Published: March 01, 2009
While 2007 and 2008 saw a tidal wave rush through the financial markets, 2009 is proving to be the year in which every industry is affected by turbulence and uncertainty. We continue our series of executive features with an interview with Pierre Fersztand, Global Head of Cash Management at BNP Paribas, who describes some of the ways that treasurers can create some stability in their company in an environment where uncertainty seems to permeate every part of the business.
Back to basics: Treasury Policy and Objectives
Over the past few months, during which time the financial crisis has extended from the banking market to all industries, we are seeing our clients adopt a “back to basics” approach, focused on managing the core financial risks and preserving liquidity. For most treasurers, market conditions have been so far removed from those anticipated in their treasury policies that they are finding themselves in uncharted territory. Consequently, it is a good time to review the treasury organisation and its scope, objectives and priorities and how these relate to the company’s overall business objectives.
Procedures and Technology Tools
In addition to aligning treasury policy with the business strategy, treasurers need to review the procedures and tools which enable them to deliver on the policy and support the needs of the business. During times of significant volatility, treasurers need access to group-wide, real-time information to understand the company’s cash position and to be responsive to changes in the market and changes in the business requirement. To allow this, the right systems, and effective integration between them, are essential to facilitate information flows between business units, treasury and its banking partners. Achieving this improves straight-through processing of transactions, allows more accurate forecasting and permits timely decision-making.
There have been great strides made in recent years in improving corporate-to-bank connectivity, including the development of technical standards, such as ISO 20022, and improvements to connectivity tools. For example, in addition to advanced technology provided by the banks, including web-based and host-to-host solutions, SWIFT Corporate Access, of which BNP Paribas has been an early proponent, is increasingly the connectivity method of choice of large, complex organisations with bank accounts worldwide. Not only are our solutions and services ideally suited to the domestic markets in which we excel, namely France and Italy, but we have invested heavily in our internet banking solutions, SWIFTNet solutions and after-sales support to ensure a consistent approach across BNP Paribas’ geographic footprint.
There have been great strides made in recent years in improving corporate-to-bank connectivity, including the development of technical standards...
Banking Relationships
As part of the review process incorporating objectives, policies, procedures and technology, corporate treasurers should look closely at their banking relationships and banking structures. In some cases, there will be opportunities to rationalise bank accounts and in others, it may be a good time to ensure that the right banking relationships are in place. Criteria for choosing a banking partner have changed considerably in recent months. Cash management is not a commodity product and a banking partner needs to be exactly that, i.e. a partner, which you can trust to provide both the funding and cash management services the company needs. As obtaining credit remains a significant challenge for many organisations, cash management needs to be a priority for every corporate treasurer.
An important element in an effective cash management strategy is to ensure that your bank’s footprint matches that of your organisation. For example, BNP Paribas has built a leadership position in cash management in Europe, Asia Pacific and across the world, but we also have a strong focus on supporting corporate needs in France and southern Europe, including Italy, Spain, Portugal, Turkey and Greece where we have strong capabilities, a flexible best-in-class service offering, and expertise in the cash management, cultural and technical needs in each country. This was recently reflected in TMI’s award for Best Cash Management Bank - Southern Europe, 2008. Consequently, in addition to those companies which work with BNP Paribas globally, many corporations which may work with other banks in the Americas, Asia and other parts of Europe have selected BNP Paribas in the markets in which we demonstrate particular strength and expertise. [[[PAGE]]]
Corporate treasurers need to be zealous in their pursuit of high quality banking partners with the financial standing, funding capability and cash management products and services which the company needs to support its business. The financial services market has changed unrecognisably over the past year, but in the midst of this turmoil, BNP Paribas has stood firm as one of the largest and strongest financial services groups in the world.
The bank has a robust approach to risk management and a stringent risk policy.
There are a variety of reasons for this, which account both for the bank’s resilience to the current crisis and our ability to weather the continuing storm. The bank has a robust approach to risk management and a stringent risk policy. Our culture is one of conservatism, cost control and stability, which are characteristics which have proved essential in recent times and will ensure continuing strong performance in the future. We focus on the needs of our clients and align our organisation and management structure to meet these needs and focus on risk management and cost transparency across the bank.
As I mentioned before, trust between financial partners is essential, and during these months which are proving difficult for all organisations, we have strengthened our client relationships and focused on enhancing mutual trust and transparency, so that both bank and corporation fully understand the needs of the other.
Liquidity and risk management have been discussed for many years, but while credit was cheap many treasurers did not prioritise these activities: the cost of tying up cash was relatively small and market volatility was within reasonable bounds. Today, corporate treasurers are demanding greater transparency and better oversight of their business so they can maintain the flow of liquidity through the company and identify and manage risks. In my opinion, there are a range of factors which treasurers need to prioritise in order to do this more effectively:
Increasing treasury efficiency and centralisation. As I mentioned before, choosing the right tools and ensuring effective integration between them is essential to facilitating the flow of transactions and the information on which decisions are made. We have noticed an increasing trend for centralising treasury and payments as a way of improving treasury’s efficiency. For example, a growing number of organisations are establishing pan-European payment factories which BNP Paribas is well equipped to support. Not only do we have in-depth expertise in implementing and optimising centralised payment factories, but we offer various connectivity options, including different SWIFTNet solutions, and a range of file formats, including XML messages, to satisfy the diverse needs of our clients. [[[PAGE]]]
Unlocking working capital. With credit becoming scarce and more expensive, unlocking working capital from within the business, and using financial assets as a source of liquidity should be a priority. Consequently, effective financial supply chain management and the use of techniques such as factoring and supply chain financing are becoming more popular as a way of increasing cash flow and reducing the cost of funding.
Improving liquidity management. Once cash has been received into the business, it needs to be in the right place at the right time. There are three stages to this: Cash flow forecasting, ensuring visibility over cash and enabling cash to be accessed when required. This includes establishing the right cash sweeping and pooling structures to take rapid hold of cash.
Enhancing risk management. Treasurers’ perception of risk has changed dramatically, and policies and procedures need to reflect the actual risk to the business. Commodity and FX hedging have become more significant activities, and counterparty risk needs to be managed closely.
Establishing trust. A lack of trust and a lack of information would seem to be amongst the major factors which have caused the current crisis. Creating stability in the business requires a return to trust and transparency. For example, companies should focus on stabilising the financial supply chain by strengthening relationships with suppliers and customers, which might include supplier financing or factoring/receivables financing. Building a relationship of trust with banking partners is also key to business stability, to ensure access to funding, effective cash and liquidity management and timely, integrated information flows.
In recognition of the difficult period in which we all find ourselves, we have chosen “Liquidity management and trust in an ever changing world” as the theme of BNP Paribas’ 3rd Cash Management University, which will take place on October 8 - 9, 2009 in Paris, France. The Cash Management University is a relaxed and informal environment comprising expert presentations, panel discussions and the opportunity for treasurers and CFOs to exchange ideas and discuss solutions to the issues of the day with key industry players.
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