Published: February 01, 2010
Owing to the international nature of the Arçelik business, we have over 30 subsidiaries involved in both production and distribution across a wide variety of locations. Each subsidiary is responsible for its own payments and collections, while treasury activities and strategic decision-making is undertaken in treasury. From a cash management perspective, we were concerned that treasury lacked visibility over transactions undertaken locally, and it was difficult to manage the company’s overall cash position. This problem was exacerbated by the large number of currencies and bank accounts that we had to manage.
We made the decision to implement a single banking relationship to replace our existing bank relationships in order to monitor and control our cash flow globally.
In 2007, we reviewed our cash management activities and decided to put in place a new banking and cash management structure to support our evolving needs. At that time, we had 14 operating subsidiaries with over 25 banking relationships globally. This resulted in a lack of visibility and control over cash flow and severely restricted the mobility of cash. We made the decision to implement a single banking relationship to replace our existing bank relationships in order to monitor and control our cash flow globally. This would provide us with a common banking platform across the business on which we could standardise our cash management transactions and achieve visibility across all subsidiary companies.
There were a number of reasons for seeking to replace our disparate banking relationships with a single banking partner. In particular, a single bank would enable us to:
Our project to appoint a partner bank took three months, including an extensive evaluation process of seven banks. We had a range of selection criteria, including technology, presence in the relevant countries, depth of cash management products, operational capabilities, costs and cut off times, and willingness to take on the credit risk of Arçelik. Having shortlisted three banks, we finally invited ABN Amro (now The Royal Bank of Scotland [RBS]) to be our cash management partner. The shift from multiple banking partners to a single bank created huge efficiencies from both a cash management and risk management perspective, even before embarking on the next stages of the project.[[[PAGE]]]
Reducing resistanceWe were conscious that the move to a single banking arrangement could have resulted in a negative response from subsidiaries initially, as they were losing their local banking contacts and financial autonomy. To alleviate potential issues of this type, the implementation team held meetings with finance managers in each country, including representatives from the bank as well as the internal team members. We talked through our new cash management strategy, the reasons behind it and reassured subsidiary staff about the impact that the arrangements would have on them. These efforts went a long way towards reducing any negative behaviour and attitudes, and encouraged support for our strategy.
Once we had appointed our cash management partner bank, the next stage was to implement a cash pooling structure. The need to centralise our cash became particularly apparent following the acquisition of Grundig Multimedia, as some Grundig entities needed cash while other Arçelik entities were cash rich. We reviewed alternative liquidity structures and made the decision to implement a cross-currency notional pool which best fits our requirements (Figure 1). This is now in place and extends across most parts of the group, including over 100 accounts and more than 10 currencies, which we can use as if we had all our cash in a single currency in one account. As we can use cash across the group, irrespective of its location or currency, we now have significant financial flexibility, resulting in a considerable reduction in financing costs. Overall, we would summarise the benefits of our cross-currency notional cash pool as follows:
There are some regions which are still excluded for regulatory reasons, such as Russia, but we hope to be able to include these in the future as regulations change.[[[PAGE]]]
The third stage of our project was to build on the process and financial efficiency we had already achieved and automate our inter company payments. As we have both production and distribution companies, there is a large volume of cash flows paid from the distribution entities to the production businesses. To reduce the number of physical flows between Arçelik entities, we implemented an internal direct debit scheme, assisted by RBS. As this operates within our pooling structure, we can achieve an international, cross-border scheme. Direct debits are fully automated, creating both operational efficiency and easier reconciliation.
While we have achieved our initial objectives, there are always further improvements that can be made. For example, we are considering centralising our financial operations, such as payments and/or collections in a shared services environment, although we have not yet made a decision on this. SEPA will not impact on Arçelik considerably as we do not have considerable amounts of euro-based payments within the Eurozone. We have been very pleased with what has been achieved and our new cash management and liquidity structures have proved very successful. A cross-currency notional pool is an unusual structure within the industry, and it has been important for us to enhance our competitiveness and demonstrate industry best practice. We now have one of the most highly developed and innovative cash management structures within the industry. Looking ahead, we have a structure that can support our business needs as these evolve, and as we conduct further acquisitions in the future.
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