Comment: A marriage made in Birmingham - Trade & Forfaiting Review

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posted 22 Feb 2005 in Volume 8 Issue 4

Peter Sargent looks at the blooming romance between cash management and trade finance.

Spring must be early because love is definitely in the air. Everywhere I turn lately the talk among corporate treasurers is about their new-found admiration for the guys across the corridor in trade services. And this is no passing fancy. Truth to tell, more than once I have heard the word ‘marriage’ fall from the lips of even the most hardened cash manager. What is going on?

It seems that the cash managers – encouraged, of course, by their bankers – have been glancing a more than admiring eye at the new generation of online trade-services platforms, which are driving an unprecedented level of confidence in the reliability of documentation – and therefore the timelines of trade transactions. By linking browser-based front-ends into a central bank-provided hub and back-office clearing system, the error margin on documents is rapidly disappearing. While this is great news for trade services, it is also pretty good news for our hard-pressed friends across the corridor in cash management – something that has not escaped their notice.

As any jobbing trade financier can tell you, all trade transactions ultimately end up as cash transactions, although corporate cash managers have, in the past, had little faith that incoming cash from trade receivables will appear in the right place at the right time and without having been exposed to undue risk. Electronic trade services has changed all that, at last making international trade receipts a tool for profitability. By taming the timeliness of trade receipts, the full value chain of trade-focused corporates has matured into a cash-management tool able to drive an overall strategy for corporate liquidity enhancement.

It’s an opportunity that few trade-focused corporates can afford to miss. The efficiencies integrate what was something of a contradictory relationship between the procurement and commercial functions in a company’s value chain, making the supply chain geared around orders. This means that the goods themselves spend less time losing money while cluttering the warehouse before being despatched. It also means that each link in the chain – each ‘cash point’ if you like – can be re-examined in the light of how its liquidity demands can be met from within the parameters of the transaction, rather than by drawing on hard-won working capital.

Accounts payable should certainly be pleased with these new efficiencies as it means they can push out payment terms towards precise future dates. For receivables, it means piggybacking on the credit quality of counterparties to gain the fullest possible benefit from invoice discounting. Indeed, working capital is defined as the current assets minus the current liabilities. With the greater part of these often made up of receivables – and goods – on the one hand, and payables on the other, it really does make sense to reduce working capital requirements by interlinking these two areas.

So having established that the marriage should go ahead, how should it be achieved? This requires a broad range of trade and cash bank products to be combined and applied with a new level of purpose. However, basic cash-management products alone are not enough to maximise transactional profitability. This requires the application of cash accelerants to facilitate transactions and minimise company exposure via more efficient cash flows. In fact, such products have often been developed for application to import and receivables finance, but are increasingly applied domestically – in the case of supplier finance, for instance. Alternatively, some banks (mentioning no names) now offer the availability of working capital based solely on the comfort provided by a company’s outstanding receivables – meaning that short-term debt does not have recourse to the company balance sheet.

Of course, to maximise the possible efficiencies from matching cash-management needs with trade-finance technology, customers should get hold of the most sophisticated reporting mechanisms and have good real-time systems integration (which link payment and risk management systems into the treasury function). Yet this presents a conundrum. The obvious eventual result of this web-enabled convergence is that the market for bank-customer transactional web portals will standardise with each committed trade-finance bank eventually offering broadly the same platform. This means that the banks will have to find new ways of differentiating themselves. For me the answer is obvious: service.

If the banks are not building these platforms purely to enhance their own profitability, their key aim has to be to enhance quality. Yet quality is only partly about process – whether a function of a small office in Birmingham, UK, or a vast centre in Bangalore. It’s also partly about getting the right advice and the most effective support, both of which require personal, human relations, which can only be delivered from a banker who knows how to navigate not just the web but the one-way system of the client’s home town.

Hence the title of this column. Like most modern couples, the marriage of cash and trade may be a result of them meeting on the internet. The bank that marries them, however, needs to be on hand in much more than a virtual sense. They need to personally know the client and be there on the ground, which makes the small office in Birmingham as vital as it ever has been.

Yet this need to retain a local approach shouldn’t denigrate the web-based advantages available from such a marriage. A key feature of web-enabled trade relationships is that the cash-management benefits are shared between counterparties, meaning joined-up value-chain cycles across several companies. This links raw-materials suppliers to end users within an ever more prosperous environment of cash-transmission and payment confidence, especially as web-based cash transmission systems continue to weaken the distinction between national and international cash flows. Indeed, aided by inter-bank co-operation and the introduction of the euro, the number of overseas banks needed by an exporting company should be much reduced, allowing treasurers to move money cross-border at the click of a mouse.

Given this ability, corporate treasurers should now be free to decide how and where cash can be used to their greatest strategic advantage, as well as when, which, when applied to my wife, certainly sounds like a marriage!

Peter Sargent is global head and international trade finance director at Lloyds TSB in London