Global Cash Management: the Challenges of Multicurrency Operations
By Michaela Klosterman, Treasury Manager, Adient plc
One of the S&P 500 companies proudly presented its new cash pooling structure at the treasurer’s conference in Miami in 2012. At the end of the presentation, the speaker added: “We have a USD cash pool, but we still don’t know how to deal with multiple currencies we use across the globe.” My boss and I looked at each other and said simultaneously: “Should we tell them about BMG?” Only then we realised how sophisticated our cash management structure at Johnson Controls Inc. was.
Bank accounts as building blocks
Do you remember when you were a child and creatively built structures from Lego, with multilevels and different colours? Well, besides the fancy words that people outside the finance world don’t understand, global cash management isn’t very different.
So let’s cover the basic building blocks first. Effective cash management consists of liquidity management and efficient use of cash. Liquidity management means that the company maintains sufficient funds, at the right time, place and in the right currency to be able to pay its obligations. Efficient use of cash means minimising the cost of short-term debt and maximising the return on short-term investments.
Cash pooling is a cash management technique. It allows companies to combine their credit and debit positions in various accounts into one account. This is done automatically by a bank.
Local and global cash management
An organisation that has business units in one country only or in a few countries in the same region and using the same currency, can use a fairly simple structure for cash optimisation.
Most corporate banks offer today a zero balance cash pooling. In a ZBA structure the operational bank accounts of business units sweep their balances at the end of the day to the master account, or in the case of a negative balance they receive funds from the top master account. This can be done within one country or even across borders within the same bank. Some banks also offer the option to move the funds on the master account to a third-party bank automatically, through the use of SWIFT messages.
The master account is generally connected to an overdraft line, to facilitate the liquidity function of cash management. This structure together with cash forecasting, is often sufficient for smaller local companies, operating in one currency.
But what about a global company like Johnson Controls Inc, registered on the New York Stock Exchange, operating in several time zones, five continents and using 30 plus currencies?
From Johnson Controls to Adient
Johnson Controls Inc., a corporation with 37bn USD net annual income, recently completed a spin-off of its automotive division. Adient plc came into existence in October 2016, with a 17bn USD turnover, and is the largest global player in automotive seating.
Both Johnson Controls Inc. and Adient plchave a single currency cash pool in almost every country where they are present and where cash pooling is allowed under local regulations. The cash of Adient plc is managed from three treasury centres: Asia – Hong Kong, Europe – Belgium and the Americas region out of Mexico.
The company has implemented a global e-banking platform TRAX, a SWIFT-based solution provided by our partner FIS (formerly SunGard). We receive daily statements to TRAX platform, from all the banks globally, which helps the regional cash managers quickly asses the cash position in each country. Based on the cash position on the master accounts, a decision is made as to whether the country needs funding or has excess cash that can serve the group’s needs.