMG Corporate Treasury News, Edition 144, June 2024
Authors:
Börries Többens, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Nadine Hauptmann, Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG