Are Medium-sized Businesses Getting a Fair Cash Management Deal?
When it comes to cross-border cash management services, size shouldn’t matter. There appears to be a generally held view that banks will fall over themselves to offer the biggest corporates tailor-made, innovative and efficient cross-border cash management solutions, whereas the offering to the medium-sized business is missing. There are, however, banks out there willing and able to deliver medium-sized businesses exactly the same cash management services enjoyed by the larger multinationals.
With ever increasing opportunities for expansion in Europe, it is no wonder that many medium-sized companies have established trading channels in Europe. Multinational companies, regardless of their size, require effective, easy to use services including collection accounts, visibility of subsidiaries’ bank accounts and cash flows, competitive cross-border transfer options and liquidity management solutions that offset interest earnings against interest costs. Irrespective of size, all companies wish to make sure their working capital, across the group structure, is working to its maximum potential.
While a medium-sized businesses cross-border needs may not be dissimilar to those of a far larger company, it is often felt that there are limited alternatives for mid-market companies and that the options tend to be prescriptive and, typically, not cost effective.
Indeed, the view of bankers has often been that the mid-market corporate carries potentially higher credit risk and therefore cash management schemes should not be available to these medium-sized enterprises. The reality however is quite different in that the implementation of a complementary cash management solution can make the mid market corporate more attractive to the banker as it carries less risk than a credit only relationship with a larger multinational.
Given that some 45 per cent of the 1.3 million mid-market companies across Europe are now actively trading across EU borders, it’s surprising that some of the more bespoke, sophisticated solutions available to this market sector are not more widely known.
To complicate matters, it is not generally recognised that overlay structures and partner-bank solutions are not all that is available. In today’s highly competitive banking environment there are solutions that do not require multiple bank involvement but it does seem that companies need to look more deeply into the market offering to seek out all the possibilities available to them.
It is true that there are many standard cash management and electronic banking services readily available for medium-sized businesses to help liquidity management when trading in Europe. But there is now far more on offer than ever before. Specialist solutions such as target balancing and cross-border, cross-currency notional pooling are accessible to the mid-market, albeit not on every corner. This is partly because successful delivery of such solutions is limited to only those banks with their own integrated network of offices in all the required locations.
While not all medium-sized companies will require such sophisticated services, other cash management services such as collection accounts, cross-border electronic banking and preferential rate cross-border transfer solutions are also on offer to ensure that making and receiving payments can be achieved expeditiously.
Awareness of the full range of services available is sure to play a part in this, perhaps too the ideology that such services are ‘too good to be true’. Ensuring better awareness and that clients are fully informed of all the options, is in large part the responsibility of the banking sector. But there are also some misconceptions that need to be laid to rest. There are some recurring perceptions among medium-sized businesses with regard to cross-border cash management solutions, including the assumptions that:
It is fair to say that an up-front investment is required to establish a new cash management structure or to change banks but beyond this the reality is that a well-designed cash management facility will result in cost reductions, increased visibility and control of group accounting as well as bolstered cash flow and working capital for the group.
For companies with concerns about losing local banking knowledge, there are banks with offices across Europe that bring with them the experience not only of the local market but additional expertise from across their network. Working with a single bank in all locations will open lines of communication, improve transparency, and ensure that everyone is pulling in the right direction. Most certainly, all banks are not the same.
Cash management can help identify where subsidiaries’ assets are not being put to best use and then provide the opportunity to improve the group’s overall group cash positions. For example, cash raised against assets in one country can then be used to offset debt and interest charges in others. By assessing where a company’s assets are highest and debts most expensive, cross-border cash management facilities can reduce debt and interest charges. Potentially, it can also release working capital for use in other spheres of the business.
The benefits of robust cash management systems should also result in lower charges i.e. the cost of reporting balances/account statements to a central electronic banking platform, uniform and cheaper cross-border transfer prices which eradicate lifting charges, simultaneous value dating removing that unnecessary ‘float’. These ‘costs’ to the business can often be overlooked when evaluating cross border liquidity structures due to the focus on the ‘bigger picture’ but as they say the ‘devil is in the detail’ and businesses should be aware of these costs as they can eat into the real value that is gained from such solutions.
Cross-border cash management solutions can be as simple or complex as the individual company’s requirements and businesses cross-border cash management solution should not be decided solely based on the size of the organisation. It is important that the banking partner of any medium-sized international company is looking to derive the right solution for a company’s specific requirements and not simply fit the requirement into the only available solution. A square peg will never fit into a round hole!
Real added value is generated when a company’s cash balances are pooled. The benefits of effective cross-border banking stem more from adept banking management rather than the availability of financial products alone. It is these benefits that medium-sized businesses should be seeking out to help synchronise flows across borders and optimise cash flow. We hope that as medium-sized businesses become more aware of the benefits that cross-border cash management services can bring to their business, they will be motivated to seek a provider that will match their needs.