By Ursula Conterno
Partnering with the business to enable successful international growth—a cash management perspective.
As the world economy continues its path towards globalization and companies grow internationally, treasury finds itself facing new challenges. In particular, the challenge for cash managers is to balance their role as business partners and their fiduciary duty to protect the company’s cash, while doing it all in the most efficient and costeffective way. According to the PWC Global Treasury Survey 2014, cash management optimization is a high priority for treasurers, so this challenge is neither small nor about to disappear anytime soon.
In an ideal world, treasury would devise a scalable structure to address cash management that could be easily replicated in new markets as the business expands. In reality, different local regulations, banking capabilities and business practices make this ideal nearly impossible. This is evidenced by answers to a recent NeuGroup survey showing that the three main reasons for treasury to expand its international footprint were: (1) the complexity of local regulations and practices (2) international business growth; and (3) the need to support local businesses.
Cash management building blocks
Understanding cash well beyond cash balances.
Timely cash visibility is the foundation of efficient liquidity management. In order to make decisions on how to manage cash, treasury needs data. The company as a whole needs this data—not only cash balances but also transactional data. This end-to-end visibility allows practitioners to apply collections efficiently, to execute timely payments, to forecast your cash needs and to identify any excess cash in the system. This cash knowledge goes even beyond and expands into being able to access the cash by understanding the flexibility of the bank account structure —what are the restrictions to move cash from country-to-country? How fast that movement can happen? Where is cash trapped?
Managing cash risk…
Building on understanding cash well beyond cash balances, Treasury is able to minimize risk around cash. From an operational perspective, understanding the banking structure and operational business needs behind them enables companies to set appropriate controls in place for opening /closing bank accounts, managing account signatories and granting systems access.
Also, it gives perspective while trying to balance operational needs versus counterparty risk. Understanding forecasting accuracy and cash accessibility makes it easier to appropriately manage net funding and investment positions. Finally, it enables practitioners to rationalize FX exposure, as FX risk should arise from business practices, not from banking or legal structures.
…while minimizing costs
By understanding cash and managing it more actively, Treasury should be able find operational efficiencies over time. One source is reduced costs related to external borrowing and overdrafts, as well as additional returns on surplus cash. Another one could be lower banking fees from more actively managing counterparties.
On the opposite end of the spectrum from the ideal “scalable structure,” each country would be managed individually. One way to explore the puzzles posed by international expansion is through its effects on what we like to call the Cash Management Building Blocks (see box). This is a framework that could be used to examine this topic from a high-level and organized perspective.
As companies expand internationally, understanding cash becomes harder. Different time zones and banking practices affect timely and standard delivery of data. This may result in many manual and non-standardized processes to manage information.
If just looking at cash balances becomes so complex, the effects on collections identification and forecasting becomes even more challenging. Also, cash structures grow more complex and inflexible as different legal and tax restrictions are added.
There is a rippling effect on managing cash risk and minimizing cost. For example, the less cash visibility, forecasting accuracy and structure flexibility, the more the need for additional idle cash throughout the bank account structure. There is not only a financial cost associated with idle cash, but also additional cost from managing compliance on a more complex bank account structure. In addition, the less standard the process, the more costly it is to manage. Having explored the possible effects of international growth, let’s focus on the tools that cash managers can use to find a middle ground between the two ends of the spectrum.
Centralization
Cash managers can pursue standard processes globally with exceptions as needed. Beyond standard processes, the operations can be centralized at certain geographic locations. Again, recent NeuGroup survey bears this out, showing that most respondents operated under a certain type of centralization while a small percentage operated only at the local level. In fact, the most common centralization structure was a mix of HQ and regional centers. According to the same survey, companies have been leveraging on SSCs and RTCs for a long time now, while IHBs have developed more recently. All these structures are an option when moving along a continuum
that goes from local operations to POBO/ROBO structures.
All of them can be used as tools to centralize operations and streamline processes.
Leverage technology
Embracing new treasury technologies provides significant benefits for cash managers, including improving cash visibility, increasing workflow automation, establishing systemic controls and streamlining bank interfaces. According to an April 2014 NeuGroup survey, manual account administration and lack of cash visibility are two of the most common drivers of treasury technology changes.
There are many technology solutions available in the market-place, including TMS’s from third-party providers (Sungard, Wall Street Systems, IT2, etc.), ERP treasury modules (Oracle, SAP) and other treasury systems that can be used in combination with bank platforms.
The most popular amongst respondents of the April 2014 survey were TMS systems. Also, there has been a rise in the number of treasury-related system implementations. The same survey showed that over 50 percent of respondents were in the process of implementing a treasury technology solution.
Using these tools, cash managers can find a solution that enables them to find a balance within their roles as business support and cash guardians, and do it all efficiently. There is no one-size-fits-all solution, but each company needs to evaluate what works best for them based on their industry and the international markets they expand into. The good news is that there are plenty of options available there to help companies achieve a best-in-class operation.