There are many concepts in which a virtual account can be deployed. In this second article on ‘How to setup virtual accounts in SAP’, we depict the concept that can be implemented in SAP the easiest without needing specialized modules like SAP Inhouse cash; all can be supported in the SAP FI-CO module.

In the process, we rely on a simple set of building blocks:

• GL accounts to manage positions between the OpCo’s and Treasury and GL accounts to manage the external cash balance.
• Receipt and processing of external bank statements.
• On the external bank statement for the Master Account, an identifier needs to be available that conveys to which virtual account the actual collection was originally credited. This identifier ultimately tells us to which OpCo these funds originally belongs to.

How to implement virtual accounts in SAP

This part assumes that the basic FI-CO settings for i.e. the company code and such are already in place.

Master Data – General Ledger Accounts

Two sets of GL accounts need to be created: balance sheet accounts for the representation of the intercompany positions and the GL account to represent the cash position with the external bank.

These GL accounts need to be assigned to the appropriate company codes and can now be used to in the bank statement import process.

Transaction code FS00

House bank maintenance bank account maintenance

In order to be able to process bank statements and generate GL postings in your SAP system, we need to maintain the house bank data first. A house bank entry comprises of the following information that needs to be maintained carefully:

1. The house bank identifier: a 5-digit label that clearly identifies the bank branch
2. Bank country: The ISO country code where the bank branch is located.
3. Bank key: The bank key is a separate bank identifier that contains information like SWIFT BIC, local routing code and address related data of your house bank

Transaction code FI12

Secondly, under the house bank entry, the bank accounts can be created.

1. The account identifier: a 5-digit label that clearly identifies the bank account
2. Bank account number and IBAN: This represents the bank account number as assigned to you by the bank.
3. Currency: the currency of the bank account
4. G/L Account: the general ledger account that is going to be used to represent the balance sheet position on this bank account.

Transaction code FI12 in SAP ECC or NWBC in S/4 HANA

The idea here is that we maintain one house bank and bank account in the treasury company code that represents the Master account as held with your house bank. This house bank will have the G/L account assigned to it that represents the house banks external cash position.

In each of the OpCo’s company codes, we maintain one house bank and bank account that represents each of the “virtual” bank accounts as held with your house bank. This house bank will have the G/L account assigned to it that represents the intercompany position with the treasury entity.

Electronic Bank Statement settings

The Electronic Bank Statement (EBS) settings will ensure that, based on the information present on the bank statement, SAP is capable of posting the items into the general or sub ledgers according to the requirements. There are a few steps in the configuration process that are important for this to work:

1. Posting rule construction
   Posting rules construction starts with setting up Account symbols and assigning GL accounts to it. The idea here is to define at least three account symbols to represent the external Cash position (BANK), the IC position with OpCo1 (OPCO1) and thirdly the IC position with OpCo2 (OPCO2). A separate account symbol for customers is not required in SAP.
   For the account symbol for BANK we do not assign a GL account number directly in the settings; instead we will assign a so-called mask by entering the value “+++++++++”. What this does in SAP is for every time the posting rule attempts to post to “BANK”, the GL account as assigned in the house bank account settings is used (FI12 or NWBC setting above).
   For the account symbol OPCO1 and OPCO2 we can assign a dedicated balance sheet GL that represents the IC position with those OpCo’s. These GL accounts have already been created in the first step (FS00).
   Now we have the account symbols prepared, we can start tying together these symbols into posting rules. We need to create 3 posting rules.
   Posting rule 1 is going to debit the BANK symbol and it is going to credit OPCO1 symbol.
   Posting rule 2 is going to debit the BANK symbol and it is going to credit OPCO2 symbol.
   Posting rule 3 is going to debit the BANK symbol and it is going to credit a BLANK symbol. The posting type however is going the be set to value 8 “Clear Credit Subledger Account”. What this setting is going to attempt is that it will try to clear out any open item sitting in the customer sub-ledger using “Algorithms”. More on algorithms a bit later.
   As you can imagine, posting rules 1 and 2 are applicable for the treasury entity. Posting rule 3 is going to be used in the OpCo’s EBS process.
   Transaction code OT83
2. Posting rule assignment
   In the next step we can assign the posting rules to the so-called “Bank Transaction Codes” (or BTC’s like i.e NTRF) that are typically observed in the body of the bank statements to identify the nature of the transactions.
   To understand under which Bank Transaction Code these collections are reported on the statement, you typically need to carefully analyze some sample statement output or check with your banks implementation team for feedback.
   Important to note here is to assign an algorithm to posting rule 3. This algorithm will attempt to search the payment notes of the bank statement for “Reference Numbers” which it can use to trace back the original customer invoice open item. Once SAP has identified the correct outstanding invoice, it can actually clear this one off and identify it as being paid.
   Transaction code OT83
3. Bank account assignment
   In the last part we can then assign the posting rules assignments to the bank accounts. This way we can differentiate different rule assignments for different accounts if that is needed.
   Transaction code OT83
4. Search Strings
   If the posting rule assignment needs more granularity than the level provided in step 2 above here (on BTC level), we can setup search strings. Search strings can be configured to look at the payment notes section of the bank statement and find certain fixed text or patterns of text. Based on such search strings we can then modify the posting behavior by for instance overruling the posting rule assignment as defined in step 2.
   Whether this is required depends on the level of information that is provided by the bank in the bank statements.
   Transaction code OTPM

Importing and processing bank statements

We should now be in good shape to import our first statements. We could download them from our electronic banking platform. We could also be in a situation where we already receive them through some automated H2H interface or even through SWIFT. In any case, the statements need to be imported in SAP. This can be achieved through transaction code FF.5. The most important parameters to understand here are the following:

1. File parameters: Here we define the filename and storage path where our statement is saved. We also need to define what format this file is going to be, i.e. MT940, CAMT.053 or one of the many other supported formats
2. Posting Parameters: Here we can define if the line items on the bank statements are going to be posted to general or sub-ledger.
3. Algorithms: Here we need to set the range of customer invoice reference number (XBLNR) for the EBS Algorithm to search the payment notes for any such occurrence in a focused manner. If we would leave these fields empty, the algorithm will not work properly and will not find any open invoice for automatic clearing.

