North Eastern Mindanao State University \

Rosario, Tandag City, Surigao del Sur 8300

TREASURY MANAGEMENT
Global Perspective on
Corporate Treasury

DISCLAIMER:

This module is a compilation of works from the internet sources, manuals, and books from
different authors and this will be used for Educational purposes only. Due recognition is given
to the authors who are the source of some parts found in this module. The compiler/owners
does not claim copyrights to any parts taken from other sources.

Compiled by:
James Q. Grefalde, PhD/Assistant Professor 2
Department of Business Management
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 Table of Contents
LESSON 1 Role of Treasury in a Global Corporation Perspective............................................................... 5
Intended Learning Objectives ................................................................................................................ 5
Treasury Leadership ............................................................................................................................... 5
Organizational Structure and Responsibilities ...................................................................................... 8
Regulators ....................................................................................................................................... 9
From exchanges .............................................................................................................................. 9
For banks......................................................................................................................................... 9
To investors ................................................................................................................................... 10
Agencies ........................................................................................................................................ 10
Financial Institution....................................................................................................................... 10
Technology Companies ................................................................................................................. 10
Service providers ........................................................................................................................... 10
Treasury Functions and Responsibilities.............................................................................................. 11
Treasury Functions ............................................................................................................................ 11
Transactions .................................................................................................................................. 11
Balance Sheet and Liquidity .......................................................................................................... 12
Risk................................................................................................................................................ 12
Treasury Infrastructure ........................................................................................................................ 12
Policy ............................................................................................................................................. 13
Strategy and Objective .................................................................................................................. 13
Contingency Planning .................................................................................................................... 13
Processes ...................................................................................................................................... 13
Control .......................................................................................................................................... 13
Compliance ................................................................................................................................... 13
Documentation ............................................................................................................................. 13
Accounting .................................................................................................................................... 13
System and Technology ................................................................................................................ 14
Service provider ............................................................................................................................ 14
Banks ............................................................................................................................................. 14
KPIs and Deliverables ........................................................................................................................... 14
Lowering the Cost of Funding and the Cost of Capital .................................................................. 15

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 Providing Liquidity to the Firm ...................................................................................................... 15
Enhancing Operating Cash Flows .................................................................................................. 15
Increasing the Stability of Cash Flows and the Balance Sheet. ...................................................... 16
Summary .............................................................................................................................................. 16
Activity No. 1 ..................................................................................................................................... 16
Activity No. 2 ..................................................................................................................................... 16
Activity No. 3 ..................................................................................................................................... 17
LESSON 2 Treasury Design in Global Context........................................................................................... 18
Intended Learning Objectives ............................................................................................................... 18
Key Elements of Treasury Design ......................................................................................................... 18
System Design ................................................................................................................................... 18
People and Organization Structure Design ....................................................................................... 19
Process Design .................................................................................................................................. 19
Control Design .................................................................................................................................. 19
Cash Flow Design .............................................................................................................................. 19
Risk Architecture ............................................................................................................................... 19
Introducing Centralization ................................................................................................................... 20
Accounts and financial activity .......................................................................................................... 20
Systems and infrastructure ............................................................................................................... 20
People (processing, execution, and decision making) ....................................................................... 20
Evolution of Treasury Models .............................................................................................................. 21
Decentralized Treasury ........................................................................................................................ 22
Shared Service Centre ....................................................................................................................... 22
Basic Treasury Centre ....................................................................................................................... 23
Value-Added Treasury Centre ........................................................................................................... 24
In-House Bank ................................................................................................................................... 25
Outsourced Model ............................................................................................................................ 26
Summary .............................................................................................................................................. 27
Activity No. 4 ..................................................................................................................................... 27
LESSON 3 Treasury Global Culture ........................................................................................................... 28
Intended Learning Objectives ............................................................................................................... 28
Qualities ............................................................................................................................................... 28
Proactiveness .................................................................................................................................... 29

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 Control .............................................................................................................................................. 29
Teamwork. ........................................................................................................................................ 29
Transparency .................................................................................................................................... 29
General Skills ........................................................................................................................................ 29
Relationship Building ........................................................................................................................ 29
Culture Knowledge ............................................................................................................................ 29
Technology........................................................................................................................................ 29
Process Orientation .......................................................................................................................... 29
Written Communication ................................................................................................................... 30
Technical and Work-Related Skills ........................................................................................................ 30
Business ............................................................................................................................................ 30
Financial and Markets Awareness ..................................................................................................... 30
Accounting ........................................................................................................................................ 30
Regulatory ......................................................................................................................................... 30
Hats of the Treasurer ........................................................................................................................... 31
Summary .............................................................................................................................................. 31
Activity No. 5 ..................................................................................................................................... 32
LESSON 4 Importance of Operations and Control Efficiency ................................................................... 33
Intended Learning Objectives ............................................................................................................... 33
Tools ..................................................................................................................................................... 33
Policy................................................................................................................................................. 33
Process Mapping ............................................................................................................................... 34
Process Notes.................................................................................................................................... 34
Systems and Technology ................................................................................................................... 34
Integration ........................................................................................................................................ 34
Reporting .......................................................................................................................................... 34
Control .............................................................................................................................................. 34
Different Offices: Front, Middle, and Back .......................................................................................... 35
Front office.................................................................................................................................... 35
Back office ..................................................................................................................................... 35
Middle office ................................................................................................................................. 35
Activity No. 6 ..................................................................................................................................... 36
Activity No. 7 ..................................................................................................................................... 36

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 References ............................................................................................................................................ 38

List of Figures

Figure 1 Three Components of Treasury Leadership .................................................................................. 6

Figure 2 Treasury and Financial Supply Chain Flows: A Context ................................................................. 7
Figure 3 Roles and Organizational Flows .................................................................................................... 8
Figure 4 Treasurer in the Organizational Context ....................................................................................... 9
Figure 5 Treasury Linkages ........................................................................................................................ 10
Figure 6 Treasury Functions and Responsibilities ..................................................................................... 11
Figure 7 Treasury Performance Indicators ................................................................................................ 15
Figure 8 Treasurer Daily Transaction ........................................................................................................ 17
Figure 9 Treasury Design ........................................................................................................................... 19
Figure 10 Centralization Themes .............................................................................................................. 21
Figure 11 Evolution of Treasury Model ..................................................................................................... 21
Figure 12 Decentralized Treasury Model .................................................................................................. 22
Figure 13 Shared Service Centre Model .................................................................................................... 23
Figure 14 Basic Treasury Centre Model (with SSC) ................................................................................... 24
Figure 15 Division of Activities Between SSC and TC, courtesy of Gourang Shah ..................................... 24
Figure 16 TC++ Model (with SSC) .............................................................................................................. 25
Figure 17 In-House Bank Model ................................................................................................................ 26
Figure 18 Outsourced Model .................................................................................................................... 26
Figure 19 Components of Treasury Culture .............................................................................................. 28
Figure 20 Hats of the Treasurer ................................................................................................................ 31
Figure 21 Tools for Strong Operation and Control .................................................................................... 33
Figure 22 Segregation of Duties Across Front, Middle, and Back Office ................................................... 35

