International cash and bank management 5 December 2016 These slides are for educational purposes only and are not intended, and should not be relied upon, as advice.
Table of contents Evolving treasury landscape
2
Cash management
5
Cash flow forecasting
11
Bank management
16
Financial risk management
20
Treasury centralization
24
Technology unlocking treasury value
27
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International cash and bank management
Evolving treasury landscape
Page 2
International cash and bank management
Evolving treasury landscape
Cash management
Cash flow forecasting
Bank relationship management
Page 3
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Growing need for real-time visibility and access to global cash balances and bank accounts
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Increased sophistication of fraud tactics leads to significant financial losses
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Low interest rates diminish return on excess cash
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Companies require reliable and efficient cash flow forecasting process to manage their global liquidity effectively and support financing decisions
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Cash flow generation is receiving more scrutiny from the investor community, which puts additional pressure on accuracy of cash flow forecasts
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Consolidation in financial services industry reduces diversification of counterparty exposures
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Banks reviewing their operating model may reduce availability of credit
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Growing need for a strategic banking architecture enabling an efficient and cost-effective global bank relationship and account structure
International cash and bank management
Evolving treasury landscape
Financial risk management
Treasury centralization
Treasury technology
Page 4
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Treasury is charged with developing a holistic view of financial exposures and managing these exposures appropriately
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Financial markets are less tolerant to earnings surprises resulting from foreign currency movements
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Reliable exposure forecast remains a key challenge to a successful risk management program
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There is a growing need to develop an agile treasury organization that can quickly react to changing business cycles
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Companies are seeking to improve global treasury management by making processes more efficient from an operational and tax perspective
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Treasury processes should be streamlined, standardized and automated to focus scarce treasury resources on value-add activities
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There is an organizational need for treasury to evolve into an analytical hub that supports business decisions
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Selecting and successfully implementing an appropriate treasury system is an enabler of achieving world-class treasury operations
International cash and bank management
Cash management
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International cash and bank management
Cash management Cash pooling: overview
Objective: increase cash mobility through a centralized treasury structure Cash pool types ►
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Sample benefits of cash pooling
Notional: allows the company to combine balances of several entities, without any actual movement of funds across borders, while still gaining centralized access Physical: physically move funds in order to combine funds from various accounts into one single account to be utilized Hybrid: combination of notional and physical pooling to optimize the company’s liquidity
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Increase control of, visibility into and access to global cash balances
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Increase net interest income
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Reduce manually created intercompany loans
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Lower foreign exchange (FX) cost by reducing the number of FX transactions
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Integrate third-party payments and collections by adding foreign currency accounts to the cash pool
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Intercompany netting settlements
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Use cash pool for tax-driven distribution, acquisition and other “corporate” payments
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Reduce the need to change bank relationships
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Use pool accounts for hedging strategies by executing “synthetic” forwards
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Establish centralized balance and transaction reporting for all global bank accounts
International cash and bank management
Cash management
Cash pooling: key considerations Focus area
Typical delivery alternatives
Pooling structure
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Geographic coverage
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Banking infrastructure
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Physical pooling methods
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Enabling organizational structures
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Physical cash pooling Notional cash pooling Complementary hybrid models In-country pools Regional pools Integration of regional pooling structures into a global liquidity pool
Fragmented banking relationships Consolidated banking relationships Deployment of current accounts Zero-balance arrangements with banks Standing wire instructions with banks Manual cash concentration Cash concentration automatically triggered by a treasury system In-house bank Treasury center “Country cash center”
International cash and bank management
Cash management Netting: overview
Objective: organizing and simplifying the settlement of intercompany and third-party payments and receipts on a fixed periodic schedule Netting process
Sample benefits of netting
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Collect invoice payments from participants
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Increase in efficient liquidity management
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Process invoices through the netting system
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Increased visibility and control by centralization
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Calculate net position (payment or receipt) for each netting process participant in its functional currency
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Fewer cash flows between the company’s subsidiaries
Settle netting proceeds
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Centralization of hedge settlements
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Types of payments potentially eligible for ►
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netting(1)
Internal and external hedge routing
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FX bank maintenance in the netting system
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Flexibility in settlement terms (currency, gross/net, pool or local bank account, etc.)
Intercompany settlements (e.g., trade, royalties, management fees)
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Intercompany loans, interest, dividends and investments
Lower remittance costs from reduction in the number of settlements
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Reduced FX costs from reduction in the total number of FX trades executed by the company
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Lower float kept by banks when settling payments (represents a financing cost)
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Third-party supplier and vendor payments
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Internal in-house bank hedges
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External hedges
(1)
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Eligibility of payments for netting process is dependent on evaluation of the company’s specific circumstances.
