The objective of cash management is to manage the firm’s cash position using its cash as effectively as possible through a self-financing approach; keep the costs arising from cash and cash flows as low as possible; and minimise the interest costs while maximising the interest income within predefined risk parameters.
Centralisation of the cash management function can bring with it efficiencies, as well as visibility and central control of cash, but there are also disadvantages. Some companies may decide that the drawbacks to full centralisation outweigh the advantages and opt for a mixed structure.
The three main drivers/challenges behind whether or not to centralise cash management can be defined as:
- Applications and systems.
- Organisational structure and culture.
- Other drivers, such as the single euro payments area (SEPA), which are also pushing large corporates towards centralisation of back office and payment activities.
This article looks at cash management centralisation using a client case study to illustrate this process.
Cash Management Centralisation: A Case Study
Background information on the case study
Retail NV operates in the European market in an area where low sales margins are giving grounds for improving the efficiency of the company. Its activities include retail trade with over 1000 stores that operate in the Netherlands, Belgium, Germany, Austria, Switzerland, and Spain. Retail NV is a listed company on the stock exchange with solid figures, even in these difficult economic times. Nevertheless, the treasury, which is located in the Netherlands, wanted to get a better grip on the company?s liquidity in order to optimise cash across the group.
Cash management can be broken down into two parts: liquidity management and cash flow management.
In general, the centralisation of liquidity management is the first step towards centralisation (see, control and optimise cash). Centralisation of cashflow management (pay and collect the cash) often has more impact on the technical infrastructure and processes and is, in most cases, the second step towards centralisation.
Liquidity Management: The First Step Towards Centralisation
Liquidity management comprises cash balance management and funds management. Cash balance management refers to the day-to-day management of the company’s current accounts and the consolidation with the firm’s cash flow forecast. Funds management is the management of borrowing and investments. It refers to the management of the company’s excess cash and short-term deficits. When investing excess cash, the firm’s risk appetite is the primary goal, keeping the cash liquid and safeguarding flexibility is the secondary goal, and yield enhancement is of tertiary importance.
In today’s market it is crucial to know the overall cash position of the organisation. Where is the available cash and where are the deficits? Putting this knowledge into use will increase cash optimisation.
Cash pooling, which is part and parcel of a centralisation programme, can be an important tool for improving cash management because it allows the treasurer to have visibility of the company’s cash – they can see where the cash is irrespective of which country or currency the account is held in.
For example, banks can help organisations to centralise their liquidity management via an end-of-day sweep, where it is possible to transfer balances from local accounts to one central account or to centrally maintained accounts in the name of the local subsidiaries. It is also possible to automatically move the balances back to local subsidiaries, while profiting from the advantages of a central interest pool.
Hence, the treasurer has better control of the cash and can view it as a corporate asset within the organisation. The treasurer knows where the cash is, as well as the deficits, and can act on that information.
In addition, by automatically pooling the company’s cash, the treasurer doesn’t need to worry about what to do with the cash because it’s all centralised into one account. Because it is automated, a treasurer doesn’t have to move the money him/herself, which will save the treasury department time, as well as limit risk and optimise the firm’s working capital.
Those are the advantages from the customer’s perspective, but there are also challenges. First, because of the different fiscal and legal regulations in the different EU countries, it’s not always possible to create a comprehensive solution across the eurozone.
Second, a company’s structure influences whether cash pooling is an appropriate solution. A corporate that has autonomous divisions or subsidiaries that want control over their cash will find it difficult to concentrate cash in the hands of the treasurer in the head office because, although it benefits the treasury to centralise cash management and have cash visibility, it does not always benefit the local subsidiaries.
The solution chosen by Retail NV
By implementing a pan-European Rabobank International Cash Management structure, Retail NV can control its cash position in a more effective way. The cash is centralised via cross-border cash sweeps, which entails fully automated, value-neutral sweeps. Thus, Retail NV has a zero loss on interest days for its international transfers, thereby optimising its cash management position on a daily basis. Moreover, regarding its domestic cash management needs, a flexible solution was provided combining domestic servicing with centralised liquidity management. A notional cash pool was arranged where each subsidiary is in full control of its funds, while optimising the total balances on group level. Irrespective of the bank where the account is held, Retail NV is able to see and control its funds, via the web-based Rabo Financial Logistics Portal (RPLP). The central treasury organisation can now see, control and optimise the cash, without ignoring local operational needs in the broad sense.