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 Treasury Role and Perspective in a Global
LESSON 1
Corporation
Intended Learning Objectives
1. Discuss the essence and importance of treasury leadership;
2. Explain the organizational structure and responsibilities from a global perspective;
3. Illustrate and describe the treasury functions and responsibilities, and treasury infrastructure;
and
4. Articulate the treasury key performance indicators (KPIs) and their deliverables

The dimensions that need the board's attention and management of a transnational company increase
dramatically as industries expand and become more dynamic and competitive and markets become closer
and more interrelated.

While the core business and processes themselves require direct attention, the money that needs to flow
through the organization's veins and arteries, as well as its different aspects, involves intensive analysis
and focus, a team that understands both from a tactical and a strategic perspective the functioning of
money and markets.

This is where the Treasury team puts its hand to aid the Chief Executive Officer (CEO), Chief Financial
Officer (CFO), the Board, and the business units to ensure that the company's business side operates
unhindered by setting up a broad monetary framework to expand and outperform companies.

Treasury Leadership
First, we present the Treasury Leadership model, wherein Treasury positively affects the f rm's efficiency
and pushes the company to leadership of the industry and segment. Treasury Leadership creates an
atmosphere that encourages excellence in the construction, execution, and support of resources in all
facets of Treasury and works to produce a business product.

Therefore, Treasury Leadership is transformed into a path-breaking and cutting-edge Treasury consisting
of:
■ Best practices in Treasury management
■ Most efficient turnaround times
■ The highest degree of control
■ Most motivated and skilled employees with great work-life balance
■ Zero defects or errors in processing
■ Optimum cash and liquidity
■ Highest visibility of firm-wide cash flows
■ The ability of the business to set newer standards for industry performance
■ Firm’s outperformance over the competition through well-managed Treasury processes,
funding, and risk management
■ Most stable and environment-proof risk management

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 ■ Great partnership with other group functions to increase firm value.
■ Treasury is seen as an attractive function to work in

Figure 1 Three Components of Treasury Leadership

The three components of Treasury Leadership (shown in Figure 1) are:

1. Treasury Design. The design creating the right processes, structures, and approaches at the right
place with the right infrastructure and of course the right people;
2. Treasury Culture. The treasury culture enabling an atmosphere of knowledge and positive
teamwork to ensure the highest work and motivational standards; and
3. Treasury Fitness. Assessing the Treasury's functioning, similar to a fitness test for the human
body, to identify potential pain points and prevent any significant potential breakdown.

The Treasury world deals with the f ow of assets, the f ow of cash through the balance sheet, from capital
sources to its financial uses. The concept that the Treasury will be the storehouse of money or capital for
firm is expanded here: Treasury flows operate through the supply chain under the company's business.

Suppliers provide raw materials that are kept as inventory, transformed through the manufacturing and
distribution process into finished goods, and eventually sold and distributed to the consumer. The flow of
cash is in the opposite direction to the flow of goods or services. It forms the basis of the organization's
financial supply chain flows or business flows. Money owed to the supplier becomes a payable account,
which is eventually paid out. The client's money to the firm remains an account receivable until it is
realized and cash is paid into the company's account.

Via the Treasury, the funding and transfer of money associated with these economic flows are carried out.
The nature of treasury flows and their ties with those of the financial supply chain is shown in Figure 2.

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 Figure 2 Treasury and Financial Supply Chain Flows: A Context

It takes capital to run the entire operation. The inventory, processes, and supplies need to be financed
before the customer pays the company. It is important to collect and deposit proceeds from sales earned
through locations to make Treasury make payments from those or other locations to operate the
company. In these areas, accounts need to be maintained, maybe in various currencies, and these
accounts need to be handled. There is a need to finance trade transactions, and records must be prepared
and used. It is important to prepare and conduct the whole aspect. This forms the basis of one of the
treasury's main functions: handling transactions as part of cash management and handling the
organization's cash and funds.

To make these payments, it is better to use the company's own money, because the money needs to be
transferred quickly from one place to another, making them accessible where they are needed. If treasury
cannot use the company's cash, alternate plans must be made, such as borrowing from a local bank, for
example. Even if access to these funds is differentiated, the company still needs to keep going, ensuring
that cash is available when needed to ensure the firm's liquidity. Excess capital needs to be safely invested
in producing a business return before the cash is required. Long-term projects require money, which must
be arranged at the lowest possible cost to place the least burden on the organization's cash flows. The
company needs to be creditworthy. The company's financials need to be matched to ensure that the
performance is consistent with or better than expectations to retain and increase its creditworthiness and
thus its ability to produce liquidity and lower its financing costs. It needs the management of the balance
sheet effectively, and with the right structure. This whole set of operations, the second main feature of
the treasury, includes managing the balance sheet and the business's liquidity (which is another aspect of
cash management).

If the organization travels across borders, sells or imports from one country to another, or exposes itself
to other partners and undertakes financial transactions, it exposes itself to the danger or uncertainty that

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other causes, perhaps market fluctuations, defaults of trading partners or banks, or internal errors, will
not achieve business and financial goals due to a shift. The management of these risks is the third primary
function of the treasury.

Organizational Structure and Responsibilities

Figure 3 Roles and Organizational Flows

It will be beneficial to refresh our understanding of a typical multinational corporation and its structure
before defining the treasurer's fitness in the organization. Figure 3 describes the functions in traditional
in-country activities and the relations with cash flows and goods/services.

The procurement team will put the order in the country or subsidiary operations and purchase the
supplier's products. Credit terms are negotiated, mostly credit terms applied at the agreed price by the
seller, or a reduced price if the payment is made sooner. On the balance sheet, a payable shall be booked
if the payment is to be made later. The raw material and components are then processed, and the
manufacturing process produces the finished product, based on some credit terms, that is sold to the
consumer by the sales and front-end team. If the payment is not made promptly by the client, the
accounts are booked with the receivable. Before the due date, the payment shall be made to the supplier,
withdrawing from the books the payable sum. The collections staff has to recover the invoice, which
liquidates the receivable on the balance sheet when received in cash into the account. The money
collected from the clients is used to pay the suppliers, pay off any loans received, or buy new supplies.

