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Chapter 7 CASH MANAGEMENT Cash Management is usually required by a group to carry out three classic missions: monitor the

e cash situation: forecasting the evolution of current receipts and payments; manage the cash balance: making up cash decits at the lowest cost and investing excess cash with the best return and an acceptable degree of risk; conduct risk management for liquidity, rates and exchange. However, in a group like ours these cash missions take on an entirely different dimension, the Cash Management team being specically responsible for: monitoring the cash positions of the Group and its subsidiaries; centralising cash management: on one hand, balancing the accounts of the member companies in the Group to avoid nancial costs due to market imperfections and, on the other, favouring the Groups access to nancial markets; calculating and monitoring the indicators and ratios of debt, solvability, working capital and working capital requirements, releasing cash ow, etc. Cash Management cannot limit itself to purely technical management, specialising in the best possible organisation of monetary and nancial ows for the Group. It also acts as the point of convergence for all ows:

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by making all the company heads and senior staff in the Group aware of the cash-effect induced by any investment or management decision, through the ongoing improvement of procedures for circulating information on accounting and nance, by advising the directorship of the Group, or even warning them about strategic choices with important nancial implications. Consequently, Cash Management is also responsible for helping to dene and implement Group strategy, notably by: working out its nancial strategies through proposals in the short, medium and long term for raising capital, portfolio optimisation, etc., nancing acquisition operations, overall management of the relations between the Group and its bank partners, notably in the choice of partners, negotiating conditions, integrating computer relations, etc.; by protecting assets through controls, both a posteriori (bank reconciliation) and a priori (principally in bank powers). Finally, due to the international dimension of the Altrad Group, Cash Management is also required to take account of the nancial ows in various currencies and manage exchange risks, i.e. forecasting cash outows and inows for the companies in the Group; managing these ows and liquidities, including export debts; organising foreign currency cash services and specialised bodies, if need be: coordinating centre, cash pool or netting system (allowing bilateral or multilateral compensation between accounts receivable and accounts payable in the same currency). As we have seen, Cash Management is entrusted with a wide range of missions. It has responded with several concrete measures and recommendations in ve main areas: Working capital requirements (WCR), investments, cash forecasting and reporting, centralised cash management, and the protection of assets.

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A. Working capital requirements Stemming from the Altrad Groups collegial and interactive management, the WCR procedure calls on each company to make an accurate estimate of the three components of its Working capital requirements: accounts receivable (customers), accounts payable (suppliers) and inventory (stock levels). Within this general framework, each company nevertheless follows its own procedure in this eld, adapted to local customs notably German and Italian in matters of payment. 1. Accounts receivable (customers) The procedure is dened on one hand by the maximum term of payment and outstanding debt, and the follow-up methods, on the other. For terms of payment and outstanding debts, the procedure sets the upper limits beyond which the company head must seek agreement from the Groups Marketing Management, in the aim of minimising the nancial risk to the Group. To avoid the systematic application of this limit, the procedure is completed by an individual objective (which may or may not be accompanied by remuneration, depending on the company heads). Indeed, if, for example, the maximum term of payment is 60 days on the 10th of the following month and in 90% of cases the company head applies this maximum term, the average calculated term will exceed 90 days. For customer follow up, the procedure sets the rules to apply in the case of non-payment: rst reminder, second reminder, taking legal action, blocking late payment accounts, etc. Each company sends a detailed monthly statement to Cash Management listing the outstanding accounts with a summary document to check follow up, terms granted to clients and the maximum outstanding debt authorised by the company head. If this is exceeded, Marketing Management and/or

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Cash Management may demand justication for the excess or even a denite closure of the account. Despite the harmonisation policy engaged by the Group, some companies maintain a particular arrangement due to local particularities. Altrad Italia, for example, is autonomous in regard to its clients in the framework of a term of payment xed at 95 days, in return for a monthly control made by Cash Management of the prospects of reaching the objective and terms of payment granted. Moreover, the creation of the entity Altrad Financement, offering credit from 4 months to 5 years) on demand from sales staff and customers, is obviously a positive element in managing customer accounts. 2. Accounts payable (suppliers) To avoid anticipated payments, the suppliers are paid at 90 days, on principle, on the 10th of the month apart from administrative or commercial exceptions, notably: electricity, gas and telephone bills; bills for breakdowns, repair services, etc. for amounts below a certain level (company-specic) for companies that pay their suppliers directly; invoices from suppliers who are also customers in the Group (the most favourable terms for the Group are applied, according to respective turnovers). This procedure is applied in all countries, apart from those where local practice differs too widely. In the latter case, Cash Management restricts itself to setting an objective per company, with periodic checks on compliance with payment deadlines. 3. Inventory (Stock level) Each head of company in the Altrad Group rmly commits to a four-monthly objective which is not always reached. Cash Management plays a crucial role in optimising stock management by applying a sequential procedure in ve steps, involving

