Liquidity Management

Transcription

1 Liquidity Management What is liquidity management? Liquidity management can refer to the practices we use in corporate treasury to concentrate cash (aka liquidity). Liquidity management can also refer to the investment decisions resulting from cash concentration. They go together because, once we have concentrated our cash, we need to do something with it. This article will concentrate on the former ie cash concentration. Why do we need liquidity management? Waste not, want not as the saying goes. Just as we humans need to shepherd ecological resources, corporations need to manage cash with care. Cash is a scarce resource these days and, according to MGI s Dec 2010 report Farewell to cheap capital? [1], this scarcity is likely to get worse. As a result of multiple rounds of quantative easing and other liquidity measures undertaken by western central banks, top corporates can borrow very cheaply on public debt markets at the moment. But smaller companies are cash squeezed because banks are contracting their balance sheets to meet ever tightening liquidity regulations designed to make the banks less risky and because economic uncertainty and pervasive risk aversion have sharply reduced their investor pool. Even in good times, wasting cash by leaving it dispersed and idle has to be sub optimal for most corporates. Idle cash increases costs by tying up capital unnecessarily and reduces operational flexibility. Corporates that use some kind of value based management like EVA or CFROI and understand from using WACC that low interest rates do not equate to cheap capital appreciate the importance of efficient cash management. The biggest savings in capital efficiency normally come from addressing issues in the working capital cycle accounts Liquidity Management David Blair 2013 david.blair@acarate.com Page 1

2 receivable, inventories, accounts payable. The resulting cash is a core responsibility of treasury and is relatively easy to manage, because money is easier to move than customers, warehouses, and suppliers. Cash concentration also enhances control over cash. Cash that has been centralised can be deployed according to group priorities or invested according to group investment policy. It is easier to ensure consistent and compliant use of cash from one location than from many locations. Cash concentration also helps to manage and reduce credit risk. Once we have concentrate our cash to one place, we are free to invest it in the safest way possible for instance in a high availability money market fund and thereby to reduce our exposure to banks. This has been a major benefit of liquidity management during the global financial crisis. Another benefit is the significant workload reductions that come from properly implemented liquidity management. Done properly, liquidity management structures can be thought of as outsource in house bank type functionality to banks. We reduce the workload in subsidiaries without significantly increasing central treasury workload, once the solution is up and running. Bank relationship management is often raised as an issue when discussing liquidity management. Clearly banks want corporate liquidity, especially idle funds dispersed in current account around the world. Banks appetite for liquidity has increased since the global financial crisis. But, as described above, efficient cash and working capital management is increasingly germane to corporates too post GFC. Concentrating cash helps corporates to deploy liquidity more strategically for BRM purposes. The perils of cash concentration Liquidity Management David Blair 2013 david.blair@acarate.com Page 2

3 Before we dive into the standard techniques for cash concentration, we need to consider the corporate context. Another duty of liquidity management is to ensure that the corporation has cash where needed, when needed, and in the right currency. In our enthusiasm for concentrating cash, we must avoid leaving subsidiaries short of funds for instance in certain regulated emerging markets where cross border funding can be problematic, and may take time to arrange. Also in the context of regulated and developing markets, we need to keep in mind the limits of the techniques described below. In some emerging markets, a weekly manual payment to the concentration centre may be the best realistic (and cost effective) outcome. Internal or external? When discussing cash concentration, we often think of a variety of bank services like pooling and sweeping (see below). It is worth remembering that there are a variety of internal business models that can help concentrate cash for instance: principal structure, re-invoicing, commissionaire, single legal entity, etc. And, as mentioned above, in emerging markets simple manual processes may be the most cost effective solution. Precursors to liquidity management Liquidity management arrangements like sweeps and pools represent the automation normally by outsourcing to banks of precursor arrangements to ensure first cash visibility and then control over cash. Visibility means having next day visibility over global cash. This can include exchange control countries because for visibility we just need balance reporting, there is no money moving so no regulations apply. Visibility is normally achieved with SWIFT or agency balance reporting solutions across multiple banks. Liquidity Management David Blair 2013 david.blair@acarate.com Page 3

