Published: October 01, 2009
by Michael Walser, Head of Treasury, Hoval
Hoval is a family-owned company based in Liechtenstein, providing sophisticated traditional and renewable heating and ventilation technology. Although relatively small in size, the company has distributorships delivering products to over 50 countries globally, with branch offices in more than 12 countries in Europe and Asia. Until recently, Hoval had a decentralised treasury approach, with each business unit managing its own cash and treasury management requirements. In recent years, however, it has undertaken a major project to centralise and optimise its cash and treasury activities.
In the past few years, Hoval’s management team has increasingly recognised the potential benefits of centralising its treasury operations as a way of reducing both internal and external costs, including netting deficit and surplus balances across the business to decrease external borrowings. About three years ago, we took the first steps towards achieving this. Firstly, we needed to appoint regional banking partners with which we could work across the group, including all the countries in which we operated. In Germany and central and eastern Europe (CEE) which is one of Hoval’s most important growth areas, we appointed UniCredit. We already had some experience with the bank having worked with them in Germany and Austria, so we had confidence in their approach and capabilities, and we were impressed by their experience in CEE which was critical to supporting our ongoing business growth in the region.
Working with UniCredit, we implemented overlay cash pooling (cash concentration) arrangements in all the countries within the region in which we operated. Wherever possible, we implemented zero balancing, but where this was not feasible we put in place target balancing. Therefore, our cash management solution is based on a combination of zero balancing between Hovalwerk AG Vaduz and Austria, Italy, Czech Republic and Slovakia, together with target balancing between Hovalwerk AG Vaduz and Czech, Switzerland, Germany and United Kingdom. In the future, we aim to migrate to a zero-balancing arrangement in all countries, but there is no overwhelming reason for doing so at this stage.
There were various reasons for structuring our cash management solution in the way that we did; in particular, we wanted to implement the most straightforward solution that would allow us to achieve our liquidity management objectives quickly. Therefore, we decided not to change our local banking relationships, many of which had been in place for a number of years and worked very successfully. [[[PAGE]]]
Cash pooling outcomesOur primary observation based on our project experiences is that every step needs more time than is anticipated – however, clearly it is preferable to have a solution that is a little late rather than one that does not work! Some of our banking partners were not wholly supportive of our cash pooling strategy, so they did not necessarily respond as quickly as we had hoped. However, ultimately the project was a success and we have achieved the cost savings we were hoping for. In addition, our treasury department now has daily oversight over our cash flow and we are in a position to make more strategic borrowing decisions at a group, rather than local level.
The benefits of our cash management project were experienced at a local level as well as by Hoval’s headquarters. Initially, we needed to foster the enthusiasm of some business units for the merit of our cash management approach, so we invested time in communicating our plans and the benefits both to the group as a whole and to them individually, in order to gain their support. For example, local business units no longer need to spend time on managing cash flow processes, so they can dedicate more resource to areas that add greater value to the business. In addition, treasury acts as an in-house bank, and we are able to provide better rates of interest on internal loans than local subsidiaries could achieve in the past, as we can leverage better borrowing rates at a group level.
Having implemented the first phase of our core cash management structure in CEE, we are now looking to extend the solution both more widely in the region and beyond; for example, we are considering cash pooling in Poland, France, Spain, Romania and Croatia. Having enhanced our external cash management structures, we are also seeking to optimise our internal processes by implementing a specialist treasury management system (TMS) which we will start evaluating early in 2010. This will enable us to manage our interest rate and FX risk more actively, including making greater use of currency swaps and interest rate swaps. Making a decision for a TMS is a highly involved process, however, requiring a detailed evaluation in order to assess our internal priorities, initial requirements and future ambitions, and determine the extent to which potential systems meet these needs.
Our cash management project has been a learning process for us and we have benefited from experiences that will help to shape our future decision-making. Clearly, it is important to work with a bank that provides the cash management solutions that the business needs, but the quality of the relationship, with common goals and priorities, is also essential to the success of the project and achievement of the desired outcomes. Treasury is a ‘people business’ and strong internal and external relationships are critical to its success.
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