Cash management debate: How can cash managers add more value?

Cash management debate part two: How cash is driving working capital management
Cash management debate: Learn more about the panelists

Jack Large Let’s start with the issue of aligning business and corporate treasury. As treasury becomes more important, this is increasingly vital. Sean?

SC, AstraZeneca Treasuries have to do more with less or the same and so we constantly seek efficiencies. One set of these is improving our own processes and the banks’ products, the other is to understand what matters the most to the business. That can only be established by understanding the business strategy and making sure we put our time and effort into the areas that are going to add most value to it.

So for us the key thing is what that means for our investment needs and our shareholder return targets. That affects financing, the amount of cash we hold and how we structure ourselves to support the business and drive cost efficiencies. And we are finding that we need to review this much more frequently than in the past.

RoM, Co-operative What makes the Co-operative Group different is what we do with our profits, so cash remains king. If we can’t generate the profits and the cash, we can’t reinvest in our business and serve our members as we would want to in the true Co-operative model of returning dividends to our members and investing in community projects across the country. To Sean’s point, though, we certainly have to comply with our return-on-capital-employed target and indeed net debt and ebitda ratios in order to minimize interest costs and so on.

PP, easyJet This is very pertinent to me because four months ago a new CEO and CFO started on the same day and were keen to undertake a strategy review. From a treasury standpoint the crux was a study of the overall shape and size of the balance sheet. And an important rider to that is that we are still a very young company; we are only 15 years old with almost 200 aircraft in the fleet, the result of massive expansion in Europe. This is a very different model to companies where processes are more established and it means that much of the complexity you see in other companies does not exist in ours.

The internet is almost designed for us in the way we run our business, so all of our collection and processes are through a UK website, which makes it an awful lot easier. We hardly see any cash at all; it is all through cards, which is great. We do not have overseas branches as such, but we do need help from our banks to establish some relationships, outsource payment provision for payroll and so on.

Jack Large So how can the banks help their corporate clients comply with these new business objectives?

RaM, Citi Sean and Roger have talked about some of the drivers behind the increasing connectivity between business strategy and treasury. As I see it, there are three main drivers of change: liquidity, risk management, and efficiency. With liquidity, global companies are already dealing with concentration issues and challenges around trapped liquidity and we have many conversations with our clients around visibility, mobilization and, finally, optimization. Never before have these themes been more prevalent.

The second driver of change I mentioned is around risk and here we are seeing treasurers expand their risk remit across the entire business – engaging on both the supply and distribution sides. And with efficiency, this spans both cost and operational efficiencies and there is no doubt that treasurers are moving far beyond the confines of their historical purview.

In addition, there are new developments to the overall business environment that are affecting treasuries in a way that is giving them broader scope to implement change across their organizations. For example, derivatives and accounting regulations, such as Dodd-Frank, are significant emerging agenda items for treasurers. M&A and capex are also an increasing focus – depending on the geographical footprint regulations.

Clearly banks can help in these discussions and processes and they are resulting in an increased demand for working-capital solutions, where you see a more holistic buying pattern in the corporate than before.

LW, BAML The regulatory change will have an impact at all levels. Banks need to work closely with clients, sharing experiences, providing insights and providing oversight. In this new norm things both sides previously took for granted before are now no longer so. Increasing pressures in governance, risk management, access to funding are all coming to the fore. The future is to combine our experiences and best practices to come up with a solution together, deepening our relationships and trust.

The other key driver is technology, in particular systems interoperability. It influences the ways treasurers can realize efficiencies, being able to do more with less. To help them do this banks need to provide the tools and quality data that treasurers need.

VM, RBS Yes. Efficiency begins with visibility and control. As corporates look to mitigate their bank and institutional investment counterparty risk, they have also been reviewing the financing arrangements and risk profile of their own customers and suppliers, their own straight-through processing rates, and the process and information flow efficiency between these key relationship streams.

Treasurers need to be able to see trade, cards, cash, capital markets, exposures and maturities as well as your suppliers and so on. Only then do they have a practical tool, in addition to ERP/TMW functionality, with which they can deep-dive into flow processing efficiencies and risks across treasury, procurement and finance. This need is increasingly evident in the market availability of dashboard-style overviews from banks, integrated bank-wide technology platforms and enhanced reporting and reconciliation solutions.

