Cash Management in the Changing Financial Markets of Europe

1、optimising a global cash management structure at philips electronicshendrik blenken blijdenstein and wim westerman, university of groningen hendrik blenken blijdenstein is employed by royal philips electronics in germany. wim westerman works at the faculty of economics and business of the university

2、 of groningen, the netherlands. this article provides our strictly personal views. we are much indebted to philips corporate treasury staff officers, especially simon braaksma. we also thank henk von eije (university of groningen) and two anonymous reviewers for their comments. remaining errors must

3、 be ascribed to the authors.correspondence:dr. w. westerman, faculty of economics and business, university of groningen, p.o. box 800, 9700 av groningen, the netherlands, tel. +31 50 363 7088, fax +31 50 363 7356, w.westermanrug.nlkey words:globalisation; cash management structure; optimal scenarios

4、abstractthe release of financial markets opens the road towards global corporate cash management structures of multinational firms, whereby accounts payable, accounts receivable, inter-company transfers and liquidity management are integratively handled. with a simple payment factory, receivables ha

5、ndled per currency with a global bank, a corporate in-house bank and a global structure of bank accounts, the netherlands-based royal philips electronics found a standard. country restrictions, bank relationships and internal considerations impose limits on this, though. still, scenario building can

6、 create a framework for a locally optimised global cash management structure. this is illustrated with feasible scenario tracks, ranging from purely global, via differing rates of local adaptation, to internal oriented.optimising a global cash management structure at philips electronicskey words:glo

7、balisation; cash management structure; optimal scenarios abstractthe release of financial markets opens the road towards global corporate cash management structures of multinational firms, whereby accounts payable, accounts receivable, inter-company transfers and liquidity management are integrative

8、ly handled. with a simple payment factory, receivables handled per currency with a global bank, a corporate in-house bank and a global structure of bank accounts, the netherlands-based royal philips electronics found a standard. country restrictions, bank relationships and internal considerations im

9、pose limits on this, though. still, scenario building can create a framework for a locally optimised global cash management structure. this is illustrated with feasible scenario tracks, ranging from purely global, via differing rates of local adaptation, to internal oriented.1. introductionit seems

10、to be so simple. financial markets in evermore countries have been freed as from 20 years ago. liberalisation and deregulation do not just occur in north america, western europe and parts of asia, but are spreading all over the world. globalisation of cash management structures is feasible holland,

11、c.p., g. lockett, j.-m. richard & i. blackman (1994) the evolution of a global cash management system, sloan management review, fall, 37-47. . that many corporate treasuries still opt for distinct approaches per country is just a matter of time. indeed, this holds for europe by and large eije, h

12、. von & w. westerman (2002) multinational cash management and conglomerate discounts in the euro zone, international business review, volume 11 number 4, 453-464. yet, it already turns questionable within the america-europe-asia triad. global cash management may even look like a fata morgana fro

13、m other perspectives tsamenyi, m. & d. skliarova (2005) international cash management in a russian multinational, managerial finance, volume 10 number 31, 48-64. . so, as a result of many interrelated factors, a multinationals cash management still varies country-wise. nevertheless, structures t

14、hat enable global cash management are increasingly becoming available. internationalising commercial banks have set up efficient systems for routing cash all over the globe. software firms have built applications providing interfaces both within and between banks and firms. as a result, multinationa

15、l firms increasingly make efforts to set up integrated cash management structures. cases from advanced multinational firms are becoming publicly available via the professional literature. while common standards have not been found yet, global cash management structures can function well. that is: in

16、 principle. global structures have to allow for deviations, especially in less developed countries. this article offers rationales for optimising global cash management structures with philips electronics at a crucial moment of development. it adds to the debate on best corporate treasury practice l

17、eavy, p. (2007) best practice in corporate treasury management: the debate journal of corporate treasury management, volume 1 number 1, pp. 61-67. by showing how to design cash management structures, but does not aim to describe the current situation at the firm. royal philips electronics (philips)

18、is a global firm. having been founded in the netherlands in 1891, the high-volume electronics firm employed about 164.000 people in 2003. philips had more than 150 production sites in over 25 countries and sales and service outlets in circa 150 countries. the corporate turnover was 29,0 billion in 2

19、003, while total assets amounted to 29,0 billion by the end of 2003. corporate treasury at philips consisted of six product lines (see figure 1): corporate finance, financial risk services, operational hub, cash management, insurance and treasury control. cash management, handling liquid assets volu