4 Control means having access to execute payments from multiple banks globally. Control is normally achieved with SWIFT or agency payment messaging solutions across multiple banks. Liquidity management means leveraging the visibility and control with an automated system (usually outsourced to a bank) that concentrates cash globally or regionally. While this is a logical and necessary sequence, it does happen that visibility and control are put in place simultaneously as part of a liquidity management roll out project. Pool or sweep? The terms pooling and sweeping are often used interchangeably, and the term cash pool is often used to refer to sweeping structures like zero (or target) balance accounts (ZBA). For current purposes, we will distinguish between notional pooling and sweeping. Notional pooling is an arrangement with a bank whereby the bank agrees to pay credit interest and charge debit interest on the net balance of a designated group of accounts (and not on each account individually) as illustrated in figure 1. Notional pool Notional balance = +10 Account A Balance = +500 Account B Balance = -300 Account C Balance = -190 In the above example, instead of receiving credit interest on the gross credit balance of +500 and paying debit interest on the gross debit (overdraft) balances of = -490, and incurring typically very large bank spreads on the difference between the Liquidity Management David Blair 2013 david.blair@acarate.com Page 4

5 credit and debit interest rates, the corporation would only receive credit interest on the net credit balance +10. Key characteristics of notional pools include: - No movement of funds - No change of ownership of funds - Balances remain at bank - No additional accounting entries - Bank normally needs right of offset In contrast to notional pooling, sweeping means transferring funds from participating accounts into a designated master account (and the reverse in case a participating account is in overdraft), normally at the end of each banking day as illustrated in figure 2. Master Account Pre balance = 0 Post bal. = +10 Account A Pre bal. = +500 Post bal. = 0 Account B Pre bal. = -300 Post bal. = 0 Account C Pre bal. = -190 Post bal. = 0 In the above example, funds are transferred (or swept ) at the end of the banking day from Account A to the Master Account and from the Master Account to the other two accounts, so that Accounts A and B and C show a zero balance at the day s close. The economic result is similar to the notional pooling above in the sense that the bank pays interest only on the Master Account balance of +10 and the corporation avoids the spread between bank credit interest rates and bank debit interest rates. Key characteristics of sweeping include: - Movement of funds to and from the master account Liquidity Management David Blair 2013 david.blair@acarate.com Page 5

6 - Ownership of funds passes to pool master entity - Sub account balances become intercompany balances - Daily accounting entries required - Bank does not need right of offset Notional pooling and sweeping are very different ways of achieving the goal of cash concentration. Which is better for any given corporation depends on business model, corporate structure, culture, geography, regulatory context, etc. Notional pooling Notional pooling requires that the bank gets the right to offset the pooled debit and credit balances in the bank s own balance sheet so that the bank need not set aside regulatory capital for the gross pooled balances. If the bank does not have the right of offset from its regulators then the bank will have to set aside capital to cover the gross pooled balances; this capital has a cost which the bank will need to recoup from the corporation somehow, thereby negating the spread saving described above. In order to get the regulatory right of offset, banks need to be sure that they have the right of offset with regard to the client. This means that bank must have a legally enforceable right to use pooled credit balances to cover pooled overdraft(s) for instance if a subsidiary goes into default. This is typically done with a floating pledge of credit balances to cover any overdraft balances that may exist from time to time. Some regulatory regimes require that such a pledge be supplemented with a general cross guarantee, and the situation can be further complicated based on different jurisdiction s bankruptcy practices. Some regulators do not allow the right of offset required facilitate notional pooling (for example, USA). Some countries prohibit intercompany lending and intercompany guarantees; this precludes Liquidity Management David Blair 2013 david.blair@acarate.com Page 6

