Given President Trump’s energetic focus on increasing import tariffs, the media has reported many global companies considering bringing manufacturing back to the U.S. Given the timeliness of this important topic, at the 2017 CFO Innovation Conference on May 24th at NJPAC in Newark, NJ, CFO Studio and its partners will present a discussion on manufacturing in the U.S. This will be just one if many exciting programs at the Conference, and will be sure to draw the attention of a large number of CFOs. Register to attend the Conference.
Financial Risk
As Seen in CFO Studio Magazine Q1 2017 Issue
CENTRALIZED VS. DECENTRALIZED TREASURY: WHICH WORKS BEST FOR YOUR COMAPNY?
-BY WALTER CIRILLO, Treasurer, Novitex Enterprise Solutions, Inc.
During the last global economic downturn, many companies were caught unprepared by the speed at which events impacted their business. Many CFOs asked questions like, What is our current cash balance globally? In which financial institutions are these balances invested? and, What is our counter-party risk?
Companies with centralized treasuries typically had better visibility and information relating to these questions. However, decentralized treasuries deliver other benefits for many companies.
Will a centralized or decentralized treasury function be best for your company? That depends on the nature of the business. Factors such as global geographic footprint, the similarity of business operations across geographies, and management’s philosophy all weigh in this decision.
Pros and Cons
Treasurers are responsible for managing a company’s assets and liabilities, financial risks, and banking relationships. For businesses with operations around the globe, managing these components is complex.
Some of the benefits of a decentralized treasury structure are: (1) Flexibility, as local operating units or subsidiaries manage treasury in line with local conditions, and the solutions are specific. (2) Knowledge of local markets provides advantages for selecting appropriate debt or investment vehicles, foreign exchange hedging instruments, and banking partners. (3) Local staff may have more intimate knowledge of local regulations, and business/legal/tax/banking environment. (4) Local staff likely takes pride in managing all aspects of the operations.
On the other hand, some of the benefits of a centralized treasury structure are: (1) Economies of scale. (2) Rationalization of costs. (3) Standardized cash flow forecasting. (4) Identification of company’s cash balance and risk. (5) Closer control over investment performance and risk. (6) Greater access to financing and liquidity. (7) Ability to leverage banking and other relationships. (8) Local staff can focus on growing the business.
A particularly strong argument for a centralized treasury is that such a structure allows integrated payables and receivable solutions to achieve straight-through processing, which can help improve a company’s working capital position.
Consider Specifics
A centralized treasury structure seems more efficient, but a key question to reflect upon is leadership’s philosophy toward managing the assets and liabilities of the company. A company’s specific situation, such as degree of international presence, type of business, growth prospects or business cycle, sophistication of ERP system, availability of Treasury Management System, and external factors (global/regional financial crises), all play a role.
Facilitating the trend toward centralization is technology (more sophisticated treasury workstations interconnected with ERP systems), as well as legislation or regulatory changes (i.e., the Eurozone’s move from national payment instruments to SEPA, Single Euro Payments Area, and easing of controls in several emerging markets), and globalization of markets.
However, centralization is not without its challenges. Treasurers need the communication and cooperation of local staff to provide valuable knowledge and information on local rules and regulations. Ultimately, the company that implements a centralized treasury approach will likely be better prepared to manage the risks of the global marketplace.
ÜBER-Controlling
As Seen in CFO Studio Magazine Q1 2017 Issue
WHY BUSINESSES WITH GLOBAL CONCERNS NEED A NEW DYNAMIC ON THEIR EXECUTIVE TEAM
-BY GEORG ANNEN, Chief Financial Officer, Unger / USA & Europe
To navigate a company through rough market conditions requires knowledge, experience, and leadership. Management teams rely first of all on timely and accurate financial data and detailed business analytics. ROI calculations, valuations, and future cash-flow predictions are other critical factors. All this can give a company a vital competitive edge — and this is where controlling comes into play. Such prognostic information is so essential to management decisions, and the responsibilities of the controlling function are so extensive that I prefer to call it “ÜBER-Controlling” (“über,” the German word meaning “in excess of,” “above,” or “over,” not to be mixed up with Uber, the mobile taxi service!).
Basically, ÜBER-Controlling consists of three functions:
- Sales & Marketing Controlling: Information about revenue development by customer and product as well as volume/price/mix effects; success of marketing campaigns and price sensitivity; market-related versus cost-plus pricing models; price entry points for new-product development, etc.
- Production Controlling: Information about material, labor, energy, freight, and other manufacturing costs in total and by unit; make-or-buy decisions; margin comparison based on standard costs and variance analysis; discounted cash-flow calculation for capital investments, depreciation alternatives, and inventory optimization.
- Overhead Controlling: Information on so-called fixed costs per department (Selling, Marketing, R&D, Supply Chain, Admin) and cost category (Personnel, Travel & Entertainment, Consulting, etc.); comparison to budget and prior year expenses.
An ÜBER-Controller does not just collect data from these three functions. He or she adds another dimension to it: Instead of looking just backwards or at today’s performance, he or she concentrates on looking forward. Through strategic and mid-term planning, annual budgeting, and rolling forecasting systems, the future of the company is being shaped by the ÜBER-Controller’s involvement and expertise.
Reporting
Nevertheless, ÜBER-Controlling can only be successful when it works hand-in-hand with the financial accounting department under the leadership of the corporate CFO. Statutory financial statements for external information purposes (looking back) and management reports for management decisions (looking forward) are closely intertwined. Modern, fully-integrated ERP systems with new general ledger concepts and dedicated FI and CO modules can provide a multitude of management reports. For improved management reporting purposes, it is important to use notional costs for depreciation, interest, taxes, and asset and liability amounts based on actual market valuations.
The ÜBER-Controller’s role and responsibilities are critical for the success of a company. They transition the typical conservative finance function into a future-orientated, vibrant think tank. The more specialized and entrepreneurial the controlling knowledge is, the better is this individual’s support as a business partner.
The function of the ÜBER-Controller and his or her entire controlling team is highly delicate, because they are a hybrid in an organization. Whenever I discuss my concept of an ÜBER Controller, the question comes up: Are they part of finance or of an operational business function? The best way to deal with it is to have controllers sit next to the sales and production managers and be their day-to-day “sparring partners.” However, it is best for the ÜBER Controller to report into the CFO function, thereby guaranteeing complete independence and objectivity in their judgment.