Cash & Liquidity ManagementCash ManagementForecasting is Key to Control in a Complex Financial Environment

Forecasting is Key to Control in a Complex Financial Environment

This year’s Cash Management and Trade Finance Survey found that the centralisation of cash management structures is important for two-fifths of the companies polled. While 28% of the companies currently manage cash globally, 40% intend to implement (or keep) a global cash structure in the next two years.

In the same vein, 82% of companies said they will have a shared service centre (SSC), payments factory or in-house bank (IHB) within the next two years (compared to 75% that currently have one of these structures). Companies are also looking to include more countries and currencies in their cash pools, which can be seen as a sign that they really are trying to make the best use of cash on a global level.

The globalisation of trade finance is continuing: while 18% currently have decentralised trade finance management structures, just 7% intend to continue with this in the next 24 months. The survey found that treasury is gaining more control over trade finance: 45% said that treasury is currently responsible for trade finance. This is likely to increase to 53% in the near future. There is also greater integration of trade finance data into cash management applications.

Forecasting was found to be the function that is most likely to improve a company’s overall working capital efficiency. The good news is that more than four-fifths of companies now include trade finance data in their cash flow forecasts. Although in most cases most of this is added manually, 34% have full or partial automation.

Other findings include that treasury still needs to extend its influence over its incoming receivables, in order to minimise customer counterparty risk and achieve maximum accuracy in its forecasts for incoming cash flows. Meanwhile the rising cost of capital associated with Basel III is a concern for corporates and companies may be more uncertain of how to treat short-term cash investments (such as bank deposits) and financing (such as bank overdrafts) as these options tend to be less favourable in today’s financial environment.

Towards Cash Centralisation

A growing number of companies have been centralising their treasury function in recent years and it’s a trend that the survey indicates is set to continue. While 28% of companies surveyed currently manage cash globally, 40% say they will have a global cash structure within two years. There is also a move away from decentralised treasury structures: 18% of respondents currently have completely decentralised treasuries, but just 7% plan to remain decentralised in the next 24 months.

Jonny Sander, the offering manager for corporates at SEB global transaction services, says this is an on-going trend: “Treasurers are taking greater responsibility for the full supply chain and are seeking full understanding of the business. In the current financial environment, resources are scarce, so treasurers really need to see the full picture and know where their capital is trapped and where the risks are. There is a clear connection with cash flow forecasting: better forecasting will provide better data for improved decision-making.”

An important and intrinsic part of the centralisation process is the setting up of SSCs, payment factories or IHBs, all of which increase efficiencies and can help to control and reduce risk. Three-quarters of respondents currently have a SSC, payment factory or IHB, while 82% intend to have one of these centralised structures within two years.

SEB’s Sander adds: “Companies are taking these steps to practically improve their processes, often as part of a company-wide treasury centralisation project. Having a payments centre is more efficient in terms of costs and means less manual work. This is really improving efficiency and is a positive step towards controlling and therefore mitigating risks.”

However he also notes: “SSCs might be a lot of work to set up, but the level of complexity depends on the company structure and business model. It is certainly something that is worth considering.”

Although centralisation is a significant trend, many companies find they operate efficiently with a decentralised structure, which inevitably has a better local business perspective and can be very valuable in terms of knowing the business culture and relationships. Companies have to weigh up what is more important to their business: local expertise or economies of scale.

The survey also found that companies are likely to increase their use of a variety of cash concentration techniques in the coming two years, such as notional pooling, cross-currency pooling, or single legal account pooling. Zero-balancing remains the most popular technique, used by 43% of respondents currently.

Sander says: “If this indicates that more companies want to include a greater range of currencies and countries in their cash concentration structures, this will have a positive impact on cash flow forecasting and improve the conditions for managing projects to improve working capital.”

The Integration of Trade Finance

Corporate treasury attitudes to trade finance mirror the increased centralisation that is taking place within treasury’s cash management operations. While 19% of the respondents said that their company currently has global management of trade finance activities, 26% believe this will be the case within the next two years. Conversely, there is a marked move away from local autonomy of trade finance activities, from 18% currently to just 7% in the next 24 months.

Sander says: “It’s important to be able to see where you can free up working capital. Having a global strategy and bringing trade finance in line with your treasury goals is beneficial. The key aspect is to have a mandate to oversee trade finance activities as well as the traditional treasury operations to make the picture more complete.”

