International cash and bank management - EYFile/EY-international-cash-and-bank-management.… ·...

International cash and bank management

5 December 2016These slides are for educational purposes only and are not intended, and should not be relied upon, as advice.

Page 1 International cash and bank management

Table of contents

Evolving treasury landscape 2Cash management 5Cash flow forecasting 11Bank management 16Financial risk management 20Treasury centralization 24Technology unlocking treasury value 27


Evolving treasury landscape



► Consolidation in financial services industry reduces diversification of counterparty exposures

► Banks reviewing their operating model may reduce availability of credit► Growing need for a strategic banking architecture enabling an efficient and

cost-effective global bank relationship and account structure

Cash flow

forecasting

Cash

management

Bank

relationship

management

► Growing need for real-time visibility and access to global cash balances and bank accounts

► Increased sophistication of fraud tactics leads to significant financial losses► Low interest rates diminish return on excess cash

► Companies require reliable and efficient cash flow forecasting process to manage their global liquidity effectively and support financing decisions

► Cash flow generation is receiving more scrutiny from the investor community, which puts additional pressure on accuracy of cash flow forecasts



► There is an organizational need for treasury to evolve into an analytical hub that supports business decisions

► Selecting and successfully implementing an appropriate treasury system is an enabler of achieving world-class treasury operations

Treasury

centralization

Financial risk

management

Treasury

technology

► Treasury is charged with developing a holistic view of financial exposures and managing these exposures appropriately

► Financial markets are less tolerant to earnings surprises resulting from foreign currency movements

► Reliable exposure forecast remains a key challenge to a successful risk management program

► There is a growing need to develop an agile treasury organization that can quickly react to changing business cycles

► Companies are seeking to improve global treasury management by making processes more efficient from an operational and tax perspective

► Treasury processes should be streamlined, standardized and automated to focus scarce treasury resources on value-add activities


Cash management


Cash managementCash pooling: overview

Objective: increase cash mobility through a centralized treasury structure

Cash pool types 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

► Increase control of, visibility into and access to global cash balances

► Increase net interest income

► Reduce manually created intercompany loans

► Lower foreign exchange (FX) cost by reducing the number of FX transactions

► Integrate third-party payments and collections by adding foreign currency accounts to the cash pool

► Intercompany netting settlements

► Use cash pool for tax-driven distribution, acquisition and other “corporate” payments

► Reduce the need to change bank relationships

► Use pool accounts for hedging strategies by executing “synthetic” forwards

► Establish centralized balance and transaction reporting for all global bank accounts


Cash managementCash pooling: key considerations

Focus area Typical delivery alternatives

Pooling structure ► Physical cash pooling► Notional cash pooling► Complementary hybrid models

Geographic coverage ► In-country pools► Regional pools► Integration of regional pooling structures into a global liquidity pool

Banking infrastructure ► Fragmented banking relationships► Consolidated banking relationships► Deployment of current accounts

Physical pooling methods ► Zero-balance arrangements with banks► Standing wire instructions with banks► Manual cash concentration► Cash concentration automatically triggered by a treasury system

Enabling organizational structures

► In-house bank ► Treasury center► “Country cash center”


Cash managementNetting: overview

Netting process Sample benefits of netting

► Collect invoice payments from participants

► Process invoices through the netting system

► Calculate net position (payment or receipt) for each netting process participant in its functional currency

► Settle netting proceeds

► Increase in efficient liquidity management

► Increased visibility and control by centralization

► Fewer cash flows between the company’s subsidiaries

► Centralization of hedge settlements

► Internal and external hedge routing

► FX bank maintenance in the netting system

► Flexibility in settlement terms (currency, gross/net, pool or local bank account, etc.)

► Lower remittance costs from reduction in the number of settlements

► Reduced FX costs from reduction in the total number of FX trades executed by the company

► Lower float kept by banks when settling payments (represents a financing cost)

Types of payments potentially eligible for netting(1)

► Intercompany settlements (e.g., trade, royalties, management fees)

► Intercompany loans, interest, dividends and investments

► Third-party supplier and vendor payments

► Internal in-house bank hedges

► External hedges

(1) Eligibility of payments for netting process is dependent on evaluation of the company’s specific circumstances.