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International cash and bank management
Cash management
Netting: reducing payment complexity Flows without netting
Flows with netting
Corporate Treasury
Corporate Treasury
Subsidiary B Subsidiary A
USD
Subsidiary A
Subsidiary B
Netting center
GBP
Subsidiary D
Subsidiary F
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Subsidiary D
Subsidiary C
Subsidiary C
USD
Subsidiary E
Subsidiary F
International cash and bank management
Subsidiary E
Cash management
Growing threat of payment fraud ►
Payroll
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Vendors
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Payments
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Expense account reimbursement
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Ghost employees, including terminated and/or fictitious employees Payroll adjustments, including salary, overtime or bonus adjustments Falsified time reports Unauthorized changes made to the vendor master file, including changes to bank account information Unauthorized or shell vendors Fictitious invoices Duplicate payments Kickbacks/improper payments Altered/counterfeited/forged checks Manual checks Closed account fraud P-card abuse Wire fraud Misappropriation of funds Overstated expenses Mischaracterization of meal and entertainment expenses Fictitious/altered receipts
International cash and bank management
Commonalities across cases of payment fraud: ►
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Limited standardization of payment processes Payment processing is frequently decentralized Perpetrators often identified themselves as senior executives from international subsidiaries Lack of clear escalation process within targeted companies Internal payment controls were either inefficient or bypassed by treasury personnel
Cash flow forecasting (CFF)
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International cash and bank management
Cash flow forecasting Sample forecasting goals Financial planning
An accurate estimate of the organization’s annual cash flows and related long-term borrowing requirements or investment opportunities
Liquidity management
A tool to manage the ongoing cash and financing activities of the company on a short-term basis
Financial risk management
An integral part in the identification and measurement of foreign exchange exposures
Analyst communication Leading indicator
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A reliable cash flow target that senior management can provide to financial markets Advanced warning signals of cash flow forecast shortfalls, which enable treasury and other stakeholders to proactively implement corrective measures
International cash and bank management
Cash flow forecasting Six key components of CFF
Improved forecasting accuracy, development of early warning indicators and key performance metrics can provide management with the tools for improved financial performance 3
1
Business infrastructure
2
Time cycle
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Forecasting approach
4
Source and uses Receipts and disbursements
Forecasting methodology Historical trend analysis Top-down trend analysis Bottom-up business unit analysis
Early warning indicators
International cash and bank management
5
Variance analysis
Cash flow forecasting Common CFF issues ► ►
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Effects of hedging not factored into forecast updates Resource and system constraints/not enough time to properly update or perform analysis Measurement has moved from a country basis to a product line basis, which makes it harder to obtain the underlying data as each business group may only own a piece of the product line No established performance measurement — senior management metrics not tied to cash flow accuracy Not leveraging the capabilities of a treasury system, as well as underlying payable and receivable data, to produce forecast cash flows No ownership — not one person’s job
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International cash and bank management
Cash flow forecasting
Strong cash culture can be critical for an effective CFF process Successful implementation of short-term cash flow forecasting can be directly linked to the level of support from people operating the business “on the ground” Typical CFF Components
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Cash culture: Manage the business to cash and profit so that forecasting becomes part of routine reporting
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Shared responsibility: Local accountability is fundamental so that CFF reflects the operational reality. Treasury’s ownership is critical for topdown analysis and stakeholder management
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Data input quality: Use Enterprise Resource Planning (ERP) systems to generate the first data set, with forecasters making specific adjustments to reflect operational knowledge
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Reporting: Leverage technology to focus resources on the quality of CFF rather than the mechanics
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Continuous improvement: Treasury works directly with forecasters as part of the variance analysis process
International cash and bank management
Bank management
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International cash and bank management
Bank management
Managing bank relationships Key objectives
Common considerations
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Access to credit and noncredit services
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Management of costs and quality
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Monitoring risks
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Reasonable approach to dealing with banks
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Companies should consider a wide range of factors when assessing how a bank suits their business needs
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Credit ratings provided by rating agencies serve as a proxy for financial strength of a bank; however, internal credit analysis is beneficial to assess the risk profile of a bank
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The number and nature of bank relationships a company maintains depend on a variety of considerations, including credit accessibility, costs, collection and concentration systems, global banking services, strategic implications and financial strength
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A robust process for measuring and managing counterparty exposure can be a critical tool to protecting the company from a financial loss due to a bank failure
International cash and bank management
Bank management
Fee negotiation and performance management Common fee negotiation considerations
Common performance management issues
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Fee negotiation plays an important part in managing bank relationships
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Service quality is an important aspect of corporate relationships with banks
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Banks have developed more sophisticated methods for measuring relationship profitability
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Standard global rate cards reduce complexity and provide better visibility and control over bank fees
