TMI223 Exec Interview.

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Treasurers
and finance
managers are
scrutinising
each of the
activities that
influence
working
capital.

A Focus on Best
Practices in Cash
Management
28 TMI | Issue 223
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With SEPA compliance
projects now largely
underway or nearing
completion, what priorities
are you seeing emerging
amongst your corporate
customers?
After a busy couple of months over both
year-end reporting and SEPA migration
projects, corporate treasurers are now able
to take stock and review their strategic and
operational priorities for the year ahead. In
some cases, treasurers are now able to
progress projects that had to be deferred as
a result of the global financial crisis and
more recently, the need for SEPA migration.
In others, they are using the opportunity of
relative calm to reflect on, and consolidate
TMI | Issue 223
An Interview with Robin Terry,
Head of Sales, Europe, Payments
and Cash Management, HSBC
Helen Sanders, Editor
their activities to identify opportunities for
future improvement.
Whether they see the next few months as
a time for action or reflection, companies of
all sizes are recognising that implementing
best practices in cash management offers
operational efficiency, cost savings,
improved returns and greater shareholder
value. Consequently, treasurers are coming
to us to talk about opportunities to enhance
cash management efficiency, discuss best
practices and understand how these can be
adopted in their business.
On which elements of cash
management are customers
focusing?
The components of an efficient cash
management strategy are well understood:
working capital management; bank
relationships and accounts; liquidity
structures and efficient channels. However,
as the business environment evolves and
companies’ strategies progress, these often
need to be reviewed and adapted to meet
changing needs, both individually and in
combination.
Working capital management has been
discussed for some time, but it has become
far more of a senior management focus.
According to a recent PwC survey, $3.7tr in
working capital could be released globally
through the adoption of effective practices.
Even small changes in behaviour can make a
material impact on the business, so
treasurers and finance managers are
scrutinising each of the activities that
influence working capital. For example,
companies continue to review their
receivables practices to reduce days sales
outstanding (DSO) and increase the
predictability of cash flow, such as using
direct debits. In tandem, they are looking to
increase days payable outstanding (DPO) by
lengthening payment terms from 30 to 60
or 60 to 90 days or longer.
However, treasurers and finance
managers recognise that simply extending
executive interview
payment terms has the potential to impact
suppliers and affect the resilience of the
supply chain. Consequently, they are
implementing solutions such as supply chain
financing alongside DPO initiatives to
strengthen supplier relationships and reduce
negative impact on their suppliers’ working
capital.
What about smaller
companies which have the
same need to optimise
working capital but may not
have the same credit
leverage as their larger
peers?
Many working capital solutions, such as
receivables financing, are appropriate for
companies of all sizes. On the payables side
too, although supply chain financing
programmes were traditionally set up by
larger companies, we are now seeing smaller
companies establishing these programmes.
It is important to emphasise that working
capital optimisation is both essential, and
entirely feasible, for all sizes of company. By
freeing up working capital and creating
greater financial flexibility, treasurers enable
their organisations to pay down debt, buy
back shares and invest in efficient Many
production and processes to drive down
costs. These savings can then be passed on
working
to customers in the form of lower prices, capital
driving greater competitiveness. solutions,
such as
You mentioned SEPA receivables
migration at the beginning, financing,
which companies should
are
now have completed. To
what extent have treasurers appropriate
and finance managers so far for
been able to leverage the companies of
cash management
advantages that SEPA all sizes.
offers?
While there are a number of organisations
that have used SEPA as a catalyst to
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centralise and rationalise processes, bank
accounts and cash management structures,
the majority of SEPA migration projects
have focused on compliance. In these cases,
Liquidity and treasurers and finance managers have only
working had the time, resource and budget available
to ‘lift and shift’ from legacy formats and
capital
BBAN to XML and BIC/IBAN for SEPA
initiatives are payment instruments. Once these
closely instruments and formats are bedded in,
interrelated, treasurers can then think about how they
use the opportunities that SEPA presents for
so treasurers
rationalising accounts, cash and liquidity
need to management structures and centralising
adopt best payments and in some cases collections.
practices
across the As part of this, presumably
whole an important first step is to
rationalise banking
spectrum of
relationships?
activities.
