Features : Treasury and Cash Management Comes Back To the Core

Increasingly, global businesses are recognizing the benefits they can gain from centralizing their treasury and liquidity management. Setting up suitable systems to achieve that goal, however, is far from simple.

As the worlds biggest companies spread their operations ever farther afield, they are looking for efficient ways to manage multiple cashflow streams in often-diverse currencies. Many already appreciate the benefits of managing cash and treasury functions centrally, but even with the rapid development of technological solutions, they are finding the process is complexand often costly.

For most companies, the desire to do business in multiple markets can come at a price. Siemens is represented in more than 190 countries, which makes managing liquidity a truly global challenge, says Peter Murer, head of cash management advisory, Siemens Financial Services. Siemens Treasury & Financing Services division acts as an inhouse bank responsible for all internal and external payment transactions for Siemens worldwide.In Europe we have a substantial number of subsidiaries in each country, and each subsidiary has a number of bank accounts, Murer explains.

To add to the complexity, while a number of Western European and US-based companies are eager to expand their geographical footprint to developing countries with high economic growth, local laws and regulations can prevent them from freely moving capital from these markets to other international subsidiaries. In China, for example, the lack of convertibility of the Chinese renminbi has restricted multinational corporations ability to implement fully centralized treasury and liquidity management solutions in the region.

It is not feasible or practical to have full centralization of FX among different entities in different cities, says Leong Wai Leng, vice president and chief financial officer of Philips, China. Philips has excess renminbi liquidity in China, which is difficult to mobilize to other parts of the company when needed. The question I often get from our headquarters is, How can we justify the situation where Philips globally has borrowing positions overseas, but yet we have a huge pile of renminbi in China just sitting in bank accounts? says Leong.

Similarly, in Russia the ruble is not convertible, so Siemens in Munich, Germany, which does substantial volumes of business in the region, has to think outside the box in order to manage their liquidity needs in that market. Rubles cannot be obtained outside of Russia, so as we have substantial volume in the local market, we need to look for alternative solutions to manage the liquidity position for that currency, Murer explains.

Making Capital Work


Peter Murer, Siemens

Companies inability to adequately manage their liquidity is not just restricted by FX controls. A lack of automation, manual processing and general inefficiencies in the corporate supply chain can mean companies have less control over their working capital, which ultimately affects their ability to better manage their liquidity. Good working capital management is a pre-condition for good liquidity management, says Murer. If you dont know when your customers are going to pay you, how can you determine your liquidity position for the days and weeks ahead?

Yet as John Gibbons, head of relationship management, EMEA, at ABN Amro, explains, there are examples of highly sophisticated European companies with billions in cash balances sitting idle in bank accounts around the world. Consultancy REL estimates that 1,000 of Europes largest corporates have $1 trillion in trapped capital. The biggest challenge is to get the goods and money to move together. But according to research conducted by ABN Amro in conjunction with BDRC, only 33% of treasurers surveyed were actively engaged in their supply chain, and 66% did not pay any attention to receivables.

Lisa Rossi, head of liquidity management, Deutsche Bank Global Transaction Banking, believes treasurers are more empowered to understand their entire supply chain, whereas 10 years ago that probably was not the case. More recently it has become a requirement to engage the business areas to get a better handle on the whole supply chain, she says.

Another reason for companies to better manage their working capital and liquidity is the tremendous pressure put on companies by shareholders and executive boards to better manage their cash. Cash is king so cash flow is critical, says Gibbons. Companies are waking up and saying if it is about cash flow, we need to figure out how best to mobilize our cash.

Regulations such as Sarbanes-Oxley and Basel II also demand that companies have better visibility into their cash flows. Rossi believes that automated liquidity management solutions are the best way of addressing this need. Automated liquidity management is a significant improvement over manual processing as it provides an electronic audit trail and improves the information companies are receiving, she says.

From The Center


Lisa Rossi, Deutsche Bank

Aside from enhancing working capital efficiencies, there are a number of ways companies can optimize their ability to better manage liquidity on a global and regional basis. The more international a company, the more likely it is to benefit from centralizing treasury and liquidity management operations.

Siemens Financial Services centrally manages liquidity positions in Asia-Pacific, EMEA and North America via centers in Hong Kong, Munich and New Jersey. Its corporate financing function also uses a single platform globally to manage cash positions. Bank account statements are imported electronically every day, Murer explains. We can determine our cash position at the beginning of the day. The selling and purchasing of currencies is added to that starting balance as well as invoices and commercial in-flows and out-flows, which enables us to determine our end-of-day position per currency.

Rossi says companies continue to approach her about implementing centralized liquidity management solutions. Everyone is looking to optimize liquidity, whether it is in regard to working capital management or optimizing their balance sheet, she says, but not everyone is implementing centralized liquidity management right now. There is more emphasis on enhancements to regional liquidity management, which leads to discussions on a global overlay solution. Corporates can then globally leverage what they have instituted regionally.

Automated Solutions

Automated liquidity management tools can help companies better manage excess liquidity by centralizing cash balances in multiple currencies. One of these tools is cash concentration, which can be done regionally or globally. Some cash concentration solutions such as that provided by ABN Amro are multi-currency and multi-bank, which means companies can use it to manage excess liquidity in accounts that are not held with ABN Amro.

Deutsche Banks Global Cash Concentration product physically sweeps surplus US dollar and euro local cash balances to a designated Deutsche Bank account anywhere in the world. Rossi views global cash concentration as a step toward centralization and says it provides companies with the ability to automatically move funds to wherever they are needed. For example, a company could use their end-of-day cash balances in their Deutsche Bank account in Frankfurt to fund a short position in their New York account. Alternatively, companies can also sweep excess euro liquidity from Asia into Europe or US dollars from Europe into Asia. In the past, companies had to figure out when and where to wire money to; now it can be done automatically with end-of-day value, says Rossi.

Cash pooling is another tool for automating liquidity management. Zero balancing cash pooling brings credit balances on subsidiary accounts back to zero, and that balance is then swept to a master account. Notional pooling, on the other hand, means no funds are actually transferred. Interest is paid on the net amount of the pool, and the net cash is reported on a companys balance sheet.

As Siemens maintains multiple subsidiaries and bank accounts, it has cash pools in a substantial number of countries. With regards to euro, funds from subsidiaries are pooled into a master euro account in Germany. However, the ability to pool currencies is not just confined to the dollar and euro. It can work cross-currency as well, which is popular with companies based in Europe and Asia. Automated centralization of funds is already well developed, says Gibbons. It is now a case of enhancing the model by including more currencies and creating more global liquidity management structures.

However, pooling is not something companies should take on without completely reviewing the tax and regulatory requirements. Pooling is a sound strategy for some companies, says Rossi, but there are certain regional considerations. Rossi says some new issues have also emerged around Basel II, which could have an impact on notional pooling. I am confident banks will offer this from a technology standpoint, she says, but there are still regulatory issues to contend with.

On a notional level, Rossi says companies need to ensure they understand the legal and regulatory aspects involved that affect their particular structure. Inter-company borrowing can also raise complexities, depending on the jurisdiction a company is operating in. As Murer explains, Liquidity management is about resolving legal and tax aspects, issues that can be challenging in regulated markets such as Russia and China, where the transfer of liquidity between different legal entities is subject to many rules.

The situation is further exacerbated in Europe by the lack of harmonization around regulation and taxation, such as the treatment of resident and non-resident accounts. The ideal is to have one single eurozone, not different laws or a wannabe eurozone where each country has its own boundaries, says Murer.

Anita Hawser