Cash management debate part one: How can cash managers add more value?
Cash management debate: Learn more about the panelists
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EXECUTIVE SUMMARY
• Treasury is increasingly involved with payment
• Treasuries’ risk management strategies follow the business the company is involved in. Different approaches result
• Cash is the new driver of working capital management solutions and opportunities
• Treasuries are increasingly becoming their own banks
• Post-crisis new products are being developed to give treasurers more investment options |
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Jack Large Let’s look at managing FX and commodity volatility. Perhaps we can start with those who have been struggling with the eurozone?
PP, easyJet One key point is to focus on natural hedges and the nature of your business, rather than reaching for the derivative solution every time. For example, we have discretion as to how we are billed. If a company is offering us sterling billing, chances are it is because its own treasury is making a turn on it. I try to make sure that procurement pay in the natural currency that the seller or the provider would like to receive. So although 44% of our €2.8 billion revenue is in euros, the net result is something under €500 million a year after we take into account euro costs. So we make sure that the teams involved understand the implications of their choices.
Jack Large This is picking up what Rajesh was saying: that increasingly treasury is getting involved in procurement and those types of tasks.
SC, AstraZeneca We have been working on this a lot in the past 18 months or so. We have a global procurement organization, which helps, but you still find odd historical practices. We report in US dollars, so to use an example similar to Paul’s, if we buy from, say, a European supplier, we are quite happy to take euro costs because we have a big euro revenue base. So we are working with the procurement teams on the key principles about what currencies they should be transacting in. For the basic ones, single currency is reasonably easy. It gets a bit more complicated when you get multiple jurisdictions and global supply groups. And to me, one of the easiest ways to manage your FX risk is to do this natural matching.
RaM, Citi In other words, both Paul and Sean look at the natural offsets first and then look at the residual, and finally, look at the basis risk and the correlations, and only hedge the delta.
Different approaches
LW, BAML Absolutely, the risk management strategy of treasury generally follows the business that the enterprise is involved in – in addition whether treasury is viewed as a profit or cost centre by its organization. Those that build or trade take a different approach to those that serve or make money from money. If you look at Google, its approach is innovative and very much speculative, and it can be due to its profile. A manufacturer, however, cannot be as speculative as it needs to have cash for use in its business. What is consistent is that risk management needs to be aligned closely with business strategy and consistently monitored to ensure it is meeting the end goal of the treasury.
RoM, Co-operative Our approach is straightforward. Once we have a contract in place and we have a currency exposure, we will hedge that exposure. All our operations are in the UK, – except that we have a joint venture in China – but we hedge when we have an unconditional contract in terms of having any exposure to manage. We have also become much more sophisticated in commodity hedging as we consume large amounts of electricity and gas – our annual electricity budget is between £50 million and £60 million – and we now put in place fixed-price contracts with the National Grid supplier in accordance with our predetermined hedging policy. We are the UK’s biggest farmer and we hedge the price of wheat in terms of fixed-price supply contracts with milling agents. This is the result of having a much better idea of how commodity and FX price volatility could hit the P&Ls of our various businesses.
VM, RBS Forecasting is the key to a successful hedging programme. We did a survey on cashflow forecasting and about two-thirds of the corporates that we spoke with couldn’t accurately forecast with confidence past 30 days from a liquidity perspective and had implemented fundamental changes to their treasury and finance operations to improve the accuracy and reliability. The same approach to forecasting is also required for FX risk management. What we are seeing is a more rigorous approach to cashflow monitoring and hedging – not just using those monthly rolling cycles that you get from the ERP budget and placing your forward or swap and letting it roll to maturity and then rolling it over. We are seeing much more of a discussion around the tenor and level of hedging; the accuracy of your cashflow forecast is clearly key to getting the right tenor. Post-crisis, one of the key success factors in the varying financial performance of peer corporates was the effectiveness of their hedging programmes.
We are also seeing much more willingness to look at options as an integral part of a hedging portfolio. This is not just because there is an increased level of comfort in the technology and accounting support that is available, it’s because the crisis tested the other forms of hedging to the limit. And the upcoming revisions to IAS39 and FAS133 will help this further.
DM, Barclays Our focus has traditionally been very short. We look at rolling monthly cycles and use short-dated forwards to close that risk. Does that mean that we are missing a trick on the bigger picture in terms of, say, the long-term patterns of commodity prices? What is the natural hedge in the long term against the cost of that input to a business? Is there a natural hedge for example on Asian consumption? I think that is where the market is heading, but we are not seeing significant activity yet.