The Treasurer usually reports to the chief financial officer or finance director, along with the financial
controller. The controller takes care of the accounts payable and receivable, handles collections and
disbursements, and works on the accounting and balance sheet's cash management aspects. The
controller is usually responsible for monitoring unpaid revenue (DSO) days and outstanding payables
(DPO). The acquisition, sales, and collection processes continue to be handled at their end by the country
and subsidiary operations. The Treasurer becomes responsible for the liquidity aspects of cash
management, providing financing, controlling the balance sheet and financials, and managing risk with
banks and other parties. Increasingly, in many businesses, the Treasurer plays an advisory role in handling
the accounts payable (AP) and receivable accounts (AR), tracking the DSO and DPO (as they form a central

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component of the financial ratios and evaluation of the company), and providing feedback on credit to
different entities and the financial impact of their decision making. Figure 4 presents a simple Treasury
and control structure in a firm.

Figure 4 Treasurer in the Organizational Context

The Treasurer and the Treasury team have to deal with entities from outside and in-company functions
daily. Any of these corporate Treasury touchpoints are shown in Figure 5.

Six of the Treasury team's external interfaces are:

Regulators. Enforcement. Other than market activities, the regulatory element of capital and fund f ow
makes Treasury a crucial point of touch for regulators. Compliance with local law and policy is paramount.
For different purposes, such as investment, risk control, foreign currency requirements, trade flows,
collections, and payments, areas for which Treasury is specifically responsible are areas where, due to
process lapses, technical error, fraud, or other reasons, treasury may contravene such regulations and
laws. Central banks, securities, and exchange commissions and regulators, company registrars, and
ministries in the relevant departments are, therefore, some of the major regulators for whom an interface
is mandatory.

From exchanges. As the main interface for capital execution, the Treasurer will be in touch for
enforcement and reporting purposes if the company is listed on the exchange.

For banks. The Treasurer is typically the main touchpoint with both the bank and the corporation for
banking relationships. The Treasury compiles the various regional, operational, financing-based, cash
management, exchange, hedging, markets, and accounting operations that are the main components of
potpourri banking. The Treasurer remains the primary driver and thus the main point of contact for the
bank for longer-term capital market transactions.

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To investors. If the organization goes out to obtain diversified and alternate capital sources, the Treasurer,
who is in charge of raising capital and therefore has the greatest exposure on the balance sheet, financials,
and cash flows of the firm will be the main resource for investors to have a dialogue with them to gain a
wider understanding of the financial status of the company and thus their expectation of return. The
Treasurer is also given the task of handling investor relations in many organizations. This is a reasonable
extra duty granted to the Treasurer, but it is not legally a Treasury function.

Agencies. The Treasurer is accountable for the company's credit rating and for maintaining the highest
credit rating. The Treasurer is also the driver of the interface with the rating agencies (and occasionally
analysts).

Financial Institution. Financial institutions (non-bank finance firms, funds, money market players) remain
a capital source in many countries and suppliers of useful investment products and networks (funds,
investment banks, etc.). The Treasury's relationship with financial institutions for both origination and
investment is directed under Treasury responsibilities.

Technology Companies. The Treasury of Modern Day uses technology and structures as an essential tool
for guiding the process and day-to-day activities. In assessing the productivity and efficiency of treasuries,
advanced treasury systems and ancillary systems, such as market information systems (e.g., Thomson
Reuters Extra), risk engines, and forecasting and reporting tools play a leading role. Treasury's significant
access point is the standard interface with the technology service provider/vendor for updates,
improvements, and functionality enhancement.

Service providers. It is possible to outsource many Treasury tasks and functions, and many service
providers provide reliable, flexible, and highly regulated levels of service across various levels. Just a few
of the resources that Treasurers want to outsource are netting, sets, lockbox, and reconciliation.

Figure 5 Treasury Linkages

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Treasury Functions and Responsibilities
The Treasurer is the liquidity provider, responsible for the liquidity component of cash management and
the risk, financing, and investment manager for the f rm. We dive further into the different tasks and roles
that make up the Treasury department in this section. We also address the infrastructure needed for the
members of the Treasury team to outperform in their positions.

Treasury Functions
Treasury’s core functioning can be classified across the management of three main themes illustrated in
Figure 6.

Figure 6 Treasury Functions and Responsibilities

Transactions
The transactional and operational element of cash management and money movement is the first of the
three functions. This includes:

■ Managing accounts
■ Monitoring and enabling payments and managing the payment process and timing
■ Monitoring the collections process and facilitating the concentration and movement of funds received
■ Coordinating the process of consolidating and netting payments for increased efficiency
■ Supporting financial control in the creation of a shared service centre to optimize the AR and AP
processes
■ Establishing an appropriate forecasting process for cash flows to enable better planning and
management and coordinating with various business units and functions

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■ Reconciliation of accounts and cash flows
■ Execution of trade-related transactions, such as letters of credit and bank guarantees
■ Settlement and execution of cash f ow and cross-border transactions

Balance Sheet and Liquidity

The transactional and operational element of cash management and money movement is the first of the
three functions. This includes:

■ Managing accounts
■ Monitoring and enabling payments and managing the payment process and timing
■ Monitoring the collections process and facilitating the concentration and movement of funds received
■ Coordinating the process of consolidating and netting payments for increased efficiency
■ Supporting financial control in the creation of a shared service centre to optimize the AR and AP
processes
■ Establishing an appropriate forecasting process for cash flows to enable better planning and
management and coordinating with various business units and functions
■ Reconciliation of accounts and cash flows
■ Execution of trade-related transactions, such as letters of credit and bank guarantees
■ Settlement and execution of cash f ow and cross-border transactions

Risk
Managing the various financial risks because of market movements, credit deterioration, operational
issues, market liquidity, and contingency situations is the third function. This involves the management
of:

■ Market risk (such as foreign exchange, interest rates, commodity, etc.)

■ Credit risk (includes counterparty and cross-border risk)
■ Liquidity risk
■ Operational risk
■ Contingency risk

This management can be accomplished using many methods with various elements of rigour and flow.
This book covers the use of Aktrea ’s Set IMAGE© methodology, which involves a simple continuous five-
stage process.

1. Identification of risk
2. Measurement of risk
3. Accounting and reporting of risk
4. Governance of risk
5. Evaluation of the risk management process

Treasury Infrastructure
A key part of the Treasury role in handling and dealing with the Treasury team's tools to execute their
duties and fulfil their responsibilities.

