Perhaps it’s just an urban myth that treasury is the one department within a company that really has control over working capital. If you believed this, you might have been in a minority all along, because more than half of the respondents to this year’s gtnews trade finance survey claim that their treasury has no more than a monitoring role when it comes to working capital. Only 36% claim they have ownership – the answer we would have expected from almost all companies.
This surprising result – and there are more to come – is just one of several key findings from the survey. But there is also encouraging evidence that many treasuries – particularly those in smaller and mid-sized companies – are moving towards best practice. A greater percentage of companies now manage their trade finance activities globally compared with the 2009 survey, while the trade finance and cash management functions are also moving (slowly) towards full integration.
The fact remains that, in the volatile financial environment, companies have been holding on tight and haven’t been able to focus on the ‘luxuries’ of gleaning extra working capital throughout the supply chain. As the global economy seems to be emerging tentatively from its recession, now could be the time for treasurers to position themselves within the company and make sure they’ve got the most efficient working capital processes in place – which will include gaining automated access to trade finance data.
Integration of Trade Finance with Cash Management Activities
The results of this year’s survey show that 75% of companies have either fully or partially integrated their trade finance with their cash management activities. This figure in the 2009 survey was 72%, so this is good news and shows a shift – albeit a small one – in the right direction.
However, the 25% of companies that still handle their trade finance separately to treasury is a reminder that there is still work to do in this area – although this figure came down from 28% in the 2009 survey results.
Figure 1 below suggests that smaller companies are driving this trend and are realising the benefits of integrating these two functions, while multinationals and large regional companies may be finding the process of integration harder to achieve because of unwieldy top-down governance policies and complex global operations.
Of course, the severe market conditions of the past 18 months have left many treasurers with anxiety and sleepless nights. As Patrik Zekkar, head of trade finance sales for SEB Sweden, says: “Treasurers would have been more concerned with not losing too much equity, rather than pushing the project to centralise the governance of their working capital.”
Companies Adopting ‘Best Practice’
Current best practice is to centralise the trade finance function and to integrate it with cash management. According to SEB, there is really no good reason not to do this and there have been several recent examples of listed Swedish companies integrating their trade finance and cash management.
While some companies argue that they need to keep a close eye on their trade finance receivables, this can and should be done from a treasury level. After all, payment data needs to be visible whether it comes from a trade finance document, on open account or is part of the company’s other cash flows. There is no reason why trade finance payments shouldn’t be monitored and measured in the same way as all other cash management transactions.
Zekkar points out: “When you’re dealing with trade finance flows, you’re closer to the actual physical side of the business and you’re dealing with documents enabling the delivery of the physical goods. This is an area where treasurers can add value and make the value chain more efficient and profitable. Information is value and only having part of the information is a weakness.”
Using Your Assets and Determining Your Trade Finance Policy
Another question in the 2010 survey asked what factors were important in determining the company’s trade finance policies. The answer ‘an increased liquidity in trade assets’ was chosen by 15% of respondents in 2009, compared to 24% in 2010’s survey.
Lars Hagne, head of trade finance sales for SEB Norway, has seen more focus on risk management among his clients during the financial crisis, with companies asking for support on risk hedging. He points out that companies that use letters of credit (LCs) are able to optimise their working capital by having the bank confirm that LC. A confirmed LC provides a more timely payment and if the payment terms of the LC are deferred then it’s relatively easy to obtain a discounting of the confirmed LC value(s) in order to decrease the day’s sales outstanding (DSO) for the transaction.
There is a growing realisation that trade finance receivables should be hedged, and that the hedge can in turn be used to boost a company’s working capital.
Another factor in choosing a trade finance policy is a company’s own internal risk policy – it is important to 54% of the survey’s respondents. Risk management has been a cornerstone of financial well-being for companies throughout the turbulent financial markets.
One surprising response was the emphasis placed upon bank trade solutions. According to SEB’s Zekkar, this has been non-existent during the past 18 months because banks have also been going ‘back to basics’. The survey results could indicate greater appetite among clients for structured trade products.
Going forward, companies should be less concerned with volatile markets and will be able to look more closely at optimising working capital tied up in the trade finance process. Furthermore, growth is expected in emerging markets, so risk policies will have to adapt to this.
Are Companies Looking for Working Capital in their DSO and DPO?
