Cash Management Centralisation: Is it Right for Your Company?
Centralisation
of the cash management function results in efficiencies and visibility of
cash, but there are various challenges that face corporates attempting to
create this structure. A combination of centralised and decentralised models
may be the best solution for some corporates.
The
objective of cash management is to manage the firm’s cash position using its
cash as effectively as possible through a self-financing approach; keep the
costs arising from cash and cash flows as low as possible; and minimise the
interest costs while maximising the interest income within predefined risk
parameters.
Centralisation
of the cash management function can bring with it efficiencies, as well as
visibility and central control of cash, but there are also disadvantages.
Some companies may decide that the drawbacks to full centralisation outweigh
the advantages and opt for a mixed structure.
The
three main drivers/challenges behind whether or not to centralise cash
management can be defined as:
·
Applications
and systems.
·
Organisational
structure and culture.
·
Other
drivers, such as the single euro payments area (SEPA), which are also pushing
large corporates towards centralisation of back office and payment
activities.
This
article looks at cash management centralisation using a client case study to
illustrate this process.
Cash Management
Centralisation: A Case Study
Background
information on the case study
Retail NV operates in the European market
in an area where low sales margins are giving grounds for improving the
efficiency of the company. Its activities include retail trade with over 1000
stores that operate in the Netherlands, Belgium, Germany, Austria,
Switzerland, and Spain. Retail NV is a listed company on the stock exchange
with solid figures, even in these difficult economic times. Nevertheless, the
treasury, which is located in the Netherlands, wanted to get a better grip on
the company’s liquidity in order to optimise cash across the group.
Cash
management can be broken down into two parts: liquidity management and cash
flow management.
Figure 1. Cash
Management
Source: Rabobank
In
general, the centralisation of liquidity management is the first step towards
centralisation (see, control and optimise cash). Centralisation of cashflow
management (pay and collect the cash) often has more impact on the technical
infrastructure and processes and is, in most cases, the second step towards
centralisation.
Figure 2. Centralisation: See, Control
and Optimise
Source: Rabobank
Liquidity Management:
The First Step Towards Centralisation
Liquidity
management comprises cash balance management and funds management. Cash
balance management refers to the day-to-day management of the company’s
current accounts and the consolidation with the firm’s cash flow forecast.
Funds management is the management of borrowing and investments. It refers to
the management of the company’s excess cash and short-term deficits. When
investing excess cash, the firm’s risk appetite is the primary goal, keeping
the cash liquid and safeguarding flexibility is the secondary goal, and yield
enhancement is of tertiary importance.
In
today’s market it is crucial to know the overall cash position of the
organisation. Where is the available cash and where are the deficits? Putting
this knowledge into use will increase cash optimisation.
Cash
pooling, which is part and parcel of a centralisation programme, can be an
important tool for improving cash management because it allows the treasurer
to have visibility of the company’s cash - they can see where the cash is
irrespective of which country or currency the account is held in.
For
example, banks can help organisations to centralise their liquidity
management via an end-of-day sweep, where it is possible to transfer balances
from local accounts to one central account or to centrally maintained
accounts in the name of the local subsidiaries. It is also possible to
automatically move the balances back to local subsidiaries, while profiting
from the advantages of a central interest pool.
Hence,
the treasurer has better control of the cash and can view it as a corporate
asset within the organisation. The treasurer knows where the cash is, as well
as the deficits, and can act on that information.
In
addition, by automatically pooling the company’s cash, the treasurer doesn’t
need to worry about what to do with the cash because it’s all centralised
into one account. Because it is automated, a treasurer doesn’t have to move
the money him/herself, which will save the treasury department time, as well
as limit risk and optimise the firm’s working capital.
Those
are the advantages from the customer’s perspective, but there are also
challenges. First, because of the different fiscal and legal regulations in
the different EU countries, it’s not always possible to create a
comprehensive solution across the eurozone.
Second,
a company’s structure influences whether cash pooling is an appropriate
solution. A corporate that has autonomous divisions or subsidiaries that want
control over their cash will find it difficult to concentrate cash in the
hands of the treasurer in the head office because, although it benefits the
treasury to centralise cash management and have cash visibility, it does not
always benefit the local subsidiaries.
The
solution chosen by Retail NV
By implementing a pan-European Rabobank
International Cash Management structure, Retail NV can control its cash
position in a more effective way. The cash is centralised via cross-border
cash sweeps, which entails fully automated, value-neutral sweeps. Thus,
Retail NV has a zero loss on interest days for its international transfers,
thereby optimising its cash management position on a daily basis. Moreover,
regarding its domestic cash management needs, a flexible solution was provided
combining domestic servicing with centralised liquidity management. A
notional cash pool was arranged where each subsidiary is in full control of
its funds, while optimising the total balances on group level. Irrespective
of the bank where the account is held, Retail NV is able to see and control
its funds, via the web-based Rabo Financial Logistics Portal (RPLP). The
central treasury organisation can now see, control and optimise the cash,
without ignoring local operational needs in the broad sense.