Yes, absolutely. Many multinational
corporations continue to maintain a large
number of bank relationships, which can
bring problems of proliferation of accounts,
high administrative overheads, compliance
challenges and difficulties in maintaining
timely, accurate visibility and control over
account balances. There has therefore been
a clear trend over the past few years
towards rationalising bank relationships and
reducing the number of both accounts and
electronic channels. One challenge for
treasurers, however, is to determine how
many cash management banks they really
need. Since the global financial crisis, few
large corporations have sought a single
global cash management provider, both to
avoid concentration of risk and leverage the
strengths and geographic coverage of more
than one bank. In most cases, large
multinationals will appoint between three
and five cash management banks. These
could be appointed at a regional level, or
according to each bank’s expertise in
specific countries.
Having appointed core banking partners,
treasurers can then focus on identifying key
accounts that are required for operating
and liquidity purposes and transferring or
closing non-core accounts wherever
possible. While there may be regulatory
reasons why accounts need to be held with
local banks, such as to pay local taxes and
custom duties, in some cases the barriers are
organisational rather than regulatory.
However, techniques such as in-house
banking and virtual accounts offer local
entities the same, or even higher quality of
TMI | Issue 223
executive interview
information and automation than physical
accounts, which can be very valuable in
surmounting internal barriers and
facilitating effective cash management
centralisation. While in-house banking is a
well-established technique, its role has
evolved from enabling intercompany
financing to supporting centralised
payments and collections on a payments-
on-behalf-of (POBO) and receivables-on-
behalf-of (ROBO) basis respectively.
Companies of all sizes are now exploring
these opportunities, particularly now that
SEPA makes it easier to standardise payment
instruments and formats. Although SEPA is
a catalyst, the opportunity is not limited to
the Euro area; rather, the use of XML has
global applicability and many treasurers are
now seeking to standardise communication
formats across all regions.
To what extent are
treasurers and finance
managers reviewing bank
communication channels at
the same time?
Related to the demand for standard
formats, treasurers and finance managers
are also seeking to rationalise and simplify
electronic banking channels. Large
multinationals with many banking
relationships frequently have extremely
complex communication infrastructures
incorporating multiple channels, each of
which has its own look and feel, user tools,
security protocols and supported formats.
This results in significant costs, resource
overheads, fragmentation of information
and a reduced ability to automate processes
such as bank account reconciliation.
Consequently, as part of their efforts to
leverage best practices, treasurers and
finance managers are increasingly adopting
SWIFT for bank connectivity for secure,
bank-agnostic, multi-bank communications.
While the use of SWIFT was historically
limited to large multinational corporations,
service bureaus and Alliance Lite2 enable
mid-cap as well as larger businesses to move
away from proprietary bank channels.
Related to cash
management, optimising
liquidity has become a
priority for corporate
treasurers. What best
practices are emerging?
As you say, treasurers’ desire to
understand and implement best practices
is not restricted to cash management.
Having streamlined account structures,
payments and collections, they are then
in a better position to manage their
global liquidity. For example, we are
seeing a growing number of companies
implementing follow-the-sun cash
pooling structures to transfer the use of
cash to regional treasury centres in
different time zones throughout the
course of the day. For example, the end-
of-day balance on a zero-balancing,
multi-currency pool in Singapore may be
swept to or from a European cash pool,
and then on to North America. Basel III,
and in particular CRD IV (Capital
Requirements Directive) will have an
impact on liquidity management, such as
the ability to include multiple entities in
a single pool, so we are waiting for more
clarity in this area.
It is very apparent from
what you have said is how
interconnected cash and
treasury issues are.
Absolutely: liquidity and working capital
initiatives are closely interrelated, so
treasurers need to adopt best practices
across the whole spectrum of activities. A
valuable first step to optimising liquidity,
for example, is to establish a centralised
approach to cash and treasury
management, and rationalise accounts
and banking partners. At HSBC, we are
working with corporate customers to
identify and implement best practices
that support treasurers’ strategic and
operational objectives at both a regional
and global level whilst complying with
local regulations. Not only do customers
seek our support in emerging markets
where we offer considerable depth of
presence and expertise, such as China,
but they also rely on our extensive
network in regions such as Europe where
we partner corporate customers for cash
management services across more than
18 countries. By working with a global
bank with an extensive footprint,
cohesive solutions and significant
expertise across all major markets,
customers can benefit from our insights
in identifying, adopting and benefitting
from global best practices across cash,
liquidity and working capital. ■
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