And further standardization is coming in bank interoperability. This includes Swift initiatives such as EBAM and 3SKey – the single token individual digital identity technology – which will drive that standardization and simplification further. That is something that a lot of corporates really look forward to. Banks and the regulators will still require the necessary paperwork, proof of identity, and related authorizations, but there will certainly be a lot less bank-specific maintenance, and more standardization and consistency can be brought to a corporate’s operating structure, particularly when you have to deal with a broad panel of banks to do your business globally.

LW, BAML And technology can give you the value-added analytics that make big differences. All banks can undertake the basic payment functions – the value is in the quality data flow, the analytics and integration. We are currently working with a big technology name developing XML version 2, removing legacy formats, standardizing the way that information is delivered. This is how banks can add real value to business. We banks need to talk to each other, otherwise how are we going to make the treasurers’ lives any easier in the future? We succeed only if our clients succeed.

Metrics

Jack Large Does this focus on alignment with the business change the metrics against which you are measured?

SC, AstraZeneca Absolutely. In pharmaceuticals in general, for example, we have been through a period of strong growth. Now the approaching period of patent expiry is driving strategic and operational changes including mergers, cost-cutting programmes and re-evaluation of R&D engines. And there has also been a much greater focus on cash, as much of a focus as there is on sales and earnings. So treasury now needs better ways to measure and communicate the cash performance of the business. Working capital, for example, is significant in bridging our traditional earnings focus to more of a cash focus. And there is more focus on the way we do investments and the business cases that support those, in particular return on capital invested: rigorous and robust NPV calculations, all based off cashflow.

VM, RBS More generally, the metrics are what drives the integration. I was at a company a couple of weeks ago where there was quite a disjuncture between the treasury department, the shared service centre manager and the local business units – all working to deliver under conflicting organizational key performance indicators. But treasury has to be integrated with the rest of the business, and is increasingly seen to be the driver of a balanced business scorecard that defines and aligns enterprise-wide objectives.

Jack Large Sean, for you cash is the key metric, right?

SC, AstraZeneca There are two aspects: one is physical cash and how we efficiently get it into a place where we can use it. That is technology and straight-through processing and a metric. The second aspect is forecasting. Having good historical knowledge of, say, your daily flow by currency is very helpful, but it only gets you so far. So you need accurate forecasts and you need a mechanism for responding to forecasts when they predict problems.

PP, easyJet In other words, if you are just observing or doing statutory accounts you are not adding any value. I take issue with the point that Rajesh made about the ownership of working capital. For example my performance appraisal this year had very clear objectives in terms of working capital improvements, which I shared with the group financial controller, whereas for most of the other direct reports it was purely on group performance on a number of different key performance indicators. We specifically had 20% to 30% of our bonus based on what we did specifically – I listed about eight or 10 working capital initiatives. That is against the backdrop of having significant cash balances – we still emphasize the importance of improving working capital.

RaM, Citi To the point about metrics: I have never seen so many questions around benchmarking as I have of late. Treasurers now want to benchmark everything – from days payable outstanding (DPO), days sales outstanding (DSO), (days inventory outstanding) DIO, to costs, productivity, returns, process cycle times, etc – and not just within their own industry. As the cycle turns, we are also starting to see a reversion to the focus on sales and restocking or re-inventorization. This is especially true for those with an Asian remit, where growth is driving the agenda. As bankers, this is a stage that interests us and we are monitoring it very carefully.

Treasury re-engineering

Jack Large Let’s move on to the related topic of treasury re-engineering. Lesley?

LW, BAML The treasurer’s role has had to change and they have had to dig deeper into the operating agenda of their business. The starting point therefore is to look at how treasury supports the operational needs of the organization it serves. Then it is about ensuring that treasury is organized to best execute business strategy. It has to be fit for purpose. Whatever structure is created, it must be adaptable to change, be nimble, and open to evolution. This nimbleness is the common component in every successful treasury operation we have come across.

The main focus for many treasuries that we work with is around setting proper controls and risk management procedures. Also in the setting of organizational key performance indicators. Whilst according to PricewaterhouseCoopers treasury has primary responsibility for working capital in only 20% of cases; direct control can be left to operational areas, as long as the right measures, and processes are implemented. This approach can free up treasurers’ time from operational tasks, allowing them to drive efficiencies elsewhere in the business.

