Cash & Liquidity ManagementCash ManagementAchieving Global Control of Cash

Achieving Global Control of Cash

“It’s 11 o’clock. Do you know where your children are?” asked US television newsman, Irv Weinstein, habitually of American parents for more than 30 years. Today he might ask viewers a similar question on the whereabouts of their money, given that cash is at least as elusive as the average teenager. Although quantum physics might suggest you can either know how much cash you have or which direction it might be going, but never both, corporate treasurers and cash managers always want to know more.

Cash is one of the most valuable corporate assets in any organisation. It pays the bills and keeps the lights on. It meets the payroll and stands ready to be traded for whatever is needed to keep the ‘going concern’ going. Managing it has always been an important corporate priority, but the 2008 credit crunch taught an even harder lesson to senior executives about the supreme importance of strong cash management.

Companies have responded to this challenge in different ways. Centralising cash management and consolidating bank balances are two of the most popular approaches, but system limitations and the unending variety of bank formats are always standing in the way. Throwing money at the problem, by building bespoke interfaces to and from every bank and internal enterprise finance function, is one obvious approach, but consolidation of IT budgets is occurring at least as quickly as the need to consolidate cash. Even if everything could be connected to everything else, as if with magic electronic spaghetti, maintaining an overall view of the landscape, along with the bottom line on a comprehensive daily cash report, would remain as far away as ever.

Clearly a new approach is required. Millions of payments via hundreds – if not thousands – of accounts stored in dozens – if not hundreds – of banks produce a blizzard of paperwork that can take all day just to reconcile, let alone compile and analyse. A straight-through processing (STP) success rate of 95%, or even 98%, can still leave dozens of bank statements in need of manual attention before confidence in any number can be achieved, and fully occupy a small army of cash analysts before they can start producing any positive corporate value. Cash reports remain limited to more-easily reconciled and reported balances, subsidiary balances remain uncounted and pending purchase requisitions and revenue pipeline numbers remain tomorrow’s surprises.

Statoil as a Case Study

The solution has to be a better corporate cash landscape, with more effective and comprehensive bank communication.

Norway’s Statoil is the world leader in crude oil sales, operating in 36 countries across Europe, the Americas, Africa and Asia. At the recent EuroFinance conference in Monaco, Patrick Pots, the group’s cash and treasury manager, and Tor Stian Kjøllesdal, its head of financial supply chain, were joined by SAP’s Christian Mnich to outline Statoil’s redesigned approach to cash and payments. The session, ‘Achieving Global Control of Cash’, was billed as follows:

“This case study will look at one company’s quest for visibility and control of its cash, a journey which brought them full centralisation using one integrated enterprise resource planning system, including establishment of: an internal bank, a payment factory, central accounts payable (A/P) and receivables (A/R), a multi-bank gateway via SWIFT, centralised bank account management and control of bank charges.”

So how did Statoil meet these goals, and how can others follow their example to achieve the same?

Current challenges in most organisations mirror the ‘before’ picture at the group, as follows:

  • Monitoring tools need to be bolted on to core finance applications.
  • Expensive and technically-complex middleware is required across the landscape.
  • Channel connections are bank-by-bank, proprietary and expensive to maintain.
  • Message formats are numerous and frequently changed, heavily burdening IT resources.

Statoil’s solution was to meet each challenge head-on, and to take a comprehensive and automated approach to resolving complexity through:

  • Monitoring and communicating via a comprehensive bank communication tool.
  • Leveraging standard technology that eliminates the need for extra middleware.
  • Utilising a consolidated banking communication channel, such as SWIFTNet.
  • Standardising an open global communication standard, such as Extensible Markup Language (XML).

Taking this approach, in turn, creates opportunity for a more streamlined and effective banking landscape that:

  • Eliminates paper.
  • Improves compliance.
  • Achieves a single standard process for all banks.
  • Enables better control and visibility.
  • Reduces bank fees.

