The link between financial performance and working capital metrics

| 10-07-2018 | Theo Paardekooper | treasuryXL

Managing working capital is an important task for treasurers in order to reduce the financial risk of a company and to improve the financial stability. In various studies the costs and benefits of working capital have been claimed.

According to Blinder and Maccini (1991), supply costs and price fluctuations can be reduced by larger inventories and this can prevent loss of business due to scarcity of products. However, there are also effects of investment in working capital, which may lead to a negative impact on firm value. Firstly, keeping stock available imposes costs such as warehouse rent, insurance and security expenses, which tend to rise as the level of inventory increases (Kim & Chung, 1990). Secondly, larger investments in working capital, involves opportunity costs and financing costs (Kieschnick, Laplante, & Moussawi (2013) and this will increase credit risk. Summarizing, working capital management affects the perational performance of the company and external circumstances can influence working capital management accordingly. The corporate treasurer is the key person to create working capital policies and initiate managerial focus on this topic. In order to define the added value of a treasurer in the perspective of working capital management the main question is:

Is there a link between the financial performance of a company and its working capital metrics?

This question can be mathematically rephrased as

Where the working capital metrics are defined in the Cash Conversion Cycle (CCC)

Several studies conclude that a faster rise in the cost of higher investment in working capital relative to the holding of more inventories and or granting trade credit to customers may lead to a decrease in corporate profitability (Deloof 2003) and Shin and Soenen (1998) find in a comprehensive study a strong negative relationship between working capital metrics and corporate profitability for US corporates. Most studies focuses on the linear relationship between financial performance and working capital metrics, however a non-linear relationship between financial performance and working capital metrics is at stake. On top of the non-linear relationship industry specific effects might play an important role. After investigating the statistics of a database containing the financial information of 39.052 non-US listed corporates in a time period between 2010 and 2017 2 samples of scatter charts below give a view on the data

  • The results indicate that in 50% of the industries a relationship between financial performance and working capital metrics is confirmed, and this relationship is non- linear. A certain optimum for financial performance is at stake.

  • The cash conversion cycle is industry driven as we see a wide range of different cash conversion cycles over various industries.
  • Working capital management can improve the financial performance, however based on the data, we see a lot of different results in the working capital metric compared to financial performance. This can indicate there is room for more focus on working capital management

 

Theo Paardekooper

Independent treasury specialist

 

Wat zijn de mogelijkheden van een Flex Treasurer binnen het MKB?

09-07-2018 | treasuryXL |

Laagdrempelige en hoogwaardige expertise van ZZP’ers uit de treasury wereld voor kleine en middelgrote organisaties die geen treasurer of cash manager in dienst hebben.

WAT IS EEN FLEX TREASURER?

U bent de eigenaar van of werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft. U denkt waarschijnlijk dat er binnen uw organisatie geen plaats is voor een dergelijke functie. Maar, oordeel niet te snel: ook het MKB heeft behoefte aan professionals als het gaat om treasury en cash management. Toch gaat het aannemen van iemand vaak een stap te ver.

Welke mogelijkheden zijn er?

treasuryXL en Treasurer Search hebben de handen ineengeslagen om laagdrempelige en hoogwaardige expertise van ZZP’ers uit de treasury wereld te koppelen aan kleine en middelgrote ondernemingen die geen treasurer of cash manager in dienst hebben.

We willen met deze dienstverlening geen substituut worden voor de grote treasury consultancy organisaties maar we bieden graag ondersteuning bij vraagstukken die nu onbeantwoord blijven. U kunt de vraag aan ons stellen en wij zullen u vrijblijvend in contact brengen met de juiste deskundige. Leidt dit tot een samenwerking, dan kan dit op urenbasis, als lump sum of in een abonnementsvorm ingevuld worden.

Beschikbare diensten

Wij kennen Flex Treasurers uit verschillende vakgebieden: risk, bankrelaties & technologie, regulations, non-profit, financiering, trade finance, cash management, SME & overige gebieden.

Meer informatie kunt u terugvinden op onze website. Hier kunt u bijvoorbeeld een overzicht van de diensten vinden die we aanbieden in samenwerking met de Flex Treasurers zoals bijvoorbeeld een treasury  quickscan en een treasury coach.