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Policy
Policies are the basis of the operation of a treasury. It is important to have a thought-out, but clear
policy accepted and regularly checked at the board level. Both aspects of the treasury operation,
particularly transactions, balance sheet and liquidity, risk management, and the reporting and analysis
methodology for these functions, will be set out in the Treasury policy.

Strategy and Objective

Defining the priorities and objectives of the treasury as well as how to assess its success is important. If
Treasury is a cost centre or a benefits centre, whether it needs to be an active or passive Treasury, all
aspects must be established in advance, and treasury strategy must specify the goals accordingly.

Contingency Planning
For treasuries that work across countries, regions, and continents, having a continuity-of-operations
plan in place is critical. The more centralized the operations, the more important the need for a well-
planned, tested, and robust contingency plan.

Processes
Procedures and their management may distinguish treasuries. Smooth and reliable processes contribute
to fast turnaround and service levels, which minimize operational and financial costs and improve
employee engagement.

Control
Treasury requires the highest level of control to avoid losses due to operational, enforcement, regulatory,
and fraud factors, considering the relations with the f rm's cash flows. Part Five covers the significance of
some operations and control elements and provides a checklist of operations and controls that can be
used to create a functional control environment for an enterprise.

Compliance
Local rules and laws have to be complied with at all costs for a global company with a footprint and
activities across countries. Procedures, structures, monitoring, and other statutory aspects have to be
aligned accordingly. In certain cases, the direction of operations may also be decided by local laws.

Documentation
With the history of cash and money flows, one of the backbones of a robust Treasury is watertight and
well-implemented documentation.

Accounting
Treasury must be compliant with the accounting process by various accounting principles across locations.
Since the balance sheet and capital structure are the Treasurer's responsibility, the accounting
procedures, translation, and revenue and expense recognition make a difference to the organization's
performance and financial condition. Some transactions could have an economic advantage, but they may
be unfriendly from an accounting perspective. Mark-to-market prices for hedges and portfolios may also
produce financial uncertainty. The prices of assets, liabilities, and cash flows could alter market
movements. Given the Treasurer's duty to handle volatility, which includes balance sheet variability, the
Treasurer's relations with the accounting systems and the financial controller are paramount in the
Treasury's smooth functioning and efficiency parameters.

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System and Technology
Always enablers, systems have become an integral part of the modern Treasury, linking every part of the
globe to increase the visibility of cash flows, manage risks, and deploy cash where and when needed. The
advent of great banking platforms and outsourced solutions has also dramatically increased leveraging
systems and technology.

Service provider
The use of various service providers for systems, integration, netting, reconciliation, system maintenance,
and the like is becoming more and more popular, to ensure a greater degree of specialization, scalability,
and control.

Banks
Banks represent the architectural infrastructure of the treasury. Without a Banking Partner, no Treasury
is complete. When the Treasury is a simple one with operations only in one country or a complex group-
wide, in-house bank operating as a bank for all group businesses, it is important to provide value to the
organization through an effective banking services suite solutions.

People

Structures and procedures characterize a Treasury, but the people run it. Finding the right person with
the right mindset and inspiration in the right positions is a must for a great Treasury. Treasury positions
include empowerment, opportunity, learning, and insight and are a perfect breeding ground for
tomorrow's financial and business leaders.

Treasury infrastructure plays one of the most pivotal roles in the efficient running of a Treasury while the
non-glamorous component does not hit the headlines when times are good.

KPIs and Deliverables

Now that we have explored the role that the Treasury plays in the organization and the context of its
function, it is important to explore adequately and transparently the value that the Treasury generates,
its priorities, and objectives.

Given the ties that the Treasury has with other functions and the interdependence between other
functions and foreign influences, such as markets, legislation, liquidity, and the banking system, it is
difficult to calculate and assess the Treasury's direct contribution to the organization. It is exacerbated by
the Treasury desk, which in many organizations is also a service unit, intended to provide comprehensive
assistance to businesses and operations worldwide to ensure the company's smooth operation
worldwide. The company would be negatively impacted by disruption to operations or the financial supply
chain due to a lack of financing or high market volatility.

Therefore, we are trying to define basic parameters of the treasury's performance, its contribution to the
company's financial metrics, and explicitly relate the Treasury's output with the overall organizational
performance.

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 Figure 7 Treasury Performance Indicators

Figure 7 summarizes the performance indicators of the Treasury. If we define the core objective of
Treasury as supporting the business to increase enterprise value, we can identify four distinct but
related objectives with which Treasury can contribute:

1. Lowering the cost of funding and the cost of capital

2. Providing liquidity to the firm
3. Enhancing operating cash flows
4. Increasing the stability of cash flows and the balance sheet

Lowering the Cost of Funding and the Cost of Capital. This is done by searching for the right sources of
capital and by achieving an acceptable capital structure, by targeting and achieving an appropriate credit
rating, and by retaining or improving it, and by searching for opportunities by the use of less foreign capital
and other ways to lower the current cost of capital.

Providing Liquidity to the Firm. This is achieved by determining the correct liquidity sources, preferably
internal, and reducing reliance on market and external sources, providing the company with the ability to
transfer cash, raising the visibility of the money of the company, and eventually providing cash where it is
needed, when it is needed, and for the sum and currency in which it is required and the time for which it
is required.

Enhancing Operating Cash Flows. This is achieved by proactive and active resource management, including
top-line management and improvement, by investing surplus cash (without sacrificing liquidity or rising
risk levels), optimizing the use of capital and balance sheet investments, and maximizing the value of those
investments and the balance sheet. By reducing costs through process efficiencies and using technology
and applicable models, relevant banking and account frameworks, and accessible and tailored products
and services to increase performance and minimize internally needed capital, bottom-line improvements
will come. A reduced human resource demand would also result in higher productivity per job.

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Increasing the Stability of Cash Flows and the Balance Sheet. It can achieve this through optimal hedging,
risk management, and cash management to reduce volatility and increase visibility.

Summary
In this lesson 1, along with the Treasury's main duties and functions, we went through the sense of the
Treasurer's role in the organization. The important aspects of the Treasury infrastructure that help make
the Treasury more resilient were addressed.

We ended with a look at some of the Treasury KPIs. We went through a typical Treasurer's Day, covering
various transaction management, balance sheet, liquidity management, and risk management topics,
beginning with time-critical morning operations and concluding with evaluations and strategically
relevant issues.

