A total of 211 gtnews readers participated in the survey, of which 191 were corporates from all over the world-43% from Western Europe, 30% from North America, 19% from Asia Pacific, 3% from Central/Eastern Europe and 2% from the Middle East and Latin America. In terms of size, 60% of the corporate respondents had revenues more than US$1bn, 20% had revenues more than US$10bn and 20% had revenues around US$500m.
For many corporates, centralising liquidity management remains a difficult proposition but the advantages of doing so cannot be underestimated. The benefits include efficient use of excess cash to fund deficits internally as well as the ability to pay down debt quickly. The trend towards centralising liquidity management is certainly not new but what has changed is the fact that it is now the focus for corporates of all sizes not just the large multinationals. Small- to mid-market sized companies operating across countries and regions have to deal with liquidity on a cross-border basis in the same way as their larger counterparts. Despite the fact that smaller companies might have fewer resources and possibly limited access to technology, they too can reap the benefits of centralisation.
“Today’s automated liquidity management tools, such as sweeping, multi-bank cash concentration, and cross-currency notional pooling, are making it possible to move positions across a group of accounts, locations and currencies into a single global cash position,” says Phillip Lindow, head of global treasury and investment management, transaction banking at ABN AMRO. “As the regulatory environment evolves, we expect more and more companies to look at these capabilities.”
Centralisation is currently a key focus for corporates, and the benefits are common knowledge, but to what extent have corporates actually centralised to date? Which cash concentration tools are being used to achieve centralisation and what are the main driving factors and associated challenges? These were some of the questions asked in the survey and that are discussed in this article.
Centralisation by Region of Operation
The region of origin of the companies involved was crucial to the research. The data is therefore represented from this perspective, in order to analyse the extent to which operations are centralised both in the company’s home regions as well as in the various regions in which they have operations across the world.
For example, European companies operating in Western Europe are fairly centralised with only 13% being decentralised, 40% saying they are regionally centralised and 47% globally centralised. North American companies with operations in Europe tend to be more decentralised in Europe (27%) but a higher proportion are regionally centralised (55%). This supports the fact that when the euro was introduced, US corporates were among the early adopters of regional liquidity management in Europe but now Western European companies are closing the gap in terms of centralisation.
% corporates by respective region that have operations in Western Europe
The survey results reveal much higher levels of decentralisation among corporates operating in Asia where 44% of Asian corporates are decentralised followed by 48% of Western European corporates and 57% of US corporates. However, the results also show that around half of the corporates operating in Asia have managed to centralise their treasury operations at a regional or global level, indicating that it is possible to centralise liquidity management in this region. This suggests that although there are still highly regulated countries in Asia where it is particularly difficult to centralise operations, there is potential for centralisation across Asian countries with open economies.
% corporates by respective region that have operations in Asia Pacific
As expected, North American companies operating in North America are mostly centralised with just 9% decentralised, while European and Asian corporates are more decentralised in North America.
% corporates by respective region that have operations in North America
Cash Concentration Tools
To find out how liquidity management is being centralised, the survey considered the tools corporates are using to manage their liquidity in each of the three regions.
In Europe, sweeping cash from one country to another is an important tool. Regional and local sweeps between bank accounts are often used but cross-border notional pooling remains a challenge. True cross-border notional pooling is where the money is kept locally within countries and then a pool offset is applied; few banks offer this service, however, and it is quite costly. In contrast, cross currency notional pooling provides offset balances nominated in different currencies where the balances are held in one country. Cross-border interest optimisation aims to provide interest enhancement across accounts held in multiple countries.
% total sample by region of operation – Western Europe
The survey results show that, in Europe, only 9% of Western European corporates operating in Europe use cross-border interest optimisation but that usage is expected to increase in the future. The research also underlines the popularity of both regional and global sweeps with regional sweeps set for a significant leap in use from 31% to 41%. Newer services, such as cross-currency notional pooling and automated multi-bank sweeps are becoming more popular. The survey also revealed that among corporates operating in Europe, 17% expect to use cross-currency notional pooling in the future with 29% planning to use automated multi-bank sweeps.
As expected, local cash pooling and sweeping is very common in North America (53%). Twenty-nine per cent of companies say that they use regional sweeping, which will probably include US$ sweeps between accounts in Canada, Mexico and the US. Notional pooling is not a common product in the US, however, but we expect to see a rather strong increase among companies-5% to 11% for cross border notional pooling and 6% to 10% for cross-currency notional pooling. The number of respondents using automated multi-bank sweeps is also high compared with many of the other cash concentration tools, with 26% of companies saying they plan to use this facility in future.