Once these parameters are maintained in the import variant, the system will start to load the statements and generate the required postings.

Transaction code FF.5

Closing remarks

Other concepts could be where a payment factory is already implemented using i.e. SAP IHC and the customers wants to seek additional benefits by using the virtual account functionality of its bank.

This is the second part of a series on how to set up virtual accounts in SAP. Click here to read the first part. A next part, including more complex concepts, will be published soon.

For questions please contact Ivo Postma.

The importance and benefits of delivering a digital strategy for treasury operations are well understood. For many organizations, however, there is a significant barrier that may prevent them from being able to successfully implement. In this article, we discuss how to overcome that barrier, resulting in an accelerated process to achieve a true smart treasury function at lower overall cost.

As discussed in the recent joint-whitepaper from Zanders and Citi on the future of corporate treasury, both corporations and financial institutions should be focusing their attention on developing a digital treasury strategy. This is being driven by the increasing pace of regulatory change, continuously evolving business models, volatile economic conditions, fast-growing technological developments and the benefits of a strategically focused ‘smart treasury’ – one that utilizes the latest technology to be more integrated, automated and optimized, adding value to the business.

Although the benefits of going digital are well recognized at a company level, they are not at the treasury level – while two-thirds of respondents to a digital preparedness survey indicated their organizations are already engaged and experimenting with digital solutions, only 14% had a digital strategy in treasury.

Strategy void

We know the levels of adoption of a digital treasury strategy vary greatly between organizations – at the top end of the scale, a number of trailblazers have already developed theirs and are actively implementing, firmly on their way to achieving the smart treasury vision. These are normally financial institutions and large multinationals who utilize in-house technology teams containing a pool of resources dedicated to treasury technology and digital transformation. They may also have ample means to utilize external advisors to deliver on their behalf.

A void exists, however, comprised either of corporates that are yet to transform from traditional MS Excel-based methods to an ‘efficient treasury’ function, or those that have already traversed the transformation pathway but are unable to progress further to ‘smart’.

For those yet to progress to an ‘efficient’ function and realize the benefits of centralization, standardization and automation, getting the basics right is the first hurdle to overcome before digital transformation can be considered. To do this, they should look to select and implement a treasury management system (TMS) and, where appropriate, run a fully operational in-house bank and payment factory. However, in this scenario, the size and scale of their business makes it unlikely that in-house teams with the requisite knowledge and skills to do this exist, and the cost of external advisory projects can be prohibitive. Their barrier is one of having the right structure and resources in place.

For those that have already traversed the treasury transformation pathway and are experiencing the benefits of their new ‘efficient treasury’ function, such as improved cash management, reduced transaction costs, standardized processes and increasingly effective risk management, ‘smart treasury’ is the natural next step. But they also face similar significant barriers in developing and implementing their digital treasury strategy to those struggling to progress to ‘efficient’ – the lack of in-house teams and no budget for advisory projects. Once again, the issue of structure and resources is the barrier.

Progressing through efficient to smart

In our discussion of the aforementioned joint-whitepaper, Ron Chakravarti, Citi’s Global Head of Treasury Advisory, commented: “Today, more than ever, the treasury function needs to include people who are technologically savvy. People who are able to comprehend what is changing and how to best deploy technology… Treasury teams recognize that they need to have a digital strategy, but many of them are not fully equipped to define one.”

Looking more closely at the current team structure of corporates that struggle to achieve their efficient or smart aspirations, it is clear they either have difficulty in finding technologically savvy people, or this requirement is simply being overlooked. The ways that organizations try to respond to the resourcing challenge varies. Some choose to divide the role among existing team members, others merge the requirements into an existing role, and in some cases a dedicated treasury systems manager role is created.

However, none of these solutions are optimal, as to effectively deliver digital change the following niche set of ‘digital treasury’ skills are required:

1. Intricate knowledge of the business coupled with detailed working and technical knowledge of their treasury operations and a strong understanding of corporate treasury principles in general.
2. Well versed in the latest technologies on offer, and any future technology in the pipeline, that could be effectively utilized by the organization based on their current and future needs.
3. Practical experience of implementing and integrating a variety of new digital technologies, combined with strong general IT skills and awareness.

Finding the right resource in a niche market is a challenging one and finding a solution to overcome this becomes critical to moving forwards. We propose a way to remove this barrier and deliver a digital treasury strategy in a lean and cost-effective way, while opening the door to a multitude of further opportunities and benefits for your new ‘smart treasury’ function.

An alternative way to manage your treasury systems

The creation of a dedicated treasury systems manager role appears to be the best of the current solutions to the resourcing barrier, but in practice this is a difficult role to fill due to a trade-off between cost and experience. How can organizations find a senior resource not only with strong experience and understanding of treasury, but with excellent knowledge of the latest treasury technology trends, experience implementing them, and a network of other financial technology professionals on call to resolve issues and propose new ways of working?

One solution may be to form a treasury technology partnership with a third-party, who will assume all day-to-day treasury systems management tasks while defining and delivering the digital treasury strategy. This suggestion is not the costly advisory solution previously mentioned that can be prohibitive for corporates struggling to transform. Contrary to expectations, there are savings to be made and other significant benefits to be enjoyed when a treasury technology partnership is compared to employing a dedicated treasury systems manager.

Treasury technology partnership benefits

Cost reduction – your partner will be able to perform the day-to-day treasury systems management service at lower cost than an in-house treasury systems manager. This is because it can be delivered by a pool of dedicated systems admin staff, allowing the benefits from economies of scale to be realized. The quality of service would also improve based on the collective knowledge of the partner, who will also be managing the same systems for other clients.

Accelerated strategy – your partner will be uniquely placed to define and deliver your digital strategy quicker than can be achieved by the treasury team or a stand-alone systems manager. They would be able to achieve this by applying extensive company-specific knowledge gained during the partnership, along with their awareness and experience of the latest technology. They will already have solutions for common treasury issues and will be supported by their in-house team of treasury technology professionals.

Additionally, the accelerated strategy could be delivered at a lower cost than any discrete transformation advisory project, as the technology partner would benefit from already having a strong understanding of your business’s strategic and technical requirements. Time spent on scoping would be vastly reduced.

