The Treasury Management System: The Operational Backbone

A treasury management system is the single record holding every bank account, balance, payment and exposure, reconciled against the bank statements without a person retyping anything. At Nirjhar Industries Limited, invented, it covers 26 accounts at 4 banks in 3 currencies. Its value is not the effort it saves. Its value is that a complete cash position exists early enough in the day to act on.

Almost every explanation of this subject leads with the hours it gives back. The hours saved are the number the project was approved on, and they are the wrong number to remember. The other number is harder to put in a business case and is the only reason the record is worth building: a figure that arrives after the decision it was meant to inform has already been taken is worth exactly what no figure is worth.

What is a treasury management system, and what does it actually hold?

The word system pulls attention towards software, and the software is not the subject. A treasury management systemThe single record holding every account, balance, payment, borrowing and exposure a treasury is responsible for. is a record. The record is one place where every bank account the group has, every balance sitting in one, every payment leaving one, every borrowing, every deposit placed and every currency exposure taken is written down once, with one identifier each, and kept current against what the banks themselves say. The distinguishing feature is not that the numbers are in a computer, it is that there is exactly one of each object and everybody is looking at the same one.

The shape of that record is familiar from ordinary life. A household with one salary, three bank accounts, a card and an insurance instalment does not need software to know what it has, but it does need one place where all five are written down. The moment the total lives in one person's head and the card statement lives in a drawer, the household has a record with a hole in it. The household will discover the hole in the same way every household does, by paying something twice or missing something once. A group is that household with more accounts and less forgiveness.

Tile OB7 is worth reading for what it does not carry. The record holds the treasury limits TL1 to TL5 and what is running against each of them, but it does not set any of them. Choosing a cap on how much may sit with one bank, or how long an investment may run, is a decision somebody with authority takes and writes into the policy; the record is only where the group finds out whether it is inside that cap today. A system measures against limits and never chooses them, and treating the record as the source of the limit is how a treasury ends up with a cap nobody remembers agreeing to.

What was being done before, and by whom?

Before the record existed, the same job was done and it was done by people. Each bank sent a statement for each account. Somebody opened it, read it, and typed the figures into a spreadsheet. Somebody then went line by line, matching what the spreadsheet said against what the group ledger said, and where two lines did not agree, somebody sent an email and waited. At the end of all that, the accounts were added into one total. Every one of those steps was a place where a correct figure could become an incorrect one, and none of them was anybody being careless.

The word for the middle of that job is reconciliationMatching what the record says against what the bank statement says, item by item, until the difference is explained.. Being exact about the word matters, and reconciliation is not checking. Checking asks whether a figure looks right. Reconciliation asks whether two independently produced lists agree item by item, and where they do not, it insists on a reason for each difference rather than a plausible story about the total. Reconciliation takes so long by hand for one reason: the effort is roughly proportional to the number of lines, and the number of lines does not care how experienced the person reading them is.

Automatic reconciliation replaces steps two, three and most of four, and it replaces them with a rule. The statement comes in as data rather than as a document, the record matches it against what the record already expected, and the matched items never pass through anybody. Step five survives untouched. A payment that genuinely never arrived is still a genuine difference, and no record can settle it without somebody picking up the telephone. The related idea on the outgoing side is straight through processingA payment that reaches the bank from the record without anybody retyping it., where an approved payment leaves the record and reaches the bank without a second person retyping the account number. The gain from removing retyping is not mainly speed, it is that a class of error stops being possible rather than becoming less frequent.

How much effort does it save, and is that the point?

Now the number the project was approved on, stated exactly. Before the record existed, 3 people spent 11 working days a month on bank statement reconciliation at this group. The old total is 3 times 11, being 33 person-daysOne person working for one day, which is the unit most system business cases are written in and the wrong unit for this one. a month. After it, 2 people spend 3 working days, being 6 person-days. The saving is 33 less 6 = 27 person-days a month, and 27 over 33 = 81.8 per cent of the effort. Every one of those figures belongs to Nirjhar Industries Limited, and 81.8 per cent is not a saving any other business should expect to repeat.