7 cross guarantees, and thereby makes notional pooling impossible. Many emerging markets prohibit notional pooling directly. Notional pooling enhancements Notional pooling has evolved over the decades. One area of improvement has been multi-currency pooling. Originally notional pooling was only done in one currency. Later some banks experimented with overnight foreign exchange swaps to bring in other currencies, but that proved too complicated and expensive to be viable. The leading providers now can offer multi-currency notional pools including 40 or more currencies albeit with important caveats (see below). Multi-currency notional pools offer an interesting alternative to forward foreign exchange contracts for hedging foreign exchange exposures. But note that most providers are not efficient enough to make this economically viable, because their interest rate spreads are too wide (which compares unfavourably with the relatively low capital weighting of forward contracts). Early notional pools were single entity; this obviated the need for cross guarantees. Multiple entity notional pools are now normal. Notional pools can now also cross borders, involving entities from different countries. Cross border pooling raises tax issues (see below). But note that, for regulatory reasons, all the bank accounts in a notional pool must be in one bank branch. Some banks offer multi branch arrangements for example, interest optimisation but this is not as cost effective as true notional pooling because the bank does not have the right of offset and will therefore need to recover a capital charge. Sweeping From a regulatory perspective, sweeping is simpler. It can be done in any situation where money can be transferred. Indeed, sweeping need not be a bank service at all. Many corporate TMS (Treasury Liquidity Management David Blair 2013 david.blair@acarate.com Page 7

8 Management Systems) can read in MT942 electronic intraday bank statements, compute a sweep amount, and then initiate MT103 payment instructions. The same process can be done manually, given sufficient resources. Most corporations choose to outsource the process to banks because banks have greater scale in technology and are more likely to run 24 hour operations needed to do this globally, and because banks have been doing this for multiple decades. Challenges for sweeping include tax and regulatory issues around transforming bank balances into intercompany balances, and operational issues around managing and accounting for the daily sweeps. The challenges are not insurmountable. They are basically the same as those facing any in house bank which allows subsidiaries to go into debit with the IHB. IHB is out of scope for this article. Interest allocation In case of notional pooling, none of the accounts intrinsically receives or pays interest. From a tax perspective (and from an internal accountability perspective), this can end up looking like the credit balance accounts subsidising the overdraft accounts. Indeed tax authorities have attacked notional pools on the basis that they distort intercompany transfer pricing. To some extent the same problem can occur with sweeping. Unless the corporation has an ERP or TMS set up to calculate interest on intercompany balances, there will be no interest payments other than at the master account level. Because of this, most banks who offer pooling and sweeping services, offer various forms of interest calculation services, where the bank calculates interest on behalf of the corporate and often executes interest settlement as well. Liquidity Management David Blair 2013 david.blair@acarate.com Page 8

9 The three most common methods are: - Arm s length interest. The bank calculates interest on each account at market rates including a market risk premium. This results in a profit for the group (which approximates the saving of bank spread) which would normally be credited to treasury or head office. - Gross interest reallocation. The bank allocates the pool net interest amongst all the pooled accounts in proportion to their balances such that all pooled accounts benefit equally from the spread saving. - Net interest reallocation. The bank allocates the pool net interest amongst all the pooled accounts which have balances in the same direction as the pool net balance (normally credit balances). The distortive effects may be problematic fiscally and organisationally. Please note that most providers do not offer flexible interest allocation, and some do not offer it at all. They will suggest that the corporate do their own interest allocation. This brings issues of complexity (especially when dealing with bank spread as well), workload, and heightened tax risk. Since the method of interest allocation can have big tax consequences in terms of whether the balance is considered to be a bank or inter-company balance and in terms of transfer pricing, this is a more important issue than it might at first appear to be. Tax considerations Tax is beyond the scope of this article and in any case different corporations will present different tax situations, so it is advisable to seek specific tax advice on any cross border movement of funds. Just to give a flavour of the typical issues arising in different cash concentration arrangements, here are some common tax considerations. Liquidity Management David Blair 2013 david.blair@acarate.com Page 9

