Deutsche Bank

Commentary

Risk versus reward. 

Treasurers face this eternal trade-off directly when investing short term cash. There is pressure to increase earnings, and a constant search for new solutions, but the priorities remain, in order:

1. Safety
2. Liquidity
3. Yield

Companies put a lot of effort into making money and bringing in cash: the potential downside to losing money outweighs any yield benefit risky investments may bring.

As always, there is a lot of complex detail, depending on the size, the cash balance and the culture of the company.

• Most companies have a formal investment policy, often approved by the board.
• One of the benefits of centralising cash is to avoid paying the bid/offer spread of having cash in one place, and debt in another. Several peers used notional pooling (BMG and JPMorgan were mentioned) to achieve this. Both banks offer deposits for the cash in the pool.
• The most used instruments are bank deposits and MMFs (Money Market Funds). A few peers invest directly in high quality sovereign bonds, as well as repos. The rules can be more flexible in highly regulated countries, such as Turkey and Angola.
• Some peers used bank deposits as a means of balancing wallet share with relationship banks, but most take advantage of the higher rates provided by MMFs.
• Others left pools of cash in different countries and regions: in these cases, the short term investments were frequently managed by a team in central treasury.
• One peer managing Latin America was pleased with the better yield offered by some currencies with higher nominal interest rates, though this was not a common approach. Most of the commonly used instruments are available in...

Commentary

In this second call in our working capital series, we discussed supply chain financing and factoring programmes, and people’s experience with them. These differed significantly.

One of the main takeaways is that, for some companies, managing working capital is a key strategic goal (in our survey of September 2024, 44.6 % said their company has a formal working capital policy): this is reflected in the measurements and tools, which vary to reflect regional differences. Some use working capital financing if it is a cheaper source of funding: they often find it is not - though some find it is. Many participants are interested, but prioritise operational issues, such as improving supplier payment terms or late collections.

Our survey showed a higher level of adoption of receivables financing (factoring, securitisation) at 48%, versus 36% for supplier financing. For future intentions, both solutions were 39% and 41% respectively. The call gave a lot more colour.

Factoring: 

• One participant had implemented a factoring programme. They initially had a poor experience with a fintech, and so moved to a bank solution, the bank offered the same price without a credit wrap. The company views participation in the programme as a way of managing wallet share, and so carefully controls distribution. This works, but it limits the programme size.
• Few others on the call were actively factoring or selling their receivables. Some had discontinued existing receivables programmes, due to cost. This generated a lively discussion: some found the cost attractive, especially if you include other considerations, such as risk mitigation.
• Factors need a lot of

Commentary

With complex countries, we usually think of emerging markets. Japan is one of the most advanced, largest and affluent economies in the world – but it is also a very complex place for foreign companies to operate in.

Usually, the complexity for treasurers comes from regulation. In Japan, this is not the case: the yen is freely traded in one of the deepest markets; cash can be pooled and swept both within the country and across borders; one participant does POBO there; Japanese banks willingly report transactions and balances by MT 940; it has deep and open capital markets; and four of the world’s twenty largest banks by assets are Japanese. Instead, the complexity comes from a very strong culture, which is often not well understood by non Japanese, and which leads to a different way of doing business.

This call, which was well attended and quite animated, went into the challenges foreign treasurers face in this environment. Peers raised the following:

• High bank fees: Japanese banks are reluctant to negotiate these down
• Japanese banks are not used to RFPs for cash management – this is not how the domestic market operates. Many large Japanese companies have strong historical relationships with their banks, which often involve minority shareholdings.
• While MT 940s are not an issue, one participant faced significant issues getting their Japanese bank to implement even a simple host to host communication
• Communications challenges: it can be difficult to find Japanese employees who speak good English – very few bankers in domestic operations speak it.
• The need to carefully manage business meetings: these are usually more formal than in many other cultures: deference to senior personnel is required
• Difficulty managing onshore operations from a remote location: the local online banking tools are nearly all Japanese language only
• The language issue is further complicated by the katakana character set
• Resistance of local teams to change, especially if it involves working with foreign banks
• Complexity in managing relationships and wallet share with Japanese banks, who are often key global providers of credit and FX
• The use of company chops instead of signatures, and the related control issues
• The requirement to use local bank accounts for certain types of tax payments
• Security and confidentiality in Japanese online payment systems is not best in class – one participant had an issue with a single person (not in HR) making all payroll payments
• Repatriating cash via dividends and intercompany loans is not a problem, but it brings the usual complications: the need for retained earnings (one participant’s business receives advance payments), withholding tax and currency hedging cost. 

How to handle these problems?

• One peer did an RFP a few years ago, and awarded

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