Objective: organizing and simplifying the settlement of intercompany and third-party payments and receipts on a fixed periodic schedule


Cash managementNetting: reducing payment complexity

Flows without netting Flows with netting

GBP

Subsidiary C

Subsidiary A

Subsidiary B

Subsidiary D

Subsidiary E

Subsidiary F

USD

CorporateTreasury

Netting center

CorporateTreasury

Subsidiary A

Subsidiary B

Subsidiary D

Subsidiary E

Subsidiary F

Subsidiary C

USD


Cash managementGrowing threat of payment fraud

► Altered/counterfeited/forged checks► Manual checks► Closed account fraud► P-card abuse► Wire fraud► Misappropriation of funds

Vendors

Payments

Payroll

► 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

► Ghost employees, including terminated and/or fictitious employees► Payroll adjustments, including salary, overtime or bonus

adjustments► Falsified time reports

Commonalities across

cases of payment fraud:

► Overstated expenses► Mischaracterization of meal and entertainment expenses► Fictitious/altered receipts

Expense

account

reimbursement

► 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)


Cash flow forecastingSample forecasting goals

An integral part in the identification and measurement of foreign exchange exposures

Liquidity

management

Financial

planning

Financial risk

management

An accurate estimate of the organization’s annual cash flows and related long-term borrowing requirements or investment opportunities

A tool to manage the ongoing cash and financing activities of the company on a short-term basis

A reliable cash flow target that senior management can provide to financial marketsAnalyst

communication

Advanced warning signals of cash flow forecast shortfalls, which enable treasury and other stakeholders to proactively implement corrective measures

Leading

indicator


Cash flow forecastingSix 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

Forecastingapproach

Receipts and disbursements

Business infrastructure

Source and uses

Time cycleVariance analysis

Early warning indicators

Forecastingmethodology

Historical trend analysis

Top-down trend analysis

Bottom-up business unit

analysis

1 2

3 4

5

6


Cash flow forecastingCommon CFF issues

► 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


Cash flow forecastingStrong cash culture can be critical for an effective CFF process

Typical CFF Components

► Cash culture: Manage the business to cash and profit so that forecasting becomes part of routine reporting

► Shared responsibility: Local accountability is fundamental so that CFF reflects the operational reality. Treasury’s ownership is critical for top-down analysis and stakeholder management

► Data input quality: Use Enterprise Resource Planning (ERP) systems to generate the first data set, with forecasters making specific adjustments to reflect operational knowledge

► Reporting: Leverage technology to focus resources on the quality of CFF rather than the mechanics

► Continuous improvement: Treasury works directly with forecasters as part of the variance analysis 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”


Bank management


Bank managementManaging bank relationships

Key objectives Common considerations

► Access to credit and noncredit services► Management of costs and quality► Monitoring risks ► Reasonable approach to dealing with banks

► Companies should consider a wide range of factors when assessing how a bank suits their business needs

► 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

► 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

► 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


Bank managementFee negotiation and performance management

Common fee negotiation considerations Common performance management issues

► Fee negotiation plays an important part in managing bank relationships

► Banks have developed more sophisticated methods for measuring relationship profitability

► Standard global rate cards reduce complexity and provide better visibility and control over bank fees

► Concentrating fee-based business with key banks provides the required scale to negotiate lower fees

► Service quality is an important aspect of corporate relationships with banks

► Determine exactly which quality standards must be met and which error rates are reasonable for various services

► Performance expectations should be based on the service levels stipulated in its agreements with the bank

► Combine qualitative and quantitative factors when evaluating bank performance

► Two of the most common types of performance measurement techniques are report cards and relationship reviews

► Share key areas of focus with banks —generally they want to be part of the solution


Bank management Overview of FTP and SWIFT communication options

Customer premises VAN

Host-to-host X

Host-to-host Z

Host-to-host Y

VAN

VAN

TMS*

Bank X

Bank Y

Bank Z

Customer premises

TMS

Bank X

Bank Y

Bank Z

File transfer protocol (FTP) SWIFT

► A customized, separate communication channel developed in collaboration with each relationship bank to exchange information

* Treasury Management System

► 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

SWIFT

Net


Financial risk management


Currency and interest rate

Energy and commodity Banking structure Forecast and

budgetGlobal supply

chain

Credit and liquidity Other market risk Cash management

Accounting and tax Market share

Risk management

Treasury process

Business process

Market risk integration

Cash integration

Businessintegration

Treasury risk 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

► Treasury may be charged with developing a holistic view of all exposures and managing these exposures in an integrated manner