 

Highlighted partner: Treasurer Search

| 3-7-2018 | treasuryXL |

Over the last two years treasuryXL built a community with and for corporate treasurers and all interested in the profession. Starting from the Netherlands our network expands into surrounding countries and we cooperate with more and more partner organizations. In the summer months we will present the most prominent ones.


Treasurer Search

In 2009 Pieter de Kiewit founded Treasurer Search after an international career of 15 years in consultancy and management of two prominent recruitment companies. In the first he learned about executive search of, amongst others, group treasurers of listed firms. In the second he was responsible for building a number of international subsidiaries of the Dutch market leader in the mid segment recruitment market. The German the most prominent one. Approaching 40, he decided to continue as entrepreneur.

Treasurer Search finds candidates for interim assignments and permanent positions. From graduate level to group treasurer of a listed firm. Clients are headquarters of large corporates, international treasury hubs, treasury consultants, non-profit organizations and some companies in financial services. In the Netherlands and increasingly international: recent recruitment has been done in Belgium, Luxembourg, Germany and Switzerland. Job types include cash & treasury operations management, risk, corporate & project finance, treasury IT and treasury control.

By now, Team Treasurer Search holds 6 members, 3 of them recruitment consultant. With their niche market approach they invest in thorough job content expertise and a very warm network. Over 90% of the placed candidates already had a meeting with Treasurer Search before the assignment was landed where he or she started in. The team is stable, something the recruitment industry is not known for.

Having a keen interest in what’s happening in treasury and knowing not each contact with a candidate and client can be about job openings, Treasurer Search takes a proactive network role. Most often as a courtesy Treasurer Search connects people with expertise with those seeking treasury knowledge. For this team members are in constant contact with educators, professional bodies and other suppliers of treasury solutions. All this makes Treasurer Search an obvious partner of treasuryXL.

For more information check out:

Pieter de Kiewit
[email protected] / +31 6 1111 9783

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Best read articles of all time – This is why corporate treasury is great – The laymen introduction to corporate treasury

| 26-06-2018 | by Pieter de Kiewit |

My father was a civil engineer and would have liked one of his kids to follow in his footsteps. Regretfully for him we all went in different directions, me landing an engineering degree of the wrong type. What I did like to learn from my first business management professor was about creating bridges between various functional areas. That is what I have been doing as a recruiter for almost 25 years, the last 8 solely in corporate treasury. Why treasury?

All organisations, even the small ones, can benefit from good treasury. Only the bigger ones hired permanent experts. The main three areas, perhaps oversimplified, they focus on are:

  1. Money logistics: opening and closing bank accounts, doing (bulk) payments, forecast money coming in and going out;
  2. Managing (treasury) risk: understand and manage the implications of interest or currency fluctuations. If your manufacturing costs are in Euro and you sell in Dollars and the price of the Dollar drops, what to do? What to do if you have excess cash on your current account;
  3. Funding: where do you get your money for new or current business? Bank loans, equity, mortgage, leasing?

This does not sound sexy, does it? But do understand that during the crisis treasurers found solutions for companies how to survive. They found funding to pay salaries, helped sales finding creative funding solutions to make complex transactions achievable, helped prevent companies going belly-up due to currency exposures, forced banks to offer better solutions at a more acceptable price.

Treasurers manage huge amounts of money and operate very close to the CFO. They are involved in mergers & acquisitions, reorganisations and international expansion. They act in small numbers but have huge impact if they would stop doing their work. And the job type evolves continuously. Creating new treasury bridges to traditional job types like accounting, tax, sales helps all doing a better job. The academic world is showing increasing interest. In the Netherlands the post graduate education at the Vrije Universiteit is becoming more prominent in the treasury community. Corporate treasury is very dynamic!

What I love doing is helping CFO’s, HR, internal recruitment and senior treasury managers with their staffing questions. What qualifications and personality type matches best with your current and future business situation. If you only hire one treasurer per year, what do you need to know to choose the best candidate? I hope now you can understand my passion for creating bridges in treasury and recruitment.

I look forward to your thoughts to the above and further contact,

Pieter de Kiewit
[email protected] / +31 6 1111 9783

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Best read articles of all time – Corporate Governance – It is all about the rules

| 20-06-2018 | treasuryXL |

Corporate governance is the rules and processes by which a company is controlled and directed. It is a balancing mechanism between different stakeholders – directors, shareholders, management, government, external financiers etc. The treasury function performs highly skilled and complex tasks to ensure continued and harmonious execution of all cash related functions. At the same time, there is much interaction with both internal and external stakeholders. The corporate governance within the treasury function should always be performed in accordance with predetermined and approved metrics as laid out in Treasury statutes. This means undertaking operations that are consistent with the governance within the corporation.