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all the departments in the company (marketing, production, industry, design, purchasing and accounting): step 1: make an inventory of stock as a basis for calculating stock rotation by article. step 2 (simultaneously with the rst): secure the reliability of computer stock. step 3: analyse stock rotation article by article, identifying dormant stock to be disposed of, slow rotation stock to be reduced, supply batches to redene, questioning the companies or departments that show any anomalies like, for instance, orders for three months consumption of a particular item or holding stock from such and such an outdated list. step 4: adapt marketing strategy, particularly in regard to deliveries. Cash Management will get each company to dene delivery dates per product line that are acceptable to its customers. For the most sold products, minimise the risk of stock shortages and ensure normal delivery dates to customers while reducing the levels of cold stock (with a slower rotation). The sales network is informed of the risk of longer delivery times for these items. This redenition of stock levels affects the different functions of the value chain, with a knock-on effect on estimations of supply batches, buffer stock and manufacturing orders at production level. step 5: manage procurement according to a programme optimising the product management references initiated several years ago by the Altrad Group and whose efcacy is another important factor in reducing stock and thus WCR. 4. New approaches Cash Management is constantly on the lookout for new ways to reduce WCR. By way of example, here are ve recent proposals currently dealt with in directorship meetings, either being analysed or already implemented: revision, in the case of a clear failure at the end of the year, of the exceptional arrangements currently granted to certain

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companies in view of the habits of their customers, or their alignment with a strict application of general procedures; prot sharing among the actors concerned for respecting these procedures, through a remuneration scheme based on WCR items (rather than protability, as is usually the case). This entails the participation of Cash Management in making an exhaustive analysis of the modes of variable payment, notably, in regard to members of staff whose work affects WCR items; prot sharing (direct or indirect) for the sales staff on successfully concluding credit les that benet the Groups overall protability; the creation of centralised invoicing and receipt of payment for all the companies in France, following after a thorough legal feasibility study; the creation of a trading group, in collaboration with Purchasing Management and Sourcing and using the same approach to negotiate the best conditions in terms of prices and terms of payment.

B. Procedures for investment, cash forecasting and reporting According to the Altrad Groups investment procedure, each company head negotiates his investment budget with General Management when the forecast operating budgets are drawn up, dening his needs for investment and nance (machines, buildings, land, etc.). If accepted, the investments can be made during the period, once the company head has lled in a budget request form for each project. This document lists the arguments in favour of investment and forms the basis for formalised authorisation of investment (unless refused or deferred to the following period). Once accepted, the le is submitted to the companys Purchasing department.

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Cash Management is a stakeholder at each stage in this procedure. It offers advice for the nancing package, helps to choose the right moment to invest spending, checks compliance with investment and WCR procedures, deals with the cash forecast, etc. Based on the accounts receivable, accounts payable, inventory and investment objectives negotiated annually in the framework of forecast operating budgets, Cash Management draws up a yearly and monthly provisional cash plan, with the corresponding consolidated plans for the Group. These are revised monthly according to the investments, purchases and sales reported by the companies, thus checking the performance of each company in terms of accounts payable and accounts receivable. This control mission is part of the Altrad Groups reporting procedure. Cash reporting, like any other form of reporting (sales, budget control, accounting, etc.), presupposes the correct transmission of information via a report whose form and contents are dened by the Staff service of the Group. C. Centralised cash management Centralised management and cash control are currently distinguished according to whether the activities take place in France or abroad. However, the Altrad Group has commissioned Cash Management to study the possibility of harmonising cash management to reduce this dichotomy. Our management chooses exibility over dogma, so Cash Management, after analysing the situation, may well advise a mixed system. This would be centralised for certain operations, whereas others, in view of our Groups worldwide locations, would be regionalised or decentralised, for example with a specic regional centre and banks for each block (Asia, Central Europe, etc.).