The survey also asked about areas of the business that treasury is responsible for and, while the expected areas of cash management, capital markets/investment, treasury systems and risk management ranked highly, there were also some pleasant surprises in that 45% said that treasury is responsible for trade finance, likely to increase to 53% in the near future.

In terms of treasury applications and systems, 47% of respondents said that more than half of their cash management applications are integrated with trade finance. However, more than one-third (36%) keep the two areas separate. The quota of companies that keep these two areas separate is likely to decrease in future, as more companies choose to centralise their financial operations.

Sander says: “Understanding trade finance flows as well as payment terms is important to get a better grip on cash flow forecasting, which ties in with the increasing importance of liquidity management.”

Cash Flow Forecasting: Key to Improving Liquidity Management

Forecasting is the function that is most likely to improve a company’s overall working capital efficiency according to the survey, which found that 26% of respondents said they believe cash flow forecasting has the highest potential for improving working capital.

“All elements of business tie into each other, treasurers no longer work in a fragmented world. Now it’s important to get the overall picture. In order to improve working capital, they need to see the full supply chain. The first thing to do is to devise a forecasting strategy and see how much data you can get into your forecast without making too many changes,” says SEB’s Sander.

As would be expected, the majority of companies polled (69%) said that treasury is responsible for cash flow forecasting.

“There is certainly more focus on forecasting, but ensuring you have a modern and integrated ERP [enterprise resource planning] system will enable you to get more information into central treasury. Many companies still depend on Excel but there is interest in improving this process, reducing manual processing and getting more integrated and automated data from trade finance and regional finances,” Sander adds.

The importance of trade finance data to improve overall working capital efficiency is underlined by another result, which shows that more than four-fifths of companies now include this data in their cash flow forecasts. Although almost half of the respondents (48%) need to upload the data manually, the high-level of trade finance data inclusion is important. The 18% of companies that don’t include it are missing an important component of the company’s financial picture, according to Sander.

The main perceived barriers to effective cash flow forecasting include inaccurate sales targets and projections, lack of internal systems integration and inefficient processes at subsidiary level. Other barriers included factors that were not specific to the financial or treasury departments, such as lack of resources, lack of priority within the business unit or lack of communication.

Extending Treasury’s Reach: Influencing A/R and A/P

Of the various working capital activities, the majority of treasurers polled are responsible for cash flow forecasting (69%) and liquidity management (90%), as would be expected. Far fewer have responsibility for activities such as accounts receivable (A/R) and for accounts payable (A/P) – 10% and 8% respectively.

This could indicate that if treasury wants to really maximise tied-up liquidity, they will have to exert more influence on processes such as A/R and A/P. However, gaining control or influence over these processes would involve a company-wide working capital project.

SEB’s head of GTS Corporate Sweden, Erik Seifert, agrees there is a need for treasurers to exert more influence over receivables and payables and he has noticed treasurers already making moves in this direction. “We clearly see more treasurers taking an active role in the A/R and A/P management,” he says.

SEB’s Sanders adds: “You need to involve many different departments in the company – and get management on board, from the CEO [chief executive officer] and executive level. You need strong buy-in for working capital projects, in order to increase treasury’s influence over sales, A/R and A/P. The approach cannot be fragmented, rather you need a common ideal and it must come from the top.”

Managing Short-term Investments and Financing

The survey results suggested there could be a shift away from popular short-term investment instruments in the coming years. While 49% of respondents said they currently have bank deposits, only 42% indicated that they would maintain them in future.

Fewer companies are set to use inter-company loans and pay-down debts as well, while interest in money market funds and direct investments is set to remain static. The use of yield-enhanced funds (used by just 9% of respondents currently) is set to rise to 10% of respondents in the next two years.

SEB’s Seifert says: “Discussions with our clients increasingly involve questions such as: How much liquidity do we need? In what form? Cash or bank loans? How to manage cash?” This shows the increasing importance of short-term liquidity management in what can only be described as a very complex and difficult market.

The survey reflected this by suggesting that short-term financing is in fact set for a shake-up in the next few years. Bank overdrafts are currently used by 39% of the survey’s respondents, but only 29% of them say they will continue to use bank overdrafts in the next 24 months. The companies polled said they will also rely less on other types of bank debt (fixed or variable rate bank debt), while intercompany loans and the selling of receivables will also be used less as a means of financing.