Determine exactly which quality standards must be met and which error rates are reasonable for various services
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Concentrating fee-based business with key banks provides the required scale to negotiate lower fees
Performance expectations should be based on the service levels stipulated in its agreements with the bank
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Combine qualitative and quantitative factors when evaluating bank performance
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Two of the most common types of performance measurement techniques are report cards and relationship reviews
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Share key areas of focus with banks — generally they want to be part of the solution
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International cash and bank management
Bank management
Overview of FTP and SWIFT communication options File transfer protocol (FTP) Customer premises
SWIFT Customer premises
VAN Host-to-host X
Bank X
Bank X
SWIFT Net
VAN
TMS*
Host-to-host Y
Bank Y
Bank Y
TMS
VAN Host-to-host Z
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A customized, separate communication channel developed in collaboration with each relationship bank to exchange information
* Treasury Management System
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Bank Z
Bank Z
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Standard communication channel designed to alleviate the complexity and cost incurred by companies in managing a multitude of separate communication channels for each bank relationship
International cash and bank management
Financial risk management
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International cash and bank management
Financial risk management
Integrated financial risk management ►
Investors and analysts tend to be less tolerant of earnings surprises due to volatility in the financial markets
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Treasury may be charged with developing a holistic view of all exposures and managing these exposures in an integrated manner Treasury risk management
Market risk integration
Currency and interest rate
Cash integration
Energy and commodity
Banking structure
Risk management Credit and liquidity
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Treasury process
Other market risk
Cash management
International cash and bank management
Business integration
Forecast and budget
Global supply chain
Business process Accounting and tax
Market share
Financial risk management
Comprehensive process for market risk management Whether it’s FX, commodity, interest rate or counterparty exposures, a robust risk management process can allow effective identification, measurement and management of market risk Step 1: Exposure identification ► ► ► ►
Business unit risk profile Activities Magnitude and tenor Accounting impact
Step 2: Data gathering and risk quantification ► ► ► ►
Step 5: Risk instrument evaluation ► ►
Internal process changes External financial instruments
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Step 6: Hedge execution ► ► ► ►
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Exposure reporting Forecasting capabilities Financial systems review Value-at-risk review
Step 3: Management objectives
Centralized vs. decentralized Structural vehicles Strategic vs. speculative Program cost
Awareness Definition of objectives Mandate Resource issues
Step 4: Policy and control guidelines ► ► ► ►
Step 8: Performance measurement
Step 7: Implementation ► ► ► ►
Market input and timing Pricing Front and back office Systems integration
International cash and bank management
Business plan Risk tolerance Oversight and controls Benchmarks
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Implement measures Monitor and finetune strategy Ensure outcome achieves policy goals
Financial risk management
Potential benefits of an effective FX risk management program ►
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Financial risks are managed through an effective framework that reflects corporate goals and objectives Management fully understands nature and magnitude of exposures Financial risk management is recognized as a value-added function within the company Creates a value-added function: ►
Finance becomes a true “business partner” with operating units
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Innovative risk management techniques that can help increase competitive advantage without costly corporate restructuring
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Integration of finance and operating functions can lead to creative approaches to product marketing and potential for increased market share
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International cash and bank management
Treasury centralization
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International cash and bank management
Treasury centralization Treasury center overview Key objectives
Potential benefits
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Centralized currency exposures and minimized impact on corporate earnings and cash flows
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Minimized FX impact on local country intercompany trade activities
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Consolidated cash management operations and increased visibility and access to cash across the organization
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Increased efficiency of global banking relationships and fee structure
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Improved cash and FX forecasting capabilities
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Either through local currency billing, assignment of risk or re-invoicing, FX exposure is centralized and minimizes its impact on corporate earnings and cash flows
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Centralized activities provide more visibility into cash movements and balances
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Improved FX forecasting capabilities and minimized FX impact at the local country level on intercompany trade activities
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Develop other business-facing support through treasury center, as required
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Optimized bank relationships and account structure to reduce bank fees
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Consolidate cash flow forecasting processes to allow for better analysis of cash usage and future needs
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Improved tax efficiencies
International cash and bank management
Treasury centralization
Typical activities contained in a treasury center ►
Bank relationship management and bank account administration
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Cash pooling
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Payment factory
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Intercompany trade netting/multilateral netting
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Intercompany and external lending activities
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FX and cash flow forecasting
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FX exposure identification and management
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FX risk centralization/re-invoicing