Activity No. 1

1. How do the Treasurer and his or her team at Treasury achieve these goals?
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2. What do Treasurers have to do to ensure that their job is done and the firm's support and business
and other functions are robust?
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3. How do the Treasurers fit into the global context of the organization?
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Activity No. 2
1. What is the difference between cash management and liquidity management? Discuss
comprehensively.
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 ______________________________________________________________________________
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Activity No. 3
The illustration below shows what does the treasurer does a day at the office. Discuss the three treasury
functions and their relatedness based on the llustration.
Figure 8 Treasurer Daily Transaction

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LESSON 2 Treasury Design in Global Context
Intended Learning Objectives
1. Explore the concepts and themes of a good treasury design in the global context;
2. Evaluate the different treasury models adopted by the global firms; and
3. Describe the outsourcing of various process-oriented activities of treasury centre and in-house.

THE TREASURY DESIGN Principle is simple: to organize the Treasury's role, its individuals, and processes,
working towards quality, elegance, and usefulness.

Treasury Design's starting point is a study of the main performance indicators (KPIs). The ultimate
objective of achieving these performance targets is the survival of the Treasury and its structure.

As treasury can use more than one route and model to accomplish similar objectives, other factors come
into play in the organization's design of a properly structured Treasury. Such considerations are:
■ Lower cost
■ Lower turnaround times for decision making and resolution
■ Higher degrees of control and wider net for control
■ Lower cost of capital and increased availability and diversity of capital
■ Legal environment of various locations
■ Accounting practices followed by the f rm and accounting environment of the geographies in
which the business is being done.
■ Tax aspects
■ Automation required
■ Existing and future volumes
■ Growth and increase in business and geographies
■ The expectation of turbulence of competitor and industry landscapes

The basis for these KPIs and considerations is the three Treasury themes or functions: the management
of transactions, balance sheet and liquidity, and risk. The growth of the method of Treasury Design is
shown in Figure 9.

Key Elements of Treasury Design

System Design. The design introduced the importance of systems and technology and their role in the
Treasury. Systems must be designed with various aspects and considerations in mind.

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 Figure 9 Treasury Design

People and Organization Structure Design. This people and organizational structure design entail
identifying the right people, equipping them with the right skills, and putting them in the right jobs with
the right reporting line. It is also linked to the decision of the degree of centralization and outsourcing.

Process Design. The process design forms the Treasury function's bulwark based on creating watertight
processes with controlled and measurable handoffs.

Control Design. A strong control element is a safeguard against potential hazards and situations around
implementation and execution. Even if the rest of the Treasury Design elements are put in place, a weak
control design element will not sustain the implemented Treasury Design and processes' strength.

Cash Flow Design. One of the Treasurer’s key areas of delivery is ensuring that the f rm is adequately
capitalized. The price the f rm pays for the capital is the lowest in the circumstances. Capital structure also
has a bearing on the firm’s credit rating and financial perception and performance, making it one of the
critical areas evaluated by potential investors and lenders.

Risk Architecture. The last, but one of the most critical, components of Treasury Design, covered risk
management and its architecture.

We now explore Treasury models' evolution, with snapshots of various models, and discuss some of
their benefits and concerns.

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Introducing Centralization
Centralization has been one of the larger areas of focus of Treasurers over the past few years. Growing
businesses, increasing geographies, evolving technologies, and emerging markets have necessitated
fresher approaches to managing cash and risk more efficiently.

Centralization itself can cover a wide gamut and array of themes. The concept itself evolved to achieve
three key objectives:

1. Increase efficiency
2. Reduce cost
3. Achieve deeper and wider control

What are we centralizing? Centralization involves concentrating aspects into one physical location. The
factors going into the choice of these locations vary by company and situation. The aspects that can be
centralized may be broadly classified into the following:

Accounts and financial activity. Moving the actual venue where the accounts and financial activity, such
as capital raising, cash concentration, risk management, and investments, are situated in one aspect. The
drivers of these will be location-specific, such as availability and cost of capital, cost of maintaining
accounts, accounting status, tax friendliness, any potential financial benefits on offer, and the like.

Systems and infrastructure. Cost, control, backup, access, and service providers, among other aspects,
determine the location of centralized systems and infrastructure.

People (processing, execution, and decision making). The location of the people performing these
roles could be different from the accounts and systems' locations. For example, a centralized Treasury
with Singapore accounts could be operated by people based in London with the databases and systems
located in Hong Kong.

The idea is to move from multiple systems, nonuniform processes, different legal entities having different
degrees of control in different locations, various service providers, numerous bank accounts in various
currencies, and varying degrees of support, toward an operation that minimizes all of these; the result is
close to having uniform systems and processes to support various entities from one location, with a
rationed set of service providers, minimal bank accounts, and consistent service levels.

Various benefits accrue from these that tie into the three key objectives discussed earlier.

20
 Figure 10 Centralization Themes

Evolution of Treasury Models

We now explore the various models of Treasury and what they mean across various parameters. Figure
11 (not to scale) summarizes the value-added across various stages of centralization.

The definitions here are only indicative, and different companies follow different models of
implementation and achieve varying degrees of success and benefits from these models. Some companies
do not follow a progressive, stage-by-stage route but prefer to implement entire structures at one go.

Figure 11 Evolution of Treasury Model

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Decentralized Treasury
The decentralized Treasury is the basic model, where many companies start. Decision making across
various criteria is decentralized at a subsidiary or country level, with headquarters (depicted as HQ in
Figure 12 and subsequent figures) only consolidating the numbers and framing the overall group policy.
This is more in vogue in younger firms where business leaders in each country run the businesses more or
less independently with an entrepreneurial and sometimes unstructured approach.

The dependencies and control depend very much on the people running them, and consistency of results
and value is not guaranteed.

As shown in Figure 12, the bulk of the boxes' activities are being done by the local teams on the ground.
Aspects such as systems, reporting lines, and performance measurement can be done centrally at
headquarters or locally, or a hybrid model can be developed.

The benefits of this model are increased flexibility and speed of operations. Control, economies of scale,
and lack of synergy could contribute to increased costs, potential losses, and larger degrees of exposure
and risk to the firm’s financials.

Figure 12 Decentralized Treasury Model

Shared Service Centre

A shared service centre (SSC) utilizes the concept of centralized processing of high volume and low-
complexity activities, achieving economies of scale by concentrating activities and control in one location
through systems, communication, and interfaces with banking service provider technology.

The SSC typically handles processes such as payments and disbursements, accounts receivable (AR) and
accounts payable (AP) management, reconciliation, expense processing, payroll, general ledger
(GL)/enterprise resource planning entries, and report generation, sometimes referred to as a payment's
factory (an accurate but incomplete description). More evolved SSCs also perform confirmation and
settlement of foreign exchange (FX), risk management, and investment transactions.