20、mes, is where this study finds its origin. it linked with corporate finance and financial risk services, but we mainly refer to liaisons with the operational hub as a processing centre. at the time of our research study, the international cash management structure at philips used to be mainly countr

21、y-wise structured, but with a focused in-house bank and with cash concentration. philips did aim to save costs of cash, to lower financial risks and to shorten the balance sheet. the firms relative working capital management rating was low. however, a focus on financial logistics and information con

22、trol made day-to-day management of cash flows improve steadily. the number of main banks narrowed down to just two. philips teamed up with a software firm to create a “payment factory” for outgoing cash. it became vital to a new “operational hub” as a service centre. co-operating with philips office

23、rs over the years, the sense for philips cash management system gave a major input for our study. being cheered for her progressive cash management system, professional articles on cash management by philips were readily available. mid-2003, the first author accepted an assignment to evaluate philip

24、s global cash management structure and to show improvement areas for cash management structure decisions. following, philips treasury officers, banks and software firms provided many primary data. however, the main input came from a lengthy questionnaire filled in by local treasury personnel. our st

25、udy indicated that the philips global cash management structure could be laid out into several scenario tracks. in this article, we show that scenario building can bring about a framework for local optimisation of global cash management structures. philips worldwide cash management structure in 2003

26、 is used as a point of reference for reasoning. an idealised structure for philips at the time is derived in section 2. in section 3, country restrictions to cash flows are integrated into the design. bank relationship influences in the various countries are regarded in section 4. in section 5, inte

27、rnal considerations within philips are applied to the theoretical structure. the optimal global cash management structure is grouped in scenario tracks in section 6. section 7 provides our conclusions and recommendations. 2. idealised global cash management structurein 2003, philips viewed her world

28、wide cash management system along a matrix. the y-axis depicted the 4 regions (asia pacific, north america, south america and europe) and the 50+ national (country) organisations with over 1100 reporting entities using about 60 different currencies for some 2.5 million payments. the x-axis represent

29、ed the four cash management focal areas: (1) third party payments (a/p), (2) third party receivables (a/r), (3) inter-company transfers (ict) and (4) liquidity management (lm). by integrating the y-axis into the x-axis, we developed an ideal design for each of the focal areas. below, we describe our

30、 idealised global cash management structure for philips. third party payments (a/p)the (accounts) payable process is the most important part of a cash management structure, because the payers must bear the costs. philips buys supplies all over the world. these must be paid for to thousands of suppli

31、ers in multiple currencies. a payment factory enables this, creating efficiencies by centralizing and automating commercial and financial inter-company and third party payments killen & associates (2001) billing and incoming payment in the 21st century, white paper, november, . payments are batc

32、hed up into files and sent to selected banks that manage these on behalf of the firm. the banks then submit the payments to the local payments systems. third party payments are processed in such a way that a maximum of cross-border payments are converted into domestic ones. a world-class payment fac

33、tory takes care of all third party payments. instruments to be supported include cash*, cheques, bank transfers, giros, promissory notes, electronic funds transfer, automatic clearing house (ach) payments, electronic bills of exchange* and direct debits*. the philips payment factory, to be held as w

34、orld-class in this respect, did not back up very specific instruments marked with an *. when applicable, a payment factory can reduce payment fees (that become more domestic), diminish bank float (non-interest bearing cash transfer time), allow for efficiency cost savings (fewer clerks handle fewer

35、accounts) and lower cash balances (outgoing cash flow is managed centrally). however, costs of ownership and local working capital management prudence are discouraged.third party receivables (a/r)the (accounts) receivable process is by far the most difficult part of a cash management system. the cas

36、h flows are less predictable than the others, as the payment initiation mostly lies with the customer. a “collection factory” will be subject to the payment input, timing and information from the customer. cash flows are reconciled and separated when coming in on a central account. firms such as phi

37、lips did not have any collection factory implemented, but concentrated cash locally. every unit had one account in its functional currency at the most suitable bank. foreign currency accounts were kept at a global bank, in the country of a currencys origin. this was called the currency centre princi

38、ple.amounts on bank accounts preferably come in without taking action, at no bank float and precisely timed. cash and cheques do not meet these criteria. quite common electronic funds transfers do better: no action is needed and bank float is low. electronic bills of exchange (settled at an automati

39、c clearing house) and direct debits (originated by a beneficiary) match the criteria, but are not widely accepted. a collection factory would avoid currency conversion on a country level (which is costly for small amounts), saves interest costs (by reducing float) and comes with a low cost of owners

