What is the true value of a treasury management system?

By Bob Stark May 3, 2016

Over the years, the value of treasury management systems (TMS) has changed dramatically. The proposition for a TMS used to be all about time savings, improved efficiency, and better productivity. While these remain important wins for a treasury team, time savings are actually the least interesting of the benefits that a TMS offers corporate treasurers and CFOs.

WHAT’S WRONG WITH PRODUCTIVITY?

Saving time spent on treasury tasks is still important. Yet, time savings have no direct value in the eyes of the CFO. Even if one goes through the exercise of quantifying the value of 40+ hours that can easily be saved, it isn’t like a full time headcount will be eliminated because of a TMS. There are two reasons for this:

  1.   Hours saved are across the entire team, so it would take a significant reworking of responsibilities to eliminate an actual person
  2.   Treasury is understaffed already so there is no shortage of value added tasks that a Treasurer can find for this newly found ‘free time’

Because no actual costs are being eliminated, time savings ends up being a soft cost. And soft costs aren’t going to make the business case for a TMS compelling enough for the CFO to urgently approve.

HOW IS THE VALUE OF A TMS MEASURED?

The value of a treasury management system is not in what it saves — but rather in what it enables. And  a TMS enables many benefits that drive a compelling ROI. Key examples include the following:

Cash Visibility

Visibility is one of the most cliché terms in treasury. Yet, its popularity is deserved as cash visibility allows decisions to be made that drive enormous bottom line value. However, to be truly effective, cash visibility must include cash forecasting so that Treasurers have forward looking confidence in what cash (and liquidity) is available. This allows treasury to capture additional yield on investments, pay down debt or make lower cost borrowing decisions, offer liquidity to the A/P team to take advantage of supplier discounts, and improve the effectiveness of a previously underhedged FX cash flow hedging program.

Additional reading: Ebook–Four Steps to Global Cash Visibility

A TMS not only offers the visibility and the flexibility in developing multiple forecasting models, but it also delivers confidence in your forecasting by offering detailed variance analysis — so that treasurers can perfect the forecast and be more confident in its conclusions.

It is that certainty — that the forecast can be relied upon — that drives the value of visibility and forecasting. If there is doubt over the accuracy of the forecast, conservative decisions will be made, money (literally) gets left in the bank reducing the value of the forecast, and the financial benefits offered by the treasury team.

Scalability

A TMS allows a treasury team to do more with less. For a growing organization, a TMS can eliminate the need to hire additional headcount. While we talked before about automation not having value because no one loses their job due to a TMS, there is value to not adding new headcount for treasury. This is a common practice for tech companies or organizations expanding internationally where they can grow the number of banks, bank accounts, and cash pools managed by 3x to 4x — without having to add a new person to the team.

Once there is agreement that a hiring decision can be foregone, the contribution to the ROI becomes both simple and defensible.

Financial Controls

Since fraud and cybercrime are significant risks that CFOs must proactively manage, implementing improved financial controls has become critical to ensuring effective risk mitigation plans are in place.

Key control features in a TMS that help mitigate errors and fraud include multi-factor authentication, IP address filtering, digital signatures, separation of duties, payment modification controls, dual administration, and payment watch list screening.

The value of these types of controls can be measured by the reduced likelihood of fraud multiplied by the total cost of a fraudulent payment or hacked bank account. In addition to the direct loss, indirect loss such as loss in reputational value (e.g. via a drop in stock price) should also be considered.

The same math can also be used to calculate reduced mistakes and errors — a far more likely scenario than fraud.

While the cost of errors such as broken formulas, extra zeros being typed, accidental overdrafts, and duplicate payments is lower than the potential loss due to fraud, the likelihood is vastly higher. Many studies suggest that 95% of spreadsheets contain errors, meaning that reduced mistakes in treasury spreadsheets must also be included when making a business case for a TMS.

Business Continuity Business continuity is a critical requirement for every CFO and Treasurer to ensure that treasury continues to operate in any scenario. A TMS provides a strong business continuity solution, helping prevent four loss conditions:

  1.  Loss of employees — A TMS provides standardized templates and processes for daily use of the treasury system, which both minimizes training and speeds up onboarding of new employees to eliminate the reliance on a single employee’s expert knowledge or custom spreadsheets.
  2.  Loss of facilities — Most TMS operate in the cloud (or are hosted offsite, at least), so in the event of a disaster that renders company offices unusable, the TMS continues to be available to support your treasury operation. Further, the TMS offers standardized visual workflows so that procedures are followed everywhere around the globe should a particular location be disabled, ensuring treasury operations are continuous.
  3.  Loss of services — In the event that company offices lose key services such as power or internet access, the TMS should remain accessible in the cloud via even a low speed web connection (such as a mobile phone). Many TMS can also be run on a mobile device without loss of functionality.
  4.  Loss of access — Should employees be unable to access company offices then the TMS remains accessible at home or from other locations for treasury personnel, using their choice of device. Security authentication procedures in the TMS can be configured specifically for non-work locations to align with company information security policies.

While these benefits are obvious, quantifying the value is more challenging. Two popular solutions include:

a) Calculating the costs for an alternative solution — potentially internally supported by IT — that offers the same level of business continuity.

b) If the same level of business continuity cannot be provided by an internally supported continuity plan, then calculating the costs that would be incurred by the company for each “what if” scenario. Once those costs are calculated into a formula, then the probability of that scenario occurring must be factored in.

Reductions in Bank Fees and Costs

Bank fees represent a significant cost and high proportion of a treasurer’s annual budget. Fortunately, there are opportunities to generate bank fee savings, including:

  • Bank Reporting — Centralizing bank reporting lessens the number of reports polled each day on bank portals when there are multiple users across the organization polling the same data over and over again
  • User Access – Many bank portals charge based on the number of users who consume bank services through the portal. With a TMS, the number of users accessing bank portals drastically drops
  • Data Storage — Banks often charge for maintaining payment templates and to retain bank reporting for more than 90 days. These costs are completely eliminated with a TMS, where data is stored indefinitely and without charge
  • Transaction Netting — the netting abilities of a TMS for payments, for borrowing/investing, and for intercompany payables/receivables will translate to less payments and FX hedges — meaning less costs
  • Bank Fee Analysis — In addition to short term ‘accuracy’ analysis, longer term bank fee analysis remains important as a cash manager armed with the costs of banking services and the bank account usage (trending of daily balances & transactions) will determine opportunities to streamline bank accounts that are not optimally used

SUMMARY

Besides the multitude of ways that a treasury management system can add immediate and recurring value to the CFO and Treasurer, the best “new development” in TMS is the affordability. The value of having a TMS is compelling — and combined with the pay-as-you-go subscription model — the ROI for treasury technology will look that much better than five years ago, never mind in prior decades.

For those looking for more reasons to make the business case for a TMS, think of this one: if you are seeking new employment, you will be competing for positions against practitioners that have extensive TMS experience. If your resume shows that you haven’t implemented treasury technology, you might as well be saying you don’t know how to use a smart phone either.

This article originally appeared in Treasury & Risk: Making Strides with the Help of Technology

Play back the recorded webinar: The True Value of a Treasury Management System in the Evolving Role of Treasury

 

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