In re-engineering or business transformational projects funding is usually tight, so delivering the business case to the board is critical. In my experience there are three key areas of consideration: understanding the country-specific external environment including tax and legal; justifying the business case internally to secure the investment required; and finally having the right internal and external parties involved from a project standpoint. Having the right banking partner that can provide relevant expertise and experience is critical to the success of any re-engineering effort.

DM, Barclays Re-engineering is interesting because it affects how we respond to client needs. So a lot of our product response has been developing instant-access products that will pay bonuses over time and range-based products, which will be innovated quite substantially within the industry. On the other side in terms of re-engineering we are seeing a very broad range of client responses, from the bank agnostic – "We don’t want to have any dependency on one particular bank, we want you all to offer us the same opportunity and give us the flexibility to choose" – to clients who say, "We are willing to commit strongly to a certain bank and you can build very deeply into our back offices so we can host-to-host, or come into our back office and you will put vendors in there to give us a bank-in-a-box type solution". The banks are having to be very flexible in how they respond to that type of need.

LW, BAML Agreed – flexibility is central to the entire process. When it comes to re-organizing treasury the starting point is often centred on account structure. Making sure that you can maximize visibility, access and control of your cash. There is no single ultimate structure blueprint, every business is different. There are definite characteristics shared by all. Simplicity, flexibility and the ability to evolve. Understanding where you are now and where you want to be. Then entering into a discussion with your partner banks where they can share best practices and benchmarking expertise.

Jack Large Roger, how, for you, would re-engineering crystallize itself?

RoM, Co-operative Since July 2007 the Co-operative Group has undergone a series of important changes. First was a merger with the second-largest co-operative society, bringing together the two largest co-operative societies in the UK. Then, in 2009, we acquired Somerfield. Instantly we went from debt levels of about £250 million [$386 million] to about £2.4 billion – now down to about £1.5 billion. In that situation, whereas previously cashflow and cash headroom – liquidity management – wasn’t a key focus, now it is absolutely. We have had to become an organization with a strong commercial edge now and we will negotiate with suppliers as competitively as any of the big-four supermarkets.

So there was significant re-engineering of treasury systems and reporting. We have a weekly cashflow forecast process where we are constantly reviewing and challenging our businesses in terms of their cashflow control, capital expenditure and looking at any strategic challenges or big payments. We have a 13-week rolling cashflow forecast as well as a longer-term strategic cash forecast. Controlling our working capital is now crucial, as you would expect in a business of our size.

VM, RBS It is interesting that when people think of treasury re-engineering, they think of cashflow forecasting. Dashboard perspectives are not a cashflow forecasting tool, but they do provide a historical audit trail to enable better predictions. However, treasurers need much more than this. We work a lot on value-added analytics, tying together all the information flows from banks, country subsidiaries, treasury hubs and so on and presenting it in such a way that treasurers are able to spot opportunities, highlight early warning signals of financial distress or fraud, understand specific and potential customer segments and isolate specific risks around those segments. These tools are, of course, only assistance to a well-thought-through forecasting methodology.

Our clients have told us that they rely on the bank to do one thing, to provide those value-added analytics and information to them in a way that can be easily understood and brought into their workstation. They don’t necessarily rely on the bank to provide the cashflow forecast and the technology to do that. Another development that corporates are asking us for on the flow-processing efficiency side is that we make it simple to have a single pipe across all of the transactions that they do with the bank, be it supplier payments, treasury payments, commercial payments, discounted payments. That is where you see the banks coming with integrated technology across their own internal business units.

SC, AstraZeneca I would certainly be interested in the value-added analysis as I think the banks could do a lot more of the historical analysis that we do now ourselves. I would rather have the bank do that than our staff throughout the network. That would free up resources for re-engineering to add value to the business as a whole. I haven’t really seen it done and it’s a big opportunity.

RaM, Citi In terms of re-engineering, I agree with the others in that the first order of business is to get risk and liquidity management right – followed by forecasting. In our case, we work with clients in two domains: procure to pay, and order to cash. On the procure to pay end of the spectrum, we use data analytics to work with clients to examine their cycle times, optimization opportunities, cost savings and procurement best practices for banking products. Aside from the data component, we also hold a workshop with our clients to understand how they manage each step – from procurement to cash, to accounts payable. By doing this, we kill two birds with one stone. Not only are we able to determine which processes can be re-engineered for efficiency – such as straight-through processing, billing and processes to free up headcount – but we are also able to look closely at the DPO cycle and how this is affecting working capital. In the order to cash domain, or the sales side, we examine DSOs, and consider how solutions like receivables financing, discounting and e-billing can improve this metric. Again, it is re-engineering straight-through processing as well as improving working capital. This is a win-win.

