Treasury Trends for 2011

Centralisation, Standardisation, Simplification and Automation

Centralisation, standardisation, simplification and automation – these are the focus areas for an efficient treasury process, according to Judith van Paassen, partner at Zanders Treasury and Finance Solutions. She believes that the key drivers for treasuries are to reduce cost, create value, reduce risk and improve control.

According to van Paassen it is impossible to achieve treasury efficiency if you are working with Excel sheets without a defined process.

“The first thing to do is to centralise your treasury processes. A centralised treasury management system [TMS] is a prerequisite for supporting this and, where possible, should be carried out as a straight-through process,” she says.

But even if you have centralised processes, you may still need to standardise and simplify both the internal and external processes, such as dealing with group entities or managing external counterparties. These items are key in any treasury transformation project, where standardisation and simplification should be attempted before automation.

During the recent credit crisis, the value of semi-real-time information was highlighted. As access to credit is always number one on the treasury objectives list, global visibility of cash in a semi-real-time way became important. Interest in cash flow forecasting and counterparty risk also increased. A common request was: “I need an overview of our counterparty risk in five minutes.”

Payment processes and integration are also areas to focus on. Improving payments processing has become easier thanks to developments such as the single euro payments area (SEPA) and the technical standardisation that has spun off that, including XML.

“To get the best coverage and services for cash management, a treasury often needs to use regional banks. This was previously difficult due to different connectivity solutions, but SWIFT and XML help to standardise connectivity and thus make it easy for corporations to choose regional bank services,” says van Paassen.

When you have the process straightened out, it is time to enter the last phase: automation.

After standardisation, everyone works in the same way. Automation gives you even more transparency, mitigates operational risks and creates one standardised process that is repeated every time.

“The phases to go through are centralisation, standardisation, simplification and automation – in this order. My advice is to also use optimal technology and to make the best out of it,” suggests van Paassen.

She believes that the credit crisis gave treasuries some valuable lessons about the importance of information and processes. When the processes are in place, they can still be used even now that the economy is brightening up.

Treasury Roundtable Highlights Key Issues

Four other treasury experts spoke to OpusCapita about their thoughts on how a variety of topical themes will evolve in 2011. They are: Wim Lambrecht, corporate treasurer of Multi Corporation; Sirkku Markula, corporate treasurer at KONE Corporation; Jørgen Jensen, director with Nasarius; and Allan Buhl Møller, group chief financial officer (CFO) for EG Holding.

Wim Lambrecht, corporate treasurer, Multi Corporation
Multi Corporation is a commercial developer of inner-city retail space in Europe, comprising complementary companies in property development, investment, asset management and property management. Multi is active in 14 countries, with its head office in the Netherlands.
Sirkku Markula, corporate treasurer, KONE Corporation
KONE is one of the global leaders in the elevator and escalator industry. KONE is present in more than 50 countries. The head office is based in Finland.
Jørgen Jensen, director, Nasarius
Nasarius provides large corporations in the Nordic and European region with specialised consulting services concerning their treasury departments, bank connectivity and the finance value chain. It has many years of experience garnered from projects around the world.
Allan Buhl Møller, group CFO, EG Holding
EG is a Danish-based company that supplies IT solutions and consultancy services for the Scandinavian market. The core of the product portfolio is enterprise resource planning (ERP) systems. The company has offices in Denmark, Sweden and Norway.

Areas For Development in 2011

Wim Lambrecht, corporate treasurer, Multi Corporation: Liquidity control and working capital management (WCM) will become even more important. You can only use your money once, so the question is how to use it wisely. Forecasting is challenging, as the real estate development sector has many external issues affecting the business. These include surety, permit and environmental issues as well as the weather.

Sirkku Markula, corporate treasurer, KONE Corporation: For KONE treasury, the most important development areas in 2011 will be in global liquidity management and foreign exchange (FX) risk management. Our aim is to develop new solutions for managing and centralising global liquidity, including new cash pools. This is a real challenge, since KONE is present in over 50 countries. We are currently focusing on China, in particular, and the organisation of our local treasury operations. In FX we are evaluating a new global business model and a streamlined process for managing FX risk, including reporting and hedge accounting.

