The gtnews 2011 Cash Management and Trade Finance Survey, based on the answers of 279 companies, brought some surprising insights into the world of the corporate treasurer – for example is it possible that treasurers always blame the sales guys when cash flow forecasts aren’t as accurate as they should be? And why aren’t more treasurers interested in pensions or tax?
There were also broader findings about the integration and management of trade finance and liquidity. Both trade finance and liquidity are continuing to move towards a centralised model with global monitoring and control. In future 73% of companies polled said they would have a global or regional liquidity management structure in place, while 48% of companies manage their trade finance activities globally, according to the survey.
The integration of cash management with trade finance seems to be accelerating, with 82% of companies now using trade finance data to project future cash flows while 42% of companies say their trade finance activities are integrated with their cash management activities.
As mentioned above, sales and accounts receivable (A/R) was an area that 27% of respondents identified as having potential for working capital improvements. Inaccurate sales targets were also cited as a barrier to cash flow forecasting by 53% of companies. These two results suggest that treasurers may see improvements that could be made in the sales and A/R process, which they have not yet been able to achieve through financial processes.
The survey also delved into corporate treasurers’ attitudes to regulations such as the single euro payments area (SEPA), Basel III and International Financial Reporting Standards (IFRS), as well as treasury’s preferred instruments for short-term funding and surplus cash. It seems that corporates continue to look to their banks for financing and deposits, but the heightened awareness of counter-party risk management, as well as the impact of Basel III, could change this.
Getting a Grip on Global Liquidity
The survey found that companies are continuing to look towards a global liquidity structure and away from decentralisation. Respondents were asked which answer best describes their organisation’s current liquidity structure. Fifty-five percent of respondents said they currently have either a regional or a global cash concentration centre. In future, 73% of companies expect to have a regional or global liquidity structure.
Erik Seifert, head of SEB’s Swedish global transaction services (GTS) business in the corporate segment, says: “Getting control on global liquidity is more important than ever given the impact of Basel III and the fact that business is more global than ever before.”
Nonetheless, 20% of respondents currently have a decentralised liquidity structure but the future trend is well defined as only 8% claim they will keep this structure in future, as shown in Figure 1.
Figure 1: Description of Current/Future Liquidity Structure (%)
Respondents from western Europe and North America were broadly in line with the overall results. Companies in central and eastern Europe (CEE) were more likely to have a decentralised liquidity structure (30%) and companies in that region are also the least likely to have a global structure (only 10%). However, the trend in CEE is also moving towards a global structure (20% of CEE respondents say they will implement a global liquidity structure in future).
When it comes to breaking the respondents down by their industry sector, a notably higher percentage of transport companies have already implemented a global liquidity structure – 62% manage their liquidity globally, while 79% of them said they would do so in future. No transport companies had a decentralised structure.
Smaller Companies Can Benefit from Cash Centralisation
The survey also asked how companies’ cash is managed. Thirty-four percent of respondents said they have a decentralised structure, 33% have an in-house bank and 24% use a shared service centre (SSC).
Forty-six percent of companies with revenue of less than US$10m have decentralised structures compared to 31% of companies with revenue over US$10bn. Seifert remarks: “Larger companies are taking the lead in terms of centralisation but smaller companies will follow – and SEPA will offer some advantages to small and large companies alike. Particularly at the moment when liquidity is a scarce resource, centralisation can benefit companies.”
In western Europe, in particular, there is a trend away from decentralisation and towards the use of SSCs, payment factories and in-house banks. Seifert says: “This could possibly be connected to SEPA, which is serving as a catalyst for companies to move ahead with centralisation initiatives. Standardisation and harmonisation will facilitate any such initiatives.”
Managing Risk from a Distance
“Trade finance is very much a risk mitigation instrument, and strategic risk decisions are often better taken from a central location,” says SEB’s Patrik Zekkar, head of trade and supply chain finance, in response to the survey’s findings that 48% of companies polled manage their trade finance activities globally or with global oversight over regional autonomy, as shown in Figure 2.
Zekkar adds: “From a distance, you are able to make tougher decisions and you hopefully see the whole picture. In other situations, closeness can be an advantage – in selecting banks and establishing customer relations for example.”
The survey also found that treasurers are taking on more responsibility and ownership of trade finance, with 39% of respondents currently believing they are fully responsible for trade finance. This figure is expected to rise to 50% in future. Seifert adds: “Trade finance has historically been managed locally and de-centrally – when meeting clients we sense that more and more treasurers see the value of centralising oversight of trade finance in order to achieve more control over risk management and working capital.”
However, a greater percentage (76%) of organisations based in Asia-Pacific manages their trade finances with local autonomy (or local autonomy with regional monitoring). This figure compares to 28% in North America and 44% in western Europe.
SEB’s Zekkar notes that centralisation of trade finance activities can be costly and that banking partners can help to smooth this process: “Centralisation takes time and effort, but it can benefit smaller companies too. That’s why I think banks have a role to play – small companies need to be supported by a bank that has all the knowledge of legislation, tax and technology, which can all be expensive.”
