Published: May 01, 2010
When I arrived at Aviapartner in June 2008, the group faced a liquidity crisis, with fully utilised credit facilities and breached financial covenants. The first task was to create a new finance team, comprising Kris Geysels, CFO, Carol Struyf, Group Controller, Ronny De Pooter, Group Consolidation and myself, which was fully supported by the new board executives, Laurent Levaux, CEO and Kris Geysels. Following this, it was imperative that we embarked on immediate negotiations with unions, banks, investors and the new management to secure the company’s future. In consequence, based on the efforts of all these parties, we formulated a new strategy that included a complete restructuring of our debt and an increase of capital, resulting in a positive net cash position of EUR12.0m by the end of 2009 compared with a negative cash position of EUR230.9m at the end of 2008.
An important element of this solution was the restructuring of our cash management arrangements. Historically, the company had a decentralised cash management structure, with multiple banks and accounts, which meant that significant amounts of time were spent maintaining these accounts and collating information, as opposed to optimising the cash cycle and credit means. Visibility over balances was limited and it was impossible to make decisions based on up-to-date information. We had around EUR5m ‘trapped’ in accounts, compromising our liquidity efforts, with inefficient processes that were subject to error. As the financial crisis unfolded, this situation was exacerbated by changing banking partners and products that were altered or no longer supported.
To address these issues, we decided to embark on a new cash management strategy to achieve a series of key objectives:
[[[PAGE]]]
To achieve these objectives, we decided to appoint a single cash management bank. This would make it easier to achieve consistency across the group, achieve consistent cut-off and settlement times and costs, and enable data to be concentrated in a single system. Following an extensive process, we selected KBC, which was already a member of our banking syndicate, although we would have appointed a non-syndicate bank if necessary. There were various criteria in our selection:
Our new pooling solution brought considerable advantage. We use a physical cash pool (zero balancing) to sweep cash into our treasury accounts from business units’ non-resident accounts in Belgium, which benefits from an efficient, cost-effective payments infrastructure. By concentrating non-resident accounts in one country, zero balancing is immediate and cost-effective as transfers are treated as domestic transactions. This also avoids the need for intraday limits because KBC can monitor our cash position at all times.
Single Euro Payments Area (SEPA) migration was intrinsic to our cash management structure to achieve the degree of standardisation that we were seeking. The set-up took only a matter of weeks, and we now make the majority of payments using SEPA Credit Transfers, with the exception of cheques in some locations, which will be phased out shortly. By standardising execution and settlement times across the group, there is no advantage to working with local banks which may make payments more quickly. In addition, the cost structure of cross-border payments is now covered under EPC directives, with no difference between domestic and cross-border payments, and fees must be charged separately rather than deducted, simplifying reconciliation and price negotiations.
In addition to establishing an efficient external cash management structure, we needed to resolve internal challenges and potential obstacles. To ensure the success of such a project, treasurers need to spend as much time as possible with local finance teams at operational centres to understand their daily activities and cash management needs. For example, if it takes just an hour to dispatch an aircraft, but two days to process the related invoice, this creates major operational challenges. By developing a mutual understanding between the front line business and group treasury, imposing rules can be avoided and processes improved so that everyone benefits. Treasury should be an integral part of the business to support and facilitate its activities, not an ivory tower that operates independently.
The project has proved highly successful in achieving our objectives, and these will be further enhanced once the migration to SEPA across the Eurozone is complete. Establishing a cash management structure based on SEPA which is still only partially implemented brings some disadvantages. Many suppliers and customers are unprepared for SEPA or may be unaware of it altogether, so it has taken some time to educate them. More surprisingly, some banks operating in the Eurozone are still not ready to accept SEPA payments, even though SEPA Credit Transfers were launched over two years ago. Based on our experiences with SEPA so far, there are two issues we would encourage other treasurers to consider:
Firstly, if all treasurers were to put pressure on key financial players (including public authorities) and business partners to migrate to SEPA, overall acceptance would be increased and migration accelerated. Treasurers are set to benefit considerably from SEPA migration, including the ability to reduce fees, simplify cash management and implement shared services such as payment factories.[[[PAGE]]]
Secondly, treasurers should consider what trigger or motivation would be required to intervene and redesign current working practices. In the case of Aviapartner, a shortage of liquidity and lack of control were ample reasons to review our treasury management. With SEPA approaching inexorably, however, there are opportunities for every treasury to enhance the way it operates, and treasurers should at least investigate the potential for reshaping treasury flows and taking advantage of more efficient and cost-effective cash management practices. SEPA migration is no longer restricted to early adopters, but there is a real risk that some treasurers will be in a negative position compared with competitors by leaving it too late.
As SEPA adoption gradually increases, Aviapartner’s treasury is gaining further benefit from our new bank and account configuration. We have plans for additional enhancements in the future. Firstly, we are setting up a new payments factory based in Brussels which will enable us to control payment timing and enhance security over flows. This has already been implemented but is not yet fully rolled out across the business. We are using this opportunity to look more widely across our payments and collections activities, and treasury is becoming more involved in payments and collections. For example, treasury now approves every new customer and supplier contract to assess risk, payment terms etc. By becoming more involved in field operations, treasury can help to inform the decisions that contribute to efficient cash and liquidity management, as opposed to simply dealing with the outcomes. This places treasury in a pivotal position within the company and increases its ability to optimise working capital and reduce risk across the business.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
