Cash flow forecasting and centralisation are still in the spotlight for treasurers. But there are stumbling blocks to effective cash management and forecasting – including decentralised treasury structures, the difficulties of managing data and continued reliance on spreadsheets. Other issues include many treasuries not managing foreign exchange (FX) processes and lack of single euro payments area (SEPA) awareness.
The 2010 Cash Management Survey was conducted by gtnews during April and May 2010. A record number of corporates answered the survey – 438 in total – the majority of which were from Western Europe (34.5% of them), North America (34.7%) and Asia-Pacific (16%). These three regions made up 85.2% of respondents, while Latin America, Central and Eastern Europe, and the Middle East and Africa collectively accounted for less than 15%.
Just 6.6% of the respondents were from companies with a turnover of less than US$10m, while more than 51% of the companies had a turnover greater than US$1bn.
It’s fair to conclude, then, that these results are most meaningful as a representation of the views and practices of large corporates headquartered in North America, Western Europe and also, to a lesser extent, Asia-Pacific.
Focus on A/R and Cash Flow Forecasting to Improve Cash Management
What processes should treasury focus on in order to improve cash management? Thirty-six percent of the survey’s respondents thought that cash flow forecasting would most improve cash management, while almost 29.7% thought that liquidity management, in the form of cash concentration, short-term investment and funding, would be most likely to make a difference.
This echoes the results of the 2009 Cash Management Survey, which found that 31.3% of respondents said cash flow forecasting had the greatest potential for improving cash management (while 32.7% thought sales and receivables were the areas most likely to improve cash flows).
Despite the belief that better forecasting could improve cash management, there is little sign of improvement in that area, as the results of this year’s survey show.
However, results varied when sliced according to company size. The smaller companies, with a turnover of less than US$10m, didn’t see cash flow forecasting as such a priority, instead putting their faith in short-term liquidity management and cash concentration (38.9% thought this area is most likely to improve overall cash management).
Just 11.1% of companies with a turnover less than US$10m thought that cash flow forecasting would enhance the efficiencies of cash management, while about 38% of larger companies gave cash flow forecasting prime importance.
In fact, unwieldy amounts of data in large, global companies remains a problem for cash flow forecasting. Niclas Osmund, SEB’s head of cash management advisory, says: “It’s the large companies that have most trouble with cash flow forecasting, but also have the most to gain from improvements in cash flow forecasting.”
Is Cash Flow Forecasting a Catch-22 for Treasurers?
As liquidity is squeezed by the scarcity of bank credit and supply chains that might be running a little less well than clockwork, treasurers are looking for other ways to enhance their cash flows – and as already shown, cash flow forecasting is a key area, according to this year’s survey. However, the fact that it’s the centre of attention doesn’t necessarily mean that companies are doing it, or that they’re doing it well.
In fact, more than two-thirds – 69.2% – are still using the trusty spreadsheet for their forecasting needs. One positive sign is that far fewer respondents to the survey say they will continue using spreadsheets for forecasting in future – just 28.9% intend to carry on doing so.
Of course, we may have heard this optimism before. The write-up of last year’s survey also noted that, while there is clear “ambition among corporates to migrate away from using spreadsheets for cash flow forecasting”, it is still a process with “myriad stumbling blocks”. So when will companies finally wean themselves off spreadsheets?
According to this year’s survey, just over 34% of respondents intend to use third-party software for cash flow forecasting in future, compared with 16.5% currently doing so.
Inaccurate sales targets are another stumbling block for accurate cash flow forecasting.
While these are one of the most important data sets to include in a cash flow forecast, they are also one of the most difficult figures to incorporate with any accuracy – 53.8% of the survey’s respondents said this was the main barrier to accurate cash flow forecasting. Other significant challenges are a lack of internal systems integration, a lack of inter-departmental communication, lack of priority/effort within the business unit and limited resources.
The lack of resources, cited by 33.3% of the companies, is in part due to the expanding role of treasurers, at a time when there is little or no investment in extra staff. “This might be a hopeless equation for the treasury to put together,” says Osmund. “They know what they need to do, but they are unable to do it because it’s not a priority within the business unit and they don’t get the budget for it, so it’s like a Catch-22 for treasurers.”
