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Decentralised data capture, centralised data analysis: a case study
| 10-7-2017 | Hubert Rappold | TIPCO Treasury Technology GmbH | Sponsored content |
Case study
Groups with international subsidiaries need to regularly request all financial data from their subsidiaries spread around the world. This requires a lot of time and robust review procedures. Our web-based treasury information platform, TIP, allows the decentralised input of these data, irrespective of the various source systems, and their automatic reporting to Group Treasury. On behalf of the well-known family-owned company Faber-Castell, we recently implemented a solution which allows this stationery manufacturer to access and plan its group-wide data, ranging from its financial status and cash flow forecasting to its derivative management. Find out more about the implementation and how Quick Guides helped Faber-Castell subsidiaries to get started with the new system in their case study.
TIPCO Treasury Technology
TIPCO provides treasury reporting and cashflow forecasting solutions for over 120 companies. TIP automatically compiles existing data from various systems (TMS, ERP, etc.) and prepares analyses of these. This avoids the need to capture data manually, which is one of the most common causes of inaccurate data. Huge data volumes can be processed within seconds and reports can be set up and managed flexibly, even if the company’s requirements change. A smart cashflow forecasting module utilises that data and allows modification and simulation of forecasts.
You can read more about their case study by clicking on this link.
If you want to find out more about TIPCO and their services and products please refer to their company profile on treasuryXL.
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How long is your money tied up in stock?
| 7-7-2017 | François de Witte |
You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about. Our expert François de Witte explains the cash conversion cycle and working capital managment.
Background
One of the main tasks of the treasurer is to ensure that the company has the required funds to operate. The treasurer will usually contact the banks for this funding. However, he can also finance the activities of the company by working on cash conversion cycle and the working capital management.
Cash Conversion Cycle
The cash conversion cycle (CCC) is the length of time required for a company to convert cash invested in its operations to cash collected as a result of its operations. A company’s operating cycle is the time it takes from the moment the company pays the invoices to its suppliers until cash is collected from product sales. In other words, it is the difference between when you pay for things and when you get paid. Here is a simplified example:
When you build an equipment, you need to purchase parts. Let’s assume that you pay them 25 days after the receipt of goods and of the invoice. 10 days following on the invoice for the parts, the equipment is ready to be sold. It takes another 20 days to sell the equipment to a customer. Let’s assume that the clients pay on average after 30 days. In this case, the cash conversion cycle is 35 days. Hence, the business needs to have enough “working capital” to fund this transaction until it gets paid.
The following drawing illustrates the cash conversion cycle:
The real challenge for a company is to shorten cash conversion cycle, so as to free up cash, which can be reinvested in business or to reduce debt and interest.
If a company wishes to reduce its cash conversion cycle, and hence its working capital requirement, it can work on the following parameters:
You can reduce your Order to Cash Cycle by e.g. :
You can optimize your Purchase to Pay cycle by e.g.:
Working Capital Management Metrics
If you wish to monitor your performance in this area, it is important to have the right metrics. The most use measurement instruments for the working capital management are the following :
Days Sales Outstanding (DSO) :
This is the average number of days it takes for a company to collects its invoices. It is computed by dividing the commercial account receivables by the annual sales and multiplying this number with 365.
Example: A company with EUR 100 million turnover has end 2016 outstanding accounts receivable of EUR 15 million.
DSO = (EUR 15 million / EUR 100 million) * 365 = 54,75 days
The challenge for a company is to try to reduce the DSO as much as possible, hence shortening the cash conversion cycle. This can be done by reducing the payment terms and actively managing the overdue account receivable (credit control).
The DSO can vary from sector to sector, but as rule of thumb, when this figure exceeds 60 days, this is an alert that there is an improvement potential.
Days Inventory outstanding (DIO):
This is the average number of days of inventory a company has. I suggest to compute this by dividing the inventory by the annual sales and multiplying this number with 365.
Example: a company with 100 million turnover has end-2016 EUR 12 million in inventory.
DIO = (EUR 12 million / EUR 100 million) * 365 = 43,8 days
Here also, the aim is to keep the inventory very low. This is not always possible, because for some sectors, there can be a lengthy production process. In addition, the company needs to ensure that it has in its shops the most used products, in order to avoid losing clients. However by putting an place a good production planning and inventory management, the inventory levels can be further decreased.
