NETTING is a much underrated and under-used corporate cash management tool. In a netting system, each participant's inter-company and (optionally) third party payments and receipts are aggregated into a single local-currency amount.

A typical setup is one in which many subsidiary companies in a corporate group are located throughout the world and are invoicing each other in different currencies. Each company has payments to make in different currencies. For each payment they have to inform all the receivers of the specific invoices that are covered by the payment, which also then needs to be reconciled. These procedures are expensive both in terms of administrative costs and in the cost of making the actual payment.

With a netting system, instead of making the payments directly, each company sends the payment information to the Netting Centre. The Netting Centre calculates each subsidiary's net position in its home currency and either makes a payment to the company or instructs the company to send the payment to the Netting Centre.

The obvious benefits of a netting system come from four main sources: reduction in the number of payments; reduction in the float; reduction in the FX requirement; and less spread on the remaining FX. But the non-quantifiable benefits of netting, such as improved payment discipline and reduction in administrative and bookkeeping costs, can be just as important. Properly implemented and run, netting can be the most profitable corporate treasury tool.

Netting is frequently overlooked as treasurers search for more exotic forms of savings.

Also, until recently, netting has typically been offered by large global banks. But banks see little advantage in promoting this type of process since it reduces their revenue from commissions and FX. Today, however, the corporate customer has a choice of buying netting as a service (typically from a bank), or buying it as software (typically from a supplier).

The key difference between these two choices concerns responsibility and control. If you buy a netting service from a bank, the responsibility and the control lies with the bank. If you buy netting as software, it is the corporate treasury that is in control: it functions as an 'in-house' bank and the banks themselves are only needed at the end of the process for settlement and FX.

Although netting is traditionally the domain of the larger corporate, we now see corporates with monthly inter-company flows of less that $10 m using PC-based netting systems and breaking even within one or two netting cycles. All companies with more than $5 m of inter-company trade should consider or have considered netting.

The needs of the corporate customer are increasing in proportion with the ability of technology to produce a solution. Today's netting clients are looking for systems that are modern, stand-alone, PC-based systems.

The ability of the Netting Centre to take a spread in the netting, and thus function as a profit centre rather than a cost centre, is something that more and more customers are demanding.

Customers also want to be able to select the banks that are offering the best FX deals, rather than be tied to a particular bank for all of the FX. A modern netting system must also be able to take invoices directly from the general ledgers of the subsidiaries, net these invoices and then send information on all their invoices settled in the netting back to all the participants. This should be in a data format (Excel, for example) so that the participants can reconcile what has actually been settled with what is in their general ledger.

The resulting cost savings throughout the group from this streamlining in reconciliation are enormous, but are only achievable with a netting system that is capable of handling the inherent volume of invoices in a corporate group (thousands of transactions rather than hundreds).

It is in the area of communication between the participants and the Netting Centre that the corporate intranet comes into its own. This allows participants to access the netting data at the Netting Centre, and to input transactions (on-line) and view their netting statement (on demand). The only software they need is a standard web browser like Internet Explorer or Netscape. There is no need to download an input program. There are no issues of synchronisation between participants and netting centre. The participants can view their netting statement whenever they wish and not just when the Netting Centre sends it.

A combination of these features makes the modern netting system a key tool for any corporate with even modest inter-company flows.