22
 The SSC technically covers areas that report to the financial controller. While it remains very close linkages
to the Treasury's functioning, it can be distinct from an organizational standpoint. Given the closeness and
proximity, transactionally and conceptually, to Treasury activities and processes and the
interconnectedness of the two, we have included these areas in this discussion's scope. Figure 13 shows
the activities typically housed in an SSC.

Figure 13 Shared Service Centre Model

Basic Treasury Centre

The basic Treasury centre (TC) model (see Figure 14 ) adds value parallel to an SSC. Here, more
complicated activities are taken up, and the TC comes under the Treasurer's direct ambit.

Cash concentration, trade operations, netting, centralized bank relationship management, financing
decisions, and FX decisions are made in the basic TC. Also, account ownership may reside with the TC.

23
 Figure 14 Basic Treasury Centre Model (with SSC)

Figure 15 highlights some of the activities occurring between the two centres.

Figure 15 Division of Activities Between SSC and TC, courtesy of Gourang Shah

Value-Added Treasury Centre

The value-added Treasury centre (TC++) concept takes off from the basic TC, forecasting, risk management
decision making, investment decisions, funding and liquidity sourcing and intercompany funding, systems,
control, and reporting all moving to a centralized location. Likewise, the risk management and investment
transactions' confirmation and settlement could move into the SSC or the TC. Now we have reached a
stage where the entire Treasury operations are now centralized, with minimal activity residual within the
subsidiaries or country operations (see Figure 16). There may be some variations on this format,
depending on regulations regarding outsourcing and ownership.

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 Figure 16 TC++ Model (with SSC)

In-House Bank
The next stage in the evolution is the in-house bank concept, typically as part of the TC (see Figure 17).
Value-added services such as invoicing (or re-invoicing), credit management, and supply chain financing
are taken up here. Most importantly, however, the TC acts as a bank for all subsidiaries and countries that
come under the in-house bank's ambit. The TC behaves as a banking service company, providing account
management, funding, funds transfer, investments, and risk management solutions to the entities. In turn,
the TC interfaces with banks and professional market counterparties to execute consolidated transactions
on behalf of the entire group.

An in-house bank requires a very high degree of expertise and high process orientation. The scales of the
group's operations and financial transactions must also justify the in-house bank's investment and
maintenance cost.

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 Figure 17 In-House Bank Model

Outsourced Model
The outsourced model of the Treasury works in a rather simple way: Outsource the process focused or
non–decision-making activities and keep the decision making, review, and ownership in the house (see
Figure 18).

Figure 18 Outsourced Model

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Summary
In this chapter, we explored the concept of Treasury Design, dwelling on the key themes of a good
Treasury Design, and evaluated some Treasury models that could be adopted by global firms, with the use
of shared service centers, Treasury centers, in-house banks, and outsourcing many process-oriented
activities.

Activity No. 4
1. Compare, identify, and explain the key difference between a Service Shared Centre and a Basic
Treasury Centre Model.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2. Describe and explain the division of activities of Service Shared Centre and Basic Treasury Centre
Model.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

27
LESSON 3 Treasury Global Culture
Intended Learning Objectives
1. Articulate the importance of the Treasury Culture
2. Determine how Treasurer can, over time, create, and sustain the culture as determinant to
Treasury Leadership
3. Explore the various hats that the Treasurer needs to help and prepare for higher responsibility
and empowerment.

The idea of TREASURY CULTURE as presented is a process of thinking and action central to Treasury
Leadership's direction. It requires having the right mindset and atmosphere to work together and other
roles for the Treasury staff to achieve the best possible results and service levels. In practice, this means
equipping the workers with the right expertise, skills, equipment, empowerment, environment, and
mindset to achieve the best performance.

A good Treasury culture can explain the difference between two high-performance treasuries: one, a high-
speed, cutting-edge and productive Treasury where motivated employees make everything look smooth
and well-oiled, with zero faults, prompt service and turnarounds to other functions, and a fun
environment at work where a Treasury job is sought; the other, a good well-organized Treasury.

The steps to initiate and build a Treasury Culture are relatively straightforward. Over the course of the
growth process, a few key attributes and skills were inculcated into the Treasury team. This is achieved by
example, top-down, by the actions and the approach of the Treasurer himself, and by preparation,
simulation, and coaching. Figure 3.1 summarizes the various elements of the culture of the Treasury.

It is important to remember that these Treasury Culture components are enablers that work together
with professional/job expertise and skills to improve Treasury individuals and teams' productivity.

Figure 19 Components of Treasury Culture

Qualities
In any worker of any organization, certain generic qualities are needed. Of these, those essential to the
work of the Treasury are listed here.

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Proactiveness. When coping with the complex circumstances and possible areas of issues and
disconnections that arise daily, the proactive role of Treasury staff comes into play. The fluidity of business
activities can be improved by constructive resolution of challenges and future trouble areas and stepping
up to preempt liquidity or internal customer situations.

Control. Given the nature of work in a treasury and access to funds, a control orientation is important.
Treasury workers need to be qualified and, most importantly, aware of these opportunities for mistakes
and conduct their duties accordingly because of opportunities for failures and illegal misappropriation of
company money internally and externally.

Teamwork. We discussed earlier the different relationships and collaborations that Treasury needs to
build to add value to the organization. Without the necessary amount of coordination, the treasury would
not be able to add value. Organizationally, collective cross-functional team priorities in employees and
team reviews often enforce teamwork.

Transparency. The Treasury's cost and return parameters would likely affect the financial performance
of different business units, provided the cost of capital, returns on investment, gains or losses on marked-
to-market (MTM) positions on hedging and targeted prices apart from the cost of operations and account
maintenance. Transparency with statistics, events, and turn-around times can go a long way in improving
another units' confidence in the Treasury Community.

General Skills
General skills provide interpersonal and fundamental technical skills that treasurers have to look at from
growth and training.

Relationship Building. Given their dual responsibility for managing the Treasury and becoming service
managers to help the business, Treasury team members need strong interpersonal skills. Given the
different interfaces that Treasury has with external and internal organizations, their interpersonal capacity
is crucial, especially in relationship management (See Figure 4 for a snapshot of these linkages).

Culture Knowledge. Since interactions with individuals from different backgrounds,

countries/nationalities and cultures are a way of life in the Treasury role, it will help understand and
appreciate other cultures in smooth interactions and learn the most from meetings, conversations, and
discussions with the other group. Working in a cross-cultural, global setting often includes understanding
the different team members' experiences, markets, and environments. The team's commitment and
success depend a great deal on how well the team members work together to deliver a solid and
successful performance.