The Easy Answer – Blame Sales
Respondents were asked to name the area of the company that had the greatest potential for improving working capital. The most frequently cited area was sales and A/R, mentioned by 27% of respondents. Cash flow forecasting was mentioned by 21%, liquidity management by 20% and inventory was chosen by 17%.
Seifert says: “It makes sense that for a treasurer it is a bigger challenge to go to the sales manager to influence sales and A/R. However, more of our clients are taking a very active role in trying to be a partner to the business.”
Companies in western Europe and CEE are more likely to see potential for working capital improvement in the sales department (34% and 38% respectively), while potential was seen in cash flow forecasting by 36% of respondents from Asia-Pacific.
Barriers to Cash Flow Forecasting
Figure 3 shows that lack of internal systems integration and inaccurate sales targets were the two most frequently cited barriers to cash flow forecasting – they were chosen by 56% and 53% of survey respondents, respectively.
“These are problems that many of our clients struggle with,” says Seifert. “The ones that have succeeded have invested in systems support and implemented clear key performance indicators [KPIs] across the organisation. What gets measured gets done. We have also noted that private equity-owned companies are often quite successful at cash flow forecasting – they are typically highly leveraged and therefore focus hard on cash flow metrics, while accounting-based measures are somewhat less important since they are not publicly listed.”
However, smaller companies have different perceived barriers to cash flow forecasting. Lack of inter-department communication and inter-bank connectivity are more pressing challenges for companies with revenue less than US$10m.
The main barrier for respondents in the Middle East/Africa (MEA) is inefficient process at a subsidiary level, chosen by 100% of respondents from this region.
More Companies Using Trade Finance Data to Improve Cash Flow Forecasts
Are companies including their trade finance transaction data in their cash flow forecasts? The survey found that the majority – 82% – of companies polled are now regularly using trade finance data to project future cash flow. Zekkar says: “I’m surprised given the challenges that only 18% of companies are not including their trade finance data in their forecasts.”
Figure 4 shows that 45% of companies enter the trade finance data manually into their forecasts, 34% partially automate the inclusion of the data while just 3% have a fully automated process.
SEB’s Seifert adds: “For many companies it is probably a greater challenge automating the inclusion of trade finance flows into the forecast since many ledger systems don’t hold all the transaction details necessary. However, with the growth of international trade, it is becoming increasingly important to capture these cash flows.”
The gtnews 2010 Trade Finance Survey found that 86% of companies were importing trade finance data into their cash flow forecasts and that 50% of companies were importing the data manually. The 2011 results show a slight drop in the percentage of companies importing trade finance data, but a rise from 30% in 2010 to 37% in 2011 of automated (or partially automated) input. While it is hard to draw conclusions from this, it may indicate a move towards (partial) automation of trade finance data into cash flow forecasts.
A Zero-balancing Act
The survey also quizzed companies on their cash concentration techniques. Most respondents – 40% – reported that they currently use zero or target balancing, although only 32% would do so in future. Sixteen percent of companies polled use inter-company netting, while single legal account pooling/balance netting and notional pooling were cited by 14% and 12% of respondents, respectively.
Seifert sheds some light on these answers, saying: “Most companies use a combination of these techniques and these are, to a large extent, dictated by geographic necessity and local regulations. Furthermore, some of the techniques complement each other. For example companies need both cash pooling and inter-company netting in order to build an efficient cash concentration solution.”
Bank Overdrafts Still Preferred by Many Despite Basel III
The survey found that inter-company loans and bank overdrafts are the two preferred ways of handling short-term deficits – 49% of companies said they use inter-company loans for short-term financing and 48% prefer bank overdraft.
Seifert says: “Corporates are very aware of the fact that internally generated cash is the cheapest source of funding and this will become even more so in a Basel III world, as the new regulatory framework will have a negative impact on the cost of bank financing as well as access to it.”
The use of bank overdrafts for short-term funding is far more likely in western Europe (where 58% of companies say they use it) than in North America (where it is used by 24%). Respondents in Asia-Pacific are also reliant on bank overdraft – 67% of them use this facility. The survey found that inter-company loans will be favoured in future by companies in Asia-Pacific, North America and western Europe (52%, 42% and 59%, respectively, say they will be using inter company loans in future).
The findings show that companies will make more use of factoring and selling off receivables in future (used by 12% of respondents at the moment compared to the 15% who say they will use these techniques in future). Use of the commercial paper markets for short-term funding is also set to grow – 19% of companies polled say they will turn to commercial paper in future, compared to 16% who currently do so.
Banks Brace for Move Away from Bank Deposits
Almost eight out of 10 (79%) of the survey’s respondents said that bank deposits are their instrument of choice for surplus cash. SEB’s Seifert believes that bank deposits will continue to be the first choice as Basel III puts a value on liquidity, and thus banks will be prepared to pay higher interest going forward.
Companies in most regions indicated that, to some extent, they would move away from bank deposits in future. In western Europe, the percentage of companies dropped from 88% who currently use bank deposits to 84% who will do so in future. In North America, the current use is 67% and future use drops to 56%. There is a similar pattern emerging in other regions.
