Page 231 - Accounting Best Practices

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Finance Best Practices
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Another problem is that there are intercompany payments between sub-
sidiaries located in different countries; these transactions should be netted to
arrive at the minimum possible flow of foreign exchange.
To take advantage of these offsetting positions, a company needs to central-
ize its foreign exchange management in one place, so that a coordinated effort to
net out all exchange risks can be created. This is not just a matter of moving all of
the foreign exchange people from outlying locations into one building, but also
(and much more importantly) a matter of channeling the flow of foreign
exchange information from all divisions into a single location. This may call for
customized interfaces from each division’s accounting systems to the central
database, or perhaps an extract of data from a centralized data warehouse (see
Chapter 14). This function can also be outsourced to a bank that specializes in
foreign exchange netting, such as CitiBank or Bank of America, though one
should periodically comparison-shop their foreign exchange rates to ensure that
they are competitive. It can even be manually stored in an electronic spreadsheet,
though this approach requires some attention to the transfer of all intercompany
payables and receivables to the person who is netting out the transactions; this
involves setting a timetable that specifies a monthly settlement date, and then
works backwards from that date to determine the deadlines by which all sub-
sidiaries must report their payables and receivables. Once this information is
gathered, it must then be merged to determine a company’s net foreign exchange
position at any given time. Once this information is available, a company will be
able to achieve significant cost reductions in its hedging activities.
There are two other factors favoring the use of centralized foreign exchange
management. One is that the reduced amount of currency being shifted between
corporate subsidiaries results in a smaller amount of cash float within the organi-
zation (though this can be eliminated entirely with the use of wire transfers instead
of checks). The other possibility is to use the netting of intercompany payables
and receivables to make leading or lagging payments, which are effectively short-
term loans that may assist in dealing with short-term cash flow problems at cer-
tain subsidiaries. However, these changes in the timing of payments can take on
the appearance of intercompany loans, so expert international tax advice should
be obtained before trying such an activity.
Cost: Installation time:

11–19 INSTALL A TREASURY WORKSTATION

The multitude of treasury-based transactions can take up a large part of the finance
staff’s workday and is highly subject to error. These tasks involve management of
a company’s cash position, investment and debt portfolio, and risk analysis. The
normal approach to these tasks is to track, summarize, and analyze them on an
electronic spreadsheet, with manual input derived from all of the company’s banks