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The Corporate View
Headquartered in Italy, Indesit is Europe’s second-largest manufacturer of household appliances by market share. In 2009, the company posted €2.6 billion in sales. The group has 16,000 employees and 16 production plants across 24 countries worldwide and operates according to a model of sustainable development. We talk to Mustafa Kilic, Treasury Manager, Regional Cash Management, Insurance Management, about next generation cash management.
How is Indesit’s treasury structured and managed?
We are a multinational company based in Italy but our treasury operations are managed directly from our treasury centre in Switzerland. Here we deal with everything from FX and risk management to capital market functions and of course cash management. The latter is something that we have been particularly focused on recently. We do also have four partially independent treasury units in Argentina, China, Russia and Turkey.
All of the treasury activities are of course regulated by treasury policy. We do however review this annually, looking for ways to improve the systems and procedures we have in place.
What do you see as the treasurer’s function within an organisation today?
In my opinion, there are several things that should make up today’s treasury agenda. The first of these is centralising activities. This will allow for the strengthening of controls and should provide areas where costs can be reduced. The second is compliance. As treasurer it is hard to keep an eye on every single area of the business all at once. With a difficult economy and so many proposed rule changes in the offing, heightened regulatory oversight is a must. Regulatory risk has certainly become more prevalent over the last 18 months, as has the need for other risk controls such as a fully integrated enterprise risk management system and new financial risk policies. Liquidity is another crucial factor: as the dynamic of the market changes, so does the liquidity risk profile.
Essentially, companies need to start looking beyond what they know and their habitual practices to reach what I like to call Treasury Management 2.0. This is a highly interactive treasury function which directly impacts the business.
How are you doing this at Indesit?
As I mentioned, one of our main focuses has been cash management. We are in continuous search of enhancement of our platform from which to strategically run the entire cash management process for improved financial performance. The problem for us was that the approach we had in place did not necessarily work across all jurisdictions as there are varying practices and legal requirements between countries, particularly those rapidly growing countries such as Russia and Turkey.
As such we started to look at what we call hybrid solutions. They are hybrid because they really combine elements of existing products into one so that we can fully address our cross-border treasury needs.
Could you provide some examples?
As of now, we have implemented three hybrid solutions. The first two solutions, the direct buyer finance system (DBFS) and the direct supplier finance system (DSFS), were implemented locally in Turkey and a Hybrid Cash Pooling solution was implemented at group level covering Switzerland, Poland, Russia, Hungary and Czech Republic.
The direct buyer finance system (DBFS) was created to address the problem of direct debits not going through because the buyers didn’t have sufficient money in their accounts. The thing was that most of the buyers had direct debit set ups and also credit lines with the same bank, but these two items were never merged so that direct debits could be covered from credit.
We therefore had some extensive dialogue with our banks as to whether we could build a credit line behind the direct debit. For us it would mean that we would get paid on time and for the buyers the idea was to reduce the cost of their borrowing if they didn’t have sufficient funds to meet the direct debit.
We eventually managed to convince the bank to try it with a few companies. Once we saw that it could potentially work, the task was to convince other companies to use the solution. As I mentioned one of the key factors here was coming up with a reasonably priced line of credit. Another benefit we explained to buyers was that this was a totally electronic solution and there was no need for paper-based letters of credit for example.
How easy was it to onboard buyers?
It took some time of course. I would say though that at the end of six to eight months most of our buyers had started to show interest in this solution and we now have over 80% of our clients in Turkey onboard. At first, we did use incentives, such as discounts, to pull them into the environment. I would certainly recommend this approach to others considering new solutions as one of the key factors in the solution’s success is establishing credibility among the treasury community.
What benefits has Indesit seen from this solution?
At the time when we were setting up the DBFS, our cash management system did not let us see how costly our collection measures were because it simply hadn’t been set up with those parameters. I therefore decided to undertake a project to measure how much it was costing the company to collect €100. At the end of almost four months research, I was horrified to find out that we were spending almost €7 to collect €100! And this is not unique to Indesit, other companies will find the same if they begin to look deep down.
