Cash management debate: Learn more about the panelists
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Executive summary
• Global corporates will have to use their local assets more effectively
• Both global banks and local banks are needed to effect this efficiently
• Cash pooling has been facilitated and simplified in Europe by such developments as Sepa
• Accounts receivable processing depends heavily on full information being transmitted
• Accounts payable will always involve a degree of local autonomy alongside centralization
• Complex or sophisticated hedging is best handled as a centralized process |
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Jack Large We are here to discuss cash management and working capital management in the context of the relationship between the local, regional and global offices of multinational organizations. What strategic changes are affecting your businesses?
CE, Faurecia For a start, global corporates will have to be more inclusive and use local assets more effectively. The challenge to treasury has been that those distant locations can be very difficult to control and it has been difficult to incorporate developed market best practices. A new approach is needed. Group treasurers must realize that through collaboration they have to educate subsidiaries for the good of everybody. They need to participate in global initiatives.
Because we were asset-backed, once it became difficult to raise collateral through the existing assets, there was no-one interested in offering unsecured credit, or any other kind of credit. We had then to focus on looking for local facilities; so if we wanted to extend a factory in India, where in the past the money might have come from the centre by way of a capital injection, that was not possible because there was a liquidity squeeze. We had to go round all the local banks and get turned down nine times out of 10, but eventually we found the one bank out of the 10 who was willing to help us extend our plant because there was clearly a business case.
Jack Large So what has been the impact of that?
CE, Faurecia We need more visibility and more control from the centre because we need to be able to use cash from the regions more easily.
Jack Large And are these services best supplied by a global bank or by local partners?
CB, Coats I would have to challenge that a truly effective global bank structure really exists. I have made two or three attempts to introduce a European banking structure for different companies and found that the nature the business, for example if it involves a lot of paper-based transactions for small-value amounts or lots of cheque clearing and bills of exchange, has a profound influence on the solution. Global banks or pan-European banks can only do so much, but to do it properly in France, Spain or Italy, usually needs a ‘local’ local bank. A bank can provide a global solution for a company with large cashflows and a small number of clients; but for clients with lots of smaller customers, I do not think a global solution works. You often need local specialists alongside your global bank.
CE, Faurecia That has been my personal experience. It is important to emphasize how the game has changed for the corporate treasurer. In the past the corporate guarantee from headquarters used to fix anything locally. You gave a corporate guarantee and the local bank rolled over and did things for you. Such has been the impairment of the balance sheets of corporate HQs that this has become an issue; banks themselves want to see more of the local balance sheet being pledged to get local and regional banking relationships going. Also I think the execution of the treasury process has evolved, so that we are having to look at taking control and being more proactive in what we do regionally and locally, rather than just relying on things to come out of the centre as one size fits all, Also, why indeed would a corporate these days want to lean too heavily on one institution, given the problems that institutions have had?
To finish, there is possibly now a corporate model out there, where corporates may want to concentrate on picking specific banks for certain specialist products, and not trying to get their main corporate bank to provide everything, to spread the counterparty risk.
Bank account and liquidity structures
Jack Large So companies want local funding, better local control internally combined with more devolution of responsibilities. Are these big-picture changes reflected in bank account and liquidity structures and payment processing?
CB, Coats Yes. In the past if I wanted European cash pooling I needed to use one bank and have all my subsidiaries work with that bank, either as their main bank for domestic operations or as an overlay bank as a mechanism for funnelling cash back to the centre.
Today, instead of having a legal entity in each country it is possible to have a single legal entity based in, say, Germany, and do direct invoicing from Germany to Spain, Portugal, France, UK. Following on from that with the introduction of Sepa [the Single Euro Payments Area] in November last year, it’s no longer necessary to have a cash collection account in each country to ensure that local customers can pay efficiently. They can now pay from France to Germany for the same price as they can pay within France, so the requirement to have a branch of my European cash-pooling bank in each country is no longer there. My cash is automatically concentrated in one location.
CE, Faurecia Charles, is that just because you have a lot of collections under the €50,000 ceiling?
CB, Coats Yes.
FI, Citi Which means it suits you well but might not suit others.
Jack Large Is there a variation between your strategy in Europe and the other regions?
CB, Coats Yes, because in a lot of the other regions in which we operate there is a different currency for each of the countries.
FI, Citi And so the infrastructure is not available?
