What’s Your Future Cash Management Strategy?

An early poll of the treasury audience at today’s ACT cash management conference in London’s City district found that the biggest priority for those attending was a focus on working capital (cited by 31%), followed by a focus on liquidity strategy and improving departmental technology (both 20%). Perhaps a little surprisingly, a focus on risk management was top priority for no more than 14% of those polled.

In his opening keynote address, Andrew Hilton, director of the Centre for the Study of Financial Innovation (CSFI), noted the trend for cash hoarding among corporates both in the UK and around the world. Hilton cited an ACT poll from last September that had revealed UK corporates collectively hold £500bn (US$760bn/€675bn) of cash on their books. The same survey showed the prime reason among respondents for holding cash was as a form of pre-funding – taking advantage of the current easy availability of cash in the market. For Hilton, there are five main reasons that corporates are hoarding cash today:

  1.  Taking advantage of low interest rates.
  2.  Higher working capital needs.
  3.  Fears over on-demand bank finance.
  4.  Regulatory uncertainty.
  5.  As a hedge against deflation (although Hilton argued that he doesn’t believe this should be an issue).

Hilton suggested that cash hoarding by UK companies could be put to the country’s advantage when competing in the global marketplace, particularly against emerging markets (EMs) and China. He added that the UK’s steady move from a manufacturing economy to a services-based economy was only going to continue. In this environment, investment by corporates in research and development (R&D) and the intellectual property drive is essential. For this focus to be successful, Hilton believes that corporates need vast levels of funding on tap, something that is easily achieved with significant cash on the balance sheet.

Future-proofing Cash Strategy

The following panel discussion took a closer look at how treasurers can future-proof their cash management strategy. The ACT’s chief executive (CEO) Colin Tyler moderated the panel that comprised Alison Stevens, deputy group treasurer of life and pension fund consolidator the Phoenix Group; Andrew Beaumont, group treasurer with utility Thames Water; Nick Feaviour, group treasurer at packaging company DS Smith; and Neil Gray, senior manager, corporate business – Europe, the Middle East and Africa (EMEA) from financial messaging services provider SWIFT.

On the issue of how far ahead corporates can look strategically, Thames Water’s Beaumont said that his treasury deals with a real mix of short-term pressures and long-term projects. He added that the company tries to take a long-term view, and noted that in the utilities sector they have a regulatory environment that encourages this. Beaumont told attendees that the company is currently carrying more cash than ever, and one of his priorities is to find ways to minimise the cost of carry.

At DS Smith, Feaviour explained that the company has an annual turnover of £4bn. With cash flow of this scale, the pressure would already be on how best to efficiently manage cash, but the company also shares its financial key performance indicators (KPIs) in public. Available for all to scrutinise, the focus on cash efficiency is quite naturally heightened.

The Phoenix Group has approximately five million policy holders of its life insurance products. Having endured a tough time during the financial crisis, the group is on a journey to rehabilitate its balance sheet. The regulatory environment in the financial services industry means that Phoenix is required to keep a large amount of cash on its books, and Stevens said that she does not expect this situation to change any time soon. The group has an acquisition strategy in order to grow its business, with Stevens explaining that Phoenix buys books of business from other financial institutions (FIs) that it can then run with its existing business. As she added, due to the nature of the business that it operates in, if the group lacked a growth strategy then the business would naturally shrink.

The challenge of UK businesses operating in Europe came up for discussion, with DS Smith’s Feaviour mentioning that his company has a big exposure to Europe following a large acquisition in 2012. As it tends to operate in-country rather than export, it is not benefitting from the euro’s recent weakness. However, Feaviour was keen to point out the value of synergies that expansion can bring. He described that he had found eastern Europe to be a vibrant growth area, and that if your business is everywhere in the continent and can take advantages of the synergies present, then Europe is a very viable market. It turns out that, despite the negative headlines about the continent over the past few years, good news stories do exist in Europe!

To Hoard or Not to Hoard?

The corporate treasurers on the panel had different approaches to surplus cash. Beaumont explained that Thames Water has been in a pre-funding mode over the past couple of years due to the risk profiles of a couple of projects that it has been working on. He pointed out that treasurers need to have a flexible approach and a focus on the short- and medium-term – despite the importance of long-term strategy – as the next 10 years will naturally be different to the previous decade. He noted that Thames Water holds around £1bn in surplus cash.

Stevens said that the Phoenix Group also has around £1bn of surplus cash at group level. However, she noted that it uses this as a buffer as it is fully drawn on its bank funding facilities.

There was another different approach from DS Smith, as Feaviour explained that the company has no surplus cash, preferring instead to rely on revolving credit facilities. He added that he finds this to be an efficient structure, and questioned what benefits the company would gain by having surplus cash in the current regulatory environment. To Feaviour, holding cash is just as risky as holding undrawn lines of credit facilities.

Finishing the panel discussion with their top tips to the audience for cash management strategy Feaviour, aptly, just said “keep it simple.” Beaumont agreed, and reemphasised the point that treasurers must be very clear on their short- and medium-term objectives. For Stevens, good planning on cash flow forecasting is essential. This was a prescient top tip, as the topic of cash flow forecasting was to the fore of the corporate case studies that followed the panel discussion.

For a further report on the ACT cash management conference, click here.

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