The percentage of companies trying to enhance working capital levels by manipulating their day’s payables outstanding (DPO) or their day’s sales outstanding (DSO) is still at 53% in this year’s survey – the same as in 2009. Although it shows that more than half of companies are active in this area, it is also disappointing that awareness hasn’t increased during the past year. Of course, the flip-side is that 47% of the survey’s respondents are still not making the most of working capital in their DSO and DPO.
However, this isn’t all that surprising given the difficult financial situation. According to SEB’s Zekkar, corporates have been focusing on making sure they receive their payments, either through a credit insurer or through an export credit agency (ECA). He says: “The concern has been to ensure the payment arrives at all, rather than quibbling about getting it a month, a week or a day sooner.”
And while 53% of companies are actively extending their working capital through their DSO and DPO, this figure could be much higher. So how can banks persuade companies that they may benefit from seeking working capital in this area? SEB notes that, among its own clients there is a variation in awareness of how much capital can be tied up unnecessarily in payment terms.
While some companies are still unaware, others are a step or two ahead. One of Hagne’s clients described a well-hedged receivable posting on the balance sheet as “almost money”. He says: “Companies may feel satisfied with a transaction if they’ve got payment terms of 180 days and hedging for that time – but there is more they can do. They can ask someone to discount that hedging in order to speed up the cash flow.”
An added complication is that many markets now favour the seller or supplier. Pressure from the supplier for quicker payment makes it even harder for buyers to find value in their DPO. However, some companies are also experiencing pressure from their buyers. One head of group treasury at a company in western Europe said that he was facing “substantial pressure from the customer for extended payment terms”. Increased tension in payment terms throughout the supply chain is making it harder for companies to find value there.
“Not My Department”
Another major factor is the separation of responsibilities and duties in companies. Hagne says: “The problem comes when there are separate functions, for instance risk hedging and liquidity issues operating under different sets of KPIs. If the two sets of KPIs are contradictory large opportunities for working capital optimization might be lost.”
In fact, any treasurer who says that it’s ‘not his or her department’ to seek working capital in the DSO and DPO is missing an opportunity – as well as not fulfilling his or her role properly. In work environments that are often governed by KPIs, this attitude is all too common. Without a KPI for a certain area, there is no incentive to try and improve it. This attitude needs to be changed, especially among treasurers who are ultimately responsible for cash flows in all areas of the business.
Interestingly, the results differ across regions, with Western Europe and North America the regions least likely to be looking at DSO and DPO to reduce their working capital needs. Figure 3 below shows that central and eastern Europe is the region most likely to take advantage of optimised payment terms to improve working capital levels – with 73% giving a positive reply.
If Treasury Doesn’t Have Ownership of Working Capital… Then Who Does?
Who exactly has complete responsibility for your working capital would be a good question for 64% of this year’s survey respondents. Fifty-six per cent believe that treasury simply monitors working capital, while an astonishing 8% of respondents claimed that treasury has no part in working capital at all!
Of course the mandate of all treasury departments should be to have complete ownership of their company’s working capital. Even having a monitoring role is not enough – because it implies a lack of a strategy or a plan, a lack of procedures, governance models and policies. According to SEB’s Zekkar, all treasury departments should feel that they are the owner, even if they don’t have the final say in the total capital structure of the company.
The lack of ownership felt among treasury departments could also be blamed for the lack of value being sought throughout the financial supply chain – whether in the DSO and DPO, or in the hedging of trade receivables.
The results sliced by region suggest that only the respondents in the Middle East and Africa are working along the right lines – 46% of them claimed their treasury had ownership of working capital, and none replied that treasury had no part at all. In western Europe and North America, 38% and 43% respectively said that their treasury had full responsibility for working capital.
When the figures were analysed according to size of company, it transpired that the prevalent view, regardless of company size, is that treasury is a monitor of working capital.
These are attitudes that need to be changed within treasury departments across the globe and banks must help their customers to realise that when it comes to working capital – the company’s lifeblood – treasury needs to be completely on top of the game.
Improve Your Cash Flow Forecasting By Incorporating Trade Finance Data
Eighty-six per cent of survey respondent’s import trade finance data into their cash flow forecasts, which seems at first like an impressive result. It is certainly an improvement on the 2009 survey results in which 80% incorporated this data. However, 50% of the respondents import the data manually – a process that is known for being time-consuming and error-prone.
