THE CASH CHALLENGE WHOLESALE BANKING & MARKETS FD INSIGHTS

Transcription

1 WHOLESALE BANKING & MARKETS FD INSIGHTS THE CASH CHALLENGE Lloyds Bank and Financial Director magazine have worked together to bring you FD Insights, our White Paper series focusing on the most pressing issues facing finance directors. This edition of FD Insights looks at The Cash Challenge. The slow economic recovery means FDs cannot afford to ignore cash management. This project has aimed to find out where they are feeling the most pressure, and what tactics they are using to negotiate the cash minefield.

2 INTRODUCTION Cash: Today s hot button issue What FDs and treasurers are all chasing is peace of mind. It s up to us bankers to help them find it. No question, cash management is today s hot button issue. That s the clear conclusion of the new research among UK Finance Directors, which informs this report. And it will surprise no-one, given today s volatile conditions and the immense uncertainties surrounding the conduct and future shape of corporate UK s primary eurozone markets. Several imperatives flow from this. The first is the emphasis on security by approaching twothirds of Finance Director magazine s respondents a heightened caution within their cash management strategies and an increasing worry about the safety of deposits. What FDs and treasurers are all chasing is peace of mind. It s up to us bankers to help them find it. Flexibility is also vital. Companies simply don t want off-the-shelf solutions. That s the message from more than half the respondents in this survey. FDs expect their bankers to be fully geared to provide a comprehensive portfolio of instruments to help them optimise liquidity and manage FX risks as well as interest rate and commodity exposures. Beyond this, there s a continual drive for efficiency. Four in ten FDs focus on the need for wide-angle banking expertise to facilitate cash management efficiencies. In my book, that means equipping clients with dedicated cash management specialists to advise on the optimum transaction strategies in all guises through accounts, cards and online. And these days, of course, cash visibility has become an almost automatically assumed hygiene factor. The fact that it s registering on the Richter-scale of more than a quarter of respondents suggests to me that there s still quite a large contingent of FDs who are frankly uncomfortable about getting timely information from some banks. In parallel with this, what I m also seeing is a growing clamour for market-relevant and increasingly customisable monitoring and analytical tools to enhance cash management efficiency not only with a company s lead bank, but also across a number of providers. Speaking personally, I m slightly surprised that yield hasn t registered higher on FD s explicit agendas here. Perhaps it s a reflection of that conventional British reticence about admitting to the pressure to haggle for a bargain. But the reality for all bankers today certainly for those I m dealing with every day is that return is an absolutely key factor in their minds. And most FDs I know aren t shy about saying so. The final message from this research may seem ironic: several FDs comment on the demise of relationship banking under the pressure of an increasingly commoditised way of life. I take the opposite view. At Lloyds Bank, we re more emphatic than ever about the value we attach to deep relationships with our clients. In our experience, it s what more companies want. John Ramage Senior Director, Liquidity & FX Solutions, Lloyds Bank Wholesale Banking & Markets 2 LLOYDS BANK FINANCIAL DIRECTOR WHITE PAPER MAY 2012

3 SURVEY DEMOGRAPHICS This research was produced from more than 500 responses from the readers of Financial Director magazine. The survey represents a broad cross-section of the magazine s readership from financial controllers to finance directors and senior accountants. Readers were invited to complete the survey during March 2012 and their views make up the results gathered in this white paper. The companies represented in the research vary in size, with the majority falling into the 5m-25m bracket: 15% between 25m and 100m; and a further 20% topping 100m in turnover. The demographic split of responses was broadly in line with the distribution of the UK economy as a whole: 45% of respondents are based in London and the South East; 16% from the North; and 22% from the Midlands and East. TODAY S FINANCE DIRECTOR Today s FDs are more than mere stewards of the financial health of a business. They have a complex and varied role to play: they are all-rounders and must demonstrate their understanding of all aspects of the business on a daily basis. But while the demands of IT, HR, risk management, supply chain and corporate strategy have all increased and become more challenging, the basics remain the same. And if the past few years have reminded FDs of anything, it is that cash the lifeblood of any business is still king. It is in that context that Lloyds Bank and Financial Director magazine sought the views of UK FDs about how exactly they are meeting the cash management challenge. We wanted to know whether FDs were having to spend more time on managing cash, and if they were, what that means for their business, what techniques they are using, and what banks can do to make this less arduous. The findings of the research presented in this white paper also formed the basis of a discussion held at the Renaissance St Pancras in London. Ten FDs participated in a breakfast roundtable, offering their opinions on the challenges of cash management and how to tackle them. SECURITY OF FUNDING The majority of FDs who participated in the survey (see Graph 1) said that when managing cash, security of funding remains a main focus (64%). Managing the safety of deposits and ensuring the business is adequately funded on a day-today basis has consistently remained a top priority. Security is more important as banks drop in the credit ratings. There are a number of factors which contribute to that response, but the continued stagnation of the economy has clearly heightened the need for FDs to adopt a more cautious approach when managing cash. Security is more important as banks drop in the credit ratings, explained one survey respondent. Ensuring we limit how much we invest with any one institution is important more important than the return, as returns are currently low. Graph 1: Which of the following are current key priorities in your cash management strategy? Security 64% % Security 64% Flexibility 52% Efficiency 39% Visibility 27% Yield 25% Other 3% Total responses 578 Flexibility 52% Efficiency 39% Visibility 27% Yield 25% Other 3% WHITE PAPER MAY 2012 LLOYDS BANK FINANCIAL DIRECTOR 3

