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Home > Cash Flow Management Best Practice > How to Assess a Company’s Global Treasury Needs and Objectives Successfully

Cash Flow Management Best Practice

How to Assess a Company’s Global Treasury Needs and Objectives Successfully

by Gary Silha

Table of contents

Executive Summary

In order to identify the most effective global liquidity management structure for a company:

  • Develop a detailed understanding of the company’s local cash management needs and relationships.

  • Develop an understanding of the company’s current and future credit and/or investment strategies.

  • Develop an understanding of the company’s current and future tax strategies.

  • Research using the internet.

  • Utilize the money center banks that provide global liquidity management services.

  • Benchmark companies that have implemented successful global liquidity management solutions.

  • Utilize the availability of treasury conferences.

  • Do the work yourself.

Doing Your Homework

Since Tenneco is in the auto industry, there is an analogy I often use when I am asked what is the best global liquidity management structure. There is a reason that auto manufacturers make cars in different shapes and colors: Consumers all have different needs and desires. Similarly, corporations have different objectives when implementing a global liquidity management structure. Identifying a company’s needs and objectives is the first step in the development of an effective worldwide liquidity management structure.

The trick when accessing a company’s global treasury needs is to determine the structure that best coincides with the company’s objectives, geographic footprint, bank relationships, current and future credit and/or investment positions, and current and future tax strategies. The task can be daunting, often resulting in the project never quite getting off the ground. Detailed below are eight tips to assist in identifying a company’s most efficient global liquidity management structure.

Develop a Detailed Understanding of the Company’s Local Cash Management Needs and Relationships

There is no substitute for a face-to-face meeting with the company’s subsidiaries to understand the basis for their local bank relationships and the services provided by those banks. Keep in mind, however, that these bank relationships have been cultivated over the years by the local corporate treasury personnel. Replacing their local bank relationship with a global bank with which the subsidiary has no relationship will not be received as a positive strategy by the company’s local personnel. Resistance should therefore be anticipated.

By the same token, while many global banks will have brick and mortar operations in the countries in which the company operates, you will need to acknowledge that the company’s global bank may not be able to provide coverage for all the services currently provided by the local banks. For example, although it will vary from bank to bank and country to country, global banks have considerable difficulty competing with local banks in the areas of payroll and payroll-related taxes. It is necessary to sell the idea of a global structure and the worldwide benefits the structure will generate for the company while simultaneously gaining an understanding of the subsidiary’s cash management needs. Such a strategy will provide the foundation for the development and implementation of the company’s global liquidity management structure.

Develop an Understanding of the Company’s Current and Future Credit and/or Investment Strategy

Despite all of the technological advances introduced over the years, corporate treasury and banking continue to be relationship-based businesses. In fact, many companies practice relationship-based banking whereby only banks that are lenders to the company are considered when awarding auxiliary service business. However, what happens when the small group of worldwide banks that offer global liquidity management solutions are not in the company’s bank lending group, forcing the company to remove service-based business from a lender and award it to a nonlender?

This scenario will most likely occur either with respect to the bank that is selected as the company’s global provider or in the replacement of a local subsidiary cash management provider. Determining how the company will respond to this scenario when confronted by a current lender will dictate to a large extent the service providers considered for the company’s global liquidity management business.

Develop an Understanding of the Company’s Current and Future Tax Strategies

Although corporate treasury careers have been built on the premise that “cash is king,” it has become increasingly clear over the years that large corporate decision-making is more often driven by taxes, and in particular the minimization of taxes to boost profitability. A review with the company’s tax department, to gain an understanding of how a global liquidity management structure may impact the company from a tax perspective, will aid greatly in the selection of the most efficient global liquidity management structure. Tax departments usually appreciate global structures, since the standardization they provide facilitates their own understanding and management of each operation’s local tax position. If approached wisely, the tax department could become the company’s biggest supporter of the global liquidity management structure project.

Research Using the Internet

Global liquidity management structures come in various forms. There are zero-balance-based structures which are implemented through the use of a single bank, notional-based structures that simultaneously manage a company’s liquidity and foreign exchange exposures created by the centralization of this liquidity, and combination structures which adopt pieces of each structure in the countries where they are most effective or where current structures already exist. There is therefore a learning curve that can be achieved via some basic internet searches.

An understanding of the basic global liquidity management structures, their advantages and disadvantages, their acceptability by the central bank in each country in which the company operates, and their ease of implementation can be easily attained via an internet search. These will provide the company with a foundation for discussing these structures in greater depth with potential service providers.

Utilize the Money Center Banks that Provide Global Liquidity Management Services

As of this writing there are only a handful of banks that can provide a true global liquidity management solution. These banks have staffs of experts who live, breathe, and sleep these structures. These bankers are more than willing to assist companies in developing a global liquidity management structure that best fits a company’s needs and objectives.

The more experienced banks will have implemented similar structures for other companies and are therefore able to provide firsthand knowledge of the twists and turns of implementation in each country in which the company operates. Although for liability reasons most banks will defer to the company’s own tax, legal, insurance, audit, and accounting departments on specific issues, the more experienced banks will be able to demonstrate how other companies faced with exactly the same issues were able to resolve them.

Benchmark Companies that Have Implemented Successful Global Liquidity Management Solutions

Experience usually does not come cheap, although it is attainable by finding companies that are willing to benchmark their successes. The global liquidity management providers which a company considers for its business should be able to set up several benchmark meetings with companies that have similar footprints, needs, and objectives.

Through these meetings a company will be able to attain an understanding of, among other things, why these companies ended up with the service provider they selected, how they went about managing their implementation, the issues that caught them by surprise, the specific successes and failures they experienced in their implementation, and the ease of managing their structure on an ongoing basis.

Utilize the Availability of Corporate Treasury Conferences

There are several large corporate treasury management conferences where, for a nominal fee, an attendee will gain access to presentations of case studies of companies that have implemented successful global liquidity management structures. These conferences also offer one-stop shopping in their exhibit halls with banks that offer global liquidity management solutions. Although the amount of information an attendee will receive at these conferences can be overwhelming, the greatest benefit of attending one is the ability to introduce the company to the banks and to establish follow-up meetings with potential service providers. Having access to these banks within a day, or over a couple of days, will greatly accelerate the attendee’s global liquidity management review process.

Do the Work Yourself

Shortcuts taken in managing the review process will inevitably return to haunt a company in the end. Though there are consultants that will manage the review process, the client will end up either implementing or managing on an ongoing basis the global solution that is developed. A thorough understanding of why specific aspects of the structure were adopted or excluded is necessary to ensure the successful implementation and management of the structure. There is no substitute for hands-on learning. Outsourcing the review process to a consultant will leave the company at a disadvantage when issues arise down the road.

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Further reading

Book:

  • van der Wielen, Lex, Willem van Alphen, Joost Bergen, and Phillip Lindow. International Cash Management: A Practical Guide to Managing Cash Flows, Liquidity, Working Capital and Short-Term Financial Risks. 2nd ed. Treasury and Management Finance Series. Driebergen, Netherlands: Riskmatrix, 2006.

Articles:

Reports:

  • Diamond, Nick, and Michael Golden. “Achieving new heights through a truly global liquidity structure.” Online at: www.ibm.com/us (search on “Diamond Golden”).
  • Potter, St John. “Global provider: Do all banks live up to the label?” JP Morgan Treasury Services. Online at: www.jpmorgan.com (search on “Potter global provider”).

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