Hold that figure and then notice what it does not contain. The 27 person-days do not say that a single decision was taken differently. The saving says only that a job which used to consume most of three people now consumes a small part of two. Cheaper information is worth having, and it is a saving on the cost of producing information rather than a gain in the use the information is put to. A business case written entirely in person-days measures the cost of the report and never once measures the value of the report.

What is the real value, if it is not the days saved?

The uncomfortable idea underneath all of it is worth stating before the figures. Information has a shelf lifeHow long a piece of information stays useful, after which a correct number is worth nothing.. A number is not valuable because it is correct; it is valuable because it is correct and it exists while somebody can still do something about it. Past that moment its accuracy is a matter of record keeping and nothing else. Correctness and usefulness are two separate properties, and only one of them survives a delay.

Now apply that to this group. Before the record existed, the consolidated group cash positionThe complete picture of where the money is right now, which stops being one the moment an account is missing. was known on the third working day of the following month. After it, the same figure is known by 10 am. The figure is the same figure. The treasury uses a cash position to decide what to sweep, what to place, what to borrow and what to leave alone. All of that happens during a working day and is finished by the time the banks close. A position that lands on the third working day of the next month cannot touch any of them. A late position can only be compared against those decisions afterwards.

Why does a cash position have to be complete before it is a position at all?

Readers argue with this next part, and the argument is worth having. Suppose 25 of the 26 accounts are in the report and one is not. The instinct is to say the report is 96 per cent right and to carry on. The instinct is wrong, and it is wrong in a specific way rather than a fussy one. A total missing a known amount is a smaller total. Because nobody can say by how much it is wrong, a total missing an unknown amount is not a total at all. If the contents of the twenty sixth account were known it would not need to be in the report, and because they are not, every figure built on that report carries a hole nobody can size.

The property at work is called completenessThe property that every account in scope is included, which behaves as a switch rather than as a percentage., and it behaves as a switch. Completeness is on when every account in scope is included and off otherwise, and there is nothing in between for a reader to work with. Accuracy, by contrast, really is a percentage: a figure can be a little wrong or a lot wrong and the error can be bounded. Completeness has no such gradation. The household version is exact. The salary account and the savings account are known to the rupee, and how much is on the card has been forgotten. The position is not known 96 per cent. The position is not known.

Do the two benefits of one project arrive the same way?

The two benefits do not arrive the same way, and the difference matters to anybody running such a project. The effort saving accumulates account by account. One account loaded onto the record means a little less reconciliation done by hand; another means a little less again. Written as a straight line between the two measured endpoints of this group, and labelled as such: with n of the 26 accounts on the record, monthly effort is 33 less 27 times n over 26. The line gives 33.00 person-days at none, 19.50 at 13, 12.23 at 20, 7.04 at 25 and 6.00 at all 26. The straight line is drawn, not measured. Effort in reality does not fall evenly account by account, and the group measured only the two ends.

The complete 10 am position does not behave like that at all. The position is worth nothing at 25 accounts and worth everything at 26, and there is no reading in between. So at 25 of 26 accounts this project has delivered 25 over 26 = 96.2 per cent of the effort saving and none whatever of the position. One benefit is a slope and the other is a step, and a steering meeting reading a single percentage complete figure cannot tell those two states apart. There is one crossing worth marking on the slope: the effort line passes 10 person-days a month at 22.15 accounts, which is between the twenty second and the twenty third.

What does the 10 am position make possible downstream?

