The corporate Treasury function is witnessing turbulent changes due to greater uncertainly in the economic environment and increased choices to manage this uncertainty. Relaxation of Forex regulations by RBI and increased competition from imports requires a more nimble Treasury function. And reducing Interest Rates with more options on loans – Fixed Rate or Floating rate, derivatives like FRAs and IRS throw up opportunity to the Treasury. Treasuries that recognize this opportunity will seek to benefit from this change while slower competitors are sure to lose out.

Today typically a Corporate manages its Treasury on Spreadsheets and uses it to manage their Cash Management, managing various limits with Banks, Project Financing, evaluating Loans, Forex Inflows and Outflows. Spreadsheets serve fine in a slow moving, non-competitive environment but cracks begin to show as the Treasury tries to manage increasing uncertainty in Operations while evaluating opportunities presented by the Markets. For example it is almost impossible to find out if a certain cross currency option premium justifies the returns at a given confidence level. A mistake on a spreadsheet (and we have seen then happen) leads to a confidently taken wrong decision. This article attempts to make a case for upgrading the Treasury to specialized software and what to look for in such a package.

Best business practices

Spreadsheets do not help in thinking about your decisions. Rather, they passively participate in implementing current business practices and providing MIS to the Finance Head and Top management.

An effective way to improve treasury efficiency is to look at tools that provide best business practices. Highly recommended business practices include – setting benchmark rates, providing stop loss, take profit limits, monitoring profitability at least on a daily basis, net forex positions on matching maturities. Continuous improvement can be achieved by resetting stop loss and taking profit positions in line with market movements (called trailing stop losses). Software that alerts the finance team to take decisions is essential.

Spreadsheets are not designed to handle these requirements.

Look for packages that provide decision support, apart from generating reports. Ensure that software brings in at least one improvement to current treasury practices.

Data Availability

Most Finance departments do not get relevant data from the rest of the firm in time. So it could be weeks or even month before the Treasury gets to know that a PO has been placed with a foreign party. Markets move in minutes and data denied or delayed is opportunity lost. Treasuries are frequently handicapped by lack of accurate current financial position of the company. Typical linkages include data from Accounts, Exports and Imports departments. Spreadsheets are often update using printed reports generated from other departments. Since these departments do not have a clear stake on Financial operations, delays become an accepted part of the system.

Implementing Software provide opportunity to automate data transfers and cut down delays. Cut the delays by linking treasury software with other software in the company. Unlike Spreadsheets, treasury software can refresh latest data automatically.

Historical Analysis

While Spreadsheets are excellent tools for computation and analysis, they are very poor in archiving historical data. Quantitative performance and risk-metrics (like VaR) require historical data to be archived. If a company wants to analyse financial decisions taken over the last one year, they require a) Historical rates (Interest rates and Forex rates) and b) Position as on every date for an entire year. This is a lot of data, which can only be managed by well-designed database Software application and not wish Spreadsheets.

Audit Trail & Security

Your company auditors will never go by Spreadsheet reports. Spreadsheets don’t have the capability to track changes over a period of time. Nor can Spreadsheets to trusted to provide robust security required for financial data.

Most companies get around these problems by generating hard copy printouts and filing them. These files are audited. Apart from their bulk and cumbersome maintenance, auditors today prefer to check computerised reports. A software package can pass muster.

Software applications provide good Audit trail & Security features.

Person Dependence

Financial decision-making requires a high degree of judgement. Calling markets at the right time, negotiating correct rates are skills that have to be developed by finance managers.

Do not burden your company with added person dependence through proprietary spreadsheets. Spreadsheets have often a tendency of being understood only by the creator of the Spreadsheet. Why should calculations and reports be proprietary? We have come across companies which skip treasury MIS for days when the officer-in-charge is on vacation!!

Software applications are well documented. They come with canned training programs. They have menus that can be understood by others.

Unlock your back office from the grip of person dependence by using well-documented easy-to-use software.

Tested Computation

Users make a hue-and-cry on finding every bug in a software applications. Software gets corrected and re-implemented, during which time the impact of this bug is analysed and corrective action initiated.

Compare this with damage caused by untested Spreadsheets. Users often fail to realize the implication of Spreadsheets they develop. There is no 3^rd party independently testing whether these sheets work correctly. In course of time, they get used unquestioningly with nobody cross-checking the validity of calculations. We’ve never come across a company validating software embedded in Spreadsheets.

To illustrate, we have encountered a corporate that was showing their procedures supported by well-documented spreadsheets. Taking a deeper look at their sheets we were surprised to find them using a wrong function for IRR calculation (Tip: there are 2 Excel IRR functions IRR() and XIRR(). XIRR() handles non-periodic cash flows). Over the last couple of years the top management has been looking at reports with this wrong computation!! We can’t imagine what decisions were made suing these numbers.

This is not to claim that Software Applications are perfect. But the sheer fact that Users of the software are separated from the creators of the software ensures that output of software is audited and tested.

Use well-tested software (with good installed base) and avoid common computational errors.

VERDICT

There are clear advantages in going for Corporate Treasury Software. But no software by itself can improve treasury performance. Software is a good change agent to move to better practices. It is an enabler of a framework on which a company can make and evaluate their decisions.

Any initiative in this direction can only succeed if Corporate Finance and top management believes in contribution to company profitability. Companies need not take on additional risks to increase their return. There is ample scope for improvement, increasing efficiency and profitability through best practices. This perspective clears sufficient ground to rethink on Treasury software.

(Krishnaraj of Bangalore-based diffsoft, which develops and markets Corporate Treasury management solutions, wrote the article. For more information contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it )

Issue BG10 Jan02

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