How in-house bank accounts are run, step by step

Treasury runs an in-house bank as a ledger of accounts it holds for each subsidiary. Accounts are opened first, then loans, payments, collections and netting flow through them. Interest and fees are charged at period end, results are posted to every ledger, and statements go back to the subsidiaries.

The steps in order

1. Open and maintain an in-house account for each subsidiary. Treasury operations sets up the account, its currency and its link to the subsidiary's intercompany ledger codes. The local controller confirms the legal entity details and who may instruct on the account. Group accounting checks that the ledger mapping matches the chart of accounts, so later postings land where consolidation expects them.

1. Agree and book intercompany borrowing. A subsidiary that needs funding asks treasury. The treasurer or a funding manager approves the amount, the rate basis and the repayment terms, usually under a signed loan agreement. Tax reviews the pricing for transfer pricing purposes before anything is booked. The treasury back office then records the loan against the in-house account, and drawdowns or repayments move the balance.

1. Execute outgoing payments for subsidiaries. Subsidiaries approve their supplier and payroll runs in their own systems and pass the files to the central payments team. That team screens them, releases them from the group's external bank accounts and debits each subsidiary's in-house account for what was paid. Rejections from the external bank come back to this team first.

1. Collect incoming payments centrally. Customer receipts arrive in accounts the group controls. A cash application team, sometimes in a shared service centre, works out which subsidiary each receipt belongs to and matches it to open invoices where it can. Unidentified receipts sit in a suspense position until someone researches them. Returned items, such as bounced cheques or reversed direct debits, are reversed against the subsidiary that was credited.

1. Settle internal payments and run netting. When one subsidiary owes another, the debt is settled by a book transfer between their in-house accounts with no external cash moving. Where the group runs a netting cycle, each participant submits its intercompany payables, the netting centre in treasury calculates net positions per currency, and subsidiaries confirm their figures before settlement. Disputed invoices are pulled out of the cycle and returned to the two parties to resolve.

1. Calculate interest and fees. At period end the back office runs interest on each balance using the rates set by treasury policy. Fees for payment handling or account services are added according to the published schedule. Tax and the treasurer sign off any change to rates or fees before it is applied.

1. Post the results to the ledgers. The in-house bank's own ledger is updated, and matching entries go into each subsidiary's books. Some postings flow automatically from the treasury system. Others need manual journals, which a preparer raises and a second person approves.

1. Issue account statements. Treasury sends each subsidiary a statement showing opening balance, every movement, interest, fees and closing balance. Local finance teams reconcile it to their own intercompany balance and raise queries with treasury operations.

1. Close the period. Group accounting confirms that intercompany balances agree on both sides and eliminates them on consolidation. Breaks that remain are logged, assigned to an owner and carried into the next close.

Where it tends to go wrong

Handoffs cause most of the trouble. A payment file released late by a subsidiary misses the external bank's cut-off, and the in-house debit lands in a different period from the bank movement. Unidentified receipts linger because nobody owns the suspense account. Manual journals in step 7 drift from the treasury system when someone corrects one side and forgets the other.

Interest is another weak point. Rates set in policy are sometimes overridden for one entity by an email that never reaches the calculation.

Questions to ask the people who run it

What staff actually do often differs from the procedure manual. These questions tend to surface the gap:

• When a subsidiary needs cash urgently, what happens before the loan agreement is signed?
• Which payments bypass the central team, and who knows about them?
• How does cash application decide which entity owns a receipt with no reference?
• Who clears the suspense account, and how old is the oldest item in it?
• During netting, what is done with an invoice one side recognises and the other does not?
• Are any interest rates or fee waivers applied outside the system? Where are they recorded?
• Which postings are typed by hand, and who checks them?
• When a subsidiary queries its statement, who answers, and does the answer change the ledger?
• At close, which intercompany breaks are accepted as normal and simply rolled forward?
• If the treasury system went down, what would the team do instead?

Before changing anything

Walk one real transaction of each type through every step with the person who handles it. Watch the screens, files and spreadsheets they use, including the ones not mentioned in any procedure. Map who approves what, because approval rights often sit with individuals and not with roles. Then check how a change would land in the subsidiaries' books, since every movement in the in-house bank has a mirror entry somewhere else that a local team will have to reconcile.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.