Ad-hoc – for similar reasons to the accelerated strategy, the treasury technology partner would also be able to deliver ad-hoc projects at a much more reasonable cost than engaging in an advisory project. Tasks such as systems selections, technical changes required by regulatory changes, market reform or adjustments in generally accepted best practice, could be delivered swiftly as the technology partner would already be experienced in delivering these for other customers, while also being aware of your specific technical requirements.

Exponential technology – the use of a treasury technology partner will open up the possibility of always being able to deploy the latest technology. For example, Zanders are already experienced in delivering technological improvements utilizing robotic process automation (RPA), machine learning (ML), artificial intelligence (AI), external and internal APIs, custom applications/middleware, and a multitude of other exponential technologies. The technology partner will already be experienced in the design, implementation and use of these with their other clients, and will bring significant experience in how to deliver these, in conjunction with their understanding of your organization’s strategic and technical requirements.

Summary

Zanders has a wealth of experience in this field with numerous awards and recognitions for our technological solutions, and already performs similar services for several organizations. Entering into a Zanders Treasury Technology Partnership to deliver your first steps to an efficient treasury, perform day-to-day systems admin tasks, and develop and implement the digital treasury strategy, is an ideal solution for those corporates lacking the appropriate resources to move from ‘efficient’ to ‘smart’.

Moreover, it gives an organization access to a pool of treasury professionals at all levels of seniority, to continuously benefit from their collective experience and skills. This expertise is available at a lower cost than the alternative of employing an in-house treasury systems manager or engaging in advisory projects. For cases where the current systems admin tasks are merged into one or several existing roles, it will allow core treasury team members to focus on treasury management by removing the burden of systems management placed upon them, while also improving the quality of the systems management service.

Finally, it opens up the possibility of greater use of a multitude of exponential technologies, all resulting in cost savings, increased operational efficiencies, improved risk management, and a technology landscape that is scalable and rapidly deployable. This will ensure you achieve your smart treasury vision for a function that is well placed to support your business going forward.

In our previous article, the reasons for a new reference rate (SARON) as an alternative to CHF LIBOR were explained and the differences between the two were assessed. One of the challenges in the transition to SARON, relates to the compounding technique that can be used in banking products and other financial instruments. In this article the challenges of compounding techniques will be assessed.

The end of 2021 remains as a key deadline after which the Financial Conduct Authority (FCA) will no longer require banks to submit rates to be used for the calculation of IBOR based reference rates. While regulatory uncertainties and differences between currencies and jurisdictions persist, corporates should have arranged and executed an IBOR transition plan to renegotiate existing contracts, update valuations and financial models, implement new accounting and hedge accounting guidance, and upgrade technology solutions before the end of 2021.

In the Treasury technology space, system providers are already announcing development roadmaps and implementation plans.

In June 2020, SAP announced their development strategy and roadmap for supporting system developments arising from IBOR reform. In addition to developing the additional functionality in S/4HANA, SAP will be down-porting IBOR functionality to ECC EHP8 systems. The first parts of SAP’s release are expected in July 2020 and corporates are encouraged to incorporate SAP’s latest roadmap announcement into their transition plans.

For more information relating to SAP’s roadmap, please see their announcement here or contact Constantine Tyraskis on +44 20 7730 2510.

Are you interested in how these can help your Treasury and how to implement them in SAP? Look no further; in this article we will guide you through the first steps of virtual accounts in SAP.

What are virtual bank accounts?

In its most basic form, a virtual bank account can be described as a bank account number towards which a payment can be initiated, but where ultimately the credit is going to happen on a “real” bank account. It is a service that is mostly associated with a concept called “Collections on behalf”.

“Virtual account” (VA) is a product that is continuously developed by the global cash management banks. Within the product of virtual accounts, there are many variants and sub-services that a bank could support. Some examples:

1. Multitiered virtual accounts: It is possible to create and assign VA’s to i.e. the level of your operating company. On the other hand, to make collections reconciliation more efficient, the bank could offer the possibility to setup a VA that is assigned to one unique trade customer. Any receipt hitting this VA will then be logically and uniquely linkable to that particular trade customer.
2. Virtual sweeping: If line by line crediting into the master account is not desired, a bank could setup a virtual sweep that sweeps the individual credits from the virtual account into the master account in bulk.
3. Separate virtual account bank statement reporting: A separate bank statement could be prepared on the VA level that reports only the debits and credits that hit that VA.
4. Cross border virtual accounts: VA’s could be setup in a different country then where the master account is held.
5. Intercompany position ledger services: Some banks also provide an additional service to record the intercompany positions that arise from the VA movements into the master account movement and reports on it through i.e. an electronic banking platform. Otherwise such IC position mutations need to be managed in the ERP systems of the company on a daily basis.

In the most typical way, a virtual account structure is setup as follows;

1. The real bank account is held by the treasury entity
2. The virtual account is assigned to the operating entity
3. The customers of the operating company will settle trade invoices by making a payment into the virtual account
4. The bank will apply the cash credit from the VA into the master account, for the benefit of the treasury entity
5. The treasury entity and operating company will need to account for this transaction by maintaining an intercompany position.
6. The operating company can clear off its outstanding invoice against the IC position increase.
7. The treasury company can counter the cash increase against the IC position decrease.

Business Rationale behind Virtual Accounts

So why would a treasury typically start implementing virtual accounts in their cash management processes?

Cash centralization: Cash centralization is ultimately the main goal of implementing any liquidity structure and virtual accounts are an excellent in supporting automatic processes to centralize cash to i.e. the treasury entity.

Centralized bank relationship management (and improved negotiating position): By implementing a centrally coordinated liquidity structure, the relationship with the bank can be centrally managed and negotiation position becomes a bit stronger.

Centralized bank connectivity: By implementing a centrally coordinated liquidity structure, bank connectivity can be centralized as well, bringing further reductions in IT costs.

Daylight overdraft facility requirement reduction: Where a zero-balance type of liquidity structure typically brings the funds into the master account after EOD, for any payments made throughout the day being executed over the master account, need to be funded through i.e. a daylight overdraft facility. By employing a virtual account structure on the other hand, the collections will be credited on the master account throughout the day, effectively funding your master account.