According to Seifert, this is a worrying development as banks will be more dependent on relationship-driven deposits as part of their funding strategy in a Basel III world. He adds: “What makes treasurers more wary of bank deposits is probably not a yield chase, but a heightened focus on counterparty risk, which developed during and after the crisis. We can thus expect a differentiation in the market, where the financially strong and healthy banks will benefit from continued deposit taking, whereas weaker banks will struggle to find deposits.”
Other than bank deposits, 42% of respondents say they use money market funds (MMFs) and a further 18% say they use direct investments as shown in Figure 5.
In western Europe, there is a marked increase in companies interested in using MMFs – from 35% who currently do so to 58% who think they will use MMFs in future.
Treasury to Take More Responsibility for Trade Finance and Risk Management
The survey asked to what degree treasury has responsibility over a selection of areas of the business. Some of the results were surprising, such as an apparent lack of treasury responsibility for pensions and tax. However, the results also showed that treasury is becoming more involved in trade finance, financial risk management and working capital management.
SEB’s Zekkar says: “One of the major risks treasury has to mitigate is counterparty risk, so the whole process of trade finance is vital for managing that. Considering the world is not as simple as it was before 2008: risk has become a focus and this is reflected in the results. People now have respect for corporate liquidity and risk management.”
Thirty-nine percent of respondents believe the treasurer is currently the owner of trade finance as shown in Figure 6, while 50% predict treasury will have full responsibility in future. Sixty-one percent say treasury is currently owner of financial risk management, set to rise to 73% in future, while 40% believe treasury has responsibility for working capital management and this will be 49% in future.
Most companies polled believe treasury has ownership of cash management (85%), capital markets/investment (65%), financial risk management/mitigation (61%), IT/systems in treasury (55%) and corporate finance (50%).
However, the areas with least treasury influence are tax (64% say that treasury has no role), investor relations (again, 59% say treasury has no role), pensions management and insurance (58% and 54% respectively).
“Overall, I think it is fair to say that the role of treasury is broadening and treasurers are increasingly focusing on getting closer to the core business operations of the company, adding value in ways that go far beyond just managing the financial transactions of the company,” says SEB’s Seifert.
Integration, Value and Regulations
Forty-two percent of respondents said their trade finance activities are integrated with their cash management activities, although this figure is just 23% among respondents from Asia-Pacific.
The survey also found that 75% of companies are actively seeking to extend days payables outstanding (DPO), reduce days sales outstanding (DSO) and improve its days inventory outstanding (DIO).
When it comes to regulation, 36% of companies thought that IFRS would have the greatest impact on their business in 2012. SEPA was the regulation with greatest impact for just 17% of respondents, although companies in western Europe and CEE have, as is to be expected, more sensitivity to SEPA (27% and 29% respectively).
Basel III was on the radar for just 14% of companies and, again, there is more awareness of the impact of Basel III in western Europe and CEE (22% and 29% respectively). Seifert says: “Basel III is not an isolated European regulation, so these results are somewhat surprising. However, it is still early days, and I expect awareness of these issues to grow dramatically over the course of the next year.”
The survey found that both liquidity and trade finance activities are managed on a centralised or global basis by the majority of companies and that this is likely to increase in future.
Integration of the cash management and trade finance activities still has some way to go, with 42% claiming they have full integration. However, 82% of companies polled are now regularly incorporating trade finance data into their cash flow forecasts and many of them have an automated or partially automated system for doing so.
The most frequently cited barriers to cash flow forecasting were lack of internal systems integration and inaccurate sales targets, while the areas seen as having most potential for making improvements to working capital were sales and cash flow forecasting.
When it comes to short-term financing, companies are still reliant on bank overdrafts, although they are more widely used in western Europe (by 58%) than in North America (24%). Banks win again when it comes to surplus cash, with 79% of companies choosing bank deposits as their instrument of choice. However, with Basel III looming, this could be about to change.
Regulation such as Basel III is certainly on the radar for companies in CEE and western Europe, although surprisingly less for those in other regions. IFRS was the regulation that most corporates believed would have an effect on their business in 2012.
Overall, integration and centralisation were the dominant themes to come out of the results. Treasurers are increasingly looking to other areas of the business to make improvements in working capital and more treasurers are likely to take ownership of trade finance, financial risk management and working capital management in future.
Seifert concludes: “Group treasury is becoming less a trading centre doing foreign exchange (FX) or dealing with banks – they are becoming more engaged in trade finance and working capital, which means working with logistics, sales and many other areas throughout the business.”
About the survey
The gtnews 2011 Cash Management and Trade Finance Survey was conducted between 15 April and 5 May 2011. It is based on the answers from 279 corporates. The most represented region was western Europe (42%), followed by North America (27%), Asia-Pacific (17%), CEE (5%), Latin America (4%) and the MEA (5%). Large corporates (revenue greater than US$10bn) made up 19% of the respondents, while companies with annual revenues less than US$500m represented 40%, leaving 41% of companies with revenues between US$500m and US$10bn. The most represented industry sectors were manufacturing and IT (27%), financial services (16%) and retail and transport (making up 7% each).
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