Days Purchase Outstanding (DPO):
This is the average number of days it takes for a company to pay its suppliers. It is computed by dividing the commercial account payables by the annual costs of purchases (goods and external services) and multiplying this number with 365.
A company with EUR 100 million turnover, EUR 50 million of external purchases has end-2016 EUR 8 million in accounts payable.
DPO = (EUR 8 million / EUR 50 million) * 365 = 58,4 days
Traditionally, it has been recommended to try to increase the DPO much as possible, hence shortening the cash conversion cycle. This can be done by e.g. increasing the payment terms. However, when a company is cash rich or has an easy access to credits, it can be beneficial to decrease the payment terms by negotiating discounts.
The DPO will also vary from sector to sector.
Length of the Cash Conversion Cycle (CCC):
This can be computed as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding.
Example:
Cash Conversion Cycle (CCC) in absolute amount:
I recommend to also look at the overall figure of the CCC:
CCC in absolute amount = Accounts payable + Inventory – Accounts Payable
Example :
Why active working capital management is important
Working capital management is a cheap source of financing, because, except in the case of early payment discounts, there is no financing cost.
The following example illustrates the gains a company can generate by improving its cash conversion cycle.
By reducing the DSO from 54,75 to 45 days, and the inventory from 43,8 to 40 days, the company can reduce its financing needs as follows:
Hence, when making up your financial plan, make to also focus on optimizing your cash conversion cycle, as this enables to realize easy gains. In reality this is not always easy, but it is worth the effort.
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The EU and blockchain: taking the lead? (II)
|6-7-2017 | Carlo de Meijer | treasuryXL |
European Parliament
European Parliament votes for smart regulation of blockchain technology
Last year June the European Parliament voted for ‘smart regulation’ of blockchain technology, taking a hands-off approach. The MEPs voted in a proposal set out in a resolution drafted by Jakob von Weizsäcker, suggesting that a new task force established at the EU level which would be overseen by the European Commission, should build expertise in the underlying technology. It would also be tasked with recommending any necessary legislation, but the text warns against taking a ”heavy-handed approach” to this new technology.
The proposal clearly stated that distributed ledger technology should not be stifled by regulation at this early stage.
EPRS blockchain report
In February the European Parliamentary Research Service (EPRS) published a new report “How blockchain technology could change our lives”, providing an introduction for those “curious about blockchain technology” and aimed at stimulating reflection and discussion.
“Spotlight on Blockchain” workshop
In collaboration with the European Commission, the European Parliament has organised various blockchain events including a kick-off conference on “Demystifying Blockchain” and a series of workshops to look at blockchain developments and use case applications.
A session of discussion early May held at the European Parliament (EP) centred on the future of blockchain regulation in the 28-nation economic bloc. The “Spotlight on Blockchain” workshop, was hosted jointly by the European Parliament and the European Commission.
Part of the program initiated by the Blockchain Observatory was to cautiously approach the who, what and why of blockchain legislation.
European Central Bank
Report: Distributed Ledger Technology (DLT) – challenges and opportunities for financial market infrastructures
The European central bank (ECB) has led a study to analyse the benefits and risks of blockchain technology and consider its possible integration in its market infrastructure. The final report named Distributed Ledger Technology (DLT) – challenges and opportunities for financial market infrastructures was published in March this year.
In the report the ECB acknowledges the various benefits of DLT, such as the ability to lower back office costs and improve reconciliations by enabling automatic updates of records as well as shortening settlement cycles and therefore reducing collateral requirements.
The ECB however concluded that the distributed ledger technology does not (yet) meet the Bank’s requirements in terms of safety and efficiency. The bank is not firmly opposed to blockchain, but it considers that the technology is not mature enough to be integrated into its infrastructure as it is constantly evolving, citing deficiencies in safety and security. The report’s tone is in keeping with the ECB’s cautious approach to DLT and mirrors previous statements made by bank executives.
The European Central Bank has ruled out using distributed ledger technology within the so-called Eurosystem’s market infrastructure for the foreseeable future, until the software meets high safety and reliability standards.
“Yet the technology does not yet meet the ECB’s standards for safety and efficiency, says the report” “The ECB is open to considering new ways to enhance its market infrastructure. However, any technology-based innovation would have to meet high requirements in terms of safety and efficiency.