10 Many tax authorities restrict related party loans with limits like thin cap rules, debt to equity ratios, deemed dividends, withholding tax, etc. Since swept balances become intercompany balances, this is a problem when using sweeping arrangements to provide intercompany funding. Although balances that are notionally pooled remain bank balances and not intercompany balances, many tax jurisdictions have rules requiring balances that are supported by intercompany guarantees be deemed as intercompany balances. Since many banks require cross guarantees to support notional pooling, this can create a tax risk for corporations wishing to use notional pooling for intercompany funding. Just to be clear, cross guarantees need not trigger deemed intercompany tax treatment it depends on how they are built. The specifics in each case will be critical, so specific and competent tax advice is necessary. Finding specific and competent tax advice is not easy. There is a general lack of understanding of notional pooling. Many supposed experts generalise from single cases. Beware of sweeping generalisations like Pooling does not work in [country x]. Look for more nuanced understanding like These conditions that must be met to make pooling work in [country x]. Be aware that tax firms (and even individual offices) may have internal disagreements on these issues; so a tax partner in the same firm may be telling your pooling provider that it works, while another tax partner in the same firm is telling the corporate that pooling does not work. Be prepared to educate your tax adviser on the critical nuances of you provider s pooling arrangements. In some cases, it may be beneficial for tax purposes and also for reporting purposes (for instance to net off pool balances on consolidation under IFRS-IAS32) to periodically execute a physical sweep even in a notional pool. Leading providers offer automated services to execute such sweeps overnight so that the business is Liquidity Management David Blair 2013 david.blair@acarate.com Page 10

11 not disturbed. This is typically over a weekend so that it does not disturb the business. Pool and sweep Although we have compared notional pooling and sweeping as alternatives, in practice they are often combined. In order for the bank to achieve right of offset, notional pooling is normally done within one branch. In order to concentrate cash from various countries, we normally first sweep from in-country accounts to the branch where the notional pool is run, and then pool within that branch as illustrated in figure 3. Notional pool at pooling branch Notional balance = +10 Sub A pool a/c Balance = +500 Sub B pool a/c Balance = -300 Sub C pool a/c Balance = -190 Sub A local a/c Pre bal. = +500 Post bal. = 0 Sub B local a/c Pre bal. = -300 Post bal. = 0 Sub C local a/c Pre bal. = -190 Post bal. = 0 The local accounts of the participating subsidiaries are swept to or from accounts in the pooling branch held in the name of each subsidiary so that the balances in the pooling branch can be notionally pooled (or included in some kind of sweeping or ZBA arrangement if that is preferred by the corporation). Many corporations prefer to maintain in-country accounts primarily to ease collections but also to facilitate local payments. In particular certain statutory payments must be done through local banking systems. Liquidity Management David Blair 2013 david.blair@acarate.com Page 11

12 These arrangements are often called overlays. The local banks may be different from the pooling bank. The local accounts may be in different currencies. The notional pool itself may be multicurrency, or the sweeps from the local accounts may include conversion between local currency and pool currency. Overlays can be multi-layered. For instance, in country pools can sweep into regional pools, which are in turn swept into a global pool. Often this was done because of bank s limitations on offering a truly global solution. Sometimes this mirrors the corporate s regional treasury arrangements. The best providers today offer truly global solutions. Although multi-layered pools are still quite common, the trend is clearly towards single global pools. These are simpler which reduces operational risk and workload, and also more efficient which maximises cash concentration see chart/ figure N. Regulatory issues Overlay structures introduce multi-currency and cross border facets to cash concentration, which tend to increase regulatory complexity. For instance, a single currency notional pool poses the issue of the bank s right of offset as a condition for pooling cost effectively. In case of multi-currency notional pooling, some regulators take the view that, even when they have an effective right of offset, banks must set aside capital to cover foreign exchange risk (in case they have a shortfall if the currency of a defaulting overdraft account rises against the offsetting credit account currencies). Banks in such jurisdictions will have to reflect their added capital costs in their charges for the pooling arrangement. The cross border aspect may trigger exchange controls and other regulatory constraints, in addition to the tax issues discussed above. Sweeping is generally expected to be an automated process. The required automation is often not possible in exchange Liquidity Management David Blair 2013 david.blair@acarate.com Page 12

