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Total Number of Subscribers: 1626 |
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Date: 29th April 2010 |
Compiled by: M Sathya Kumar |
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Steps
to consider in establishing a new enterprise on solid financial ground. Company
leadership is constantly faced with meeting organisation-shaping goals within
aggressive timeframes to strengthen their market presence, establish
eminence, or simply remain competitive. As leader of a new enterprise
(‘NewCo’) formed as a carve-out - a divested business of a larger
enterprise - you face an even tougher job. In addition to meeting market demands,
you have to separate NewCo from its seller and build a solid and capable
infrastructure. The
pressure to deliver is high. NewCo is probably carrying debt obligations used
to finance the divestiture, forcing you to strive for lean operations while
demanding maximum output to sustain operations. Since you can no longer
depend on the seller to manage overall liquidity and act as final guarantor
for NewCo’s obligations, you must remember cash is king. In such cases,
you must rely on a treasury organisation to keep your organisation afloat.
This article outlines what you should consider as you build treasury services
to meet your new company’s short- and long-term needs. Planning for Day One and Beyond
In
some cases, the seller may provide transition support within a defined
timeframe for a fee. In this case, the seller agrees to continue to provide
corporate support to help NewCo reach its goals for day one, the first day
that NewCo stands as a separate company. However,
treasury services are often excluded from this offer, primarily because the
seller wishes to shield itself from NewCo’s liquidity and cash
management risks, requiring you to build treasury services in-house. This
isn’t all bad, since relying on a transition solution can put NewCo in
a precarious situation. For it to stand on its own, you must establish
NewCo’s credibility in the marketplace as a viable business and build
relationships with operational banks. Although these relationships might be
heavily influenced by agreements with the financial institutions that
underwrote the deal, it can still be beneficial to NewCo to establish these
relationships early to help address its liquidity risks. Sooner
or later, you must build a treasury organisation. NewCo must develop core
capabilities in cash management, financial risk management, debt management,
employee benefits, and insurance to survive. Ideally, these capabilities are
developed before the deal is closed, since many carve-out activities depend
on the treasury organisation. Here are a few examples of these dependencies: Ø Legal requires capital accounts to set-up new legal
entities. Ø Accounts payable (A/P) needs banking information to
ensure payments are made from legitimate NewCo accounts. Ø Accounts receivable (A/R) needs information to ensure
receipt of customer payments. Ø Accounting and tax need bank guarantees and insurance to
lock in leased properties or establish VAT and customs capabilities in
foreign countries. Ø Finance and senior management need reports on cash
positions and other financial information for tactical and strategic
purposes. Ø Payroll requires accounts in NewCo’s name to
ensure timely payments to employees. Ø Human resources requires corporate credit cards to replace
the seller’s programme. A
comprehensive planning approach - called ‘blueprinting’ - can
help you establish a treasury organisation designed to support NewCo’s
success. The blueprinting process starts with the end in mind, which in this
case is a vision for the treasury organisation’s end-state that will
support NewCo’s strategic goals. The blueprint should outline what will
be needed from treasury to attain day one readiness as well as the end-state
goals. This
blueprint can only be drawn from a deep understanding of the short-, medium-,
and long-term capabilities that will be required of treasury, including
transition support (if any) provided by the seller, as well as interim and
ongoing interdependencies with other NewCo departments. The blueprint should
include the treasury organisational structure and governance model needed to
meet day one goals, as well as specifying how these will be refined to meet
NewCo’s future needs. Do You Know Where Your Money Is?