Technology. Treasury team members may not need to have technical expertise, but they must certainly
be excellent technology users. Those involved in decision-making and implementation/integration of
systems need a strong, well-rounded understanding of system design and usage so that they have the
resources to determine which systems to use.

Process Orientation. Process tightness and zero error tolerance help to make the Treasury work beyond
expectations. Process orientation of Treasury staff, along with a control mind-set, generates appreciation
within Treasury for the integrity of well-laid-out processes, which ensures that other roles and external

29
service providers are also active in making the end-to-end financial supply chain run smoothly and
efficiently.

Written Communication. Global Treasury has many interfaces with organizations via email and, where
appropriate, letters and alerts. Treasury emails need to be crisp and communicated well enough for
readers to understand the situation quickly and react should immediate action be needed, given the
increasing emphasis on email for most modes of communication, and the resulting increase in the volume
of emails. Information-related emails should be transparent and unambiguous, meaning that there is no
further follow-up that could waste valuable time for all sides. There is a corresponding chance of over
communication. Some data emails involve an abundance and excess of information in order to minimize
reverse queries. In these situations, the recipient could well return to the Treasury to inquire where the
data could actually be located and interpret the mountain of data sent.

Technical and Work-Related Skills

The final category of Treasury Culture involves finance and job-specific items that are core to the
functioning of a well-rounded Treasury team.

Business. Sound business skills and understanding of the company's business model, supply chain, trends,
and market and competitor backgrounds can enable Treasury employees to appreciate the context of
their jobs. Many Treasury employees, particularly at the junior level, are struggling to understand the
impact of their positions and how they are actually benefiting the organization. Every Treasury position is
important, and the Treasurer and CFO will do well to ensure that every employee within the function has
a strong business understanding that, in turn, will help them add value to their positions instead of simply
executing and performing tasks automatically.

Financial and Markets Awareness. Knowledge of the global climate, particularly the political and
economic situations of the world and its effect on markets, including those in which the business is present
or likely to join, is a significant feature of the global treasury. It is critical for Treasury members to be
generally aware of key market drivers, how they function, and general market patterns and levels. Reading
economic and business reports daily would also help to develop this knowledge base. A simple
understanding of the economy and the balance sheet is also needed.

Accounting. Given the effect of Treasury actions on the balance sheet through the accounting process,
Treasury staff must have at least basic accounting expertise and, more significantly, basic accounting
procedures in key locations. In particular, aspects of the cash conversion period, market-to-market or
valuation of risk management transactions and the effects of the balance sheet translation and related
aspects should be well understood.

Regulatory. Treasury interfaces with central banks, exchange commissions, foreign exchange regulators
and other administrative and legislative bodies daily. In particular cross-border and capital-related
transactions, the essence of Treasury work can often lead to ambiguity regarding contravening
regulations. It is important to ensure that all operations and transactions comply with the applicable
regulations. In the event of uncertainty, the Enforcement Officer in charge must take the call, and
unsolved or critical issues must be scaled to the level of the nation or global governance. Although it is
not for the Treasury employee to make the final regulatory call in critical or ambiguous circumstances,
they must know the regulations well enough to understand uncertainty or possible violation.

30
Hats of the Treasurer
The Treasurer wears many hats to fulfil and succeed in his duty. This is part of the Treasury Tradition, to
instill a multi-dimensional "DNA" among senior Treasury staff and wear these hats to assist the Treasurer
and CFO and build a second-line to replace the Treasurer when the time comes for the current holder to
move on. Some of the treasurer's caps, shown in Figure 20. Putting the Treasury Culture in place is a
process—it takes time to set up, and it needs commitment to be maintained. Every cent of the time and
money spent would be worth the effort.

Figure 20 Hats of the Treasurer

Summary
In this lesson, we noted the value of the Treasury Culture and how a Treasurer can, over time, build and
maintain a culture that is a significant determinant of the achievement of Treasury Leadership. We looked
at the different hats that the Treasurer has to wear, and aspects that will enable the next generation of
Treasury managers to plan for higher transparency and empowerment.

31
Activity No. 5
1. The Four Capitals in the Treasury’s Living Standard Framework (LSF) illustrated on the figure
below. You are going to articulate and discuss the how the four capitals in the Treasury’s LSF
integrated to build and maintain a treasury in the achievement of treasury transparency,
empowerment, and leadership.
Source: https://www.treasury.govt.nz/publications/dp/dp-18-08-html

_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________

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LESSON 4 Importance of Operations and Control
Efficiency
Intended Learning Objectives
1. Articulate the essential elements of Treasury process, operations, and control.
2. Illustrate the delineation of Treasury activities and responsibilities across front, middle, and back
offices.

Processes from the Treasury feature cornerstone, with processes and technologies allowing efficient
processing to be carried out and accomplished. Unfortunately, procedures are perhaps some of the
most neglected facets of many treasuries, relegated to the shadows of the allure and publicity of
investor relations, mergers and acquisitions, capital planning, exotic concentration solutions, and risk
management.

This lesson highlights the importance of processes—their operations and control—and some of the
methods needed to put processes in place.

Tools

There are many tools available in the Treasurer ’s armory. The following tools (Figure 21) are especially
critical from an operations and control standpoint.

Figure 21 Tools for Strong Operation and Control

Policy. A Treasury policy, a preview of which is given in Part Five, is a starting point for the treasury and
control journey. Key elements, activities, risks and mitigation are identified; roles and responsibilities are
assigned, and limits and functional parameters are specified. Processes and processes must operate in
tandem with the strategy.

33
Process Mapping. Process maps provide a good foundation for watertight process notes. There are
various process mapping types and specifications. Favour maps where a role and each handoff point map
the phase is clearly demarcated from one role to the next. The system inputs and transfers' separate
function and the tasks conducted by the system distinguishes the human element from the technical
element. The handoffs are one of the main differentiators that the maps carry to the table. There are
chances for error when there are handoffs. It is necessary to log the handoffs properly and try to minimize
their frequency and number. Figure 21 shows an illustrative method map for the management of Treasury
risks.

Process Notes. Method reports, which are referred to by many other terms, such as standard operating
procedures, are comprehensive records, operation and function, of each Treasury process. Some of the
benefits of structured process notes in uniform formats are:

 Improving the efficiency and effectiveness of operations.