The inefficiency came mainly from legacy processes and products. With this new hybrid collection tool we have reduced the cost of collecting from circa 7% to almost 1% which is obviously a huge improvement. Moreover, it’s money we didn’t even know we were using before as it was hidden in processes, so the results have been really pleasing.
It just so happened that this solution really helped us out throughout the financial crisis as well. This was when our buyers were finding times particularly tough and access to credit was either very difficult or very expensive. Without wanting to sound too dramatic, this solution has really changed the way we do business and the way our trading partners do business with us.
It just so happened that this solution really helped us out throughout the financial crisis as well. This was when our buyers were finding times particularly tough and access to credit was either very difficult or very expensive. Without wanting to sound too dramatic, this solution has really changed the way we do business and the way our trading partners do business with us.
Were the banks easy to convince?
We worked with around six main relationship banks for the DBFS and DSFS solutions. When we first started discussions around this project, we managed to convince two or three of these banks to participate. Many of them however were sceptical, not really seeing what the benefits of lowering credit costs were.
However, when over 80% of our customer base became interested, the banks saw new relationship opportunities opening up as customers that have never used those banks before began using them to take advantage of our DBFS solution. It has also been an opportunity for buyers to look into new bank products such as commercial credit cards, so it has been a real win-win.
How well have the other two solutions been received?
As you can imagine, the supplier finance solution in Turkey has also been extremely helpful throughout the economic turmoil. The solution enables suppliers to receive payment before the due date and has therefore been particularly useful for those smaller companies struggling with financing. We are really looking to expand this solution over 2010 and aim to have most of our suppliers onboard by 2011.
As you can imagine, the supplier finance solution in Turkey has also been extremely helpful throughout the economic turmoil. The solution enables suppliers to receive payment before the due date and has therefore been particularly useful for those smaller companies struggling with financing.
The hybrid cash pooling solution was more for our own benefit but it has received quite a bit of interest from other treasurers and banks.
What does the hybrid cash pool consist of?
Hybrid cash pooling is essentially a mix between a physical cash pool and a notional cash pool. We had physical cash pooling in place already and we created a new notional pooling layer in Amsterdam to combine them to create a new hybrid pooling environment. The aim is to provide a consolidated view of company cash where it was not previously possible.
At Indesit, our daily cash balance comprises 11 different currencies across hundreds of bank accounts with many financial institutions in 24 countries. While notional pooling would in theory be able to provide such a consolidated overview, the practice of notional pooling is not allowed in some of the countries where Indesit operates. However, companies are allowed to open cross-border accounts in these countries.
So, the various group companies maintain accounts in their own names in the book of the service provider bank in Amsterdam, in principle in different currencies through physical cash pooling. This means that credit or debit balances are posted to each individual account at this level. However, the balance of all these accounts are offset on a notional basis. So it is a notional pooling with the integration of physical cash pooling, which is why it is referred to as hybrid cash pooling. It has been actively running since the end of last month.
This will really help treasury efficiency and we are certainly starting to actively contribute to the business now. The solution has provided enhanced risk control, financial harmony and also resulted in better interest structure.
What future plans do you have for the company’s cash management?
Going forward, we will be trying to expand the horizon of the products that I have mentioned, especially in the eastern European countries. If we can get more and more people interested in the solutions, particularly the DBFS, this will really help with cash flow forecasting as things will be paid on time.
Another project we are working on is building on and expanding our cash management platform. As I alluded to earlier, the current platform doesn’t necessarily have all of the capabilities that we would like it to. We want to build in more metrics, such as measuring the cost of processes surrounding company cash. If we can measure and monitor, then it will be easier for us to improve.
Biography
As a Treasury Manager at Indesit, Mustafa is responsible for the regional treasury operations of Argentina, China, CIS, Turkey and group level insurance activities. He joined Indesit early in 2004 after 13 years of experience in the finance and treasury field at Siemens, Nestlé and Motorola Group. He graduated with a Bachelor of Science degree from the Business Management School of Istanbul University and his expertise covers the areas of treasury, corporate finance, liquidity, credit and risk management.
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