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Leveraging Trends in Europe to Achieve Business Transformation We talk to Citi Treasury & Trade Solutions about the cash management trends and opportunities that are emerging both in Europe and more widely.

Leveraging Trends in Europe to Achieve Business Transformation

An Interview with Treasury and Trade Solutions, Citi Transaction Services

In this month’s Executive Interview, we are delighted to talk to Citi's Treasury and Trade Solutions, discussing the cash management trends and opportunities that are emerging both in Europe and more widely, and suggesting how corporate treasurers can best take advantage of these to enhance their financial and operational efficiency and control costs.

What would you identify as the most important cash management trends in Europe today?

We have seen a focus on enhancing operational efficiency and managing counterparty risk for some time now, and these continue to be important to treasurers. However, the opportunities that exist to achieve these objectives are changing. For example, a long-held ambition amongst treasurers has been to simplify, standardise and automate bank communications, such as cash and trade flows and bank account administration. With initiatives such as eBAM (electronic bank account management) and standardisation through XML-based ISO 20022 gaining momentum, corporates are in a better position than ever before to enhance efficiency and standardisation, and reduce costs.

What we are also seeing is that companies are looking to gain more efficiencies from their existing shared service centre (SSC) setups. While historically the focus of the SSCs has been to centralise and process vendor payments, there is now a realisation that this can be further expanded to cover other payment types such as payroll and tax. Furthermore, collections are also beginning to be centralised and standardised under SSC setups, and more attention is now being paid to the management of the cash application process, using additional automation tools.

Another outcome of the global financial crisis has been a greater recognition of the importance of managing liquidity and working capital.

Counterparty risk has been a top concern since the financial crisis. As a first step towards managing and diversifying counterparty risk, treasurers need to gain complete visibility of exposures and cash positions. This is more difficult to achieve in an organisation that has a decentralised treasury function without central oversight. Consequently, treasurers are focusing on gaining visibility of cash positions and exposures, supported by tools such as Citi’s TreasuryVision. In many cases, this has prompted the decision to centralise treasury to a greater degree, with group treasury or regional treasury taking responsibility for financing, investment and cash management, with an in-house bank to support the needs of subsidiaries. Not only have these initiatives led to greater visibility and control over counterparty risk, but they have also allowed treasurers to take a more strategic approach to cash and liquidity management, and refine their risk management policy, such as leveraging natural hedges across the business.

Another outcome of the global financial crisis has been a greater recognition of the importance of managing liquidity and working capital. Traditionally, the business functions that contribute to working capital, such as accounts payable and accounts receivable, have been managed independently of treasury, with little co-ordination. Today, however, with optimising working capital now a priority, treasurers have a stronger mandate to influence the elements that comprise the financial supply chain. This development has potential to smooth out cash flow profiles and avoid cash flow ‘spikes’ and therefore permit lower levels of working capital. Furthermore, by taking control of the financial supply chain, treasurers can use the company’s financial assets as collateral for financing and increase financial supply chain resilience using alternative financing techniques such as supply chain financing, thereby further diversifying counterparty risk and access to liquidity.

There are also a number of regulatory and market developments of which treasurers should be taking advantage. One of these is the gradual process of liberalisation and internationalisation of RMB. No longer should treasurers’ strategy for managing liquidity and risk, financing and investment in China be divorced from their wider cash and treasury management framework now that the opportunities for cross-border trade settlement, offshore financing and investment and inclusion of RMB in global liquidity structures exist.

In addition, SEPA (Single Euro Payments Area) has transitioned from being a regulatory initiative to an opportunity for multinational corporations to rationalise and simplify their cash management structures in Europe, standardise and automate their euro payments and collections, and reduce cross-border payment costs.

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