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One of the rst tasks facing Cash Management is to make an inventory, by country and by regional block, of the services and conditions of the various banking organisations. It then makes a shortlist and obtains the most comprehensive information, leading to the negotiations that will nally determine the Groups bank partners. This analysis and the implementation of the new international cash management system will nevertheless still be based on the present distinction between France and countries outside France. 1. In France As the Altrad Group does not practice cash pooling, it has opted for a notional pooling system for each bank France, in relation to each bank. Each month, the holding company obtains a notional pooling of the bank accounts for the whole Group, as well as an individual scale of interests for each company, allowing it to allocate the billing of interest charges between them. The saving on interests, interest charges (corresponding to the difference between the sum of notional pooling and the sum of the individual scales) remains in the holding is retained by the holding company. With the prospect of harmonising and simplifying day-to-day cash management, we are gradually setting up national cash pooling, ultimately designed to replace the notional pooling system. Moreover, Cash Management has recommended measures to: reduce nancial costs upstream, by reducing the number of bank partners and generalising the practise of xed rates; improve the security of transfers that are currently sent by fax, by setting up new banking and cash software allowing for electronic transfers, validated either by fax or by magnetic card. 2. Countries outside France Until recently, our foreign subsidiaries were nanced via current accounts, with no cash pooling or notional pooling. Cash

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monitoring was done through the intermediary of monthly reporting, a timely summary of which was sent to the Groups directorship. Cash Management then decided on a monthly arrangement to recover the surplus or to pay into the current account, depending on the state of the accounts for each company and after consulting its nancial manager. While various solutions are being examined in the framework of harmonising cash facilities, allowing the frequent, or even daily, receipt of funds, Cash Management is gradually setting up a scheme to optimise foreign cash for all the companies in the Group by: grouping bank partners and renegotiating bank conditions, notably opening accounts with Fortis Bank for all the European companies, according to unied negotiating conditions (including exemption from the costs of intra-group transfers in the euro zone); within this framework, setting up real cash-pooling facilities, with a daily levelling of bank positions in the Fortis Bank account initially and then via a partnership between our French and foreign banks and all our banking partners; daily management of the balance at Fortis Bank, attributed to the holding in France and encompassing all the funds received from the European subsidiaries; setting up information feedback on all the bank accounts, without exception, based on the MT940 model,1 format allowing consultation of the information in a foreign account via the interbank swift system (Society for Worldwide Interbanking and Financial Telecommunication).

1. MT101 and MT940 are standardised formats covering all domestic and international payment data. Most banks connected to the SWIFT network are thus able to handle payments transmitted in this format. Its use requires a programme capable of converting it to read off the bank statement, a function that is available in most credit/debit software.

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D. Cash management planning The missions and tasks of Cash Management are set out in a plan stipulating the other management units with which it collaborates, the timelines for implementation and frequency of controls to carry out, and of which the directorate of the Group expects to be spontaneously and regularly informed. Here is an example of this kind of planning:
Measure Action plan for Accounts receivable (customers) Generalisation of the individual objectives bonus granted to company heads for terms of payment and stock In conjunction with - hrm - Marketing management (Group) - Group Directorate Timeline Control of results

Finalisation Monthly at the start of the next accounting period

Action plan Control of for Accounts anticipated payable payments (suppliers)

- Company heads

Immediate

Monthly

- Purchasing Immediate Action plan Analysis of for inventory reference stock and sourcing management (stock) required for manufacturing Plan of other Prot sharing measures to of sales staff reduce wcr for Altrad Financement credit les - Marketing Immediate management even if gradual (Group) - hrm

Monthly

Analyse monthly (progressions, parts, results) of Altrad Financement credits

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Id.

Creation of centralised invoicing

- Accounts management - Legal department

Feasibility analysis before the end of the 2005-2006 period, set up before the end of 2008 Feasibility analysis as soon as possible, to be set up before the end of 2008 Before the end of the period

Id.

Creation of a trading group and payment centre

- Purchasing and sourcing management - Accounts management - Legal department

Plan for centralised cash management

Generalisation of xed rates (bank charges and nancial expenses)

A priori Action plan for the controls protection of assets

- Finance Immediate management - Group directorate