Cashflow Management: A Central Component of Cash Management
Cash flow management is the way commercial payments are executed and delivered to the banks. The direct and indirect cost of the account structure, fee structure and infrastructure are important. If this is all well-organised within the firm, it will have a positive impact on the overall cash management objectives and working capital ratios. Cash pooling can contribute to organising this process.
In an ever-increasingly globalised world, the commercial payments landscape has become ever more complex, as corporates extend their reach cross-border. Corporates need insight into the balances of their local accounts abroad and to be able to initiate transactions in the local payment formats.
When organising local payments in various countries, a corporate’s main challenge is technical, because it must have an application that can handle the many different payment formats with specific characteristics. Harmonising these many formats within one system is difficult because they have different validations in the back-end systems.
Although payments may all look the same at one level, in reality the variations are quite significant. Banks and other payment service providers (PSPs) face the difficulty of processing different formats in one system. They must also know the different validations, how they operate in the different countries, and also understand the functionality of the payment formats.
Also, product risk varies widely depending on the country. The legal ramifications of different payment methods in each country can be a big headache for corporate treasurers and also for their banks, which need to be able to communicate these differences to their corporate clients.
Regionally, Europe is experiencing a drive towards harmonisation of the payments environment in the form of SEPA and the Payment Services Directive (PSD), which gives a legal underpinning to the SEPA Direct Debit (SDD) scheme, for example. But this transformation process is only at the initial stage. It is also not happening on a global scale, so companies that move beyond the eurozone still encounter a wall of complexity when making payments. Even in Europe, it will take at least another five or six years before the new SEPA standards will truly become a standard and domestic payments are migrated to the new standard. In addition, payments industry players have flagged up the issue that many euro countries are transposing the PSD into domestic law with national variations. So even this huge harmonisation project is at risk of ending up with many different flavours.
Rabobank enables the use of various local payment instruments via its online platform for corporate banking, the Rabo Financial Logistics Portal (RFLP). RFLP gives access to all accounts and transactions via one single web portal, regardless of where these accounts are being held. In this way, Rabobank can support treasury centralisation, as corporates can manage their international accounts with optimum ease, while being able to use local payment instruments.
Centralisation is Not a Goal in Itself
Centralisation is being driven by a need for efficiency in the tough economic environment. The global financial situation has put more focus on working capital management and towards more centralised solutions for liquidity management, so that the cash is handled as a corporate asset and the treasurer can control the cash within the organisation. Most companies are looking to free up excess cash and reduce risk.
For some large companies, however, centralisation is not the ultimate goal because there are also disadvantages inherent in a centralisation project. For example, it can be extremely difficult for a large corporate to centralise all its technology systems and harmonise the culture within the organisation – this is a long-term project that may be quite costly and put a strain on resources, particularly if the corporate is acquiring new companies.
On the other hand, if a corporate attempts to sell off a subsidiary or business unit, this can turn out to be a huge undertaking if all the systems and structures are tightly integrated and centralised.
Therefore, centralisation cannot be viewed as a goal in itself. What companies are looking for is control over their cash and liquidity flows. Whether or not cash management centralisation is considered to be advantageous depends on the structure of the company, how it is organised and what the local authorities of the subsidiaries are.
Some companies are very centrally organised and therefore tend to have a centralised cash management function. On the other hand, quite large organisations may want to keep its divisions separate from each other and may solely focussing on, for example, getting the necessary information to understand what is happening in the different localities, but may not be focussed on trying to get cash out of those countries.
Why is Rabobank the preferred bank for Retail NV?
The flexibility and diversity of Rabobank’s concept for International Cash Management, the professional advice from the deal team and the co-operation and involvement of one of Rabobank’s Dutch local member banks were the reasons Retail NV chose Rabobank.
As an AAA-rated bank, Rabobank was a stable partner for Retail NV, while maximising liquidity and yield on a group level. In fact, a banking relationship does not start or end with cash management, but should contain a partnership where both parties seek a long-term relationship. The deal should, therefore, also include a working capital facility, international cash management, payment services for all group entities, trade finance, and construction of a credit arrangement for surplus liquidity (through company savings accounts).
Centralisation has to fit in with the company’s vision and strategy. A cash management structure can be a mixture of both centralised and decentralised structures. A bank needs to sit around the table with its customer and look at what is the best solution in that specific situation. In some cases, for example, Rabobank would advise the company to opt for a fully centralised cash management structure and in other situations we advise the customer to opt for a mixture of local solutions and a centralised structure. This will depend on the client’s specific needs and wants, its company structure and future growth plans. Centralisation is not a goal in itself, but should fit the organisation.
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