Cash flow Management:
A Central Component of Cash Management
Cash
flow management is the way commercial payments are executed and delivered to
the banks. The direct and indirect cost of the account structure, fee
structure and infrastructure are important. If this is all well-organised
within the firm, it will have a positive impact on the overall cash
management objectives and working capital ratios. Cash pooling can contribute
to organising this process.
In
an ever-increasingly globalised world, the commercial payments landscape has
become ever more complex, as corporates extend their reach cross-border.
Corporates need insight into the balances of their local accounts abroad and
to be able to initiate transactions in the local payment formats.
When
organising local payments in various countries, a corporate’s main challenge
is technical, because it must have an application that can handle the many
different payment formats with specific characteristics. Harmonising these
many formats within one system is difficult because they have different
validations in the back-end systems.
Although
payments may all look the same at one level, in reality the variations are
quite significant. Banks and other payment service providers (PSPs) face the
difficulty of processing different formats in one system. They must also know
the different validations, how they operate in the different countries, and
also understand the functionality of the payment formats.
Also,
product risk varies widely depending on the country. The legal ramifications
of different payment methods in each country can be a big headache for
corporate treasurers and also for their banks, which need to be able to
communicate these differences to their corporate clients.
Regionally,
Europe is experiencing a drive towards harmonisation of the payments
environment in the form of SEPA and the Payment Services Directive (PSD),
which gives a legal underpinning to the SEPA Direct Debit (SDD) scheme, for
example. But this transformation process is only at the initial stage. It is
also not happening on a global scale, so companies that move beyond the
eurozone still encounter a wall of complexity when making payments. Even in
Europe, it will take at least another five or six years before the new SEPA
standards will truly become a standard and domestic payments are migrated to
the new standard. In addition, payments industry players have flagged up the
issue that many euro countries are transposing the PSD into domestic law with
national variations. So even this huge harmonisation project is at risk of
ending up with many different flavours.
Rabobank
enables the use of various local payment instruments via its online platform
for corporate banking, the Rabo Financial Logistics Portal (RFLP). RFLP gives
access to all accounts and transactions via one single web portal, regardless
of where these accounts are being held. In this way, Rabobank can support
treasury centralisation, as corporates can manage their international
accounts with optimum ease, while being able to use local payment
instruments.
Centralisation is Not
a Goal in Itself
Centralisation
is being driven by a need for efficiency in the tough economic environment.
The global financial situation has put more focus on working capital
management and towards more centralised solutions for liquidity management,
so that the cash is handled as a corporate asset and the treasurer can
control the cash within the organisation. Most companies are looking to free
up excess cash and reduce risk.
For
some large companies, however, centralisation is not the ultimate goal
because there are also disadvantages inherent in a centralisation project.
For example, it can be extremely difficult for a large corporate to centralise
all its technology systems and harmonise the culture within the organisation
- this is a long-term project that may be quite costly and put a strain on
resources, particularly if the corporate is acquiring new companies.
On
the other hand, if a corporate attempts to sell off a subsidiary or business
unit, this can turn out to be a huge undertaking if all the systems and
structures are tightly integrated and centralised.
Therefore,
centralisation cannot be viewed as a goal in itself. What companies are
looking for is control over their cash and liquidity flows. Whether or not
cash management centralisation is considered to be advantageous depends on
the structure of the company, how it is organised and what the local
authorities of the subsidiaries are.
Some
companies are very centrally organised and therefore tend to have a
centralised cash management function. On the other hand, quite large
organisations may want to keep its divisions separate from each other and may
solely focussing on, for example, getting the necessary information to
understand what is happening in the different localities, but may not be
focussed on trying to get cash out of those countries.
Why
is Rabobank the preferred bank for Retail NV?
The flexibility and diversity of Rabobank’s
concept for International Cash Management, the professional advice from the
deal team and the co-operation and involvement of one of Rabobank’s Dutch
local member banks were the reasons Retail NV chose Rabobank.
As an AAA-rated bank, Rabobank was a stable
partner for Retail NV, while maximising liquidity and yield on a group level.
In fact, a banking relationship does not start or end with cash management,
but should contain a partnership where both parties seek a long-term
relationship. The deal should, therefore, also include a working capital
facility, international cash management, payment services for all group
entities, trade finance, and construction of a credit arrangement for surplus
liquidity (through company savings accounts).
Conclusion
Centralisation
has to fit in with the company’s vision and strategy. A cash management
structure can be a mixture of both centralised and decentralised structures.
A bank needs to sit around the table with its customer and look at what is
the best solution in that specific situation. In some cases, for example,
Rabobank would advise the company to opt for a fully centralised cash
management structure and in other situations we advise the customer to opt
for a mixture of local solutions and a centralised structure. This will
depend on the client’s specific needs and wants, its company structure and
future growth plans. Centralisation is not a goal in itself, but should fit
the organisation.
Article by Diejana van der Wal is product manager of financial
logistics for Rabobank Corporate Clients. Her main areas of expertise are
international cash management (ICM) and risk management. She has been at
Rabobank for almost 12 years in different positions, including sales
consultant and project management. She has extensive banking experience,
mainly in the cash management area. Previously, she was a sales consultant,
cash management and then moved to product management, cash management
(focused on cross-border payments and ICM). As project manager, her main
projects were: euro conversion and re-organisation of the customer support
department.
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