4 That sentiment summed up the feelings of many of the survey respondents. And it s not just the financial system that is giving FDs cause for pause. Security concerns have shifted from particular banking products to the overall risks of euro instability on the banking system, said another FD. Many FDs we spoke with believe business has changed considerably in these past five years. As one FD of a listed business pointed out: What would have been an acceptable gearing level five years ago is no longer acceptable today. And when you consider cash pools, in PLCs they have traditionally been viewed as inefficient the theory being you should be using that cash in order to invest it. Today, we tend to want security to have more cash around to protect the balance sheet. Alongside the concerns over security of funding, a significant number of FDs are increasingly demanding more flexibility in their cash management procedures and systems. Flexibility in a changing environment is key, was the view of a growing number of those demanding their cash management partners adopt a more user-friendly and flexible approach to the services they offer. The over-riding message is that a portal such as that should serve as a one-stop shop for everything a business needs, said Steve Dixie, Lloyds Bank Director of Cash Management at major corporates, transaction banking. When you get into invoicing and related AC/AR functions, the portal should offer one place for all that. Ultimately, the service is about giving you information on insight everything available at the tips of your fingers. What would have been an acceptable gearing level five years ago is no longer acceptable today. Most FDs are broadly happy with their banking provider, but there s little doubt among them that banks can do more to make FDs lives easier. In searching for flexibility and responsiveness, FDs are not averse to multiple banking relationships. We work with four different banks, said one FD. We ve obviously got a lead bank but, for me, the days of 4 LLOYDS BANK FINANCIAL DIRECTOR WHITE PAPER MAY 2012

5 relationship banking no longer exist because it is very much run by credit committee rules banking is now a criteriabased approach. I think the days of relationship banking that allow for flex at various points in the cycle have gone. FOCUS ON CASH Even in a buoyant economy, the FD has a difficult job, balancing a set of competing priorities. Every FD knows he or she will be judged on many factors: maintaining strong top-line growth; investing wisely; and contributing across the board to the overall strategy of the business. The increasing importance and profile of the corporate treasurer is seen by many as a further division of labour FDs focusing on strategy while employing operational experts to manage the back-office mechanics. But with resources scarce, hiring freezes and greater scrutiny at board level over issues surrounding cash, many FDs are returning to founding principles and focusing once again on cash. As proof, the survey showed that 37% of FDs either spend much more time or a little more time on cash Does cash management take up more of your time now than it did 12 months ago? REPLIES % Much more time 73 13% A little more time % The same amount of time % Less time 23 4% Much less time 6 1% management than they did 12 months ago (see Box 1). As one FD noted, that focus on cash has had a direct impact on corporate strategy. My personal approach to business for the next two years will be less risky that s what the slowdown since 2008 has taught us. Two years ago, I would have been looking around for a few companies to double their size and sell on in two years. But because of cashflow pressure, those deals won t be happening at all for at least two years. WHITE PAPER MAY 2012 LLOYDS BANK FINANCIAL DIRECTOR 5