40、hip (funds are directly routed to pools). however, this can only prosper if customers can be persuaded to comply. inter-company transfers (ict)inter-company sales account for the largest part of cross-border cash flows. to avoid foreign exchange payments, netting techniques are in use. netting is th

41、e offsetting of mutual claims and debts. netting methods may differ as to level, participants and settlement periods. netting preferably elapses via a central in-house bank: a corporate organisation providing bank-like services to a group. its cash management services to units include lending, payme

42、nts, communications and management. currency risks associated with cash flows can either be handled by an in-house bank or, which was already the case with philips, by an operational hub at the treasury department. philips intra-firm transfers resulted in roughly 60 billion of cash flows. netting pr

43、events actual funds transfers, though. based on technology supplied by a software firm, internal payments were processed via the payment factory. unit accounts had to be held at the parent company. units could check balances and review transactions via a web browser, however. an in-house bank struct

44、ure brings about significant cost savings (bank fees are evaded), minimises currency risk (which is moved away from the units) and eliminates the intra-firm cash conversion cycle (money never leaves the firm and bank float is evaded). still, local financial management is less motivated (internal deb

45、t being easily retrieved) and outstanding cash balances remain at group level (urging for strict controls and detailed monitoring).liquidity management (lm)a fully centralised payments and receivables structure relieves the units of the management of idle cash balances. ideally, a payment factory /

46、in-house bank shared service centre and a global bank can team up to manage balances at a group level. this enables cash pooling, which refers to a set of cash concentration instruments, retrieving positive amounts and funding negative amounts. it reduces the collective cash volatility of a firms un

47、its and thereby reduces the amount of cash. cash can either be pooled by sweeping idle funds physically to header accounts: zero balancing, or by uniting balances just virtually for interest calculation purposes: notional pooling. local regulations are quite decisive in actual technique choices. phi

48、lips pooled cash balances per currency with an overlay structure at a global bank. every national organisation had an account in the global cash pool, where it funded local balances from or transfers superfluous cash to. once in the pool, all accounts in the same currency were concentrated and the r

49、emainder was passed on to the corporate dealing room daily (zero balancing). cash concentration on a global level is enabled this way. cash balance sheets are shortened dramatically and interest costs shrivel, because of the mutual set-offs that are made use of. however, accurate cash forecasts are

50、needed. much red tape must be cut through, to enable all of this locally. still, asian pacific currencies could not be dealt with “same day value”. another global bank teamed up to handle philips asian pacific cash flows. 3. country restrictions to a global cash management structurethe above world-c

51、lass design for a global cash management structure at philips does not take local restrictions into account. local lending regulations play a role in terms of account ownership structures cascading within and outside the philips group. insolvency legislation, documentation requirements, offset right

52、s, cross-guarantees and duties are hardly harmonised. fiscal rules may make interest payments to be classified as either non-deductible or as dividend. withholding taxes may be levied on interest payments, though tax treaties may mitigate effects. transfer pricing issues may interfere when doubts ar

53、ise on at arms length pricing of interest payments. central banks require reports on cross-border transactions and on foreign currency deals. balance of payments reporting rules must be adhered to also. philips recognised three alternative best-in-class solutions for handling country restrictions on

54、 third party payments. ideally, philips has just one disbursement account per country, via which all domestic and cross border payments flow. this account being foreign (“non-resident”), domestic payments may be costly. an alternative for a simplified design is complex design. the domestic payments

55、are locally executed, either because of the costs or for regulatory reasons. if neither royal philips electronics nor the national organisations can do payments for a unit, a very complex design is needed. units pay from private accounts, but benefits of standardisation and remittance advice with th

56、e payments sent do still apply.third party receivables of units were ideally collected via a resident account of the national organisation at the global bank. otherwise, a foreign currency account at a local bank might be opened. with many receivables in a foreign currency, or if a units functional

57、currency was not the local currency, a non-resident account was kept at the local bank in the country of the currencys origin. corporate treasury monitored these accounts and helped to find competitive rates for foreign exchange deals. it is least preferable to receive all different amounts on accou

58、nts in the local functional currency, as this goes very unstructuredly and the local conversion will not occur at prices achievable by the dealing room. the inter-company payments process at philips elapsed via the payment factory with the use of the in-house bank. in case units used an internal acc

59、ount to net out cash flows, end-of-month settlement might be required to report no inter-company debt position. one has to transfer net balances to and from the units then. gross settlement requires totals of incoming and outgoing amounts to be received on external bank accounts of the units. if internal accounts are not allowed, local netting mechanisms for consolidation of in