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Centralized treasury technology
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Business advisory support
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Management and financial reporting
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Working capital management
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Investments and associated risk management
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Factoring
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Hedging
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International cash and bank management
Technology unlocking treasury value
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International cash and bank management
Treasury technology Typical benefits
Monitoring, reporting and control ► ► ► ► ► ► ► ►
Better visibility into cash balances, international and domestic Central repository of all treasuryrelated activities Near-real-time access to key information Report integration and control across business functions Standardization of process controls and audit documentation Segregation of duties is maintained on a consistent basis Treasury performance benchmarking Single point of entry, less opportunity for manual error
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Process automation and efficiency ► ►
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Scalability of processing/operations Reduction in audit risk occurring from manual intervention Consolidation of timelines for cash positioning and booking journal entries into the general ledger (G/L) Improved timing of financing decisions
International cash and bank management
Cost reduction and efficiencies ►
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Interest savings from better utilization of cash balances in investment positions, credit balances and liquidity optimization Fewer resources needed due to automation and streamlined processes Enables treasury to focus on value-add activities vs. processoriented activities
Treasury technology
Typical vendor considerations ►
Technology deployment ►
IT support (maintenance) ►
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Software as a service (SaaS) vs. client install
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Security and controls
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Custom configurability
Implementation ►
Average time frame
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Flexibility of interface controls (Who maintains?)
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Costs associated with implementation
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Availability and competency of technical support
Functional offering ►
What are your key functional requirements?
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Must-have vs. nice-to-have
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Are you willing to be flexible?
Vendor summary ►
Product stability and vendor stability
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Solution background (core competency)
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Is there currently or will there be an ERP initiative?
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Who owns the solution budget?
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International cash and bank management
Questions?
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International cash and bank management
Why EY? 01
02
03
Dedicated team
Integrated team
Functional experience
Dedicated team that includes former practitioners in the treasury, payments and banking areas in focus
Cross-functional team integrated across risk, controls, accounting, regulatory and IT
Strong credentials and success stories of reviewing similar treasury operations, payment processing activities, technologies, strategies, policies and procedures
04
05
06
Accelerators and toolkits
Risk based control framework
Proprietary accelerators and toolkits used to enhance project delivery and provide added value
This assessment is aligned with a risk-based control framework to allow for accountability over internal controls, definition of control standards, and a common framework
Knowledge and thought leadership Knowledge and dedicated insight of treasury issues through surveys and thought leadership
Certain services and tools may be restricted for EY audit clients and their affiliates to comply with applicable independence standards. Please ask your EY contact for further information.
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International cash and bank management
Contact Sandra J. Tullis Senior Manager San Francisco +1 415 984 7153
[email protected]
Background • Sandra is a senior manager in EY's Global Treasury Services practice. She has worked with a wide range of US and international companies based in the Bay Area, including manufacturing, software and health care companies. Sandra leverages 20 years of industry experience and is a certified treasury professional. She holds an MBA from Thunderbird and is a respected speaker at national and regional Treasury conferences. • Sandra and the Global Treasury Advisory team are responsible for providing a broad range of services to the firm’s clients, including assistance with global cash management, payment networks and pooling, debt and investment management, insurance risk management, receivables financing and currency risk management. Engagement experience • During her tenure at EY, Sandra has led the treasury due diligence processes for several payment remitter acquisition targets and has audited treasury policies and controls for companies of all sizes. Most recently, she operationalized the treasury processes for new payment technology products at an US$8b tech company.
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Prior work experience • Most recently, Sandra was the Treasury Director at Flextronics International, where she was primarily responsible for global cash management, corporate finance and foreign exchange. • She successfully led the implementation of a global banking request for production with multicurrency pools in Asia, Europe, the Middle East and Africa, and North America. She also implemented a hedging strategy for optionality, placing zero-cost collars for currencies impacted by declining oil prices. • Sandra has led highly successful treasury workstation implementations with multiple systems to include cash positioning, payment centralization and debt management. In addition, she completed a multicurrency intercompany netting project that included 124 locations netting 60k invoices and more than US$600m of intercompany trade per month. Sandra is also a subjectmatter resource for accounts receivable factoring and has managed more than US$1b in factoring and asset-backed securitization programs. • During her time at Trimble Navigation and CRC Health, Sandra renewed and managed insurance portfolios totaling more than US$500m in coverage. This included property, business interruption, general and professional liability; product liability; environmental liability; and directors and officers liability insurance. Additionally, she has led initiatives for post-acquisition integrations of treasury systems, insurance coverage and SSC processes.
International cash and bank management
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