6 INVESTMENT SPEND Despite the increasing importance of a joined-up and robust cash management strategy, few FDs said they will be allocating investment spend to it directly in the coming year. For many, that may well reflect the fact that they feel adequately served by their existing system. For others, it may be that resources are too thinly stretched to allow for further spending. Only 8% of those surveyed have spent significant sums on cash-related investments in the past year (see Graphs 2 and 3), although a majority of those report they will continue to do so for the coming year, suggesting that upgrading efforts are underway and will carry on despite a sluggish economy. One area where FDs feel most comfortable and in charge is in cashflow forecasting. According to the survey, 74% of those questioned said cashflow forecasting was either essential or crucially important to the way in which they run the finance function. However, for many the technology available to manage cash is becoming increasingly unfit for purpose. The problem we have is that a lot of our software is designed to look out either weekly or monthly. We have a massive cashflow cycle, and we can go up and down by 3m or 4m in one day. So that s when you go back to spreadsheets for your cash management system. Admittedly, it s slow if you re using it yourself and it can create problems. So now we have advisers looking at our forecasts because relying on spreadsheets is dangerous. For some FDs, cashflow forecasting has changed, with a growing acceptance of the need to focus on short-term concerns. Increased granularity is also a feature of many forecasting strategies. Anything more than four weeks is a waste of time, was one view. Instead, we do a weekly four-week cashflow for each of our European FDs. But it s hard when we re dealing as a professional services business with organisations that are reluctant to pay forecasting cash is very, very hard. Up-to-date online banking is key to keeping track of payments. Clients have moved more to direct payments, therefore up-to-date online banking is key to keeping track of payments. This comment was one of many that reflected the growing need for technology providers and banks to keep pace with the changing patterns of doing business. Respondents to the survey made no secret of the need for greater visibility over their cash, with almost a third citing visibility as a top priority (see Graph 4). But while a growing number of FDs are looking for greater certainty and visibility over their systems, problems remain. One CFO of a fund management company reported that although his business works with several banks, allowing him to see his company s cash position at any point, seeing and doing are two different things. I can see the balances at various subsidiaries across the world, but I m not able to move cash between them because the local banks are in different jurisdictions. That s not ideal. Graph 2: Have you invested in cash management systems or resource in the past two years? Graph 3: Do you expect to continue investing? REPLIES % No % Yes 49 8% Not sure 30 5% Total respondents 577 REPLIES % No 16 33% Yes 28 58% Not sure 4 8% Total respondents 48 6 LLOYDS BANK FINANCIAL DIRECTOR WHITE PAPER MAY 2012

7 Graph 4: How comfortable are you with the level of visibility you have over your short-term cashflow? REPLIES % Not at all comfortable 2 0% 31 6% % % Completely comfortable % 0% 6% 24% 42% 28% 100% RELIANCE ON TECHNOLOGY But a greater dependence on technology can create complexity, which concerned one participant in the roundtable discussion. For me it s about simplification: you ve got so many different passwords and systems, and getting your report into one place will help. Echoing that sentiment, another roundtable participant said that small tweaks to banking software protocols could make some aspects of cash management processes simpler. If something was sent electronically by your bank, verified and signed so that it was sealed in an industry-standard way, it could then be transmitted onward to whomever needs to verify your identity. That could make a major difference, because it could have been sealed by a bank and received by your counterparty at the other end and it could all be done by . So if once we had been verified by a bank we could take a certificate from that bank for reuse in other places, our back office could be much smaller because we wouldn t have to re-verify counterparties who have been verified elsewhere. The increased focus on careful and efficient management of cash is unlikely to change any time soon. Most FDs we heard from agreed they will continue to spend more time on cash. It s going to be top of the list, said one FD. The issue of cash management is on the board agenda each month, and there are KPIs around cash and forecasting. It s clearly important because our people are not sleeping at night as a result. They re thinking about, What if this happens? What if that happens? It s top of the list, and I don t think it s going away. If you think about the basic economy, how can you pay people? Ultimately, you pay people in cash. So the issue is not going to go away. However, FDs are beginning to reap the benefits of the last few years of cash management discipline. Focusing on cash helps to de-risk the business, and from that perspective there are certain elements of being an FD that cash management enhances in terms of skills. But does it limit the amount of time I can spend on entrepreneurial activity? Absolutely, it does. So while it gives more security on the one hand, it also limits growth. Ultimately, it s a trade-off. SUMMARY For the majority of FDs, cash management remains central to their work. But it is also clear they need help in handling this hot button issue. Many have said they feel they are spending too much time and money on its management. The services provided by those crucial business partners, therefore, must improve to allow FDs greater flexibility, efficiency and visibility over their cash management systems and processes. There is little doubt that cash will remain king, but FDs have to balance the attention they pay to this area with the demands of the rest of the business. For UK businesses to return to growth, FDs will have to be front and centre in business strategy, and they cannot achieve that if they are continually sidetracked by procedural and administrative burdens. Finally, there is a trend emerging which suggests that, for some FDs, the hard work of setting up sustainable cash management systems may be behind them. The challenges of the past three years forced them into adopting emergency measures, and they are now emerging much leaner and stronger as a result. WHITE PAPER MAY 2012 LLOYDS BANK FINANCIAL DIRECTOR 7

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