13 control environments where paper documentation has to be submitted and approved prior to payment. Operational issues Overlay structures raise some interesting operational issues. The sweeps need to be carefully timed with respect to the paying bank s cut-off times. The standard process typically requires the paying bank to send SWIFT MT942 intraday statements which the receiving bank will use to determine the amount to instruct with a SWIFT MT103 payment instruction. A typical timeline is illustrated in figure 4 below. Time Action 15:30 Bank A sends MT952 intraday statement 16:00 Bank B sends MT103 payment instruction 16:30 Cut-off for receipt of MT103 17:00 Bank A executes payment 17:30 Bank A treasury cut-off time 18:00 Central bank clearing closes The cut-off for the paying account is almost three hours before the central bank closes. Between customers waiting to the last moment to pay and banks practicing intra-day liquidity management, these last three hours are when most collections come in. So the sweep will miss a substantial part of the day s collections. Some corporations use their own cash flow forecasts to make the sweep instructions, but then they risk running into unplanned overdraft if they sweep too much. Liquidity Management David Blair 2013 david.blair@acarate.com Page 13

14 This loss of value is made worse by time zone issues. A common example is USD collections in Asia. USD has to clear in New York, where FedWire closes at 18:00 EST which is 06:00 the following morning in Singapore and Hong Kong. This means that USD funds will be coming in with good value for twelve hours after Asian branches have closed their books. And fifteen hours after the MT942 on which the sweep was based. Another issue with time zones concerns the direction of sweeping. Sweeping westwards goes with the rotation of the earth often called following the sun and facilitates sweeping from Asia to Europe or Canada Asia s cut-off times are early morning in Europe, leaving plenty of time for bank processing and corporate investment decisions. Sweeping eastward goes against the sun and complicates sweeping from Americas and Europe to Asia Asian bank branches and treasury centres are closed before the start of Americas work days, which makes the loss of one value day almost unavoidable. In general, sweeps to overlays lose at least one value day. With this in mind, it may be simpler and almost as effective to wait for MT940 end of day statements and send MT103 payment instructions the following morning. This obviates the risk of sweeping too much and would catch more of the late incoming funds. An alternative which avoids the intricacies of inter-bank collaboration is to set up standing instructions at the subsidiary bank to sweep to the overlay bank during their close of business process. This is technically just like doing a sweep to an investment or deposit account, which is an established capability at many banks. Some receiving banks will want the paying bank to send an MT202 advice to receive or a direct copy of the MT103 to ensure good value. Liquidity Management David Blair 2013 david.blair@acarate.com Page 14

15 These less sophisticated alternatives work particularly well in a follow the sun situation such as sweeping from Asia to Europe. They do not bridge the information gap, but if the provider offers good value on funds received, interest yield will be maximised. Mono banking (using only one bank) might seem attractive from this perspective, but in fact most bank branches have to manage their daily liquidity on an almost stand-alone basis for organisational and regulatory reasons. In other words, banks are not indifferent about where their cash is located. Generally, sweeping between two branches of the same bank brings up the same issues as sweeping between different banks. The one exception I know of is offered only to extremely large and profitable clients of the bank, which makes me suspect that it is done as a loss leader. Investment Although I earlier defined the investment part of liquidity management to be outside the scope of this article, it is important to understand the flexibility a proposed overlay solution will give for investing or otherwise deploying the concentrated cash. The corporate will be looking for - late cut-off times, - automatic processing during the bank closing cycle, - freedom to sweep to other institutions, - flexibility to specify trigger sweep levels, - flexibility to change sweep instructions when needed, and - reasonable default yield when there is no investment sweep. Business continuity As with all treasury operations and especially ones based on technology, it is important to understand the implications of the Liquidity Management David Blair 2013 david.blair@acarate.com Page 15