The position is not the end of anything. The position is the first number of the next thing, the rolling thirteen week cash forecast this treasury rebuilds every week. Measured against actuals over the last thirteen weeks, the forecast has a mean absolute error at week 1 of 1.4 per cent. On the group Rs 540 crore of cash that is about Rs 7.56 crore. The week 1 accuracy is not the achievement of a clever forecasting method. The accuracy is mostly the achievement of knowing the starting point. A forecast whose opening balance is itself an estimate is estimating the first number as well as all the later ones, and no method recovers from that.

Counting the unknowns shows why. A short horizon forecast is the opening position plus the receipts and payments already known about, and at week 1 almost all of those are already committed. If the opening position is solid, week 1 has very little left to be wrong about. If the opening position is a month old, week 1 has one large unknown sitting in front of every small one. How the forecast is built, how far out it stays useful and what it is used for at longer horizons are separate subjects with their own treatment; what belongs here is only that the starting position has to exist before any of it can begin.

What does it look like when a project delivers its benefit and changes nothing?

What does a treasury management system not fix?

Three things, and each of them is claimed for such projects often enough to be worth refusing in writing. First, it does not make the cash bigger. Rs 540 crore across 26 accounts is Rs 540 crore whether it is visible at 10 am or on the third working day; visibility rearranges what can be done with it and adds not one rupee to it. Second, it does not decide anything. The record shows a balance sitting idle and a facility being paid for at the same time, and a person still has to choose to do something about that. Third, it cannot make a report matter that nobody was ever going to act on.

The borrowing cost question is the sharpest version of this, so take it head on. Does the record reduce what the group pays to borrow? Not by itself. The record makes visible that a credit balance in one account and an overdrawn balance in another are being carried at the same time, and that visibility is genuinely useful. But the saving arrives only when somebody moves the money or repays the facility, and the mechanics of that, along with what any jurisdiction permits when the accounts sit in different countries, belong to a separate subject. Attributing a saving to the record rather than to the decision it enabled is how one benefit gets counted twice, once by the project and once by the treasury.

How can a treasury system be judged worth having?

There is one test, it takes a sentence, and it works before the project starts as well as after it finishes. The test asks for a decision that is now taken and could not have been taken before, and then for who takes it and at what hour of the day. If such a decision can be named, the record has earned its place and the effort saving is a bonus rather than the case for it. If none can be named, then whatever else has happened, the project has bought a cheaper version of something nobody was using.

Run the test on this group and it passes, and that is what makes this group a fair example rather than a cautionary one. The decision is the morning sweep and placement call. The person is Girish Talwalkar, the group treasurer. The hour is shortly after 10 am, when the complete position across all 26 accounts exists and the banks are open. Before the record, that same call was made on an estimate and corrected later, or not made at all. The test is answerable in one sentence when the benefit is real, and it becomes vague and general exactly when it is not.

Who actually reads this, and what do they do with the answer?

Four readers, and only one of them works inside the treasury. Start there. Girish Talwalkar reads the position at 10 am for one purpose: deciding what to do with the day. He is not reading it to know what happened. Anything the position tells him about last month is history he cannot act on, and the whole reason the arrival time was moved is that he needs the figure while the choice is still open.

The second reader is a lender. Manjari Sondhi, head of wholesale banking at Vindhya Commercial Bank Limited, invented, looks at this same group from the other side of the table as counterparty C1, and one of the questions she can ask on a working capital facility is when the borrower knows its own cash position. The question is plain and the answer is revealing. A borrower that can only answer for last month is a borrower whose drawdown requests are estimates and whose repayment timing is a hope. The answer is not a credit assessment on its own; it is one input among many, and it costs nothing to ask.

The third reader is one balance sheet up. Devendra Achar, head of treasury at the same bank, faces the identical question about the bank's own accounts. At a bank the stakes are structural rather than operational. A treasury that does not know its position cannot manage its funding. The fourth reader is the household described at the start. One person, three accounts and a card, deciding on the second of the month whether the rent can go out today or has to wait for the salary. Knowing the total on the third of next month is not an answer to that question. The total is a report about a question that has already been answered by whatever happened.