For
day one and beyond, you should establish a well-designed liquidity and cash
management structure that provides global and real-time visibility to
NewCo’s cash balances, as well as the ability to efficiently move cash
across jurisdictions and entities where possible. Developing
this structure starts with having a thorough understanding of NewCo’s
banking requirements. Of course, you should identify the operating accounts
needed to sustain local operations, but usually that’s just the
beginning. Overdraft lines to support these accounts should be assessed. Bank
guarantees may be required to pay local taxes mandated by local regulation,
and guarantees may be required to secure leases for local properties. Foreign
exchange (FX) lines also need to be assessed up front. Once
you know what’s needed, finding a suitable banking relationship (or
relationships) is the next hurdle. Depending on NewCo’s credit rating,
debt load, and financial covenants, you may not enjoy the same types of
services and pricing from NewCo’s primary banks as the seller. You may
have to shop around for banking relationships that can provide NewCo’s
basic requirements and understand the trade-offs. There is a cost to
effective liquidity management, but it does not have to be onerous if you
identify critical banking services and augment these with in-house services
provided by NewCo personnel (e.g. maintaining a target balance in-country
rather than automatically sweeping daily). Building Your Internal Bank
Ultimately,
NewCo’s treasury group should see itself as a value-adding partner to
the broader organisation that evolves with a company’s operations. When
a company is domestically focused, treasury’s operations are usually
simple, possibly providing a one-bank solution with collections (lockbox) and
payments (cheques, ACH, wires) as the main operating drivers. However, as
NewCo expands, so does the complexity of treasury’s operations,
including the ability to adapt to greater risks due to FX rates, interest
rates, and commodity pricing. Also, as international operations increase, many
intercompany transactions will pass through increasingly complex legal and
tax structures. Treasury is often tasked with executing on the cash side of
these transactions, as well as monitoring cash balances for repatriation and
providing data to accounting and tax for compliance and reporting purposes. In
this more complex environment, you will benefit from having a trusted
internal advisor: a Treasury leader who understands NewCo’s business
and markets and how these are affected by factors managed by Treasury, such
as banking and counterparty risk, FX trends, interest rate fluctuations, and
working capital techniques. A highly knowledgeable treasury organisation will
allow NewCo to eliminate unnecessary and expensive transactions running
through its external banking network (e.g. processing multiple FX contracts
rather than netting and going out to the market with consolidated
transactions). Having this expertise in-house also will enable NewCo to
process in a bank-neutral environment and not be beholden to specific bank
relationships. Growing With the Business
As
NewCo’s business grows, treasury processes should be continually
streamlined, and its control structure should be enhanced. If your treasury
needs are basic, using internet banking portals and key spreadsheets may be
appropriate. However, as NewCo’s operations grow more complex, you may
find NewCo treasury employees grappling with highly manual processes that
involve accessing multiple portals, manipulating various complicated
spreadsheets and fielding information requests with ad hoc solutions. To
prevent unnecessary complications, treasury leadership should develop a
strategic view on how to implement improvements to its operations in stages.
Mature treasury organisations utilise effective technology solutions to
automate processes, enable straight-through processing (STP), and free up
resources to focus on non-repetitive tasks. Such solutions include not only a
treasury management system, but also a bank communication approach that is
standard across the company’s banking relationships, sophisticated
technology add-ons to address more specialised requirements, and direct
interfaces with the company’s broader finance systems. While achieving
this level of sophistication probably isn’t an immediate goal, treasury
management should keep abreast of new solutions that become available and
continually update treasury operations using the best-fit tools that will
allow it to keep step as the business grows. Building From a Strong Foundation
Sooner
or later, you’ll be confronted with building a treasury organisation
for your new company. With a treasury blueprint designed with NewCo’s
short-term needs and long-term strategy in mind, you’ll ease the
process of separating from the seller and be better positioned to build a
solid and capable infrastructure to support the creation of sustainable
value. Article
by Carina Ruiz is a senior manager in Deloitte & Touche LLP's
treasury consulting practice with over 10 years of experience in treasury
strategy and design, finance, banking, and consulting. She leads large-scale
treasury transformation initiatives that have enabled clients to restructure
their treasury organizations and realise transactional and structural
benefits. Ruiz leads the practice's in-house banking services. She has
advised clients in the design, structure, and implementation of their
in-house banks. This includes modelling the business case for the initiative
as well as determining end-to-end process flows to support these structures. |
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