treasury function
Points clés
  • Financial consulting, Belguim Akeance,

Organization of the treasury function

Which centralization are we talking about?

Since few years, treasury centralization seems to be the watchword especially since the liquidity crisis. A quick study of what the CAC40 announced in their annual reports showed that over 80% of them have a central treasury. But about which centralization are we talking?

If the common language tends to associate treasury centralization with cash pooling, the cash management is far from being the only mission of the treasury function.

The missions of the treasury function

The main mission is to ensure that an appropriate level of cash to fund operations is maintained while optimizing the profitability of liquidities. But the treasury function has increased its scope of activity and it has become increasingly sophisticated. Beside managing liquidities, it must also define and implement funding and investing policies, hedge the risks, secure the payments and gain visibility.

The missions of the treasury function belong to nine macro processes among from which some represent the core business of that function. Those are:

  • accounts and payment instrument management (credit transfers, direct debits, …) ;
  • cash management within the group ;
  • financial flow management, whether cash-ins or cash-outs ;
  • financial middle and long term investing and financing ;
  • risk management and hedging: liquidity, interest rate and currency risk.

These macro processes intrinsically include the bank relations.

Other missions are not always fully dedicated to the treasury function. Indeed, they can be conducted jointly with other services such as accounting, management control, commercial services… These are those macro processes:

  • financial commitments management and international trade financing ;
  • working capital requirement (WCR) management ;
  • external relations management (except bank relations) ;
  • reporting and financial communication.

Each of these macro processes can be included in a centralized approach. The purposes of the centralization are then to pool activities and to maintain them at the highest level of activities. In this case, operational activities or activities which are less critical remain assigned to the local level.

Saying that treasury is centralized require then to define which macro process is included. For example, it is possible to centralize the cash management without centralizing the flows management through a payment facility. Similarly, a group can manage external relations to set the funding policy and let its implementation to its local subsidiaries.

Centralization does not prevent local responsibilities

One of the disadvantages of centralization of a macro process often pointed out is the disempowerment at the operational level (branches or subsidiaries). This is very relevant and understandable in terms of cash management. Indeed, the financial department of a subsidiary, which has to be very sensitive to cash by definition, may not feel motivated when its cash is pooled daily, or even worse, if it feels dispossessed.

Nevertheless, considering a macro process or the treasury function as a whole, centralization does not prevent local responsibilities. Keeping the example of cash-pooling, some groups with intensive international activities centralize by level by putting in place regional intermediate levels (country, continent). The advantage and the definition of responsibilities resulting from such intermediate levels are determined by local specificities, mostly legal and fiscal.

To illustrate this, let’s consider the case of certain areas where taking cash out of the country complex. These are the cash-trap areas which among which we can mention China, Argentina, Brazil or Venezuela. Being there and knowing well local laws is an advantage in order to manage this issue.

Therefore, considering the treasury function as a whole, local decision-making centers may not be left behind in terms of responsibilities. The treasury function could be centralized or decentralized depending on different considerations. The aim obviously remains to ensure a balance between centralizing, intermediately centralizing and decentralizing. The key lies in the correct allocation of the processes on these statuses and in the arbitration between the following:

  • the advantage of pooling ;
  • the strategic interest ;
  • the advantage to stay close to the operations.

Consequently, some activities are doomed to be achieved across different levels of the organisation. The related responsibilities are then spread across the organization as well. Considering it this way, for a given level, the responsibility of an activity offsets the dispossession of another. But it is certain that some will always see the bottle half empty compared to a previous situation where the full control of their perimeters was the rule.

It happens that international established groups consider decentralizing some of their treasury functions to empower local responsibilities of new decision-making centres. Are we then heading suddenly, by a pendulum effect, to a movement of decentralization?

Conclusion: a tailor-made organization

The international context and the core business of each impose their constraints. Priorities, objectives and of policy of groups are not the same. In addition, the organization of the treasury function is dependent on the organization of the group itself. But it is not static, it is moving. It evolves through acquisitions, divestments, reorganizations and creations of decision-making centre.

The organization of the treasury function is not an exception to the rule and must be designed and implemented in an appropriate approach to each group. It must be defined on a tailor-made approach and be able to change.

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