Treasury Today: To Centralize or Not?

If your company, like most, is continually striving to increase efficiency and enhance control, you've probably at least considered the idea of centralizing treasury operations. After all, bringing such functions as accounts payable and accounts receivable under one roof would eliminate redundant activities and help you to keep a closer eye on those processes, wouldn't it?

Not necessarily. Despite the current hype about centralization, it won't automatically accomplish the intended goals. "Centralization is a good thing, but in the majority of cases, it's done badly," says Nicholas Franck, the Singapore-based director of treasury advisory services with SunGard Asia Pacific, a financial systems provider.

If you've worked in the corporate world for a while, you've seen centralization and decentralization swing in and out of favor. In the 1980s, executives often centralized operations so they could keep together functions that required some degree of expertise, says Dan Blumen, partner with consulting firm Treasury Alliance Group LLC in Naperville, Ill. For instance, treasurers brought foreign-exchange trading to headquarters, hoping to prevent far-flung employees from trying to predict movements in the yen or deutsche mark.

Today, however, efficiency concerns and regulatory constraints are behind the pressure to centralize at most companies. To be sure, centralization can help your business achieve those goals. Consolidating all accounts payable activities, for instance, can help you justify investments in technology because the costs are spread over a larger operation.

Further, by centralizing your company's banking structure, you can consolidate cash in a few accounts and net intracompany liabilities and assets. That should cut your company's borrowing costs, because one division can borrow from another, rather than from an outside lender. At the same time, when you get a better handle on cash flows across your business, you improve your ability to accurately forecast funding needs or determine how much cash is available for investment.