Published: September 01, 2009
Gulf Energy has a small treasury function in terms of staff numbers, but the department is responsible for managing large cash balances. Treasury uses spreadsheets to manage its activities, but Oracle Financials was recently installed, and the intention is to use this for cash flow reporting in the future. In addition, we have some experience of treasury management systems (TMS) so this is a possible route going forward.
Gulf Energy has successfully centralised 90-95% of its cash flow. As a net borrower, the company has limited cash surpluses; when these arise, they tend to be short-term. In these instances, we either place cash on deposit for a few days with one or more of our key partner banks or enter into currency swap transactions, unless there are borrowings that can be offset. Our key partner bank, BNP Paribas, pays some interest on credit balances on our accounts, which makes surplus cash management straightforward.
In addition to our counterparties looking at Gulf Energy more closely from a risk perspective, we are also scrutinising our own counterparties. We have always been conservative in our choice of banking relationships, but we are putting more emphasis now on long-term relationships with stable partners. In addition to our key international banking partner, we also work closely with several local banks.
Like every company, maintaining access to liquidity is vital to the business. One of the ways in which we do this is that BNP Paribas finances our bulk purchases and customers pay the bank directly under a Collateral Financing Agreement (CFA). This is a valuable means of unlocking cash flow and reduces pressure on our borrowing facilities. We have three borrowing facilities in place.
As a growing company, Gulf Energy is continuing to invest heavily in infrastructure and business development in new markets, so access to credit is vital to our investment plans. However, over recent months, this has been more difficult as banks rein in their lending. As a cash-dependent company, without a strong international brand, there is a considerable difference in our situation compared with that of multinational firms. Capital is very difficult to access, and very expensive. To address this, maintaining close relationships with a few trusted banking relationships is essential. For example, we are continuing to work closely with our primary bank, BNP Paribas, with whom we have a very strong relationship. It is important to maintain a long-term outlook when forming and maintaining bank relationships, so that they understand our business in detail, making it easier to weather the storm.[[[PAGE]]]
Accessing the global financial markets as an African company without the strong brand of a multinational household name is quite different to the experience of larger firms with greater recognition. The strength of a brand should not be underestimated as the foundation of investor confidence. Consequently, companies that lack the scale and brand recognition of multinational corporations have had to adapt the way they interact with their banking partners to maintain access to financing. Most importantly, focusing on a few, long-term relationships based on trust and open communication makes it easier for the bank in question to understand the drivers, risks and opportunities of the business, and vice versa. While the increased emphasis on counterparty risk has meant that some companies have considered changing, or have actively changed their banks, it is difficult to start working successfully during a crisis when you have no experience of each other.
Our short-term objective in treasury is to improve our budgets and forecasting in order to anticipate our cash requirements more accurately. As a growing company, we need to look at where our cash is coming from, and be confident in our own credit process. Furthermore, we need our banking partners to support the ongoing growth of the business, which depends on credit. These partners will only be prepared to lend if they fully understand the risk that the business presents.
Our longer-term strategy is to balance growth, credit and the risk profile of our customers and continue working with our banks to finance them.
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