Financial risk managementComprehensive 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

Step 2:

Data gathering and

risk quantification

Step 3:

Management

objectives

Step 4:

Policy and control

guidelines

► Exposure reporting► Forecasting

capabilities► Financial systems

review► Value-at-risk review

► Awareness► Definition of

objectives► Mandate► Resource issues

► Business plan► Risk tolerance► Oversight and

controls► Benchmarks

► Business unit risk profile

► Activities► Magnitude and

tenor► Accounting impact

Step 5:

Risk instrument

evaluation

Step 6:

Hedge execution

Step 7:

Implementation

Step 8:

Performance

measurement

► Centralized vs. decentralized

► Structural vehicles► Strategic vs.

speculative► Program cost

► Market input and timing

► Pricing► Front and back

office► Systems integration

► Implement measures

► Monitor and fine-tune strategy

► Ensure outcome achieves policy goals

► Internal process changes

► External financial instruments


Financial risk management Potential benefits of an effective FX risk management program

► 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► Innovative risk management techniques that can help increase competitive

advantage without costly corporate restructuring► Integration of finance and operating functions can lead to creative

approaches to product marketing and potential for increased market share


Treasury centralization


Treasury centralizationTreasury center overview

Key objectives Potential benefits

► Centralized currency exposures and minimized impact on corporate earnings and cash flows

► Minimized FX impact on local country intercompany trade activities

► Consolidated cash management operations and increased visibility and access to cash across the organization

► Increased efficiency of global banking relationships and fee structure

► Improved cash and FX forecasting capabilities

► 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

► Centralized activities provide more visibility into cash movements and balances

► Improved FX forecasting capabilities and minimized FX impact at the local country level on intercompany trade activities

► Develop other business-facing support through treasury center, as required

► Optimized bank relationships and account structure to reduce bank fees

► Consolidate cash flow forecasting processes to allow for better analysis of cash usage and future needs

► Improved tax efficiencies


Treasury centralizationTypical activities contained in a treasury center

► Bank relationship management and bank account administration ► Cash pooling► Payment factory► Intercompany trade netting/multilateral netting► Intercompany and external lending activities► FX and cash flow forecasting► FX exposure identification and management► FX risk centralization/re-invoicing► Centralized treasury technology► Business advisory support► Management and financial reporting► Working capital management► Investments and associated risk management► Factoring► Hedging


Technology unlocking treasury value


Treasury technologyTypical benefits

Monitoring, reporting and control

Process automation and

efficiency

Cost reduction and

efficiencies

► Better visibility into cash balances, international and domestic

► Central repository of all treasury-related 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

► 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

► 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. process-oriented activities


Treasury technologyTypical vendor considerations

► Technology deployment► IT support (maintenance)

► Software as a service (SaaS) vs. client install

► Security and controls

► Custom configurability

► Implementation► Average time frame

► Flexibility of interface controls (Who maintains?)

► Costs associated with implementation

► Availability and competency of technical support

► Functional offering► What are your key functional requirements?

► Must-have vs. nice-to-have

► Are you willing to be flexible?

► Vendor summary► Product stability and vendor stability

► Solution background (core competency)

► Is there currently or will there be an ERP initiative?

► Who owns the solution budget?


Questions?


Why EY?

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.

01 02 03

04 05 06

Dedicated team

Dedicated team that includesformer practitioners in thetreasury, payments and bankingareas in focus

Integrated team

Cross-functional teamintegrated across risk, controls,accounting, regulatory and IT

Functional experience

Strong credentials and success stories of reviewing similar treasury operations, payment processing activities, technologies, strategies, policies and procedures

Accelerators and toolkits

Proprietary accelerators andtoolkits used to enhance projectdelivery and provide addedvalue

Risk based control framework

This assessment is aligned witha risk-based control frameworkto allow for accountability overinternal controls, definition ofcontrol standards, and acommon framework

Knowledge and thought leadership

Knowledge and dedicatedinsight of treasury issuesthrough surveys and thoughtleadership


Contact

Sandra J. TullisSenior Manager

San Francisco+1 415 984 [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.

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 subject-matter 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.

EY | Assurance | Tax | Transactions | Advisory

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Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2016 Ernst & Young LLP.All Rights Reserved.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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