One respondent to this year’s survey, a treasury director from a large firm in Ireland, cited cash flow forecasting as the main challenge to working capital efficiency, saying: “Our main challenge is proper forecasting techniques and the need for new systems.”
The widespread practice of manually importing forecasting data is also underpinned in this year’s gtnews Trade Finance survey. According to Patrik Zekkar, head of SEB’s trade finance and leasing and factoring, Sweden, a lot could be gained just from demanding more comprehensive trade finance data from banks.
SEB’s Osmund concludes: “If treasury is unable to get senior management buy-in on the need to invest in and prioritise cash flow forecasting, then it’s possible that more persuasive arguments are needed. If the prospect of cash savings is not convincing enough, treasurers could also point out the risks that could be reduced – counterparty risk, operational risk – by improving cash flow awareness and forecasting.”
Centralise Your Cash Management Structure
This year’s survey shows some positive signs of a move towards a centralised structure, with an increase in companies with a global cash concentration structure – 34.9% this year, compared with 25.5% of companies in 2009. Last year, 89% of the respondents said they plan to move to a centralised structure in the future. There could be some evidence of this happening gradually. In the 2010 survey, 52.1% of companies said they are likely to move to a centralised cash management structure in future.
While 34% of this year’s respondents currently have a decentralised structure, just 12.4% of them say they are likely to maintain this in future. So there is a clear indication that companies are moving away from decentralised cash management structures towards centralised ones.
In North America and Western Europe, 36.8% and 23.4% of companies polled currently have decentralised structures. This figure for Asian companies is even higher at 44.2%, while fewer of the Asian companies polled indicated they have global cash concentration structures – just 23.1%.
It’s also worth noting that there are fewer companies with centralised cash management structures in North America (33%), compared to Western Europe (42.2%).
One of the survey’s respondents, a manager from a mid-sized company in Finland, agreed that there are working capital challenges with a decentralised structure. He said: “While operating in 13 countries and with 12 currencies, creating a group-wide process with as few local deviations as possible is a challenge.”
This feeling was echoed by other companies polled in the survey. A senior manager from a mid-sized Czech corporate said the main challenge to working capital was a “lack of combined and coordinated effort throughout the whole organisation – sales, purchasing, manufacturing plants and treasury.” And a senior manager of a large US-based firm said the main challenge to improving working capital was the “decentralised structure – getting people to buy into a single approach and inputting data (POs) into the enterprise resource planning (ERP) system for data visibility and timeliness.”
So what is stopping companies from centralising their cash management processes? The answer might be, Osmund suggests, that centralisation is a costly, disruptive and lengthy process, so one barrier is gaining the support of senior management. He says: “At the same time, centralisation can help treasury to control and monitor cash flows and reduce risks, which is essential in safeguarding liquidity during a harsh financial environment.”
Current and Future Cash Management Techniques
So what cash management techniques are companies using now and how do they expect to manage cash in future? This question showed that 60.5% of companies currently use zero or target balance pooling, while slightly more companies – 62.3% – expect to use this type of pooling in future. The second most popular cash management technique was inter-company netting, with 45.6% of companies claiming to use this. However, the predicted future use of inter-company netting is lower – 37.7%.
The results show that other techniques are less used – notional pooling was claimed by 30.1% of the respondents, while interest compensation, single legal account pooling, reference accounts and cross-currency pooling are used by between 8.8% and 18.9% of companies.
Surveys from the past three years show that zero and target balancing have grown steadily from being used by 40% of respondents in 2007, to this year’s figure of 60.5%. Inter-company netting has also more than doubled from being used by 18% of companies in 2007, to this year’s figure of 45.6% of companies.
So is there a reason for the popularity of zero and target balancing? Osmund says: “That is the dominant type of cash management tool if you look worldwide. One driver for that is big companies who have set up treasury management systems (TMS) and enterprise resource planning (ERP) systems, they of course prefer to have the same standard in as many countries as possible.”