Sander says: “This is an important question because if bank overdrafts and bank deposits are set to decrease, what will replace them? It indicates uncertainty in the market and underlines the necessity of a more strategic approach to liquidity management. To make use of internal resources, to free up working capital stuck in the financial supply chain and make use of solutions such as supply chain financing (SCF) – these are the strategies that are important now. Allocating excess cash and taking a strategic view of short-term funding have become key questions compared to a few years ago. Companies need to know what funds they have coming in and they definitely need a strategy for short-term cash investment.”

This result ties in with the impending Basel III regulation, which is set to make bank funding more expensive. The survey found that the increased cost of capital is the main Basel III-related concern for the corporate respondents, while the lack of clarity and interpretation of the regulation is also a cause of concern (possibly referring to the lack of clarity regarding rising capital costs).

The Eurozone Crisis and an Increase in Counterparty Risk

The eurozone crisis is affecting business confidence in a number of ways but, according to the companies polled in this survey, the biggest impact will be on their banking relationships. Fifty-nine percent of companies said the on-going financial uncertainty is having either ‘some impact’ or an ‘extreme impact’ on their banking relationships.

SEB’s Sander says: “There is a lower level of corporate trust in banks now, which would have been unthinkable before the collapse of Lehman Brothers in 2008. Companies still want to work with fewer banks, but they want to choose reliable ones – there is still some consolidation but companies are more careful in choosing.”

And Seifert adds: “For us, being a strong bank in a part of the world considered less turbulent is an important factor, and that certainly shows in our client discussions.”

The survey found that companies are also reconsidering their liquidity management policies as a result of the eurozone crisis, while reconsidering risk receivables and their foreign exchange (FX) strategies are also consequences of the financial situation.

Reconsidering the risk inherent in receivables forms part of the treasurer’s strategy to mitigate customer or supplier risk in the supply chain. Greater influence of the A/P and A/R processes, as mentioned above, will also help to monitor this supply chain risk.

Conclusion: an Holistic Approach is Needed

The trend of centralisation is continuing, as fewer companies intend to maintain a decentralised cash structure in future and respondents also say that there will be less local autonomy for managing trade finance. The increased centralisation of cash management entails more cross-currency pooling and more countries included in cash concentration structures.

Seifert says: “CFO- and treasurer-lead processes for centralisation have made great cost savings and increased operating efficiency. Thus centralising of A/R and A/P to treasury is a natural step also in increasing risk control.”

This trend goes hand-in-hand with increased integration of cash management and trade finance. It shows that treasury is gaining more control over the supply chain and is able to integrate more trade finance data into cash flow forecasting.

In order to improve efficiency, risk mitigation and working capital, a more holistic approach is required. What is clear is that, considering the various uncertainties around short-term investments and funding, a strategic approach to liquidity management is necessary.

The survey also highlights the importance of a robust strategy for managing short-term cash deficits and excess funds. There is a greater need for accurate information on short-term cash flows. It seems likely that companies will be looking to optimise and use excess cash within their working capital cycle, rather than depend on bank financing, the cost of which is set to rise as Basel III comes in. Likewise, low-risk investments pay low rates of interest and companies may be looking to plough money back into their supply chain, rather than look for short-term investment options outside their business.

According to SEB’s Sander, there is a renewed focus on working capital because there are few attractive short-term financing options available. He summarises the situation: “As cash becomes scarcer, companies will want to use capital in their own supply chain as efficiently as possible. Counterparty risk is also high on the treasurer’s agenda, with the on-going financial crisis, minimising and mitigating the risk of non-payment or delayed payment from a customer is important, as is ensuring that suppliers are able to function properly. Choosing your financial partners wisely has also become increasingly important as you need to be sure that they can support the corporates’ ambitions going forward.”

About the survey
The gtnews 2012 Cash Management and Trade Finance Survey was conducted between 13 April and 3 May 2012. It is based on the answers from 135 corporates. The most represented region was western Europe (42%), followed by North America (29%) and Asia-Pacific (14%). CEE, Latin America and the Middle East/ Africa accounted for 15%. Large corporates (revenue greater than US$10bn) made up 21% of the respondents, companies with revenue between US$1bn and US$9.9bn accounted for 32% while companies with revenue between US$250m-US$999.9m made up 21%. Twenty-six percent of respondents were from companies with revenue less than US$250m. More than a third of respondents (34%) were from the manufacturing sector, while 10% each came from the IT industry and transport and logistics sector. To download the full report, please click here.


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