The Hindu Business Line : <I>Keval paise ka mamla hai </I>

THE Corporate Treasury function is witnessing turbulent changes due to greater uncertainty in the economic environment and increased choices to manage this uncertainty.

The relaxation of forex regulations by the RBI and increased competition from imports require a more nimble Treasury function. Interest rates that are coming down, with more options on loans - fixed rate or floating rate — and derivatives like FRAs and IRS throw up opportunity to the Treasury. Treasuries that recognise 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 for 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 instance, it is almost impossible to find out if a certain cross-currency option premia justifies the returns at a given confidence level. A mistake on a spreadsheet (and we have seen it happen) leads to a confidently-taken wrong decision. This article attempts to make a case for upgrading the Treasury to specialised 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, taking profit limits, monitoring profitability at least on a daily basis and nett forex positions on matching maturities. Continuous improvement can be achieved by resetting stop loss and take 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 a 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 information on the current financial position of the company. Typical linkages include data from the Accounts, Exports and Imports departments. Spreadsheets are often updated using printed reports generated from other departments. Since these departments do not have a clear stake on financial operations, delays become part of the system.

Implementing software provides 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 an excellent tool for computation and analysis, they are very poor in archiving historical data. Quantitative performance and risk-metrics (such as VaR) require historical data to be archived. If a company wants to analyse financial decisions taken over the last one year, it requires 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 applications and not with Spreadsheets. Ensure that you have easy access to both internal and external company data for at least one year.

Audit trail and 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 be trusted to provide the 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. Here a software package can pass muster. Software applications provide good audit trail and security features.

Person dependence

Financial decision-making requires a high degree of judgement. Calling markets at the right time and 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 application. 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 realise the implication of Spreadsheets they develop. There is no third 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, here's a case we encountered with a corporate that was showing its procedures to be 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 cashflows while IRR() can handle only 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 using 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 the output of the software is audited and tested.

Use well-tested software (with a 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 its decisions.

Any initiative in this direction can only succeed if Corporate Finance and top management believe in contribution to company profitability. Companies need not take on additional risks to increase their return. There is ample scope to increase efficiency and profitability through best practices. So, isn't it time for a rethink on treasury software?

The author is Director, Diffsoft, and can be reached at kimi@diffsoft.com

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