SEB believes that not enough companies are aware that they can get trade finance payment data straight from their banks in electronic format and that it can be incorporated in an automated way into their cash flow forecasts.
One of the problems is that companies are often satisfied with using their cash management data in their cash flow forecasts, leaving out data from their trade finance transactions. According to Zekkar, there has not been, up until now, a proper discussion between banks and their clients about this.
When asked by the survey to name some of the major challenges to cross-border business, one managing director in North America replied that his company had not yet found “the right IT/business software to fully automate trade finance with cash flow management”.
However, according to SEB’s Patrik Zekkar, there is no need for companies to implement complex or expensive software or ERP modules. The answer, he says, is for company treasurers to start creating the demand for trade finance data. Only the client demand will push the banks to make the information available in a format that can be easily incorporated with the company’s existing cash flow forecasting systems. He adds: “Companies need to demand a comprehensive report from their bank. It’s not the case that companies need to install or implement software or systems or modules for their ERP systems. They just need a web application.”
Latin America, central and eastern Europe and Middle East and Africa are the three regions who seem to be ahead of the global curve – all respondents from these regions include trade finance data in their cash flow forecasts, whether manually, automated or partially automated.
All companies at the larger end of the spectrum (those with a turnover greater than US$1bn) are less likely to include trade finance data in the forecasts.
Challenges Faced: From Credit Risk to Cross-Border Legislation
The survey also asked respondents to name their main challenges or concerns in improving their cross-border business. Differing legislation regarding tax, cash pooling and payments in different countries was seen as a problem by some respondents, while the global economic recession was also cited several times. Managing credit risk, finding trade/hedging solutions and finding banks willing to take on risk were also mentioned by companies, while the role of treasury – and the lack of treasury’s influence within the company – were also noted as part of the challenge.
Ten of the most representative challenges and concerns affecting cross-border business mentioned by the survey respondents include the following:
- The current economic conditions.
- Managing credit risk globally.
- Pressure from customers for extended payment terms.
- Establishing a solid trade/hedging programme to mitigate market volatility.
- Customer resistance to bank guarantees and LCs due to balance sheet restrictions.
- Getting enough information visibility and availability.
- Finding proactive trade financing partners that are willing to take risk.
- Senior management’s limited understanding of the importance of treasury.
- Finding the right IT/business software to fully automate trade finance with cash flow management.
- Lack of transparency and information communication between global, regional or local entities within a company, and between different departments (e.g., trade finance, accounting/SOX, tax).
The results show that most companies (more than three-quarters) still don’t have fully centralised control of their trade finance activities. Together with the finding that only 36% of respondents claim to have ownership of their working capital process, there is a clear picture that treasurers have yet to get a firm grip on the whole financial supply chain.
Crucially, visibility and integration of trade finance transaction data is missing, as is a sense of treasury’s ownership of working capital. Treasurers need to ensure that working capital is being optimised at every step of their business’s supply chain – whether it’s hedging receivables or focusing on improving their DSO and DPO.
One of the findings of this year’s survey is that a lack of knowledge and awareness of what is possible could be a barrier to treasuries moving forward and taking control of their entire working capital. Treasurers need to work with their banks to ensure that automated trade finance data is available to them.
Overall, corporates should be looking to work across the value chain and should be demanding more cooperation and data on this from their banks. Many banks are in a position to supply transaction data on cash management, supply chain finance and trade finance, which could extend the treasurer’s control to all areas of working capital.
As (we hope) we are now emerging slowly from the difficult financial markets, it is the right time for treasurers to make sure they are placing more focus on their working capital again. With leadership and tenacity from the corporate treasury community, and with the cooperation of their relationship banks, this will be possible.
Between 30 November and 21 December 2009, 242 targeted readers of gtnews completed an online survey, asking them about their trade finance strategies and how they are adapting these to new market conditions. They answered 11 questions, including multiple choice and open answer formats.
Most respondents (35%) were based in western Europe, while North America and Asia constituted 26% and 22% respectively. The Middle East and Africa, Latin America and central and eastern Europe each made up less than 6% of those who answered the survey.
Half of the corporates who completed the questionnaire had annual revenues of less than US$1bn. Forty per cent of the respondents had positions within their companies at executive board or director level, while another 40% were middle management and 19% were operative staff.
To learn more about SEB, please visit their gtnews microsite.
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