Intraday cash balance reporting: in a virtual account setup, as the credits flow in throughout the day on the master account, it becomes feasible to better estimate EOD balances from intraday statement reporting

Reduction of required bank accounts and associated costs: Depending on the bank and country requirements, typically opening a virtual account requires less effort in terms of KYC, contract work and suchlike, as compared to opening up a real account and hanging the account in the liquidity structure through i.e. a zero balancing agreement.

Reduction of vendor confusion: In a more classical Payment factory/Payment on own Behalf (POBO) model where a centralized Treasury entity executes payments on behalf of its operating companies, it is an often heard complaint of the beneficiaries of payments (i.e. trade vendors) that it is unclear that a payment originated from the operating company, causing issues in their reconciliation processes. Executing POBO through a virtual account attempts to remedy this.

This is the first part of a series on how to set up virtual accounts in SAP. Click here to read the second part, on Virtual Accounts Concepts.

This year, the panel of judges again selected the very best solutions that demonstrate exceptional best practice and innovation in the corporate treasury arena and awarded three Zanders client as category winners.

Kongsberg Automotive, Severn Trent and BAT have distinguished themselves with ground-breaking strong solutions to deal with their treasury challenges. We proudly present you these award-winning clients.

Kongsberg Automotive: winner ‘Harnessing the Power of Technology’

In 2019, Kongsberg Automotive Group AG received an Adam Smith Award for the ‘Best FinTech Solution’. This year, the worldwide supplier in the global vehicle industry won another award, in the ‘Harnessing the power of technology’ category. Two years ago, the company started to successfully transform its treasury function. Kongsberg’s treasury overhaul of centralizing and automating using BELLIN’s tm5 treasury management system (TMS) and Zanders intercompany rating and pricing tool, as well as a comprehensive process optimization, appeared to be is a shining example of a best practice approach, according to all parties involved.

Group Treasurer Abraham Geldenhuys: “A global treasury transformation is a journey that comes with significant change and various challenges but lots of excitement and opportunity! We started our journey with an ambitious vision. From Vision to strategic road map, detail ‘as-is’ analysis, understanding and documenting our functional and non-functional requirements, blueprint, implementation plan and a critical change management strategy. We partnered with Zanders and Bellin, and both stepped up to the plate during this intense and high-paced transformation. It has been, and still is, a pleasure to collaborate with these two class outfits with real depth in their ranks. Thank you both!”

Severn Trent: winner ‘Best Risk Management Solution’

Severn Trent Group is a listed UK water company, is exposed to interest and inflation risk originating from its core business, the regulatory framework, the debt portfolio, future debt planning and an inflation linked dividend policy. Given the complexity of the origination of these interest rate and inflation risks and their correlation, a more integrated and more quantitative Financial Risk Management (FRM) approach was required.

Zanders supported Severn Trent to succeed in adopting an integrated, strategic financial risk management framework to manage its primary financial risks. John Jackson, Group Treasurer of Severn Trent Plc, noted on the added value of the project and collaboration: “The purpose-built risk management tool has given us the ability to provide leading edge analysis to support financing decisions in the future. We were conscious that we were breaking new ground with this project, so having a partner we could trust to deliver was paramount. Zanders’ detailed and collaborative approach helped things run smoothly and any issues were quickly analysed and resolved.”

BAT: winner ‘Best Fintech solution’

As a part of a larger IHC/POBO/ROBO/Bank statement implementation project, BAT identified many business partners that had to be updated with new settlement instructions. The multinational therefore wanted to create and assign standard settlement instructions (SSI) in SAP, at business partner level for specific product types in an accurate, timely and auditable manner. As a solution, BAT automated the creation and assignment of SSI’s for its business partners in SAP using custom robotic process automation tools, leveraging on the SAP Gui scripting API.

Diana Macarascu, Head of Treasury Operations: “Usually, corporate treasures are quite conservative and to some extent risk-adverse people. It is not because of fear but because we want to do right by the company, to have it protected to the best of our abilities and we so like a controlled environment. Yet, as the time passes by, with all the new FinTech solutions available, everyone is evolving, it adapts to changes and progress, and in this sense treasury is no exception, as an operation in itself.

Looking back to what we have implemented through our project, it was not an easy feature and due to the time constrains it was adamant that we needed to look for a faster way to have it implemented. Through the partnership with the Zanders team, which was not only supporting us with development and changes in the ERP system itself, but as well on building the RPA, we have managed to deliver our project successfully, on time.

I need to admit that the RPA project in itself not only supported our project but equally meant an eye opener for myself at least, as it taught me an important lesson – the usage of RPA is only limited by our imagination.”

Once again, we want to congratulate these three winners and all other winner of the Adam Smith awards. For more information on the successful projects mentioned in this article, please contact Evaldas Balkys or Mark van Ommen.

Just as growing companies plan to expand their operations internationally, corporate treasurers seek to identify new opportunities and take on challenges. The two seem to go hand in hand, as new challenges and difficulties materialize around every corner. Certainly the most daunting challenge that the global economy has been presented with recently is the COVID-19 outbreak. The recent outbreak represents a global health emergency and the biggest challenge the global economy has faced in over a decade. The fact that very few saw it coming highlights the shortcomings companies, even successful ones, can face.

In previous articles on Treasury optimization in Asia, we focused on the Treasury and Risk Maturity model, the three optimization phases and how to achieve local optimization for corporate treasuries in the foundation stage in Asia before the contagion had occurred. In this article, we continue to explore Asia, but also look at corporate treasuries (in the developing stage) seeking regional optimization and how regional treasury centers (RTC) can offer a solution as the coronavirus impacts the global economy.

According to an article in the Financial Times , based on data made available by the UN trade and development body (Unctad), Asian economies will grow to be larger than the rest of the world economies combined by 2020. As such, corporate treasurers should actively seek to mitigate risks and seize opportunities to improve their treasury operations in Asia where, as the impact of the contagion has underlined, the economies in the region are well connected.

Potential challenges of international operations range from:

• Regulatory requirements.
• Restricted countries.
• Access to liquidity markets.
• Local bank relationships.

If not properly addressed, these challenges can have financial consequences that will negatively impact the business. Therefore, to manage a company’s international operations effectively from a treasury perspective, one should decide which approach is best suited to managing operations within the region. This needs to be balanced with maintaining the agility to proactively manage unexpected global disruptions, such as the many consequences of the current pandemic.