Corporate governance helps to define the strategies of a company, and highlight how these strategies will be implemented throughout the policies, procedures and working processes. Normally, Treasury statutes are drawn up by treasury and management – detailing the accepted methodology to perform the approved tasks – whilst responsibility and approval is granted by the directors. Once agreed upon, the statutes have to be observed by staff carrying out their duties and responsibilities.

As the treasury function is highly complex – both in financial products as well as regulatory frameworks – both directors and management need to fully comprehend the functionality as well as the implications of different financial products and services. The onus lies on the treasury department to ensure that other stakeholders not only have enough knowledge about the products, but also awareness and understanding of the relevant risks. This is vital to ensure that the right decisions are made at the highest strategic level.

Directors and management need to understand:

  • Financial risks undertaken whilst running the business on a day-to-day basis
    Operational controls to protect the business from fraud
    Risks inherent in approved financial instruments
    Strategies used to identify and mitigate financial risk
    How risk is measured and reported
    Potential exposure as a result of the agreed policy
    Acceptance that not all risks can be qualified and quantified
    The influence of external factors – market risk, counterparty risk, interest rate risk etc.

Proactive role of the Treasury

  • Accurate valuation of financial products used – if you cannot value it, you should not be using it
    Quick recording of all transactions
    Ensuring with controllers that all financial products are correctly input for accounting purposes
    Implementation and management of agreed Treasury policies
    Determining if bank covenants are being maintained
    Ensure compliance with all external regulatory frameworks
    Collaborating with auditors – both internal and external

Policy is influenced by strategy and objectives. The role of Treasury is to help to fulfil those objectives. Treasury has a dual function – it both mitigates risk as well as being the source of risk. Treasury enters into financial transactions on behalf of the business in order to mitigate risks; however, something like an unauthorised trade could subject the business to financial loss.

It is essential that directors and management understand both the risks that treasury manage, together with the potential risks that those transactions can create.

Blockchain for trade finance: A network business

| 19-06-2018 | Carlo de Meijer | TreasuryXL

Trade finance has become one of the top focus issues for blockchain technology use. The number of pilots and other trials that are looking into the opportunities of blockchain technology for trade finance and supply chain have dramatically increased in 2017 and intensified this year. The sheer complexity of trade finance is thereby reflected in the variety of potential solutions. Different parts of the ‘trade finance supply chain’ had their own blockchain initiative. A large number of these pilots however stopped or failed being too narrow in their set-up. These were mainly focused on certain – and limited – aspects of the trade finance chain.

The various parties who are involved in the trade finance and supply chain business however are increasingly becoming aware that stand-alone solutions are not the answer to the various challenges in the trade finance industry. The success of using blockchain in trade finance purposes stands or falls with networks effects and if it is adopted widely. They are increasingly convinced that as well as developing a platform and blockchain solution, a network must be in place that covers all the parties in the trade finance chain so that the full transaction can be completed on the blockchain.

As a result we have seen the upcoming of blockchain trade finance networks with exotic names like Batavia, Marco Polo, We.Trade and more are expected to follow. In this blog I want to go somewhat deeper in these various offerings.

Trade finance: a complex process

Trade finance is a complex process. Various parties from exporters, importers, banks, truckers, shippers, custom agents and regulators all require checks and verifications at various points along the chain. Each interlocking part of the chain depends on successful completion of the previous phase and on reliable information.

Banks thereby play a large role in the trade finance chain, notably in the supply of letters of credit and other financing mechanism. Letters of credit are the most widely used way of financing between importers and exporters, helping guarantee trade transactions. At the moment buyers and suppliers use a letter of credit typically concluded by physically transferring paper documents to underpin transactions. This process however creates a long paper trail and it may take between five and ten days to exchange documentation.

A network business

Trade finance is a network business. It is an activity that often involves multiple counterparties in various and far-away parts of the world. Creating a blockchain trade finance ecosystem that combines all the different stages of trade from production to end-delivery is a must. For blockchain trade finance platforms to work in an optimal way this means on-boarding other banks, regulators, customs and all parts of the trade cycle. This asks for the setting up of blockchain-enabled trade finance platforms or networks with common standards enabling interoperability.

