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Why Is Bank Independency Important?
|12-7-2017 | Mark van de Griendt | PowertoPay/Unified Post | Sponsored content |
The changing landscape
Since the economic crisis, the banking landscape has become a more dynamic environment. Besides banks going bankrupt we have also seen banks that have withdrawn themselves in certain geographical or business areas. This gave CFO’s in the corporate sector headaches for having to find another bank and to ‘move’ its business. A good example of a (sudden) change of the financial landscape is the Brexit. Not knowing what the Brexit will bring in this perspective, one thing we do know is that the changing banking landscape is here to stay.
Where using bank-independent tools, products or instruments doesn’t solve the problem of finding another bank, it does take away having to start up a time-consuming project changing the applications used in the various financial processes. Bank independency will become more and more common as the banking landscape continues to change.
Formats & Interfaces
Another good reason to use bank independent solutions is not to find yourself in a so called lock-in situation when looking at file-formats and interfaces. Where local formats or proprietary interfaces may have their benefits, formats and interfaces will be subject to change or even may be replaced by the bank offering the service. Recently a bank had decided to phase out a proprietary reporting format. Although this was done with an alternative reporting format and customers had a reasonable period to migrate, many of them were confronted with major changes in their business applications from which many of them being legacy systems.
Again in this case using a bank independent solution will not prevent you from change but a good bank independent solution or tool will offer the flexibility to deal with this type of change outside the corporate IT domain. Still a project but one with less impact on the organisation. When using fully bank independent instruments (for example MT101) the number of changes are limited to a bare minimum and in case of compliance will always be dealt with by the vendor as part of its service.
Cost Savings
Last but not least a bank independent will save costs. Of course there is an investment consideration with regards to a bank independent solution but when looking at the business case the benefits of not having to manage changes due to compliancy or technological developments will in most cases create a break-even point somewhere in year 2.
Recent customer case-studies even showed a significant decrease in costs in year 1 simply by not having to change its output from their applications creating payment instructions when expanding their business to other regions using new local banks. By itself not a bad investment, even when leaving the non-qualified benefits of bank independency aside.
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Please also read: 7 reasons why you should do e-invoicing too.
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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