Treasurers Must Take the Lead in New Markets
Spurred by the harmonizing effects of the Single European Payments Area (SEPA) – as well as the growth in south-south trade – corporates see now as the time to move into new markets. Yet making such a move will throw up a number of challenges – including optimizing working capital and minimizing risk, which will require increasing levels of cooperation between finance, sales, procurement, production and logistics departments.
With treasury departments exerting an ever-greater influence on their companies’ strategic direction, they must lead the way in improving efficiency and establishing strong collaboration between departments.
With the help of these other functions, treasuries can utilise trade finance techniques to help meet their liquidity and risk-management needs.
These techniques and the collaboration that underpins them will be greatly helped by the implementation of digital platforms. And, as treasury workloads mount, these platforms can automate routine tasks – significantly improving the speed and efficiency of day-to-day treasury operations, and reducing the burden on treasury departments considerably.
Collaboration is Key to Trade Finance in New Markets
As they move into new markets, corporates’ first priority will be to establish a strong supply chain. Larger corporates are now finding that they can reduce both the risk and the cost of their supply chains by extending their credit profile to suppliers. The principle is that where the supplier has a high credit risk, buyers can help them by guaranteeing those payments specific to the goods they wish to buy. In this way, banks can offer credit to the supplier, based on the buyer’s superior credit rating.
This technique is highly valuable as a way of strengthening supply chains in regions where suppliers struggle for funding. What’s more, by extending favourable borrowing conditions in this way, firms put themselves in a stronger position for negotiating prices. Of course, to take advantage of this strong bargaining position, firms will require strong collaboration between sales, procurement and treasury – something the treasury department should oversee.
Receivables financing is another technique that can ease entry into new markets. Here, corporates sell on contracts with payments due, in order to secure immediate funds. This has two benefits. First, it improves firms’ working capital and reduces the days sales outstanding (DSO) on the balance sheet. The second – and often overlooked – benefit is that it can serve to reduce exposure to a particular region. Firms can offload settlement risk on contracts with counterparties in the same area by packaging them together and selling them on to banks or alternative lenders.
Again, executing this technique effectively will mean firms have to collaborate efficiently across departments – and that requires a digital platform. Of course, the digital platforms should be led and controlled by the treasury department – allowing it to generate and share financial data as quickly and easily as possible.
Certainly, digital platforms are an excellent way of linking departments and disseminating information quickly and uniformly – meaning transactions and analysis can be executed in real time and with minimal administration.
Greater Efficiency throughout Treasury
Of course, digitalization offers opportunities beyond the streamlining of trade finance operations. With treasury departments developing their strategic role, implementing expansion plans and dealing with increasing regulatory requirements, simply keeping on top of the workload is fast becoming a considerable challenge.
Digital technology, however, can carry out once-laborious manual processes more quickly and without the need for supervision – a capability that promises to significantly reduce the burden on treasurers.
For example, digital platforms offer excellent scope for improving efficiency in cash-management processes such as matching and reconciliation. By automating these procedures, treasurers can execute faster and more accurately – leaving them free to devote their time to value-adding activities.
Embracing the BPO
The Bank Payment Obligation (BPO) is one example of a digital process that can drive efficiency for treasury departments. BPOs function like digitalized letters of credit – consisting of an agreement between two banks to transact an automated payment on behalf of their clients.
The use of an automated, electronic data-transmission system gives BPOs the speed and efficiency of open-account terms, while mediation from the banks serves to reduce settlement risk as if using a traditional documentary credit.
This combination of speed and security makes BPOs a great tool when entering new markets. Yet, despite this, they have so far struggled to gain significant traction with corporates.
That said, we are beginning to see a number of signs that corporates are ready to use BPOs. Recently, for example, UniCredit mediated a deal between Japanese importer Mitsui & Co. Plant Systems and German SME exporter RVT Rühr-undVerfahrenstechnik. A deal that would previously have been settled using open-account terms was, this time, settled via a BPO.
Meanwhile, in February, UniCredit oversaw Italy’s first ever BPO, between SPIG S.P.A. – a leading producer of industrial cooling systems, based in Lombardy – and one of its German suppliers.
Certainly, we are likely to see many more such transactions as firms look to establish themselves in new markets with maximum efficiency and minimum risk.
Seizing the Opportunities
Of course, treasurers will face many challenges in the years ahead – especially when trying to take advantage of the opportunities in new markets. This will require them to improve their liquidity and manage their risks carefully. Meanwhile, they must balance these considerations with the many other demands on their time.
Investing in digital processes seems the surest way of overcoming these challenges – expediting previously long-winded procedures and enabling treasuries to execute ambitious trade-finance programmes that can ease their passage in to new markets.