The secret to good treasury management

Best treasury practice requires a mixture of technology, processes and policies.
Victor Penna, J.P. Morgan
Victor Penna, J.P. Morgan

The emergence of large Asian companies with overseas businesses and the emphasis being placed on cash control and visibility has put the spotlight on treasuries as never before. But the path that local firms take when upgrading their treasury operations is by no means uniform. And not all firms opt for the most appropriate treasury models. 

“There are situations where companies may have set up treasury management systems but don’t have the right policies or processes,” said Victor Penna, managing director of solutions and advisory services, J.P. Morgan treasury services. “These firms can be collating information around risk or liquidity positions, but they also need processes and policies to analyse the data and manage those risks more effectively.”

In its early stages, the business case for setting up a treasury can be compelling because implementing some basic systems can generate significant savings for a firm. Later on, however, upgrades to systems and processes become less about savings and efficiencies and more about governance and risk. “For example, if a firm has foreign exchange trading and a portfolio of contracts, as part of a good overall risk management system it would need to ensure that mark-to-market accounting is performed at the appropriate and consistent time and without any manual intervention,” said John Chen, solutions and advisory services at J.P. Morgan. “Without such a process in place, even though you may have a treasury system in place, from an internal corporate governance perspective such a lapse does not constitute good treasury management.”

Some firms have a culture of centralisation and decisions are taken at head office. Oil companies, for example, are generally dollar-based and therefore tend to aggregate and manage cashflows centrally. Similarly, because airline aircraft and maintenance costs tend to be managed out of hubs, they too look to centralise a lot of their management. But other industries offer no such uniformity. “You can have three or four companies in the same sector that take very different approaches to treasury management because of the way they are organised or because of their philosophy,” said Penna. “But effective treasury always means visibility over cash and risk positions, as well as good forecasting and control. So the principles are the same, but how they are acted on can be very different.”

Interestingly, the future may lie in treasury management on cloud computing, at least for smaller firms with limited treasury requirements. This modular-based system provides a cheaper -- though less flexible -- alternative for firms with less complex operations. “It has not really taken off in Asia just yet, but it is gaining popularity among small and mid-size companies in Europe and the US as it can be more cost effective for firms which may be listed and want good corporate governance, but don’t have that many transactions,” said Chen. “So I think we may start to see it develop in Asia in the next few years.”

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