Home and Away: Making Your Cash Work

Minimising borrowing, particularly for short-term liquidity management, is a priority for most treasurers.

During the final roundtable discussion at the Cash Management University, speakers discussed some of the conclusions of the various workshops that had taken place during the event.Participating in the roundtable were: Mario Bruni, Managing Director UK Branch, Fiat Finance & Trade Ltd; Raffi Basmadjian, Group Treasurer, France Telecom-Orange; Pierre Fersztand, Global Head of Cash Management, BNP Paribas, and Gerd Klevenz, Head of Treasury Operations & Processes, Global Treasury, SAP;chaired by Helen Sanders, Editorial Director, TMI. 

The conversation centred around four related questions, which together addressed a wide variety of the topics of discussion during the workshops, all under the theme of how best to make cash work, both in-country and cross-border (figure 1).

How much cash do you have?

Treasurers are faced daily with the issue of identifying where their cash is, and whether it is safe. Indeed, as Damien McMahon, Partner – Finance & Treasury Solutions Group, PwC illustrated in his presentation based on the PwC Global Treasury Survey 2010, cash management is second only to financing in treasurers’ list of priorities. To ensure appropriate visibility and security of cash, treasurers need to work with the right banks, manage relationships effectively, and have appropriate cash management structures in place. According to the PwC Global Treasury Survey 2010, 78% of respondents now rank bank relationship management as a high priority compared with 56% before the crisis. In particular, banks and corporates alike recognise the links between different activities such as funding and liquidity, and how these issues need to be considered within the context of a wider relationship. Banks should be in a position to provide liquidity, but treasurers also need their banks to have a comprehensive product offering, breadth and depth of network, leading technology and a commitment to excellence.

How much cash do you need?

While many treasurers and cash managers have achieved considerable success in achieving visibility and control over cash, the issue of how much cash a company needs is more problematic. Holding too large a cash ‘cushion’ can be detrimental to business investment and limit returns, while too little cash can result in higher borrowings and an inability to respond quickly to a changing market and business environment. To address this effectively requires a commitment to accurate and timely cash flow forecasting across the business. In the PwC Global Treasury Survey, 2010, cash flow forecasting was identified most frequently as a priority by treasurers and cash managers (around 67%) but as many practitioners will recognise, this has been the case for a number of years. During the workshop dedicated to cash flow forecasting, Alessandro Nesti, Financial Activities Director, Menarini Group described the cash management project on which his company had embarked. This involved centralising cash and treasury management activities into group treasury, implementing standardised technology and above all, propagating a culture in which ‘cash is king’, with management incentives aligned with cash objectives. By doing so, cash flow forecasting has become a higher priority and greater consistency and accuracy of business unit forecasting and central reporting has been achieved. [[[PAGE]]]

In addition,it is clear that minimising borrowing, particularly for short-term liquidity managemen,it is a priority for most treasurers to cut interest costs, limit reliance on banks and enable credit lines to be used for more strategic purposes.This requires both an optimised approach to liquidity and working capital management, with a holistic approach to payables and receivables management as well as effective cash positioning and forecasting. In the past, these areas were frequently outside the remit of corporate treasury; however, as senior management increasingly recognise the value of a combined approach across the business, treasurers are taking a greater role.Companies are also looking beyond traditional bank financing for alternative means of sourcing liquidity. Factoring and supply chain finance, often considered to be the domain of smaller and medium-sized enterprises in the past, are now firmly on the agenda for companies of all sizes. One participant in the workshop dedicated to this topic explained,

“The cash from factoring has reduced the net debt on the balance sheet by around €80 - €100m.Without this, we would have breached our covenant.So factoring has helped us to avoid penalties, and allowed us to safely pursue our business.”

How do you control your cash operations?

As well as ensuring the right cash management structures are in place, treasurers and cash managers need to implement efficient and secure business processes, and increasingly leverage opportunities both for more streamlined bank communication and greater standardisation.The conclusion of the operational risks and compliance workshop was that there were ‘no excuses’ for a lack of operational controls. Ian Wyatt, Group Finance Systems Manager, Hogg Robinson Group plc outlined that typical problems include inaccurate or incomplete data passing through systems, internal resistance to change or technical inflexibility. However, with modern technology and widespread recognition of the benefit of efficient and secure processes, these perceived barriers should be removed. After all, as he concluded, by avoiding or ignoring operational issues, the department and the company as a whole suffer.

One of the challenges for multinational companies seeking to streamline payments and collections is the variety of payment instruments in each country, which makes it difficult to centralise and standardise processes. While the introduction of SEPA (Single Euro Payments Area) should help this, with consistent payment instruments across the Eurozone, the majority of corporates have not yet migrated to SEPA. There are various reasons for the lack of momentum so far, including delays in introducing SEPA Direct Debits (SDD) and mandatory reachability across direct debit banks, and the lack of clarity over a final migration date. Workshop participants, including those who had implemented SEPA and those that had yet to do so, agreed that to achieve the maximum benefit from SEPA Credit Transfers (SCT) and SDD, companies should aim to centralise payments and collections wherever possible. For SCT, moving to a ‘payment on behalf of’ model helps to optimise the effectiveness of a payments factory. With diverse payment cultures across Europe, with widely different payment terms, it is highly beneficial to adopt a standard business contract across Europe wherever possible to increase predictability of cash flow and simplify processes.

The conclusion of the operational risks and compliance workshop was that there were ‘no excuses’ for a lack of operational controls.

SDD are still limited by mandate difficulties, in particular the difficulty of using existing direct debit mandates for SDD, particularly in countries such as Germany, which has hampered its adoption. While eMandates may help in this, the conclusion was that these are likely to take too long to introduce to have a major role in addressing these challenges. Participants agreed that an important factor that has hindered adoption has been the lack of a formal end date for existing domestic payment products, which has made it difficult to prioritise investment in SEPA. As there is now greater clarity on this, we are likely to see momentum picking up, so treasurers and cash managers will need to start working with a bank that has the expertise, solutions and track record in SEPA migration sooner rather than later to ensure access to resources.

Another way of controlling cash operations is the use of corporate cards to manage expenses, which workshop participants agreed have a very important role to play in achieving compliance with company policies and controlling expenditure. When introducing a new T&E cards policy, there needs to be a significant focus on internal education and promotion to ensure maximum use of corporate cards and therefore realisation of company objectives. For medium- to larger-sized companies, with over 200 employees, travel expense management systems need to be in place alongside use of cards to derive the maximum benefit. Looking more widely at procurement, use of purchasing cards can be incorporated into overall procurement processes, with around 12-15% of total business to business expenditure now achievable using cards, and significantly higher for some industries, reflecting a valuable contribution to effective financial management.

How should you use your cash?

The short-term investment workshop concluded that security and liquidity were the primary investment priorities for treasurers, but earning a competitive return is still important, despite the low interest rate environment.There are various ways in which treasurers and cash managers have sought to achieve this, in addition to traditional bank deposits, including increasingly investing in AAA-rated money market funds (short-term money market funds under new CESR regulation) and short-term tri-party repos.With reference back to the second question,‘How much cash do you need?’ particularly in a low interest rate environment, there is a strong argument for using surplus cash to finance internal investment or mergers & acquisitions, or to return cash to shareholders. However, while these decisions would appear to be amongst the most important strategic financial decisions that a treasurer or finance director needs to make, without clear and convincing answers to the first three questions addressed during the panel, it is impossible to make the decisions that affect the company’s future financial success.