“Of course we are closely monitoring initiatives among all the other consortia that we know about developing trade finance on blockchain and we are mindful of ensuring inter-operability where we can”. Hubert Benoot, Head of Trade KBC and chairman of We.Trade

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

PSD2 Spring Update

| 18-06-2018 | François de Witte | TreasuryXL

During the fall of 2017, I published a Summer Update on PSD2. Since then, a lot of things have moved, and hence I found it the right moment to provide an update you on some developments PSD2 and open banking.

LIST OF ABBREVIATIONS USED IN THIS ARTICLE

AISP:            Account Information Service Provider
API:              Application Programming Interface
ASPSP:         Account Servicing Payment Service Provider
EBA:             European Banking Authority
PISP:            Payment Initiation Service Provider
PSP:             Payment Service Provider
PSU:             Payment Service User
RTS:             Regulatory Technical Standards
SCA:             Strong Customer Authentication
TPP:             Third Party Provider

Main updates on the regulatory framework

Several member states have experienced in the transposition of PSD2 in the national law. The current status (27/5/2018) is as follows:

• Full transposition measures communicated: Austria, Bulgaria, Cyprus, Czech Republik, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Slovakia, Slovenia, Sweden, United Kingdom
• Partial transposition measures communicated: Belgium, Lithuania, Malta, Poland
• No transposition measures communicated: Croatia, Latvia, Luxembourg, Netherlands, Portugal, Romania, Spain

Source : https://ec.europa.eu/info/publications/payment-services-directive-transposition-status_en

The EC has launched an infringement proceeding is against the states who did not or only partially transposed PSD2 in their national law.

The Regulatory Technical Standards on strong customer authentication and secure open standards of communication have been published on 13/3/2018 in the Official Journal of the European Union. They will apply in as from September 13, 2019, leaving 18 months to the payment industry to get ready for this new state of play.

The EBA has decided to maintain the obligation for the ASPSPs to offer at least one interface for AISPs and PISPs to access payment account information. As of 13/9/2019, the existing practice of third party access without identification (at times referred to as ‘screen scraping’) will no longer be allowed. In order to address the concerns raised by a few respondents, the final RTS now also require that ASPSPs that use a dedicated interface will have to provide the same level of availability and performance as the interface offered to, and used by, their own customers, provide the same level of contingency measures in case of unplanned unavailability, and provide an immediate response to PISPs on whether or not the customer has funds available to make a payment.

The banks need already to prepare some steps as from early 2019 onwards. The following timetable illustrates the deadlines:

The finalization of the RTS is an important milestone which will give banks and TPPs much more clarity and certainty on how to push forward their PSD2 compliance and strategic programs.

13/1/2018, the date of implementation of PSD2 appeared to be nonevent. Over one third of the member states failed to implement PSD2. Only very few banks had published their APIs. We observe that banks are much slower in opening up their APIs to TPPs, and this for various reasons, e.g. APIs are not yet ready technically, chicken and egg situation with other banks, etc. As a result, the API aggregators need to use screen scraping or reverse engineering to enable to provide for the TPPs (including banks) access to the accounts held at the ASPSPs.

Furthermore, the standards are not yet harmonized throughout Europe. A number of working groups were constituted to further elaborate on these standards, the most important ones being the UK’s Open Banking Working Group (OBWG), the Berlin Group, and STET. Experts seem to agree that the Berlin Group Standard is the most elaborate ones, as it incorporates the most relevant use cases and has been built with the latest technology standards using REST, OAuth2, JSON and HTTP-signature. It relies on ISO 20022 elements for structuring the data to be exchanged between TPPs and ASPSPs However the UK Open Banking standards also provide interesting insights. The UK has already a much larger experience in open banking. In my view it’s essential to create a set of common, industry standard APIs that can be used by all.

Another challenge is the implementation of the multi-factor authentication. There also some interesting initiatives took place. Gemalto the world leader in digital security, has enabled Belgian mobile ID scheme ITSME to enroll 350,000 users and securely process one million transactions per month for both private and public online services – making it one of the most successful mobile ID applications in Europe within one year of launch.

Real-time payments can be the catalyst for a new wave of innovative corporate banking, payments and cash management services. The SEPA Instant Credit Transfer, will offer in combination with PSD2 interesting new use cases for Open Banking. However, it will take time to take off, as it requires huge investment from the banks, and also a change in the mentality of the consumers.