DLT Project Team
Nonetheless, the ECB is keeping its options open, recognising the benefits that the technology could bring to securities settlement. To this end, the ECB has created a DLT Task Force to “bring together market experts on financial innovation and cyber security. Its objective is to avoid any negative consequences of technological innovation regarding the harmonisation and integration of post-trade markets in Europe and to explore the potential of DLT to help remove some of the remaining barriers to a fully integrated post-trade market in Europe”. For that they hired a senior technology executive, Dirk Bullman, with practical experience in distributed ledger applications and front and back office project management expertise
T2S
The ECB will continue to monitor DLT’s developments and could use the technology in the administration of Target2Secrities. The report states that DLT could play an important role in the administration of Target2Secrities, as well as helping to achieve its overall aim of “deeper integration of financial markets”.
Bullmann’s group is now exploring how DLT could be used in its new securities clearance platform T2S. Central securities depositories (CSDs) that participate in T2S today can effectively pool their securities so they can be bought and sold by investors across Europe. Since some technology would need to be selected in standardizing the issuance, Bullmann said DLT was a natural candidate for testing.
ECB – Bank of Japan joint initiative
The ECB has also launched a joint research project with the Bank of Japan in December last year to study the impact of new innovations of the global financial market and explore possible use of blockchain technology for market infrastructure services.
Bullmann’s task now is to coordinate with the Bank of Japan (BOJ) to explore topics such as how financial market participants could send payments using the technology, prioritizing how a certain payment might be cleared, for instance.
European Supervisory Authorities
The joint committee of the European Supervisory Authorities has released a report in April on Risks and Vulnerabilities in the EU Financial System, in which cybersecurity, including the rising use of blockchain technology, is marked as a major concern for the financial sector.
While further study is required before the EU submits new regulation regarding the financial sector and FinTech adoption, also the European Securities and Markets Authority (ESMA) has undertaken a study of cyber risk and controls of financial institutions throughout the EU. These results will be analyzed in light of existing regulations and used in making future recommendations. In June the ESMA publicized its response to the commission’s proposal on FinTech regulation following a public consultation.
ESMA and regulation
The ESMA, has stated in a new report that the current regulatory framework in effect does not pose a hurdle for the adoption and development of blockchain or distributed ledger technology in the short term. The report acknowledges the benefits of adopting blockchain before notably adding that blockchain applications are still at a nascent stage and, as such, do not require regulation. Regulatory action for blockchain technology at this ‘early stage’ is ‘premature’, said the European Securities and Markets Authority (ESMA) in its report.
The ESMA states that it does not see blockchain technology, through its fundamental core concept of decentralization, post a threat to central financial market infrastructures. The ESMA deems it “unlikely” that blockchain technology would eliminate financial market infrastructures such as Central Securities Depositories (CSDs) and Central Counterparties (CCPs). Still, the watchdog says it “realizes” that blockchain technology may render some traditional processes redundant, or affect and “change the role of some intermediaries through time”
ESMA adds that the presence of blockchain technology “does not liberate users from complying with the existing regulatory framework, which provides important safeguards for the well-functioning of financial markets.” The ESMA will continue to monitor developments in the Fintech space, to assess if blockchain technology requires a regulatory response.
European Union Agency for Network and Information Security (ENISA)
The European Union Agency for Network and Information Security (ENISA) also entered into the blockchain debate with a report launched in December 2016 aimed to provide financial professionals in both business and technology roles with an assessment of the various benefits and challenges that their institutions may encounter when implementing a distributed ledger.
ENISA analysed the technology and identified security benefits, challenges and good practices. There are however new challenges that the technology brings, like consensus hijacking and smart contract management. Additionally, it highlights that public and private ledger implementations will face different sets of challenges.
ENISA has identified good practices to overcome the issues identified as well as introduce the key concepts that decision-makers should be aware of when approaching this technology. Some good practices are: using recovery keys; using multiple signatures for authorizing and processing transactions; and, using library of standardized smart contracts.
In this paper, they also identified that there are challenges that may require further development, such as: anti-money and anti-fraud tools; interoperability of blockchain protocols; and, legal provisions and tools for implementing privacy and the right to be forgotten.
You can read the full article by clicking on this link.
Carlo de Meijer
Economist and researcher