Published: March 01, 2014
With SEPA compliance projects now largely underway or nearing completion, what priorities are you seeing emerging amongst your corporate customers?
After a busy couple of months over both year-end reporting and SEPA migration projects, corporate treasurers are now able to take stock and review their strategic and operational priorities for the year ahead. In some cases, treasurers are now able to progress projects that had to be deferred as a result of the global financial crisis and more recently, the need for SEPA migration. In others, they are using the opportunity of relative calm to reflect on, and consolidate their activities to identify opportunities for future improvement.
Whether they see the next few months as a time for action or reflection, companies of all sizes are recognising that implementing best practices in cash management offers operational efficiency, cost savings, improved returns and greater shareholder value. Consequently, treasurers are coming to us to talk about opportunities to enhance cash management efficiency, discuss best practices and understand how these can be adopted in their business.
The components of an efficient cash management strategy are well understood: working capital management; bank relationships and accounts; liquidity structures and efficient channels. However, as the business environment evolves and companies’ strategies progress, these often need to be reviewed and adapted to meet changing needs, both individually and in combination.
Working capital management has been discussed for some time, but it has become far more of a senior management focus. According to a recent PwC survey, $3.7tr in working capital could be released globally through the adoption of effective practices. Even small changes in behaviour can make a material impact on the business, so treasurers and finance managers are scrutinising each of the activities that influence working capital. For example, companies continue to review their receivables practices to reduce days sales outstanding (DSO) and increase the predictability of cash flow, such as using direct debits. In tandem, they are looking to increase days payable outstanding (DPO) by lengthening payment terms from 30 to 60 or 60 to 90 days or longer.
However, treasurers and finance managers recognise that simply extending payment terms has the potential to impact suppliers and affect the resilience of the supply chain. Consequently, they are implementing solutions such as supply chain financing alongside DPO initiatives to strengthen supplier relationships and reduce negative impact on their suppliers’ working capital.
Many working capital solutions, such as receivables financing, are appropriate for companies of all sizes. On the payables side too, although supply chain financing programmes were traditionally set up by larger companies, we are now seeing smaller companies establishing these programmes. It is important to emphasise that working capital optimisation is both essential, and entirely feasible, for all sizes of company. By freeing up working capital and creating greater financial flexibility, treasurers enable their organisations to pay down debt, buy back shares and invest in efficient production and processes to drive down costs. These savings can then be passed on to customers in the form of lower prices, driving greater competitiveness.
While there are a number of organisations that have used SEPA as a catalyst to centralise and rationalise processes, bank accounts and cash management structures, the majority of SEPA migration projects have focused on compliance. In these cases, treasurers and finance managers have only had the time, resource and budget available to ‘lift and shift’ from legacy formats and BBAN to XML and BIC/IBAN for SEPA payment instruments. Once these instruments and formats are bedded in, treasurers can then think about how they use the opportunities that SEPA presents for rationalising accounts, cash and liquidity management structures and centralising payments and in some cases collections.[[[PAGE]]]
Yes, absolutely. Many multinational corporations continue to maintain a large number of bank relationships, which can bring problems of proliferation of accounts, high administrative overheads, compliance challenges and difficulties in maintaining timely, accurate visibility and control over account balances. There has therefore been a clear trend over the past few years towards rationalising bank relationships and reducing the number of both accounts and electronic channels. One challenge for treasurers, however, is to determine how many cash management banks they really need. Since the global financial crisis, few large corporations have sought a single global cash management provider, both to avoid concentration of risk and leverage the strengths and geographic coverage of more than one bank. In most cases, large multinationals will appoint between three and five cash management banks. These could be appointed at a regional level, or according to each bank’s expertise in specific countries.
Having appointed core banking partners, treasurers can then focus on identifying key accounts that are required for operating and liquidity purposes and transferring or closing non-core accounts wherever possible. While there may be regulatory reasons why accounts need to be held with local banks, such as to pay local taxes and custom duties, in some cases the barriers are organisational rather than regulatory. However, techniques such as in-house banking and virtual accounts offer local entities the same, or even higher quality of information and automation than physical accounts, which can be very valuable in surmounting internal barriers and facilitating effective cash management centralisation. While in-house banking is a well-established technique, its role has evolved from enabling intercompany financing to supporting centralised payments and collections on a payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO) basis respectively.
Companies of all sizes are now exploring these opportunities, particularly now that SEPA makes it easier to standardise payment instruments and formats. Although SEPA is a catalyst, the opportunity is not limited to the Euro area; rather, the use of XML has global applicability and many treasurers are now seeking to standardise communication formats across all regions.
Related to the demand for standard formats, treasurers and finance managers are also seeking to rationalise and simplify electronic banking channels. Large multinationals with many banking relationships frequently have extremely complex communication infrastructures incorporating multiple channels, each of which has its own look and feel, user tools, security protocols and supported formats. This results in significant costs, resource overheads, fragmentation of information and a reduced ability to automate processes such as bank account reconciliation. Consequently, as part of their efforts to leverage best practices, treasurers and finance managers are increasingly adopting SWIFT for bank connectivity for secure, bank-agnostic, multi-bank communications. While the use of SWIFT was historically limited to large multinational corporations, service bureaus and Alliance Lite2 enable mid-cap as well as larger businesses to move away from proprietary bank channels.
As you say, treasurers’ desire to understand and implement best practices is not restricted to cash management. Having streamlined account structures, payments and collections, they are then in a better position to manage their global liquidity. For example, we are seeing a growing number of companies implementing follow-the-sun cash pooling structures to transfer the use of cash to regional treasury centres in different time zones throughout the course of the day. For example, the end-of-day balance on a zero-balancing, multi-currency pool in Singapore may be swept to or from a European cash pool, and then on to North America. Basel III, and in particular CRD IV (Capital Requirements Directive) will have an impact on liquidity management, such as the ability to include multiple entities in a single pool, so we are waiting for more clarity in this area.
Absolutely: liquidity and working capital initiatives are closely interrelated, so treasurers need to adopt best practices across the whole spectrum of activities. A valuable first step to optimising liquidity, for example, is to establish a centralised approach to cash and treasury management, and rationalise accounts and banking partners. At HSBC, we are working with corporate customers to identify and implement best practices that support treasurers’ strategic and operational objectives at both a regional and global level whilst complying with local regulations. Not only do customers seek our support in emerging markets where we offer considerable depth of presence and expertise, such as China, but they also rely on our extensive network in regions such as Europe where we partner corporate customers for cash management services across more than 18 countries. By working with a global bank with an extensive footprint, cohesive solutions and significant expertise across all major markets, customers can benefit from our insights in identifying, adopting and benefitting from global best practices across cash, liquidity and working capital.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