Conclusion

Although PSD2 should have been enacted by the member states, some states are still lagging behind. The banks are slow in opening their APIs, and open banking is not taking off as quickly as expected. Market players need also to agree on common standards for the interfaces.

However, there the deadline of 13/9/2019 is approaching and there is no way back. The clock is ticking in the PSD race. “If you cannot beat them, then you better join them”.

Open banking is a new way of approaching the delivery of financial services for customers, and as such, it requires a new way of thinking and new ways of working. This will also require a new mindset and a different team set up. Teams are going to be more agile and have a mix of skills and people. This is a big challenge for several institutions.

For your information, I will give a one-day training on the subject at Febelfin Academy on 21/11/2018. For more information, please go to: https://www.febelfin-academy.be/nl/opleidingen/detail/psd2-and-the-open-banking-architecture-addressing-.

François de Witte – Founder & Senior Consultant at FDW Consult; Managing Director and CFO at SafeTrade Holding S.A.

 

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What corporate treasury can learn from corporate insurance

15-06-2018 | Treasurer Search | TreasuryXL |

Last week Treasurer Search sent it’s monthly newsletter that included below article. Not all people in the market will think the same as the author, but we think it is definitely an interesting way of looking at our insurance colleagues.

 

One of the many benefits of being a recruiter is that every meeting is a lecture of an expert about his professional life and developments. An excellent way to learn and keep up-to-date. Every second week I try to transfer this knowledge to my colleagues in Team Treasurer Search and the risk topic often gets attention. I also want to share my observations about insurance and treasury with you.

First, perhaps a bit cynical, why is corporate insurance reporting to the group treasurer more often? The importance and professional level of insurance is increasing, this is also acknowledged by CFOs. To prevent their span of control becoming too big, they delegate the profession to legal, procurement and recently often to treasury. Many treasurers are not motivated by insurance tasks and ignore the overlap that exists. Traditionally the risk types “market risk” and “liquidity risk” create primary tasks for treasury departments that often motivate the candidates I meet. Recently counterparty or credit risk gets a bigger role, not only with financial services companies. My recent conversations with corporate insurance managers brought me new insights in how risk can be analysed and managed.

In previous blogs I wrote that “new school treasurers” distinguish themselves by better connecting with their business partners and provide understandable solutions that make sales, operations and finance happy. Insurance managers were already forced to talk with the business their whole life. If an insurance manager does not understand what his business partners do, he will not be able to make a proper assessment of the risk. And that does include all types of risk: staff getting sick, goods not being supplied, tornados, computer viruses, politicians starting embargos, etcetera. They are closer to enterprise risk managers than treasurers are. By now there are practical and scientific strategies to mitigate various risk types. Insurance managers know.

In my perception treasurers can learn from insurance how to connect to business partners and help them finding solutions for complex and diverse problems. Do you think me setting them on a pedestal is right or am I too positive?

If you want to find out more about Treasurer Search and their services visit their company profile on treasuryXL.

Geld ontvangen uit het buitenland: wat zijn de kosten voor een webwinkel?

| 13-06-2018 | by  Pieter de Kiewit |

Cash Pooling

Dat leek me een relevante vraag in de opbouw van een nieuwe e-commerce activiteit. Wat betaal ik, wat betaalt mijn klant? Een tamelijk frustrerende exercitie waarover onderstaand meer.

Als leek heb ik geleerd dat in de wereld van webwinkels er vele softwares worden gebruikt. Gelukkig is er al veel gestandaardiseerd en zijn interfaces in grote hoeveelheden aanwezig. Websites, voorraden, bestellingen, klantbestanden en ook boekhouden en betaalsystemen worden modulair aan elkaar gekoppeld voor verrassend lage prijzen.

Partijen als Adyen en Mollie, ook wel PSPs (payment service provider) genoemd, leveren plug & play oplossingen die het mogelijk maken dat je klanten kunnen betalen via kanalen die jij kiest. Hierbij kan je denken aan credit card, ideal, paypal en vele anderen. Internationaal is er een lappendeken aan kanalen ontstaan die voor een individuele ondernemer niet te managen is. Dus je geeft je eigen rekeningnummer aan de PSP, zij leveren software die je in je website integreert en het geld van je klanten stroomt naar jouw rekening.