% total sample by region of operation – North America
Regional sweeps are less common in Asia due to the different currencies and restrictions that still apply in many countries; however, a strong increase is expected in the future. Global sweeps are used more than regional sweeps, as companies seek to integrate US$ balances and local currency balances with liquidity positions in Europe and North America. As we have seen in other regions, companies are planning to use new liquidity services, such as cross-currency notional pooling and multi-bank sweeping, more in future
% total sample by region of operation – Asia Pacific
Perceived and Actual Global Centralisation
Almost half of the 191 corporates (49%) who participated in the survey said that they have a global liquidity operation. “This is very high, much higher than we expected,” claims Willem van Alphen, global head of cash pooling, transaction banking at ABN AMRO. “This may be related to the fact that corporate treasuries having a global responsibility rather than liquidity operations being physically centralised at the global level.” When we compare this statistic to the liquidity functions that have actually centralised, we get a very different view of what is actually happening.
% total globally centralised corporates
The data reveals that FX hedging and inter-company funding are the functions that are most commonly centralised. “This is not surprising,” says van Alphen. “These are typically the functions that many corporates centralise quickly as they relate to risk, which can have a huge impact on the performance of the company.”
% total sample
Looking at day-to-day operations in liquidity management, there is actually a much lower degree of centralisation. Just 26% of the total sample have centralised short-term funding globally and, in terms of short-term investments, this accounts for just 22% of the total sample-much less than the 49% of corporate respondents that said that they were globalised. The survey results, therefore, show that that there is a difference between corporates saying they have a global responsibility and what is happening in practice. “This is very interesting, as the banking services required for globalisation of operations are available, however, it seems that many companies are not yet ready to take full advantage of these new capabilities,” says van Alphen.
The research reveals that centralising daily cash balances is more challenging, even among companies that have implemented a global treasury. The survey revealed that just 13% of corporate respondents have centralised their daily cash positions (convertible currencies). “This is a low percentage compared to the 49% of the corporates who indicated that they have global liquidity management,” claims van Alphen. “Managing a single position in each currency is possible though only a few companies are actually doing it.”
This is likely to improve in the future, as 18% of the corporate respondents said they intend to centralise their daily cash balances. In terms of payment processes, the data shows outgoing payments and receivables have a much lower degree of centralisation. This is also likely to improve in the future due to market developments, such as the introduction of the single euro payments area (SEPA) in Europe next year. As one corporate respondent, a treasurer from a German company with revenues between US$1-10bn, commented: “the current differences in local legislation within Europe make cross-border cash management more complex than is necessary”.
Drivers Behind Centralisation
In the survey, respondents were asked to explain why they believe centralisation is desirable. The results reveal the top four reasons are use of excess cash for funding internally (64%), cash control (56%), cash visibility (54%) and enhanced yield/reduction of interest cost (54%). “This confirms what many corporates tell us,” says Phillip Lindow at ABN AMRO. “Control and visibility are fundamental drivers in the centralisation process.”
This was certainly highlighted by many of the corporate respondents. An international treasury manager at a US company with revenues between US$1-10bn said that “non-visibility of cash in foreign countries due to system constraints and non-integration of forecasting between US business units and foreign units” was a major problem for his company.
Another corporate respondent, a director of treasury at a UK company with revenues of more than US$10bn, commented: “To optimise cash, treasury should be involved in every in/outflow of cash without any bottlenecks in day-to-day activities. A process flow and supporting treasury system that can monitor and enforce treasury policy without any major overhead would be ideal. Every transaction paid could then be verified to see if the best instrument was being used and funding could be adjusted based on the outflows.”
% of total sample
In an open question, survey respondents were also asked to reveal their main challenges in terms of improving liquidity management overall. Not surprisingly, tax and regulatory issues as well as lack of IT standardisation and inadequate cash flow forecasting capabilities came top of the list. At an operational level, many respondents said they faced problems around understanding cash flows within the group, timing of inter-company flows, discipline generally and finding the time to implement and improve optimisation.
“Centralising liquidity operations at a global level may be challenging but by doing so corporates stand to gain a variety of benefits, such as increased operational efficiency, reduced costs, and increased control and visibility,” says Lindow. Achieving these targets is not a challenge that corporates need to face on their own though; it requires strong partnerships and the right cash management techniques and infrastructure.
One corporate respondent, a senior treasury analyst at a UK company with revenues between US$1-10bn, summed it up well when he commented: “Having key sponsors who want to achieve centralisation, the correct systems infrastructure in place and having confidence in bank relationships to support this structure over the years to come through good and bad years are all important factors.”
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