Rational Choices for Working Capital

Large consumer goods and healthcare companies typically have multiple banking relationships. This has its benefits, but it also has its drawbacks. Corporate treasurers in these two sectors are therefore considering rationalising the number of banks they deal with – often inherited as a result of inorganic growth through mergers and acquisitions – and the number of accounts they hold with those banks. Treasurers are trying to identify partner banks that can help them become more efficient, leverage technology investments in common using enterprise resource planning (ERP) infrastructures, and streamline connectivity.

Having fewer accounts to manage reduces administrative effort, cuts costs and lessens risk. It simplifies visibility over global cash positions and helps form thoughtful pooling structures that allow quick action in volatile environments, as well as creating opportunities to exploit excess balances by using earnings credit rate (ECR) to offset fees.

Bank account rationalisation is just one of several important steps being taken by companies in the consumer goods and healthcare sectors to get more out of their banking relationships and improve working capital. These steps are likely to include: optimising accounts payable (A/P) and accounts receivable (A/R) processes; managing cash more strategically, thereby releasing trapped cash; and reducing short-term borrowings.

Other strategies include using payment factories, in-house banks (IHBs), and more recently payment on behalf of (POBO) structures to support different distribution models and improve liquidity. Alternative considerations are:

  • Setting up regional and global treasury centres.
  • Initiating supplier finance programmes through banks, which can help large buyers negotiate longer payment terms with their small and medium-sized enterprise (SME) suppliers.
  • Improving connectivity with banks through the use of SWIFT, common messaging standards, and better integration of corporate enterprise resource planning (ERP) systems with bank platforms.

The macro- and micro-economic drivers behind some of the recent trends are substantial. On the macro side, world economic growth continues to slow down, especially in Europe and North America, but also in the biggest emerging markets where there is a large dependence on Western demand. The sovereign debt crisis remains unresolved in the eurozone, and other tail effects of the 2008-2009 financial crises continue to permeate across the global economies. In advanced countries, high unemployment, reductions in personal borrowing and rising taxes are all conspiring to depress consumer demand. The build-up to the US presidential election later this year is creating additional uncertainty.

On the micro-side, consumer caution has impacted many fast moving consumer goods (FMCG) companies, especially in the household and personal care, food and beverage sectors. Value, reflecting both price and quality, continues to play a key role, but with private labels continuing to grab market share, many have looked at other ways to capture customers’ attention. Examples of this include greater emphasis on emotive spending and self-reward, brand association through social media channels and a stronger sustainability and green agenda.

Within the healthcare industry, the impact of many top-selling drugs coming off-patent continues to hit the profits of many of the large pharmaceutical companies. The shrinkage of overall research and development (R&D) activity has significantly impacted the pipeline of newer drugs. These supply challenges coupled with problems on the demand side, such as price caps and generic alternatives in-line with government austerity agendas, have forced many pharma companies to look at their expense lines across the entire organisation, including finance and treasury functions.

Confidently developing a targeted end state for account structure and flows is an important step in making the right decisions on bank account rationalisation and leveraging investments in technology and resources. The options available are narrowing in focus, but the right banking partner can help ensure success during turbulent times.

Emerging Structures and Better Connectivity

Many large companies have embarked on game-changing, transformational initiatives they hope will have significant impacts to their bottomline. Changes in the regulatory and operating environment, such as the adoption of the single euro payments area (SEPA), have prompted many to re-shape their legal and account structures to allow for a much simpler payment and collection process. More recently, POBO and receipt on behalf of (ROBO) structures have become much more prevalent across global markets. The wider acceptance of the transferability of obligations and liabilities between legal entities has allowed for a significant reduction in the number of accounts needed to be held with banks.

Advances in technology, including the development of bank-agnostic tools and platforms, along with greater industry standardisation, has also fueled many transformational changes. Treasurers still shuffle paper around, write checks, make phone calls and have face-to-face conversations, but their typical banking business is mostly conducted digitally, and increasingly, in centres far from headquarters. Improved connectivity has delivered numerous benefits.

As each year passes, treasurers expect and demand, even faster communications, more reliable processing and control. They want rapid access to their financial data – on transactions, balances, investments, loans, debts and more – in either real time or near real time. Data access is only part of the story. Treasurers also want to be able to conduct a range of activities through their bank digitally, including:

  • Managing entitlements and access.
  • Initiating, processing and reconciling payments.
  • Sending electronic invoices and receiving electronic remittance advices.
  • Making short-term investments.
  • Reporting and forecasting cash.
  • Managing cross-border cash and liquidity.

Of particular importance is ensuring that there is standardisation, streamlining and simplification, so that companies are able to leverage the messaging networks, communications protocols, file formats and security standards they use to communicate better with their banks. There must be a high degree of harmonisation for corporate-to-bank connectivity to be effective. Fortunately, this is achievable, in particular through the SWIFT network, and the ever-increasing adoption of the ISO 20022 XML standard.
Corporate treasurers in recent years have been centralising their treasury management processes into shared service centres (SSCs), ERP systems and treasury management systems (TMS) to automate processes, reduce costs and increase visibility over cash flows, working capital and risks. At the same time, banks have been investing heavily in upgrading their systems to enable seamless integration with their corporate customers.

SWIFT

SWIFT for Corporates allows companies to exchange financial information (payments, securities orders and reports) with all the banks they do business with, through one secure standardised communication platform, instead of via multiple connections. The benefit is streamlined treasury measurement, providing greater visibility over cash, simpler payables and receivables, less risk, better regulatory compliance, and so forth. Many different messaging standards and formats can be used, not only SWIFT and ISO 20022 XML standards, but proprietary ones too.

More than 900 companies use SWIFT, from mid-sized companies with simple cash management structures dealing with a few banks locally, to large corporations deploying sophisticated payments and collections factories. Multinational corporate users include Exxon Mobil, T-Mobile, Caterpillar, Novartis, Microsoft and United Biscuits. Companies can use SWIFT through a third-party SWIFT service bureau provider or through a bank interface.

XML

The most widely used standard for sending financial messages over the internet is ISO 20022 XML. It is an open, free, global payment standard that can be used by any company or bank, regardless of size, industry sector and location. It is one of the many standards used by SWIFT, but is used outside of SWIFT too. There are other standards, such as PAYMUL and IDOC, but it is widely accepted that XML is the best.

Citi was one of only 10 banks invited to participate in the development of the initial XML standard in 2003, ISO 7775, and it was involved in creating the second (IS015022) and third (ISO 20022) versions in co-operation with others.

This work enhancing connectivity and cross-border standards between banks, corporations and others in the supply chain can only help consumer and healthcare firms who are increasingly looking to expand into emerging markets achieve better, more efficient treasury operations.

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