Jørgen Jensen, director, Nasarius: Now that the EU Commission and Parliament are likely to set the deadlineof 2013 for SEPA, this will bring it back on the corporate agenda and will put pressure on corporations to move forward on payments. Corporations are already adopting SWIFTNet for communication with their banks. Put together, these two changes mean we’ll see more action concerning automation of the corporate-to-bank interface, and this will help improve liquidity control and increase centralisation.

Allan Buhl Møller, group CFO, EG Holding: The development areas include increased centralisation, better visibility and more central control over cash and risk (interest, FX), as well as reduction of risks. Bank relationship management is important, too. Corporations should inform their banks earlier than before about finance needed for an acquisition to manage the banks’ internal credit approval.

Lessons Learnt from the Credit Crisis

Lambrecht: As a corporate treasurer I have noticed a shift in relationship management between banks and their customers. As the last years have been difficult for many sectors, continuous and proactive support by your bank(s) is key today and in the future.

Markula: As KONE has had a strong cash flow over the past few years and currently has no net debt, we have been in a very good position throughout the credit crisis. We are, nevertheless, very careful in our customer payment terms and have been able to manage receivables well. KONE works globally with a number of banks, and we have noticed that different banks have reacted quite differently to the market situation.

Jensen: The liquidity crisis taught some treasurers that it might not be a good idea to put all your eggs in one basket, i.e. one bank. They will now probably reconsider the number of banks they need to have, because funding cannot be as easily separated from cash management operations as was previously thought. Since SWIFTNet makes adding another bank less costly, it’s not such a big issue to have several banks as it was maybe five years ago.

Møller: Investing your excess cash is not risk-free. Especially now that there is no longer any government warranty, you should be even more careful doing this. ‘Too big to fail’ is no longer valid. Corporations want to improve their bank relationship management; they prefer long-term relationships to short-term relationships.

Bond funding can be a supplement to a traditional bank loan, but also a source that corporations can use to diversify dependency on traditional bank loans. Covenants are now more important than before; ‘overhealthy covenants’ are key to access cash for acquisitions due to the higher risk awareness in banks.

The importance of WCM has increased. More action has been taken to improve working capital by reducing inventories, accelerating the billing process and renegotiating payment terms. An adverse impact is also visible as customers stretch their payments.

The board of directors requires more in-depth forecasts for covenants and net working capital. For example, what are the consequences of a delivery on time to customers versus the reduction of inventories and the risk of postponing projects. Financial risk management is important, too.

SEPA Trends

Lambrecht: I like the concept of SEPA, but we must be prepared for the impact of a possible big bang rollout instead of a phased rollout. At the moment, SEPA is not at the top of my agenda because deadlines are not being set. The people involved and the banks should push it more.

Markula: We see this as opening up new possibilities for creating centralised payment solutions within the SEPA area. KONE has been using in-house bank accounts in SAP for more than 10 years, and we believe this will allow us to leverage existing solutions in streamlining the payment process and technical environment.

Jensen: SEPA will get new impetus now that we’re going to get a deadline for adoption. However, not everything related to it is as clear as many people had hoped. For example, in Germany there are politicians at the highest level who would like to keep the old national bank codes and bank account numbers. There is a threat that we may end up with several ‘mini-SEPAs’ due to local rules.

Nonetheless, with the new initiative from the EU Commission, we’ll be seeing a lot of new SEPA projects starting in corporations. In the first instance, many will be technical conversion projects in which corporations start to use international bank account numbers (IBANs) and bank identifier codes (BICs). Later on, we’ll see corporations rethinking the number of their local bank accounts in euro countries, for example.

Møller: I haven’t personally had much experience of them. However, they are an important step in improving Europe’s financial infrastructure and backbone and in reducing transaction costs.