De verdienmodellen van PSPs bestaan uit variaties in maandelijkse abonnementen en betaling per transactie. Redelijk transparant. Nu weten de meesten van ons dat je credit card gebruiken geld kost. Minder van ons weten dat ook degene die geld int via de credit card, bijvoorbeeld een winkelier, ook substantieel afdraagt aan de credit card company. Als privé persoon zijn we in Nederland niet gewend dat we moeten betalen voor geld overmaken, zakelijke bankklanten doen dat wel. Verder is het zo dat valuta omzetten geld kost. Vaak wordt een service fee in rekening gebracht, daarnaast is de aankoopkoers anders dan de verkoopkoers: als je naar de bank gaat en €100 omzet naar $ en het op dezelfde dag terug wisselt, hou je veel minder dan €100 over. Zelfs als er geen service fee is.

Met deze kennis klopte ik als MKB-er aan bij diverse PSPs en legde hen de volgende vraag voor: “als mijn product €500 kost en een klant koopt het in de US met $ via credit card, wie verdient er dan hoeveel aan?” en “zal ik in dit scenario minder dan €500 krijgen of zal de desbetreffende klant omgerekend een opslag moeten betalen?”. Geen van de aangeschreven PSPs kon of wilde me beantwoorden.

Ik heb besloten in de opstartfase niet door te vragen, ook omdat de uitwisselbaarheid van PSPs gemakkelijk is en mijn verkoopvolume in deze fase laag zal zijn. Voor hen die, net als ik, e-commerce ambities of al succes hebben, lijken me dit relevante vragen. Hou er rekening mee en ik benieuwd naar ervaringen en expertise. Bij voortschrijdend inzicht meld ik me weer.

 

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Is cash still king?

| 11-06-2018 | by Patrick Kunz |

All treasurers and most financials know the statement “cash is king”. I do not have to explain the meaning; it is best for a company to have cash above any other forms of (accounting) income. Not talking about the problems of not having any cash. Having cash makes a company stronger and opens possibilities to use this cash (dividends, M&A) and cash is also needed to pay the bills.

However, since several years we are living in a world where interest rates are negative. So it costs money to own cash. It is suddenly costly to be a bigger king. This has some implications for companies and treasuries.

Active cash management

Because it is expensive to have and hold cash it is important for treasurers to know where all the cash is and what the position is. Only holding the cash and doing nothing means that the cash balance will decrease because of negative interest. It therefore makes sense to look into options to reduce the cash level. This does not necessarily mean spending the money!

Several options include:

  • Compensating negative cash balances with positive cash balances, also between different currencies (fx swaps)
  • Repaying loans
  • Paying dividends
  • Paying suppliers earlier to receive a discount

Of course above options are examples and depend on the specific company. Most important aspect in doing above actions are the cash flow forecast. The actions you are taking now have an impact on your future cash position so if some actions are good for now they should also be beneficial in the future situation. Simulations and forecasting software can help with this. For example a simulation on your credit lines, changing interest rates and changing payment terms can be very interesting.

Floors and term

If you are with your bank for a long time there is probably nothing agreed about negative interest rates on your cash as this was not foreseen by banks 10 years ago. This gives you an opportunity to negotiate with the bank on your term for having cash. Some possibilities I have seen with my clients:

  • Floors in the interest rates. This does not necessarily have to be 0% floor
  • Thresholds: for example the first 10 mln no negative interest charge
  • Combinations of above
  • Spread between credit and debit amounts; a lower spread is often better.

Invest

Another option to reduce the interest charge on your cash is to invest the money. This is a sensible topic as most treasurers are risk averse. The more return is expected the higher the risk associated to the investment. Cash at a bank is considered fairly safe (given the cash is divided over several banks with a good credit rating and depending on the amounts). Furthermore the liquidity of the investment is important. Cash is readily available. If you invest the money it first has to exchanged or transferred to cash which can take time or can have an impact on the return. Most treasurers are prudent on investments and/or internal rules do not allow these.

Cash is still king

Overall looking at above cash is still king. For every company it is better to have cash then to be short on cash. However, having too much cash can hurt a company too as the return on cash balances is very low and in most cases negative. In these times the value of a treasurer looking at the cash balances and optimizing it uses (and return) is big. So does your company not have a dedicated person looking at the (excess) cash and the optimization of the cash now and in the future (cash forecasting) then it might be the time to a assign somebody on this task. In most cases the return on this person if positive (even though the interest rate is negative).

An external treasurer or flex treasurer can be of help too.

 

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV