Published: August 01, 2012
In this month’s Executive Interview, we are delighted to talk to Citi's Treasury and Trade Solutions, discussing the cash management trends and opportunities that are emerging both in Europe and more widely, and suggesting how corporate treasurers can best take advantage of these to enhance their financial and operational efficiency and control costs.
We have seen a focus on enhancing operational efficiency and managing counterparty risk for some time now, and these continue to be important to treasurers. However, the opportunities that exist to achieve these objectives are changing. For example, a long-held ambition amongst treasurers has been to simplify, standardise and automate bank communications, such as cash and trade flows and bank account administration. With initiatives such as eBAM (electronic bank account management) and standardisation through XML-based ISO 20022 gaining momentum, corporates are in a better position than ever before to enhance efficiency and standardisation, and reduce costs.
What we are also seeing is that companies are looking to gain more efficiencies from their existing shared service centre (SSC) setups. While historically the focus of the SSCs has been to centralise and process vendor payments, there is now a realisation that this can be further expanded to cover other payment types such as payroll and tax. Furthermore, collections are also beginning to be centralised and standardised under SSC setups, and more attention is now being paid to the management of the cash application process, using additional automation tools.
Another outcome of the global financial crisis has been a greater recognition of the importance of managing liquidity and working capital.
Counterparty risk has been a top concern since the financial crisis. As a first step towards managing and diversifying counterparty risk, treasurers need to gain complete visibility of exposures and cash positions. This is more difficult to achieve in an organisation that has a decentralised treasury function without central oversight. Consequently, treasurers are focusing on gaining visibility of cash positions and exposures, supported by tools such as Citi’s TreasuryVision. In many cases, this has prompted the decision to centralise treasury to a greater degree, with group treasury or regional treasury taking responsibility for financing, investment and cash management, with an in-house bank to support the needs of subsidiaries. Not only have these initiatives led to greater visibility and control over counterparty risk, but they have also allowed treasurers to take a more strategic approach to cash and liquidity management, and refine their risk management policy, such as leveraging natural hedges across the business.
Another outcome of the global financial crisis has been a greater recognition of the importance of managing liquidity and working capital. Traditionally, the business functions that contribute to working capital, such as accounts payable and accounts receivable, have been managed independently of treasury, with little co-ordination. Today, however, with optimising working capital now a priority, treasurers have a stronger mandate to influence the elements that comprise the financial supply chain. This development has potential to smooth out cash flow profiles and avoid cash flow ‘spikes’ and therefore permit lower levels of working capital. Furthermore, by taking control of the financial supply chain, treasurers can use the company’s financial assets as collateral for financing and increase financial supply chain resilience using alternative financing techniques such as supply chain financing, thereby further diversifying counterparty risk and access to liquidity.
There are also a number of regulatory and market developments of which treasurers should be taking advantage. One of these is the gradual process of liberalisation and internationalisation of RMB. No longer should treasurers’ strategy for managing liquidity and risk, financing and investment in China be divorced from their wider cash and treasury management framework now that the opportunities for cross-border trade settlement, offshore financing and investment and inclusion of RMB in global liquidity structures exist.
In addition, SEPA (Single Euro Payments Area) has transitioned from being a regulatory initiative to an opportunity for multinational corporations to rationalise and simplify their cash management structures in Europe, standardise and automate their euro payments and collections, and reduce cross-border payment costs.[[[PAGE]]]
Firstly, I’d highlight the ability to simplify cash management structures, and secondly, the opportunity to centralise financial processes, such as through payment or collection factories or SSCs.
The SEPA end date is not the end, but the beginning of a more efficient payments landscape.
Multinational corporations have typically been obliged to have one, or often more than one, euro account in each country, and use pooling structures to centralise cash balances. This can create complexity and cost, without adding value. With SEPA, underpinned by the Payment Services Directive (PSD) that standardises the legal framework across the SEPA countries, treasurers can rationalise the number of euro accounts that they hold, and therefore make it easier to centralise cash.
A single European payments area also makes it easier to implement centralised business functions such as payments and collections. In the past, these efforts have often been hampered by the diversity of payment types and formats, local clearing systems and the cost of cross-border payments. With these hurdles now being removed, payments and collections can now be managed from a central location, with greater simplicity and standardisation in file formats and integration, and the ability for one entity to make payments or collections on behalf of other entities in the group. This brings a variety of benefits beyond the advantages of cost reduction, centres of excellence and economies of scale. For example, by standardising file formats and the information on financial messages, processes such as reconciliation and account posting can be automated and accelerated, and accuracy rates improved. This in turn enables more resources to be dedicated to tasks such as reducing overdue invoices and improving days sales outstanding (DSO). Greater visibility of flows, based on consistent information also enables treasurers to manage working capital more strategically, which is an important priority as mentioned earlier.
The migration to SEPA payment instruments is no longer a market-driven issue: it is a regulatory requirement that has been translated into law in member countries. The uncertainty about the future of the euro does not impact on the progress towards SEPA migration.
With the end date for legacy, domestic payment products now set for February 2014, treasurers have no time to lose in making and implementing their SEPA migration plans. Treasurers should not be discouraged by the fact that SEPA is a mandatory requirement with a defined end date as opposed to an internally-driven initiative; in fact, the enforced nature of the project should be considered an opportunity. Until now, treasurers have often struggled to create a sufficiently strong business case and obtain budget and resources for cash management transformation projects, bearing in mind that budgets are squeezed with multiple competing priorities. SEPA migration no longer needs a business case, it is a requirement to do business in the SEPA countries; yet, corporates can still leverage the potential that SEPA offers to transform cash flow management.
While the trends I have outlined are relevant across corporate sectors, each company has its own unique challenges and priorities. Consequently the potential for transforming the business and the way this is achieved differs from company to company. For example, for some companies, improving receivables management processes will be a primary focus, while for others, rationalising account structures will be a major driver for change. It is therefore essential that a banking partner has the expertise, experience and willingness to engage at a detailed level with its customers, and gain a deep understanding of their needs, priorities and constraints. The bank then needs the product portfolio, technology innovation, skills and depth of local presence to realise solutions that will address each customer’s specific priorities.
At Citi, for example, we continue to leverage our global coverage and depth of presence and expertise in each market, to invest in technology and our comprehensive portfolio of solutions to meet our customers’ objectives. We have built up substantial experience from working with many of the world’s most well-respected companies, to which our customers attach a great deal of value. We support over 1,000 SSCs globally, and we are helping companies with activities in all parts of the SEPA zone to realise the potential of standardisation, centralisation and efficiency. Citi has been a strong supporter of SEPA and has played a leading industry role in its development. This central role, our country presence and our experience allow us to advise our clients on their SEPA strategies and to leverage the opportunities that new and evolving regulation presents.[[[PAGE]]]
The SEPA end date is not the end, but the beginning of a more efficient payments landscape. Furthermore, this potential is not restricted to the SEPA countries, but has global applicability, such as the use of ISO 20022 standards.
We are already seeing an increase in the use and applicability of more convenient payment types such as mobile payments, faster payments, and financial supply chain optimisation initiatives such as e-invoicing that will continue to gain traction.
Corporates can take advantage of new opportunities by working with a bank that has the expertise, scale, solutions and technology to help drive their success.
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