Automation and Straight-through Processing

Lambrecht: The 27 years of the company’s history have created a legacy of ‘how things have always been done’. Over recent years I have been gradually implementing improvements along with investigating the processes and systems that are being used to create an even better picture of how things could be automated and processed. So straight-through processing (STP) and automation are very important for us, as they seem to be for most companies. In practice there are challenges, such as manual data input for payments in certain countries or the lack of local bank presence in other countries, but the picture in my head is for complete automation. In the end, the goal is to have a single (overlay) bank environment.

Markula: The greatest potential that STP offers us is in the area of reconciling incoming customer payments in certain countries. We hope that we can increase the level of automatic reconciliation with international reference numbers.

Jensen: Corporations are at different stages in carrying out STP projects. Some of them have already automated almost all processes, whereas others are just starting to do it. It also depends on the type of corporation. For example, if a corporation is growing or acquiring new companies, there is typically a lot to do. Other corporations may be more stable or may have already automated their processes, so they don’t have to do so much.

At Nasarius we always recommend that our clients first find out where they are with their current processes, if they are considering better automation and STP. For example, what banks are being used? How are bank statements processed locally? And how well are short- and long-term cash flows forecasted? When you have decided to go for it, it is best to start with the easy processes and those with fast payback. It enables you to use the gains from these projects to fund future ones.

Møller: Corporations depend heavily on the financial infrastructure as well as the culture of the area where they operate. Scandinavia and northern Europe have a very well-developed electronic infrastructure, including direct debit, bank transfers and secure internet payments. In other parts of the world – for example in Latin America and the US – cheque and credit card payments are still the most common payment forms on the consumer market. A cheque is both inefficient and expensive. Many Latin American countries have an extremely high rejection rate (up to 25-35%), and credit cards are often issued with a very low limit (US$2,000-5,000). Currency restriction, for example in Venezuela, makes it challenging to deal with customers.

The conclusion is that the country’s – or region’s – infrastructure is important for driving the development. Internet transactions make it possible even for private persons to carry out transactions in less developed countries, even if the central bank or the banking systems restrict them.

Challenges for a Corporate Treasurer

Lambrecht: The market has shifted quite a lot and you are often forced to put day-to-day business aside and focus on ad hoc issues. The last years have been dominated by renewed discussions and renegotiations between companies and banks. Compared with the global companies, other companies still have problems with access to the capital markets. The world needs to return to a situation where this access is not denied to financially sound companies.

Markula: The treasurer’s greatest responsibility is to ensure that the most important financial risks are correctly identified at all times and that we are prepared for changes on the financial markets. It is also important that the treasurer has a close relationship with the business to ensure that treasury is providing the correct support to the business in a constantly changing environment.

Jensen: Corporations have different challenges depending on their cash needs. But what they should all do is keep the momentum going. The credit crisis highlighted the importance of the treasury department to management because suddenly cash was scarce. When the good times come back, it may not be so easy for treasuries to get new projects approved by management. So now is the time for the treasury department to get funding for projects that improve liquidity management and STP, if they haven’t done so already.

Møller: Key challenges for treasurers include covenants, bank relationship management and WCM. Given the cross-functional nature of WCM, it is important that the treasury understands the processes in order to support the business with improvements. There is a conflict between the flexibility needed in business with regard to payment terms (to attract customers and sales) and the need to optimise the net working capital – for example, via accelerating the billing process and tightening customer payment terms. This will increase in the coming years as long as we have the present financial markets and risk awareness in the bank sector and shortness of cash.

It is important for corporations to easily get a precise overview and be able to generate a forecast of the total financial risk and expected financial risk over six to 12 months, including the interest rate, FX and counterparty risk.

Relatively more resources will be spent on treasury functions (software investment and also manpower) in the future compared with the past one or two years due to the fact that the world is more complex than before and because the internal and external requirements for the data and forecasts from the treasury functions will increase significantly over the coming period.


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