For large multinational corporations (MNCs), which see Asia becoming increasingly important for their global trade, and Asian firms that have expanded well beyond their home market, both should seek to optimize operational efficiency, mitigate risks through concentrating activities and optimize capital through centralized liquidity management by setting up a regional treasury center (RTC). The challenge is to do that and still remain agile.

Considerations when setting up an RTC in Asia

MNCs have traditionally operated Shared Service Centres (SSC) in Asia because markets in the region were perceived as attractive locations for such ventures. As the Asian economy continues to grow, both global MNCs and Asian companies view the region as top of the list for establishing or expanding strategic RTCs.

According to a 2015 report by Reuters , about half the foreign or Chinese companies based in Hong Kong have set up regional centers that carry out treasury operations. In excess 12,000 European and US companies have set up an RTC in Singapore. With a diverse marketplace, regulatory conditions, market infrastructure and practices, business conventions, cultures, languages and currencies that differ across markets, a number of these traditional business issues must still be considered when entertaining the idea of setting up an RTC in Asia.

Added to that, now as the pandemic unfolds, we could see a restructuring of operations to move closer to the end users. This would require more regionalized centers, increasing the need for digitization and treasury technology to support the regional operations. This would increase agility, but companies still need to allow for a globalized approach, supported by a treasury management system (TMS) that provides global visibility on a regional basis.

A few key enablers can be identified for setting up an RTC, ranging from the introduction and implementation of (treasury) technology, policies and cash pooling, to bank account structures supported by banking tools and a TMS. Changing the treasury framework and reporting structures can also be beneficial.

Long-term view

If a treasury department is to support the organization in its quest for continuous future growth, it needs to adopt a corresponding view. This means it cannot treat the launch of an international subsidiary as a singular event. Future expansion and consistent growth are key elements in the creation of a sustainable perspective, with policies and structures that are scalable and can be easily aligned to an RTC’s operations as the company continues to grow. The organization must, therefore, adopt a long-term view.

That said, it is also important to remember that a long-term view is constantly subject to the set of circumstances in which the company finds itself. In other words, it will need to be re-visited and to evolve over time as the organization grows and changes.

Fast-tracking the process of digitizing the treasury organization can be a benefit here, as it will allow the treasurer to not only react but, in some cases, even proactively adjust course to mitigate the impact of disruptions on their organizations.

Operating within Asia requires treasurers to navigate an ever-changing sea of regulatory requirements, driven by unmatched economic growth. A sound long-term view and approach are vital when considering an RTC.

Strategy

With treasury’s role becoming more strategic, treasurers are frequently called on to provide sound international strategy, navigate local policies specific to situation and regulation, manage technological advancements and maintain a long-term view. As the world enters uncharted territory, regulatory changes might become even more prevalent, as governmental responses to the outbreak may require businesses to maintain certain levels of inventory and production quotas, for example.

It is important that the needs and objectives are correctly addressed from treasury’s perspective, and a seat at the executive table is therefore paramount when establishing regional objectives and policies. What is more, this should interlink with the objectives of the corporation’s TMS in its home country. From our experience, we know that companies encounter issues regarding centralization, governance, bank relations and FX policies, among others.

The extent of centralization is highly important for the overall strategy. The level of centralization that suits an organization can be driven by trade-offs when it comes to local banking and regulations, responsibilities and regional autonomy. Ideally, one consolidates the treasury function under a global treasurer and works from an operating model and infrastructure that aligns the diverse corporate activities. This assures that local treasury groups are able to respond quickly in a volatile market and uphold their reporting capabilities.

These corporate activities can be split into:

• Strategy – determine funding, growth and business model strategy.
• Scope – identify and allocate functions and operations.
• Processes – design operational, tactical or strategic processes.

Depending on the level of treasury maturity, this may not always be feasible. Some companies’ treasury departments have become so mature and efficient that they are considering taking it a step further, closing regional RTCs and further centralizing to a single treasury center. Depending on the level of maturity, complexity (compliance, regulations and local banking), tax, funding requirements and achieved levels of efficiency, an RTC may still be a viable option if an organization has not yet reached that level of maturity. But once again, the current pandemic may have an impact here. As the world takes on the coronavirus, chosen strategies may need to be revisited. It may have even become a more viable option to decentralize from a global treasury center to multiple regional treasury centres to reach the required levels of agility.

Governance and controls within a treasury department must be reinforced during global expansion into developing regions. Given the many financial instruments and accounts that the department has access to, measures to counter fraud and mismanagement must be put in place. This requires a thorough examination of current policies and processes for the core responsibilities, followed by comprehensive testing to verify that they apply properly to realistic situations.

Different regions may have alternative requirements for establishing bank relationships, making the opening and structuring of bank accounts a challenging task. The strategic outset of the company in terms of bank relationships should be closely adhered to when managing these relations. The best course of action in such cases is often to work with someone who has experience in these regions and attribute a specific professional and dedicated staff to manage the entire process.

When working with various currency markets within an organization, it is important to consider the different regulatory requirements that may apply per country. It is possible to draw up a single global FX policy for the entire company that can then be modified to meet region-specific needs. This approach will keep priorities aligned with the company’s central view while also leaving flexibility to help control region-specific situations and support further decentralization, if required. Such cases include dealing with cash sweeps, cross-border payment flows, handling inter-company payments and repatriation of profits. Developing a global policy may prove difficult and considering a risk management framework as the basis of the treasury department’s policy may help in providing clarity in the decision-making process.

Technology and infrastructure

Technological considerations become more important as the assumptions held in the past are now challenged by the contagion. Structural changes become inevitable. International expansion increases the need for reliable reporting, sending and receiving messages and risk management. During the expansion phase, it generally becomes apparent that an enterprise resource planning (ERP) system or a TMS offers greater adequacy than the use of spreadsheet reporting. What is required is always dependent on the RTC’s final scope.

Although powerful, spreadsheet reporting often lacks satisfactory terms of control, validation and interconnectivity of information. All these items are essential for international business. Having a unified database, automated processes, integration, risk avoidance and enhanced management reporting make a strong case for considering technological upgrades. An RTC country’s infrastructure should be sufficiently developed to offer state of the art technological instruments to support the treasury center’s operations.