Even more valuable than these efficiency improvements is putting a comprehensive, accurate and up-to-the-minute cash report in the hands of corporate treasurers and cash managers. No more missing balances, or surprises, from far-flung subsidiaries; fuller utilisation of cash and other current assets, with significant reduction in inflated on-hand balances kept for contingencies. Cash managers can increase the velocity of cash, with faster application of receipts, better-controlled payments for larger discounts and improved supplier relationships, compliance, audit and control.

What are the First Steps?

As with any large-scale undertaking, the first step is often achieving an inventory of the challenge. A simple question is whether you can put your hands on a complete list of all bank accounts currently open and in use. Many companies find it surprisingly difficult to do so with full and complete accuracy, even via hand-compiled lists. It’s little wonder that an accurate cash balance is difficult to achieve.

Once a list of accounts is on hand to understand the scope of the challenge, is there a map to identify each system and subsidiary that has access to or uses each account? Many companies assume they know but it can be surprising to discover how many banking dependencies are hidden inside complex systems, which would constrain attempts to streamline.

With a list of accounts mapped to each business unit, next comes the system question and the plan for automation. Which systems are interfaced to which accounts? Where are the many touch-points that require attention, should changes be considered to the banking landscape or the account list? How much IT work is required to maintain the present level of connectivity once any changes are made?  Many IT departments still use code that has run successfully and invisibly for years, but often those organisations have evolved beyond the ‘obsolete’ skills required to make changes to that old automation. It’s unclear whether that’s good or bad news, but changing existing systems can often be more complicated and expensive than replacing with new.

Solving Several Challenges

Armed with perfect knowledge of the scope of the challenges, next comes designing the components of an effective and comprehensive solution. As demonstrated by Statoil’s example, implementation of the right bank communication platform can solve several challenges at once. Even more than collecting the technical pieces and eliminating complex and expensive loose ends such as proprietary middleware, it’s important to determine and choose the right standard of communication to and from banking partners.

Advances like the single euro payments area (SEPA) and the ISO 20022 standard allow companies to simplify internal payment processes and reduce the related bank connectivity challenge. The Common Global Implementation Group (CGI) and enterprise resource planning (ERP) vendors have made implementation of standards-compliant XML messages a low-risk, high-reward strategy. Organisations like Statoil benefit from taking the bank-agnostic approach, reducing their dependency on specific banking partners and lowering related costs. Using multi-bank gateways such as SWIFTNet further prepares treasury landscapes for efficiency improvements.

That’s just the tip of the iceberg. Subsidiaries in complex multinational corporations (MNCs) typically execute numerous transactions between segments that are typically settled via payments made through various global financial institutions. Customers and suppliers across multiple national and currency boundaries create an even larger mountain of cross-border payments. Ironically, many of these payments often fail to leverage the strongest and lowest-cost banking relationships because they are poorly co-ordinated with major local subsidiaries, and fail to leverage more advantageous banking relationships across those borders. Imagine the possibility of netting these cross-border flows and reconciling between units before actually moving money through these extremely expensive banking channels.

A virtual banking infrastructure has immediate benefits even above elimination of the vast majority of expensive cross-border wire payments. Corporate cash is pooled as a matter of practice, while better terms can be negotiated with major banking partners to further reduce the cost of transactions.  Settlement of intercompany accounts is directly controlled as a part of internally-managed financial transactions. Global treasurers and cash managers enjoy the right infrastructure in place from which to better manage corporate cash.

Many more opportunities exist to strengthen practice and infrastructure as part of a global cash management initiative. Better approaches to system management and governance of corporate master data, such as bank accounts, related business units, cost centres and financial accounting codes, can be implemented more easily when a full encyclopedia of those accounts, centres and codes is known and catalogued. Accounting processes are straightforward and accurate, while reconciliation steps can be reduced if not outright eliminated in cases where intercompany transfers are completed within a single, unified financial and payment system. Reporting of cash balances is immediate, comprehensive and, above all, precisely accurate.

That’s the kind of basis upon which a truly effective treasury organisation can be built. Have a conversation with cash managers who have already taken the steps, and discover more about what you can achieve with true global control of your cash.

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