Thinking Global

Cash Management Centralisation at Pepe Jeans

by Ricard Mas, Group Treasurer, Pepe Jeans

When I joined Pepe Jeans in 2006, I found a vibrant and exciting company. It was facing many of the challenges associated with rapid corporate growth, such as the need to formalise financial policies and procedures and reorganise certain back office operations, such as cash management at a group rather than local level. A priority early on was establishing a clearer distinction between Treasury and Accounting to satisfy corporate governance and compliance requirements. There was also a need to centralise the group’s cash and treasury management activities at our headquarters in Barcelona. There were a variety of issues to address in order to achieve this, both internal and external. One of the elements we needed to consider was our external banking model, including how to centralise our cashflow in order to have quick and direct single channel access to company funds in a fast paced industry requiring continuous investment.

Diverse cash management requirements

Pepe Jeans operates using two distinct models. In some countries, we have a retail network, while in others where the scale of business does not, for example, warrant direct investment in infrastructure, we sell our products on a wholesale basis through licensees or distributors. This results in two distinct sets of needs from a treasury point of view: the retail business requires processing of cash and credit cards, for example, whereas working with licensees and distributors is closer to wholesale banking. We produce most of our goods in Asia, which are purchased in USD and shipped mostly to ports in Spain and the Netherlands, with the bulk of our goods then sold in EUR and GBP. [[[PAGE]]]

Before looking at individual banks’ capabilities, we reviewed our specific requirements and nature of our presence in each country, which could be retail, wholesale or a mix. Once we had established an overall view, we could then consider the profiles of the banks we were working with and gauge how closely they met our needs. This was a very disciplined process, involving detailed requests for proposals and an objective assessment of bank capabilities compared with our requirements. As a medium-sized company, we have restricted access to credit, so it was not feasible to appoint a single pan-European bank; however, we decided to work with three carefully selected banks. As our largest network of owned stores is in Spain, we needed a significant branch network, so BBVA was selected as our domestic bank in Spain. For the remainder of our European business, we decided to work with Fortis and Deutsche Bank. We had worked with Fortis previously, but Deutsche Bank was a new relationship.

Pan-European cash pooling

We set up a pan-European cash pool in EUR with Deutsche Bank, with a header account in Barcelona supported by a debt facility. Cash is pooled from each of our group subsidiaries and managed centrally by Group Treasury. In many respects, this cash pooling arrangement was set up as a buffer for the future: in some respects it was more than we needed initially, but it allowed us both to manage our current needs and facilitate continued business expansion in a plug-and-play fashion when new investment opportunities arise in new countries. Although cash pooling can be relatively expensive, there are considerable advantages which outweigh the costs. Some of these benefits are described quite frequently, such as efficiencies and the ability to leverage credit and debit balances across the group.

Although cash pooling can be relatively expensive, there are considerable advantages which outweigh the costs.

However, in addition to the ‘traditional’ benefits, we were looking for something more from our cash pooling structure. We wanted to avoid local ‘fiefdoms’ outside the influence of the company’s headquarters that give rise to financial inefficiencies. Centralisation required not only the new cash pool but also new group-wide procedures, transparency of information and a change in mindset. Although it was difficult at first to shift attitudes, cash pooling was an enforced discipline in changing the way the company thought. The result was a new sense of the Pepe Jeans Group, with changes in behaviour and a broader awareness.

Enhancing visibility

Cash pooling resulted in substantial change at headquarters level too. While there had been little or no transparency and access to real-time information across the group in the past, Group Treasury now has complete visibility over every account. We use Sage XRT to collate balance information (MT940 or local country format messages) from the banks on a daily basis, from which we can make our financing and investment decisions. Dealing with the financing needs of individual subsidiaries is quite different to addressing the liquidity requirements of the group as a whole. One the one hand, cash movements are higher as funding needs are bulked; on the other, a more strategic approach to financing can be adopted. As we are reliant on group level credit lines, cashflow forecasting needs to be more effective, so that we can plan our financing arrangements in advance and provide for the high seasonality associated with our business. To manage this, we are implementing a rolling cashflow forecast across the group in which all business units are required to participate. While this initially seemed an imposition, many business units now find the process valuable, as with a detailed coding structure in place, they have better transparency and granularity over their own information.

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Future aspirations

Looking ahead, we anticipate our business transitioning from a pan-European company to a global firm, and our choice of banking partners also reflects this. It was important for Pepe Jeans that as our banking needs evolve globally in the future, our banking partner has a presence in the regions into which we develop. For example, we are due to start our first Hackett operations in Tokyo and New York very shortly, and we also see expansion potential in Poland. In each case, we anticipate that Deutsche Bank will be in a position to help us. While there may be some countries where the bank does not have a local presence or specific support for our retail activities if required, the bank has sufficient influence and strength of partnerships to open doors for us. An example of this has been our recent expansion into Ireland where we have leveraged the relationship between AIB and Deutsche Bank. Another advantage with the banking structure we have adopted is that by working with a select group of banks, we can be flexible in how we address in-country cash management issues as opposed to being obliged to fit in with a particular bank’s approach.

Enhancing visibility over group information has brought dramatic benefits and allows us to better inform our strategy.

Up until now, our cash pooling strategy has been predominantly euro-based, but as our currency needs develop, with costs and revenues in JPY for example, we are starting to look at opportunities for cross-currency pooling. Furthermore, as we source products from a wider range of countries, our cost base will not necessarily be denominated in USD. Moving into countries such as China in the future requires the right banking partner to help manage different standards and ways of doing business.

Conclusion

Although the project so far has been complex and diverse in its scope, the advantages have been significant. Enhancing visibility over group information has brought dramatic benefits and allows us to better inform our strategy. Cash pooling in conjunction with cashflow forecasting enables us to centralise both decision-making and execution so we can act in the interests of the Pepe Jeans group. These changes have required a transformation in many of our policies and procedures, in particular the way in which subsidiaries interact with Group Treasury. While this has inevitably been difficult at times, it has been gratifying to see the change in mindset which has taken place and the benefits which have resulted.