Cash & Liquidity Management

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Achieving Operational and Financial Efficiency in Treasury From a centralised funding and currency management centre with relatively little profile within the group, Sandvik's treasury has embarked on a journey to take centralisation to another level, becoming a highly efficient department with automated processes that acts as a trusted business partner for the group.

Achieving Operational and Financial Efficiency in Treasury

by Anneli Walltott, Global Head of Cash Flow Management, Sandvik

Global industrial group Sandvik has undergone significant change in its treasury function over recent years, with major improvements to its financial and operational efficiency. From a centralised funding and currency management centre with relatively little profile within the group, treasury has embarked on a journey to take centralisation to another level, becoming a highly efficient department with automated processes that acts as a trusted business partner for the group. This article outlines some of the recent initiatives that treasury has undertaken to achieve this.

Treasury organisation

In 2011, with new senior management in place, Sandvik embarked on a strategic transformation process to centralise, streamline and optimise group functions, in order to serve the needs of the group as effectively as possible. Treasury had already achieved a certain degree of centralisation, but this renewed management focus acted as a driver for further improvements.

Our treasury department comprises 24 treasury professionals at our headquarters in Stockholm. This year, three regional treasurers with responsibility for the Americas, Asia Pacific and EMEA have been engaged. Regional treasurers provide an interface between group companies and treasury to align local and group objectives, and manage bank relationships in the respective region. In addition to the core treasury team, one member of the finance team in each country takes responsibility for ensuring that cash and treasury management activities comply with local regulations.

Addressing centralisation challenges

Centralisation is a major challenge for a company such as Sandvik that has operations in more than 130 countries. Rationalising banking relationships is a valuable means of centralising cash, but is often easier in theory than in practice. Currently we have around 120 banks, of which 16 are our core banks. We work with our core banks for cash management wherever possible, but not all of these banks provide extensive cash management services, or in the regions that we require, so we often need to work with an alternative bank. There may also be regulatory obligations to work with specific local banks in certain regions.

An essential first step, however, has been to centralise liquidity so that treasury has visibility and control over group cash. During the mid-2000s, we started to centralise liquidity in core European countries, using cash pools, which we subsequently extended to 22 countries. The USA is our biggest single market, so managing USD is an essential requirement. We have a very positive relationship with Nordea which covers our USD activities in USA, Canada and Mexico, and we have recently gone live with USD cash pools in US and Sweden and CAD cash pool in Canada following a successful implementation. Consequently, we now have control over a large part of group liquidity, but we continue to increase the number of countries that are included in our liquidity management framework.

Developing internal relationships

By proving the benefits of centralisation, whilst also ensuring that local needs continue to be managed effectively, we have been able to expand treasury’s influence and control over a wider range of activities. Key to the success of centralisation initiatives is to develop trust and open communication with business units. Consequently, over the past three years we have been very proactive in visiting group companies and forming relationships. We seek to understand their cash and treasury management requirements and constraints, explain what we do and how we can contribute to their business. We pay particular attention to describing the reasons for centralising treasury management across the group and the consequences if we remain decentralised. Furthermore, having engaged regional treasurers who can maintain greater geographic and cultural proximity with group companies, it is easier to maintain these relationships over the longer term and engage in ongoing dialogue.

Building group communications requires considerable personal attention to develop confidence and trust, but there is also an important technology dimension. While we have had a treasury management system (TMS) in place for some years, it was not sufficiently flexible to manage cash pool information effectively. Therefore, we selected and implemented a new liquidity management system (OpusCapita) to complement our TMS. We now use OpusCapita to collate balance and transaction information on cash pool accounts each day from our banks and report on our global liquidity position. Not only has this approach been effective in facilitating decision-making but it also supports internal reporting and accounting. We ask our banks to provide balance and rate information on the first day of each month giving the previous day’s value. This means that our month-end close is now completed very rapidly, and we can send accurate and timely balance information for each company to our consolidation system. Furthermore, the number of queries we receive from group companies has reduced substantially, which improves trust and credibility.

Unlocking trapped cash

Implementing a liquidity management tool has also been instrumental in allowing us to mobilise our cash more effectively. As a result of better visibility over cash balances across our 140 banks, we identified around SEK 3bn (USD 440m) in ‘trapped’ cash i.e. cash that is held in bank accounts that are not included in cash pools and/ or is inaccessible for regulatory or other reasons. During 2013, we embarked on a project known as ‘Cash Hunt’ with the aim of reducing trapped cash by at least SEK 1bn (USD 146m) which would add demonstrable value to the group. We analysed each cash balance systematically and distinguished between those accounts where cash is truly trapped, and those in which cash may not be readily accessible, but which could be unlocked in some way. For example, in some cases we could adapt our organisational structure, pay a dividend or include an account in a notional or physical cash pool. Consequently, each balance, country and currency needed to be analysed individually and a specific solution found, an approach that has proved extremely successful.

Our Cash Hunt project has not simply been a ‘one off’ initiative, we also wanted to find ways of avoiding the build up of cash in accounts not included in cash pools over time. We have therefore worked with our business units to enhance the reporting and cash transfer mechanism for accounts held by business units. Although we already received monthly reports, these were often provided in different formats, so it was time-consuming to collate information in a consistent format. We have now streamlined and standardised the reporting process for business units, to ensure improved visibility over non-treasury accounts. Surplus funds are also transferred to treasury more systematically. Once we have completed this process, while it is unavoidable that some cash will remain trapped, we will at least have visibility over it, with a mechanism in place to avoid the build up of idle balances in the future.

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