 Provide a ready reference tool for new workers to start executing their duties immediately and
for existing workers to back up or recognize process-related aspects in situations of uncertainty.
 Require auditors, reviewers and regulators to understand the end-to-end process and therefore
reduce the potential for miscommunication.
 Increased transparency gives rise to error and improvement opportunities, thereby increasing
control and water tightness of the process.
 Boost employee motivation, understanding and morality.
 Reduce cost.
 Provide a pan-company, cross-location standard for state-of-the-art Treasury Architecture.

Systems and Technology. The development of systems and technologies across the continuum has
significantly improved the productivity of Treasury processes. Irrespective of the nature of the company
and the market, and for the business at any stage of maturity, size and development, the Treasury is a
unit that definitely profits from automation and systems. Increasingly proactive banking systems,
payment gateways, and vendor automation have dramatically contributed to a robust Treasury method's
bulwark.

Integration. Integration of systems, operations, accounting, and control with the business's entire
infrastructure improves process coordination and eliminates the need for duplication and rework.

Reporting. An effective reporting system uses little human time and effort, is timely and relevant, and
optimizes the level of information for each management level. Overreporting can waste time and reduce
the perceived level of value of information or require more effort to distinguish meaningful and essential
information from the ocean of data. Underlying or insufficient reporting has its own apparent
implications.

Control. Daily analysis and monitoring of processes ensure that little surprises and organizational or other
losses occur due to insufficient or inadequate procedures followed.

34
Different Offices: Front, Middle, and Back

Daily analysis and monitoring of processes ensure that little surprises and organizational or other losses
occur due to insufficient or inadequate procedures followed. The delineation of duties across the front,
centre, and back offices is becoming increasingly common. Of the many inventions and thought processes
that the banking sector has lent to the world, the mid-office role is significant. This role tracks and works
closely with both the front and back offices, separately monitoring and ensuring that management
receives daily reports on the other two cogs' activities on the treasury wheel.

Front office. Focuses on planning, selling or dealing, financing, investment, risk management, contact with
banks, and accounts ownership. This is the front end of the main decision-making and transaction. This
role is reported directly to the Treasurer

Back office. Focuses on clarification, arbitration, transaction processing, simple reconciliation and the
transition of inputs to the Enterprise Resource Planning (ERP) or General Ledger (GL) accounting system.
This is the back end with main roles for execution and service. Whether the Treasurer is either a transactor
or a trader who carries out transactions daily, the back-office monitoring should be separate, preferably
the controller's duty.

Middle office. Focuses on oversight, valuation, reconciliation between front and back offices, performance
assessment, model validation, risk reporting, and minimal monitoring. This area is appropriately referred
to as the middle office, since its role is to monitor both the front and the back ends, with key control and
reporting responsibilities. The middle office often reports independently to the front and back offices,
either to the controller (if the treasurer does not have a transactional role) or to the chief financial officer
(CFO) or to the risk officer (if the controller has oversight of the back office).

Figure 22 offers a snapshot of the common duties of these three branches of Treasury operations. In
certain cases, the lack of clarification of roles may result in things falling between tables and without
ownership.

Figure 22 Segregation of Duties Across Front, Middle, and Back Office

35
Activity No. 6
1. Is it better to align processes around a good system or to align systems around existing efficient
processes? Discuss your response on this.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2. Is it better to have good use of excellent technology or excellent use of good technology?
Discuss your response on this.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Activity No. 7
CASE STUDY: WHICH DESK SHOULD LOOK AFTER THIS ISSUE?

The CFO of a European technology company was in a quandary. The books in the control system and the
Treasury system were showing different numbers. The Treasurer, who had claimed a massive savings as
a result of his hedges, had resigned when the controller reported that the hedging process over the past
two years had actually lost the f rm a lot of money and that the objectives of achieving stability and
visibility of financials were not being met. The week after the Treasurer had quit, one of the dealers came
to the CFO with a problem: A hedge transaction that the Treasurer had done earlier in the month as part
of the hedging program that had also been reported in the GL system (ERP) had come up for maturity, but
the banks had no records of the supposed transaction. Similarly, a payment that was supposed to have
gone for an earlier hedge settlement through the electronic system had shown a confirmation, while the
bank was still asking for the payment to be made.

The Treasury team was responsible for the transactions and interface with banks and for accounts and
liquidity management. Any entries to be passed were done so by the controller ’s team based on reports
issued by Treasury. The control team members were not experts on Treasury decisions and products; they
left decisions to the expertise of the Treasury team, agreeing in the spirit of teamwork to help pass the
entries in the back end. Implementation of a state-of-the-art Treasury system had assisted the process.
Entries were now mostly automated except for a few processes, where the front end or dealers still
handed over reports and the transaction entries in the ERP were then be passed by control based on these
inputs.

The CFO immediately requested an independent review, and after two weeks, he received the report.
Sifting through the points, there was one thread that was common: the differences between the various
elements, systems, or desks on their evaluations, numbers, and balances. The reconciliation process had
gone awry. The ERP (GL system) and the state-of-the-art Treasury system that the company had invested
in on the treasurer ’s recommendation was showing completely different numbers on account balances

36
and hedging transactions. Transactions reported on the Treasury system and whose mark-to-markets
were being correctly reflected in the accounting books were not present in the banks’ reports. Limit
excesses by traders had been checked (the checklists had been ticked) but not reported, since the checks
had been done by the traders themselves—system and banking reports would come in to the dealers who
would perform the verification to the best of their ability.

The CFO called the controller and the senior members of the Treasury team. All of them had done their
day-to-day operational jobs to the best of their abilities, but when the time came to discuss reconciliation,
the answers were ambiguous.

Owing to direct system handoffs between the Treasury system and the ERP, no one had felt that there
was a need for reconciliation. The banks’ offer to integrate their systems with the Treasury system had
been rejected owing to incremental implementation costs. Hence the activity had remained with the
Treasurer and his team. Limit checks were designated a noncritical activity by the dealers and hence were
not factored into reviews on automated system reports—where they had been built, the recipient e-mail
addresses listed the dealers themselves, and post migration, the addresses had not been changed. The
inbox of the Treasury team members was thus flooded with over 100 reports that kept being flushed to
the “Unread reports” folder and purged whenever the mailbox exceeded its limit.

The solution again was simple: The reconciliation process had to be done, regularly. The question was, by
whom?

Guide Questions:

1. Would it be done by the front office, giving it access to the back-end systems as well?
2. Would it be done by back-end task, reconciling tasks after the entries had been passed?
3. Would it be the worthwhile to invest in a middle office, which would be responsible for all the
reporting and the reconciliation, independent of the activities of deal origination, decision
making, and booking in the firm ’s ledgers?

37
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