16 overlay arrangements not being available for whatever reasons. Are manual backup procedures realistic? Are the resources available to execute the backup procedures? Are the liquidity consequences survivable? How frequently should the business continuity plan be tested? Smoke and mirrors Pooling and sweeping are conceptually simple. Liquidity management products are often presented in slick diagrams that gloss over the complications discussed above. It s clearly a case of caveat emptor to avoid disappointments with operational, accounting and tax hiccups down the road. One good mitigation strategy is to be very clear and explicit about corporate objectives for liquidity management. For instance, is the goal simply cash concentration, which implies only credit balances and only one way sweeping? Does it include inter-company funding, implying some accounts in overdraft and two way sweeps? Does it include foreign exchange hedging, implying a multi-currency notional pool with zero or minimal spreads? It is easy to be impressed with broad statements like We have live customers pooling across 100 countries and in 40 currencies. Corporates need to drill down and ask specifics about each country, such as in what currency and is it two way sweeping? For each country, corporates need to ask - what can be done in local currency and in G3 currencies, - whether the planned pooling branch has relevant local currency nostro accounts, - whether over draft is possible in local and hard currency, and - whether sweeping is one way or two way. Additionally, the corporate has to reach comfort on the tax implications of the proposed arrangement country by country. Liquidity Management David Blair 2013 david.blair@acarate.com Page 16

17 Successful reference customers do not guarantee fiscal success because each corporate has a different tax profile. Preparing detailed scenarios or use cases setting out operational, accounting and tax requirements and seeking specific responses country by country in RFPs helps to preventing misunderstandings. The selection of the bank branch to do MCNP will require understanding of the bank s treasury practices. For example, Singapore is a good location for MCNPs but the bank s Singapore branch may not have the require nostro account to facilitate pooling Scandinavian currencies. The proposed fee structure will impact the pool s usability. For example, a wide spread between debit and credit interest rates will preclude using the pool for foreign exchange risk management. Banks have some flexibility in how they charge for pooling, so it is important to understand the wider consequences. It is also important to understand how proposed sweeping arrangements will handle back valuation. Many solutions do not handle back valuation at all. Each corporation will have to decide for themselves how important this is in their business. A good way to ensure a clear understanding of the pros and cons of different liquidity management offerings is to include a market leading specialist in RFPs. This will help highlight operational, accounting and tax issues at an early stage. The clear leader in liquidity management capabilities is Bank Mendes Gans a boutique corporate treasury services firm in Amsterdam. Mendes Gans was originally founded by corporates to provide treasury services, and, since it provides only liquidity management (along with related netting and IHB services), it does not compete with global banks for conventional banking business. Please find below a suggestion of the format for an RFP checklist: Liquidity Management David Blair 2013 david.blair@acarate.com Page 17

18 Country Checklist for liquidity RFP Local currency Hard currency Two Sweep Sweep Sweep Sweep Pool Pool in out in out way sweep Interest rates Back valuation For readability, the table above has been simplified. Some questions to ask about each country when assessing liquidity management solutions include: - (for Local currency and hard currency separately) - Sweep in - Sweep out - Notional pooling - Overdraft availability - Credit interest rates - Debit interest rates - Ability for corporate to set intercompany interest rates - Two way sweeps - Zero balancing sweeps - Target balance sweeps - Conditional sweeps (enabling corporate to set sweep minima and maxima to meet regulatory and fiscal constraints) - Back valuation - Cut off times to achieve same day value - Flexibility of interest allocation / reallocation In addition to the checklist above, a good metric for liquidity management evaluation is what we call Total Liquidity Capture. This is the total amount of liquidity that will be included in the proposed liquidity management solution when implemented. Total Liquidity Capture can be compared with total liquidity to determine a Liquidity Management David Blair 2013 david.blair@acarate.com Page 18

