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Treasurers of US-headquartered companies agree that automation and efficiency are key to cash management in Europe. However, approaches differ when it comes to balancing local autonomy and central control, forcing US treasurers to re-think what is possible when it comes to managing cash in Europe.
In recent years, many US-headquartered companies have focused heavily on improving the efficiency of their European cash management structures. From harnessing automation to centralising bank relationship management, the quest for efficiency has played a major part in shaping companies’ cash management practices and strategies in Europe.
That said, different companies have different requirements where cash management is concerned. Matthew Sullivan, Assistant Treasurer at Cummins, which designs, manufactures and distributes engines and generators, explains that the US accounts for around half of the company’s revenues, but as much as three quarters of its cash outflows. Therefore, optimal liquidity management becomes even more important, including the use of working capital programs coupled with cash repatriation opportunities.
Where Europe is concerned, he says, cash management means managing day-to-day operational accounts for the company’s entities in the region. From a commercial point of view, Cummins has regional businesses in Europe and another in Africa and the Middle East – but for treasury purposes, Europe is covered by the EMEA team, which includes team members in the UK and in South Africa. While suppliers are paid from local accounts, excess cash is swept into a rest-of-the-world cash pool based in the Netherlands.
We have a rough rule of thumb in that we try to leave 10%-15% of annual revenue in our local accounts, which I think is the right level to manage operational needs
Assistant Treasurer at Cummins
Technology company HP Inc, which is headquartered in Palo Alto, manages its European cash centrally from its treasury service centre in Poland, and also has staff in the Netherlands. “For all cash management, we try to run lean by minimizing operating cash balances, pooling promptly where possible, and maximizing the amount of cash we invest,” says SVP & Treasurer Zac Nesper. The company operates a multicurrency notional pool in its Dutch structure to consolidate cash across EMEA with “significant automated sweeps”, while excess cash is invested locally when it cannot be pooled efficiently with its cash pool.
Headquartered in El Segundo, California, global toy company Mattel is another which has achieved a streamlined cash management structure in Europe.
The European treasury team in Amsterdam handles all Mattel’s European cash management activities, including local market funding and automated daily cash pooling from each market into the European header bank accounts. Cash held in Europe is then pooled upstream to the US on a weekly basis, enabling Mattel to optimise its global liquidity and ensure all markets hold sufficient cash while investing the excess cash.
SVP & Treasurer at Mattel
While many companies may aim for efficient cash management, what this looks like in practice can vary considerably – and one point of differentiation is the level of autonomy given to local controllers in Europe. In some cases, local controllers are responsible for managing daily inflows and outflows and are given a degree of autonomy when it comes to choosing local bank providers. For others, bank relationships are managed more tightly.
Medical device company Medtronic, for example, approaches cash management in Europe by centralising as much activity as possible, including bank relationship management. “That means limiting banking activities to just a few partners, centralising access to cash and bank accounts, and basically not allowing local organisations to have any dealings with their banking partners,” explains Paul Misere, the company’s Netherlands-based Senior Treasury Director EMEA. “There are exceptions, but our strategy has always been that we control access to 99% of the cash out there.”
For companies that opt for a centralised approach to cash management in Europe, powers of attorney can be a useful tool, as William Dakin, VP & Treasurer at Arrow Electronics, explains. “We need local execution, but under a globally standardised toolkit and set of policies,” he says. “Alongside rolling out cash pooling in Europe, we are also rolling out a treasury centralisation structure. Key to this is a set of inter-company authority documents – powers of attorney – that give treasury staff the proper external-facing authority to support the business.”
Harnessing automation and efficiency in cash management was already a priority for US companies before the Covid-19 pandemic began – but the pandemic has sharpened their focus on this topic, says KP Sunil Rao, Head of Cash Management, Americas at Barclays. He says that while companies often focus on improving efficiency and automation, many fall short of achieving their goals due to the many variables included in creating, maintaining and changing their banking structures. However, the recent crisis has pushed many to think more actively about moving to their stated end goal.
Companies are increasingly getting more complex in terms of structure, geographical presence and regulatory obligations and as such need to focus on automating and harmonizing as many of their daily processes as they can....It then becomes imperative to work with an institutional partner that understands the underlying geographies and market, tracks for ongoing changes, has experience in managing complex structures and are on a journey to evolve in line with the client needs.
Head of Cash Management, Americas at Barclays
The level of efficiency and automation that can be achieved will, of course, vary depending on the company’s business model. Jahnel notes that while Marsh & McLennan’s corporate treasury has an ongoing focus on reducing complexity, rationalising bank accounts and streamlining activities, regular acquisitions continually add more complexity – “so it’s an ongoing battle.”
One perennial question is to what extent streamlined processes and efficient technology can enable companies to eliminate processes, and even remove the need for a physical presence in some locations. “This has always been a discussion,” says Medtronic’s Misere. “Do you need a regional treasury centre, like us? Technically it might be possible, but I think the value-add lies in communicating with the shared service centre, controllers and finance to understand what’s going on in the region. I don’t think you can do that from one hub.”
Dakin agrees. “We have been able to re-invest the efficiency gains we’ve made through technology into improving the quality and breadth of the services the treasury function is able to deliver,” he says. “If you spend less time setting your daily cash position every day, you have more time to look at the company’s FX exposure – so we’re delivering more value as opposed to eliminating roles.”
What’s more, Eric Woons, Arrow’s Netherlands-based Director of Treasury Operations, argues that the treasury function needs to maintain close relationships and local collaboration with local AP and AR functions in order to ensure payments and collections are being handled efficiently. “Removing a physical treasury presence from certain locations would only work if you also got rid of those other functions,” he comments.
But for other companies, a more streamlined structure may be achievable. “We used to have one full time employee addressing cash management in Europe, but by leveraging cash pools and using more innovative techniques like FX sweeps, we have pretty much automated all of our EMEA cash management,” explains the treasurer of a US-based computer components manufacturer. “Ultimately, our goal is to have one person spending half their time overseeing all our cash management operations around the world.”
This article has been commissioned by Barclays and was written by EuroFinance, the leading global provider of treasury, cash management and risk conferences, training and research. Please visit www.eurofinance.com^ for more information.
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