If we should see a counter movement from globalization towards more regionalization, corporate treasury needs to ensure cash visibility. The use of a TMS will become even more important to improve visibility on cash flows, FX exposures, liquidity and funding across the increased number of regional centers. Through a single TMS, the organization has access to aggregated data at a company-wide level.

Location selection

When selecting an RTC location, the aim of which is to centralize activities in a business-friendly environment, the following criteria should be considered; infrastructure and technology, end-user proximity, availability of general banking services, a large labor pool and relevant experts. In addition, it should also be in a location that reduces friction costs, has open FX-conversion supporting any in-country, cross-border funding requirements and offers access to liquidity markets.

Models and structures have been developed in response to the complexity of treasury organizations. They reveal the extent of functions implicated in the real international business environment, where MNCs are required to carry out extensive studies to ensure their treasury department operates efficiently. The level of maturity, taxes, centralization and regulations will dictate the best treasury center model to use.

Our experience shows that the following criteria should be considered and should serve as a checklist, when guiding your organization through this process:

Throughout the region, many new contenders have joined the race to become the next treasury center hotspot. The familiar names Singapore and Hong Kong still reign as treasury center location champions, but they are feeling the heat with competition now coming from countries such as Malaysia, Philippines, Thailand and Vietnam.

So, what next?

As the COVID-19 outbreak challenges many assumptions held in the past, structural changes are inevitable as we see the impact of the virus on the global economy. In the past, Asian companies have demonstrated dynamism, speed and agility as they not only operate in fast-growing and highly dynamic markets but also need to respond to rapidly evolving customer requirements and digital disruptions. They come well equipped to weather the current storm supported by early signs of successful containment of the virus leaving them a step ahead of the rest of the world. This may provide treasurers in the region an opportunity to start fortifying and upgrading their operations to become more agile.

In our experience, determining a single best practice approach or a one size fits all RTC for all corporations is an impossible task. Many of our projects confirm how unique corporations are in their processes and operations. The same goes for selecting a location for and the setting up of a regional treasury center as opposed to an RTC to cover the EU and its Single Euro Payment Area (SEPA), particularly in a region as diverse and intricate as Asia. Setting up an RTC within Asia necessitates a structural approach that is backed by management.

Ultimately, international expansion is a multifaceted undertaking and many of these facets are highly dependent on the individual situation. The key considerations addressed in this article are intended to serve as a guideline on where to start and how to approach setting up an RTC in Asia. If doubts persist, enlisting an experienced party to assist on the complexity of such projects is always an option. Zanders can help corporates in their search for the ideal location using our structured 7-step approach, see below, which is modified to their particular situation. This structured approach is especially helpful in these uncertain times.

In our first article on treasury optimization in Asia, we introduced three different levels of optimization. These levels form the foundation for this series and will be highlighted and examined in greater detail. This will help you understand and identify your organization’s corporate treasury maturity level and the potential steps it should take for further optimization. In this second article, we explore the local optimization opportunities and the challenges that may be encountered when managing treasury in Asia.

In the previous article on treasury optimization, we also identified the foundation, developing, established, enhancing and optimized stages and – in some cases – a transcending stage based on corporate treasuries’ level of expertise and business integration. Using the Treasury and Risk Maturity model can help to plot your organization’s treasury along the model’s treasury maturity line. Understanding at what stage your treasury currently is at and what stage to strive for is an important first step.

Foundational maturity

Managing treasury in Asia poses many challenges and problems to European multinationals (MNCs) expanding outside their home countries. The main challenges of managing treasury in Asia include regulatory differences, the nature of financial markets, (cultural) diversities, distance and time zone, and levels of expertise and alignment.

If group treasury has limited visibility of its Asian treasury operations, and believes it’s ‘locally managed’, our experience shows there usually is much left to optimize as local CFOs and teams typically have KPIs focusing on revenue and EBIT. As with any problem, the first step to solving it is to acknowledge its presence. Once the problem has been recognized, the next step is to determine the cost of either not solving it or of allocating resources to solve it.

The same cost drivers apply in Asia as in mature markets, with the main difference being that for the same amount, balances or number of transactions, the costs are typically significantly higher. This is due to interest rates, FX spreads, fees and more being much higher. Even though it can be difficult to know in greater detail how much the value loss is, just making a rough estimate of the cost of unmanaged cash balance usually gives a good enough indication that action needs to be taken.

Example: Cost of Cash in China

China is typically one of the bigger Asian markets for many European MNCs. Regulations can provide obstacles in repatriating cash. Currently, Chinese regulations are quite supportive of outgoing cross-border loans and cash pooling. There are several different structures that can be put in place. The choice of which structure to use must be analyzed and decided on a case by case basis, as each comes with its own set of pros and cons.

In China, interest paid on a bank account is by regulation maximized at 0.35%. By getting cash out of China, swapping to EUR and reducing group borrowings, significant earnings can be achieved.

As idle cash is typically a longer-term problem, it is fair to use a medium-term average EUR funding cost. Even for a well rated company, this can be 1%. Furthermore, it is assumed that value of reduction of credit risk on banks in China is worth 1%.

Swapping CNY to EUR   3%
Repaying Group debt   1.0%
Reduction of China bank risk   1.0%
Less interest in China   0.35%
Total cost of Cash in China   4.65%

Even with a moderate amount of business in China, it is easy to have cash balances of CNY 100 M. Implementing such a cash pool could quickly add value within a month or two.

Is your cash really trapped?

Many European treasurers realize they have problems with idle cash balances in Asia and initially try to solve it remotely. Some visit Asia, agree on plans with local teams how to solve problems, and believe to have reached consensus. However, often nothing happens, despite trying to follow up. “Trapped cash” is often a term that is used to explain the situation. It is true that some cash balances really are trapped, but in many cases, there is much that can be done. Ultimately you need the team to roll up the sleeves, get into the details, understand how things really work out, be creative, determined and persistent. Using China as an example again, most cases can be solved with a cross border cash pool. Getting this cash pool in place may require effort and energy, but the outcome resulting in freed cash is well worth the effort.

A suggestion for treasurers is to run a calculation similar to the China example for all countries where their companies are active in Asia. This will provide a better understanding of their cost of cash in the region.