Reconciliation of Payments and Collections
While more companies – 35.9% – have a local or decentralised structure for payments reconciliation, the survey indicated that companies want to move towards a regional or global reconciliation structure. Just 14.5% of companies said they would continue to use a decentralised structure in future, while 39.6% intend to use a regional structure in future, and 24% predict a move to a global structure. This is in keeping with results from last year – suggesting that corporates, as with the cash management structure, want to move to a centralised process for payments reconciliation, but have not yet done so.
Companies are still not making use of outsourcing, with only a handful of companies from Western Europe outsourcing their payments reconciliation.
The way companies handle their collections reconciliation is very similar to their payments, with most – 39.8% – using a decentralised structure and just 21.9% expecting to continue doing so in future. However, 2.7% of Western European companies said they will outsource their collections reconciliation in future – as did 2.9% of the North American respondents.
While the percentages are low, SEB’s Osmund believes this could indicate a small growth in interest in outsourcing. He notes: “I think it might be that they have realised that sometimes it’s very cumbersome to centralise when you have multiple systems. This could be an alternative they are considering. An outsourcing partner could be a cheaper alternative to a large ERP migration project.”
Treasury Process Management
When asked how they manage a selection of treasury processes, including cash concentration, short-term funding, reporting/forecasting, investments and FX, a staggering 14.1% of the respondents indicated that their FX processes were not managed at all. “This is astonishing,” says Osmund, who is clearly shocked at the idea of so many companies ignoring the management of this key treasury function.
While the outlook is slightly better – just 5.5% of respondents think that FX will remain unmanaged in future – the fact remains that companies that don’t manage their FX are neglecting a core responsibility for a treasury organisation. Osmund says: “This is why treasury exists – to deal with company liquidity in the most efficient way and to mitigate risks. In FX there is a substantial risk element that you have to work with.”
The year-on-year results for future management of core treasury processes show that there is not much change in the figures of in-house process, but there is a shift from not managing to outsourcing (with the exception of FX). Osmund adds: “A possibility is that some companies are managing their FX risks locally, so the group treasury doesn’t have an overview on the exposures the group has, which can be quite dangerous.”
SEPA, What’s SEPA?
Although full conversion to SEPA is yet to happen, the European parliament has called on the European Commission to set a deadline of no later than 31 December 2012 for the migration to SEPA instruments. At the moment there are only two countries with firm end dates, but SEPA is nonetheless a reality on the horizon and is moving steadily nearer.
Therefore, it’s not really a surprise that corporates have not yet thought about what SEPA will mean for them – the survey found that 38.7% of respondents have not yet considered it. This is fair enough, but what is more surprising is that 39.6% believe that SEPA will have no impact on them at all in future.
Furthermore, 41.7% of companies based in Western Europe believe that SEPA will not affect their cash management in future either. SEB’s Niclas Osmund says: “This is quite astonishing, actually. One would expect European-based corporates to have more awareness of SEPA.”
He has seen through his own client-base that many corporates are not yet prepared for SEPA. However, 47.2% of corporates in Western Europe believe that SEPA will lead to them having fewer bank accounts.
“It has taken a long time, and it will take a long time before SEPA is fully implemented. There may be no change for two, five or 10 years, but to say there will be no impact at all is strange,” says Osmund. A short-term view could account for these results, with treasurers not looking too far into the future – perhaps a six-month or one-year horizon at most – when considering their cash concentration structure.
Working Capital Management and Treasury Responsibility
When it comes to working capital, the survey found that most respondents rated their working capital processes – purchase-to-pay (P2P), order-to-cash (O2C) and inventory – as either average or good. Few stated that they had achieved best practice in any of these processes. It also found that 36.5% of the respondents felt that the treasury was owner of the working capital process. Just over 10% believe that treasury plays no part in working capital, while 53.4% said that treasury had a monitoring role.
While far more treasurers should ideally have ownership of working capital processes, 36.5% is nonetheless an increase on the percentage of ownership in the surveys from the past two years. In 2009, 30% of the survey’s respondents said they had ownership of working capital processes, and this was a 6% increase on the results from the 2008 survey. This suggests that treasurers are gradually taking control of their company’s working capital processes.