19 percentage captures by the proposed solution. Also, when combined with the interest rate information gleaned from the checklist, Total Liquidity Capture can be used to calculate the interest saving from interest spread eliminated and improved yield on concentrated cash. Applying the company s WACC, we can also compute the benefit to the business of implementing the proposed solution. Where elimination of external subsidiary funding is a major driver of the proposed solution, measuring Total Funding Capability is also a useful metric. Calculating Total Funding Capability helps assess the solution's capability to support local and hard currency overdrafts. Sweeps and roundabouts Taxes on transfers are a further complication in some emerging markets in addition to regulatory constraints. To mitigate these, and to manage payment charges in case of very small sweeps, many cash pooling solutions allow corporates to set minimum sweep amounts (trigger sweeps) and set target balances. It is also increasingly common for software to be able to perform any-to-any sweeps across a designated group of accounts (rather than sweeping everything to and from a master account). This minimises overdrafts whilst also keeping transfer taxes and charges at a low cost effective level. Target balance sweeps allow corporates to maintain targeted balances in local accounts. This might be to ensure minimum emergency funds are always available locally, or to satisfy local regulatory requirements. Trigger or threshold sweeps allow the corporate to set the minimum amount to be swept, with a view to controlling transfer costs. This might be set from a zero balance or a target balance base. For some, the regulatory, fiscal and operational challenges will seem too much. One option might be interest optimisation which Liquidity Management David Blair 2013 david.blair@acarate.com Page 19

20 does not require right of offset or movement of funds. Interest optimisation is basically an agreement under which the bank agrees to reward the corporate for leaving credit balances in one jurisdiction with either cheaper loans or higher yields in another jurisdiction. Others may opt to do it themselves, either manually or using TMS functionality to check balances and initiate sweeps. In any case, there is no need to leave idle cash scattered across the planet. Notes: I would like to express my gratitude to Byron Gardiner who kindly shared his wealth of experience with me for this article. [1] McKinsey Global Institute: Farewell to cheap capital? The implications of long-term shifts in global investment and saving s/farewell_cheap_capital [2] EVA = Economic Value Added is a measure of economic profit. It is calculated as the difference between the Net Operating Profit After Tax and the opportunity cost of invested Capital. This opportunity cost is determined by the weighted average cost of Debt and Equity Capital ("WACC") and the amount of Capital employed. ( [3] CFROI = Cash Flow Return On Investment: Like the IRR calculation of a project, the CFROI metric is a proxy for the company s economic return. Liquidity Management David Blair 2013 david.blair@acarate.com Page 20

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22 Acarate Consulting Clients located all over the world rely on the advice and expertise of Acarate to help improve corporate treasury performance. Acarate offers consultancy on all aspects of treasury from policy and practice to cash, risk and liquidity, and technology management. We also provide leadership and team coaching as well as treasury training to make your organisation stronger and better performance oriented. David Blair, Managing Director 25 years of management and treasury experience in global companies David Blair was formerly vice-president treasury at Huawei where he drove a treasury transformation for this fast-growing Chinese infocomm equipment supplier. Before that David was group treasurer of Nokia, where he built one of the most respected treasury organisations in the world. He has previous experience with ABB, PriceWaterhouse, and Cargill. David has extensive experience managing global and diverse treasury teams, as well as playing a leading role in e-commerce standard development and in professional associations. He has counselled corporations and banks as well as governments. He trains treasury teams around the world and serves as a preferred tutor to the EuroFinance treasury and risk management training curriculum. david.blair@acarate.com Liquidity Management David Blair 2013 david.blair@acarate.com Page 22