Maturing from Foundation to Developing

Once an organization can conclude that there is significant value in optimizing its treasury in Asia, resources and tools must be allocated to support the process of growing the corporate treasury’s maturity level from foundation to developing. When maturing from the Treasury Maturity Model’s stage of foundation to the developing stage, an organization must take into account the following four important factors: resources, dedication, integration and complexity.

Once resources and the required tools have been allocated, optimization can proceed. When initiating the change, it is best to focus on both resources and tools. The optimization of Asian treasuries tends to be a more iterative process than European optimization projects, so this helps prevent the organization becoming mired in detail. A number of steps must be taken to ensure a structured approach to attaining the local optimization level. These steps do not necessarily need to be taken sequentially, and can be taken simultaneously. Their order will depend on the respective countries’ requirements and the iterative approach adopted.

Local Treasury Center

A comparison of Asian and European treasury optimization reveals the process to be ‘same, but different’. It is important to be aware of the differences. Optimizing treasury in Asia generally plays a prominent role in an organization’s global footprint, and we have seen how timely optimization can prevent an organization incurring huge costs through inefficient operations.

There are three possible treasury center models an organization can consider when attaining specified levels of optimization:

1. Global Treasury Center (GTC):
   Treasury undertakes all functions and has the highest level of centralized management. It serves as the only treasury for all global markets by combining all local and regional treasuries into a single location.
2. Regional Treasury Center (RTC):
   Serves mainly regional operations and has central management with dedicated staff
3. Local Treasury Center (LTC):
   Serves mainly local operations and is decentralized with dedicated staff.

Treasuries still in the foundation stage seeking to reach the developing stage can be described as operating in a less complex business environment. They operate autonomously from each other and therefore tend to have limited or no dedicated staff, and limited integration. To optimize this level of treasury to the stage of a developed local corporate treasury – a Local Treasury Center – it is necessary to allocate local dedicated treasury staff to focus solely on their tasks. As operations become more streamlined and efficient, more time becomes available to increase their levels of expertise, integrate with the business and tackle the level of business complexity encountered in the local economies.

Next steps

Identifying and acknowledging the problem, and the drivers that may be behind problems and inefficiencies in the foundation phase is vital. Allocating the right resources and tools is also a crucial second step towards attaining the next level of maturity. As the process tends to be more iterative in Asia, try not to get mired in details.

Treasury optimization is a multi-faceted discipline, and many of these facets depend on the individual situation. The key considerations described above are intended to serve as a guideline on where to start and how to approach Treasury optimization in Asia. If doubts persist, enlisting an experienced party to assist with the complexity of such projects is always an option. Zanders can help corporates both in structuring the right approach and as an implementation partner.

Given that it runs on a S/4 HANA engine, it is mainly profiled in the market as a phased approach to adopt SAP S/4HANA, as well as a method to centralize and harmonize local finance processes.

CFin is an SAP S/4 HANA product that was launched in 2015. In its first stage, it enables data collection from multiple ERPs into one S/4 Hana running Central Finance. This also allows opportunities for data harmonization achieved by data cleansing in the source systems and/or by applying derivation rules (during the transfer of data to S/4) to achieve data attributes that have common usage across the organization. Data transfer to CFin occurs in real-time. The harmonized data in one CFin system enables systematic consolidated reporting, removing manual work around consolidating reports (in different formats) from multiple ERPs. CFin provides the most value to an organization where there are multiple older SAP ERP instances or other non-SAP Finance applications.

CFin exploits the capabilities of HANA – real-time, speed and agility to replicate financial documents into the central system – providing a real-time organization-wide financial view. In other words, CFin allows you to create a real-time common finance reporting structure for an organization.
Perceived use cases in the market for CFin are the following:

• Merger and acquisitions: repeatable onboarding for non-organic growth.
• Instance consolidation: credit, accounts payable and collections can be centralized in one instance.
• System consolidation: migrate and decommission selected existing SAP and non-SAP ERP systems.
• Subsidiary onboarding: smaller entities or subsidiaries can be easily onboarded onto the platform.
• SAP & non-SAP: the solution lets you consolidate and harmonize data on the fly, and update enterprise structures across SAP and non-SAP ERP systems like Oracle, PeopleSoft, or JD Edwards.
• Business transformation while staying on the ECC platform but leveraging on the S/4 Hana capabilities around improved processing.
• Enriched user experience via transformed UI and Fiori apps running on S/4.
• Shared service centre optimization through central process execution in one system.
• Centralized treasury through centralized payments, In-House Banking, Bank account management, Cash positioning and forecasting and Exposure identification and measurement

Deployment as Central reporting (release 1511 and onwards)

In a first phase, SAP CFin allows real-time replication of FI Documents. The replication of data is enabled via the SAP Landscape Transformation (SLT) replication server. More specifically, SLT is a tool that allows you to load and replicate data in real-time or via batch processing data from the SAP and non-Sap source systems into the SAP S/4 HANA database. This piece of software is a key element of the CFin solution. To provide full visibility on the SLT server, SAP has developed an application interface management framework (AIF). AIF is a monitor that allows error handling and full visibility on the SLT interface, as well as mapping functionality. It is important to highlight that CFin allows both the AIF and SLT for the integration of older SAP and non-SAP ERP systems.

Once an initial load of data is performed out of the various source systems into the CFIN application, continuous replication can be setup. If all systems are setup and connected to the CFin box, CFin can function as a central database of all financial data across the organization. If fully implemented, even a single universal journal can be operated

CFin also includes a Master Data Governance (MDG) application. The MDG allows you to manage all your master data centrally with a workflow and distribution functionality to all connected systems. If MDG is fully deployed, no new master data can be created outside of MDG. While basic functionality is included in CFin license, a separate license is required for full functionality.

To minimize any impact on the source system, CFin offers the functionality to enable mapping. General master data mapping can either be configured in the CFin customizing or by using the MDG functionality. Master data related to cost object is mapped using the cost object mapping framework.

Next to the technical complexity, CFin requires intensive business changes in order to be successful. The following business changes need to occur to unleash CFin’s full potential:

• Clean up master data.
• Clean up transactional data and verify consistency.
• Clean up old processes in source systems.
• Data harmonization of GL Accounts to enable one Universal Journal.
• Harmonization of profit and cost centers across legacy systems.
• Unification of Business partner set.
• Move to standard SAP as much as possible.