Jack Large I always get nervous when I hear win-win.

RaM, Citi Perhaps it is more accurate to say "win-win-win"– this is what supply chain finance is about!

Availability of funding

Jack Large Moving on to the topic of the availability of liquidity and funding, Roger, do you want to start us off?

RoM, Co-operative Certainly. We are reliant on the debt market, be it banks or capital markets. We all know the background of the credit crisis and the forthcoming additional issues of Basle III compliance. Our strategy is to look more to disintermediation, to navigate around the over-reliance on bank funding and to go to alternative sources of capital. Bank funding is, in my opinion, going to become more expensive and less available and this is only going to get worse for the reasons mentioned. In addition the bank loan market struggles to provide the tenors that corporates need. Some corporates can only get three-year funding and they have to go through the whole cycle again. So it’s not clear that the banks can compete with these alternative sources of capital and this has been reflected in the record corporate bond issuance we’ve seen this year. I think the banks have to think long and hard with their pricing and strategy: what do they want from their corporate customers in terms of the pound of flesh they need to put corporate loans on their balance sheet? What is the appropriate level of ancillary business return to look for?

Jack Large That’s the perspective from those in need of funding. What about the cash-rich?

PP, easyJet Well, in terms of reported net debt we are pretty much flat; nil either way, really. However, all our financing is raised on aircraft on a secured basis. So availability of finance has not really been an issue. That said, the lending processes do take a lot longer than they used to – we used to do things on a lead-manager basis and now you can’t do that so easily, it has to be done bilaterally.

SC, AstraZeneca We are in a similar position as Paul in terms of having reasonably large gross cash and debt balances, so we have an experience on both sides of the balance sheet. To me, for a company like ours, with our credit rating, size and with our current financial needs, it does not make sense to borrow from banks now. We can generally fund very cheaply. There are two camps: those that have to because they don’t have as many alternatives, and those that don’t. We don’t and it would make no sense for us to do that. I don’t think that is an issue; I don’t think it is necessarily needed in a relationship. We still have a level of committed facilities with our bank group for CP backstop purposes and that is useful in galvanizing the bank group, but we feel like there is no need for us to physically borrow from our bank group.

Jack Large What can the banks do to offset these issues?

VM, RBS Balance sheet management issues for corporates are a core conversation currently. Many discussions are centred on more efficient use of bank’s capital, taking assets off balance sheet through leasing or vendor financing solutions or working capital collateralization using receivables.

We are seeing a lot of focus from our corporate clients around invoices – factoring, reverse factoring, supply chain solutions, vendor financing, receivables discounting –and it makes sense also from the banks’ perspective to work on that basis.

Jack Large Rajesh?

RaM, Citi All of the above. But I think it’s important to point out that the impending regulatory changes have predictable consequences that affect corporate clients’ working capital. It would be good if they are actively engaged in the dialogue.

LW, BAML Banks need to provide their guidance and support, it comes again down to relationship. Whilst some banks are looking to retrench market positions in some sectors, others are deepening relationships, really understanding the client’s business and coming up with solutions together. As time moves on, being alert to opportunities, sharing best practices and understanding of the individual market and client business cycle, everyone should benefit. Understanding who your key relationships are will help both sides get the most out of all opportunities.

VM, RBS Can I ask the corporates, in a situation where the banks are disintermediated, how do you share out your ancillary business?

RoM, Co-operative Well, if a bank is a member of a syndicate, then you have a seat at the table in terms of ancillary business. We absolutely expect out banks to put up their balance sheet in a significant way but we also have tier one and tier two banks that will naturally get different levels of ancillary business based on their specific strengths and capabilities. That is the basis of being in a relationship.

SC, AstraZeneca We are very similar. If you are in our banking group you will get ancillary business, but it is about execution not simply contingent on borrowing. What we are interested in is that collectively the bank group can deliver it.

PP, easyJet This works the other way too. You can go to a bank with cash to invest and be told that you have to bring other business too! And you can take your cash to them and be told that they may consider you for an FX line in two years. In terms of working, I do look to the group that have been providing us with funds, but you have to recognize that not all banks are good at all things, so you end up with a larger banking group than just your lenders.