Back in 2008 when the first signs of the worldwide crisis began to show in Spain, treasury management in most businesses was not generally considered a significant part of day-to-day management operations. With the exception of a handful of companies and also private equity-backed business (where ‘cash is king’), finance teams in most businesses in Spain were supporting management in capitalising on the country’s strong economic growth. Over the decade 1997 to 2007 annual growth in Spanish gross domestic product averaged 3%-plus.
Consequently, there was little focus within many companies on adopting internal measures to optimise cash management. Quite simply, cash management was not on the boardroom agenda.
As an example, Spanish generally accepted accounting principles (GAAP) did not require cash flow statements in the same way as international financial reporting standards (IFRS) until the 2008 year-end. Cash flow statements, in their current form, were rarely seen and hardly used in the day-to-day management of many companies.
Pre-2008 who could argue that it was necessary to monitor or improve cash flow? Most Spanish business sectors were booming, banks were wide open for new credit and, despite the significant payment term periods from public authorities to their suppliers, there were plenty of financing options to support the working capital financing requirements, as well as capital expenditure.
Measures to improve working capital were rarely seen in Spain – other than in the automotive sector, where historic techniques such as just-in-time initiatives to reduce stocks are common practice. For instance, in many domestic merger and acquisitions (M&A) prior to 2008, most clients placed little or no focus on cash and working capital management during the due diligence process. The focus was on earnings before interest, tax, depreciation and amortisation (EBITDA) and net debt. Few efforts were made to identify areas to improve cash flows from operations.
This attitude was common across many companies in Western economies, but was arguably more acute in Spain. In any event those days are long gone, both in Spain and generally across southern Europe.
Taking the Lead
Finance professionals have taken a lead role in finding a way out of the financial crisis for most European companies. Given the long and severe impact of the crisis in Spain, this role is all the more relevant in the country’s companies. The only debt-laden businesses that have succeeded in emerging from the crisis are those that were able to ensure that the appropriate cash management measures were adopted on time, in order to squeeze the limited cash-generating opportunities out of the business and build a realistic, solid and robust business case to sell to the banks.
Since 2008, it has become common in Spain for companies to start conversations with banks and suppliers in order to present, defend and/or negotiate a meaningful business plan, for the first time in decades. Here again, financial professionals have been forced to learn quickly how to interact with banks, which have generally refused financing without certain restructuring measures being adopted.
So it has become necessary in many companies to adopt a holistic view to cash management – a view that takes into consideration all aspects that have a direct or indirect impact on the level of available cash across the organisation for all business functions. The main objective for many organisations, when building up or re-engineering their internal business processes over recent years, has been to reduce working capital financing requirements through continuously improving the order-to-cash (OTC) cycle.
We have also seen the creation of the role of treasurer in many Spanish companies, where this role did not previously exist. This move responds to the need to focus on aspects such as counterparty risk in order to mitigate increased levels of bad debt, as well as to pro-actively manage other risks such as interest and foreign exchange (FX) rate risks. These responsibilities previously rested on the shoulders of finance directors, who are now more focused on taking a more integral role in the decision-making process of the company and interacting with banks, suppliers and clients.
Significant tax and legal developments in Spain since 2008 have also caused finance directors to spend more time understanding the resulting impact on their cash flows. For instance, the ability to deduct certain depreciation and financial expenses in full has been reduced in order to increase payments to the Spanish tax office. In April 2013, the Spanish government established the Oficina Nacional de Fiscalidad International (ONFI), or National Office for International Taxation to tackle aggressive tax planning by companies.
In addition, the Spanish Insolvency Act has recently been reformed to facilitate the approval of creditor agreements. These changes require finance and treasury teams to work closely across the organisation in order to align decision-making to optimise cash-generation opportunities or reduce cash outflows to the greatest extent possible.
Finance and treasury professionals in Spain, like their peers elsewhere in Europe, have become increasingly relevant as boards have adjusted their agendas. The need to understand the cash implications of their decisions and proactively manage financial and liquidity risks has moved to the very top. However, the prolonged effect of the crisis in Spain compared with many other European countries has forced these professionals to adopt a more integral role in the running of many companies – in order to focus the whole organisation on cash management as a means for their survival.
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