Mapping, either via the cost mapping framework, customization or the MDG, can alleviate the burden of harmonization on the source systems.

The key benefits of the deployment of CFin as a central reporting solution are:

• Real-time harmonized global financial reporting on various units and source systems.
• Universal journal for external, internal and management accounting.

Deployment of central processing (release 1809 and onwards)

After the first level of deployment, CFin can be an enabler for central processing. To enable central processing, the CFIN engine needs to be used as the single source of truth. This means that any documents created in the source systems are technically cleared and replicated in the CFin system. Even transactions can be directly entered in the CFin system. As a logical consequence, all status management is executed in the CFin application.

Various processes can be run on the CFIN engine, but in this document we are focusing on the following three relevant processes:

• Central payments.
• Cash application.
• Banking hub.

All three activities are a logical extension of centralizing all financial data. For example, instead of connecting to external banks out of each individual source system, all bank connections can be centrally managed out of the CFin system. Bank connectivity over Swift would further make the connectivity landscape bank agnostic, thereby limiting the connectivity to your Swift partner. Centralizing the bank connection entails outgoing traffic such as payments and collections, and incoming traffic such as bank statements.

The central payments functionality does not replace a treasury payment factory, as transactions are still executed from the debtor accounts, while a payment factory enables the on behalf payments from a centrally held set of accounts supported by an in-house bank structure

As all transactions and bank connections move to CFin, it is also therefore logical to centralize all bank statements in CFin. No distribution to ERP systems is required as all documents are technically cleared in the source systems.

Cash application refers to the management of open items, cash in transit and bank reconciliation. As all transactions are centrally executed, cash application is logically also executed centrally.

As is the case with all centralization exercises, special attention needs to be paid to the support of local payments in a central instance. With card payments, for example, the bill of exchange requires specific data elements to enable matching. If the elements are not mapped correctly to the central instance, the local payment method might not be fully supported in the central instance.

At the time of writing, only a handful of companies are live with central processing. Most CFin clients are still in the first phase of implementation.

Additional key benefits of the deployment of CFin as a central process engine include:

• Central open item management and payments.
• Consolidation.
• Central close.

Interaction Central Finance & Treasury

A key question treasurers ask is how treasury and CFin relate towards each other. Firstly, CFin central processing instance focuses on the centralization and standardization of local finance processes. However, as treasury is a well-connected corporate function in any organization, Zanders expects a sizeable impact from CFin on the treasury function. Let’s look at a few key areas:

Payment factory: Payment factory is defined here as a central structure that facilitates payment on behalf of/in name of and receivables on behalf of for all subsidiaries in the company.

CFin and payment factory applications are independent modules and ring fenced in terms of the functionality they deliver. CFin, however, complements the payment factory by simplifying the integration of source ERPs to the system hosting payment factory (the same system as having CFin). In a CFin world, the payables and receivables (for direct debits) are technically cleared in the source ERPs, as these open items are transferred to the CFin system. The payments (and direct debits) can be then executed in CFin system in a standardized way. The complexities of integrating payment requests from ERPs, particularly non-SAP ERPs, in a non-CFin world do not exist. Therefore a payment factory implementation will require less effort if CFin central processing is fully implemented.

Cash positioning: Cash positioning is defined here as establishing and managing your daily cash position by currency or bank account as well as evaluating the short-term cash needs and liquidity position.

A prerequisite for enabling central cash positioning is the setup of centralized payment processing. This allows cash positioning for subsidiary companies to be enabled in the central system. A major benefit compared to today’s process in the non S/4 HANA source systems is the overhauled user experience. Currently, a sizeable set of new Fiori apps in the cash management space are readily available on S/4, such as a Fiori app on automatic reconciliation of intraday bank movements against cash estimates. Similar apps are available on variance analysis and request bank transfers on the fly from cash position reporting. The real-time availability of data also leads to a more accurate evaluation of the short-term liquidity position.

Cash flow forecasting: Cash flow forecasting is defined as estimating the timing and amounts of cash inflows and outflows over a specific period. Cash flow forecasting tackles a longer-term horizon than cash positioning does. Generally speaking, cash flow forecasting works of provided date from treasury stakeholders combined with historic patterns.

CFin currently does not have the functionality to support cash flow forecasting. However, the real-time integration of ERP documents into the central system provides the capability to do more accurate mid-term cash forecasting. An additional benefit realized by the availability of real-time data is the pre-population of subsidiary forecasts, which leads to more accurate cash flow forecasting. It is important to note that SAP does not offer any standard functionality regarding pre-population of data in subsidiary cash flow forecasting. The interaction for treasury is mostly limited to interfacing cash flow and transaction data.

Risk management: Risk management is any functionality linked to the management of financial risk, to allow the company to meet its financial obligations and ensure predictable business performance. In most companies, treasury actively manages liquidity, credit, FX, interest rate and commodity risk.
Limited functionality is present in CFin to support risk management. The main interaction is limited to interfacing exposure data to treasury. Although all relevant accounting information is available in the CFin system, no risk management functionality is available. Therefore, treasury can help to actively manage the foreign currency risks from any balance sheet position or even from any single item. This feature is supported with the functionality Balance Sheet FX Risk within SAP’s Treasury solution.

Looking further than foreign currency balance sheet risk, as the data from multiple ERPs is now available on one system, with bespoke development it could be linked in real-time to the one exposure table from where it can be managed via SAP standard functionality on exposure, risk and hedge management. The availability of data into the exposure functionality provides significant value in overall risk mitigation. It is important to highlight that attention needs to be paid on mapping when documents are replicated to the central system. Mapping can have a substantial impact on risk management operations if not executed diligently.

Looking at the system architecture, a common question is: “Do Treasury & Central Finance operate on one common platform or as two separate boxes?” Unfortunately, the question does not have a clear-cut answer. To balance the merits of both approaches, a more detailed assessment is required.

Conclusion

CFin will become an important counterparty for treasury to cooperate with. Treasury will be a major consumer of CFin data to run operations such as a payment factory, risk management, and cash flow forecasting. Due to the importance of CFin to treasury and its operations, treasury needs a seat at the table of any CFin implementation. Involvement in the design phase is key to ensuring the information needed for treasury is available. Involvement in the mapping and harmonization exercise is particularly crucial.