A senior manager at a North American mid-sized company said that his firm’s main challenge in improving working capital was the “lack of appreciation in business units, who have a siloistic viewpoint, of the impact that is caused to the company if the execution of the working capital model is inefficient.” This exemplifies a common lack of concerted awareness at subsidiary level of the importance of working capital efficiencies and it is a process that could be improved if there was clear leadership and ownership of working capital within the company.
The survey found that a large proportion of companies had full responsibility for several other finance functions, including cash management (91.1%), capital markets/investments (85%), financial risk management/mitigation (70.8%), IT/systems treasury (65.9%), corporate finance (60.7%) mergers and acquisitions (M&A) (58%) and enterprise risk management (ERM) (51%).
The results also showed that treasury has far less sway over areas such as M&A (10%), ERM (14%) and tax (14.6%). Pensions and insurance also had a low-level of treasury ownership with 33% and 32.6% respectively.
Short-term Cash – Handling Surpluses and Deficits
If you’re lucky enough to have surplus cash, what are you doing with it? Most companies – 72.1% – replied that bank deposits are their safe place of choice for excess liquidity, which is almost certainly a reflection of the refuge companies have taken in low-risk returns during the financial crisis.
A manager of a mid-sized company in the US said the main challenge in improving working capital was the company’s access to short-term credit: “As a mid-sized private company, our access to credit, especially revolving working capital lines, has been greatly reduced in the past year and a half.”
According to Osmund, investing in bank deposits is a cautious approach, but it’s not necessarily the best way to optimise surplus cash. “If you are cash rich occasionally, I think it’s the right decision to go for bank deposits. However, companies who are always cash rich should be trying hard to assess counterparty risk, asking themselves how much money they can leave with a single bank, and how much should they demand in return for their excess cash. It could be invested with longer tenors and with better return.”
When asked to give a reason for their short-term investment choice of bank deposits, 44.1% of the corporates said it was because of the limited risk. Company policy was cited as another reason (33.6% of respondents gave this answer), because it was an ‘easy decision’ (30.1%), because of an ‘attractive interest rate’ (24.2%), while 24.2% also cited ‘inadequate forecasting’ as a reason.
Where to invest surplus cash may not be a problem for many cash-strapped companies, but there are also options that the treasurer can explore for freeing up working capital by means of short-term financing. Some of the options in the corporate financial value chain – discussed in this article – include negotiating closely with suppliers, arranging financing through export credit agencies and raising cash backed by the value of inventory.
Short-term deficits, it was shown in this year’s survey, are mainly handled by bank overdraft (56.4% of companies chose this option). This is in keeping with the results of previous years’ surveys. Other funding choices were inter-company loans (46.7%) and variable bank rate debt (33.1%). In future companies indicated a return to commercial paper (18% currently, to 22.6% planned), while variable bank rates could also see an increase (from 33.1% currently, to 39.6% predicted in future).
Looking back at the results and analysis of the 2009 and 2010 cash management surveys, there are three obvious areas that could be explored further:
- Why is centralisation not happening despite the strong wish from corporate treasurers to centralise cash management activities?
- Why do treasury organisations often find themselves in a Catch-22 scenario, balancing more and more responsibilities with the same workforce and the same old processes and systems?
- How can treasurers build their business cases to get buy-in from top management and the mandate for investing in important projects and systems?
While this year’s survey suggests there has been progress in some areas – a higher percentage of respondents this year said they owned working capital processes and there is a move towards more efficient cash management structures such as zero and target balancing – it’s still clear that there are big challenges ahead for treasury professionals.
Cash flow forecasting is an area presenting difficulties for many in terms of automation and company-wide support. Other issues, such as the management of foreign exchange and, in the case of companies operating in Western Europe, awareness of SEPA also needs to rise on the treasurer’s agenda.
As the financial markets regain a modicum of stability, the treasurer needs to ensure that the company’s emphasis on cash flows and working capital remain in focus and also that the treasurer maintains a high profile within the company. At a time when some companies might be breathing a sigh of relief, it’s more important than ever that treasurers don’t take their eye off the ball.
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