Liquidity Risk Mitigation and Management During a Credit Crunch

Publication: gtnews.com


With many global markets in the grip of the liquidity crisis, what are the latest developments in liquidity risk management and mitigation? 


In this year's third annual gtnews cash management survey, Cash Management Survey 2008 Reveals Liquidity is Corporate Priority in association with SEB, over 52% of corporate respondents said that financial risk management and mitigation was a high level of responsibility for them and their treasury department. This was second, only behind cash management, as the area of highest responsibility for treasurers. Clearly a major reason for this is the liquidity crisis in the global markets and the sharp focus that this has brought on liquidity risk. 


A New Approach to Risk 


The approach to liquidity risk mitigation is the dominant theme in the article The Five Changing Faces of Risk Management, by Philippe Carrel of Thomson Reuters. Carrel explains how different areas of corporate risk, such as valuation risk, settlement risk and regulatory risk, are interlinked as they all have a direct impact on the company through the validation of its balance sheet. "Liquidity is the ultimate reward or punishment for the sound management of the other risks combined," states Carrel. Issues with liquidity can arise from poor risk management policies in areas such as funding, portfolio and collateral management, counterparty management, failed settlements and other operational issues. It is because of the structural web that interlinks these issues that liquidity risk cannot be seen as a stand-alone area. Rather, it should be perceived as the ultimate operational risk. 


--------------------------------------
Sources of Liquidity Risk 


Thomson Reuters' Carrel highlights three main causes of liquidity risk: 

1. Market liquidity risk - the risks that assets held in portfolio or pledged as collateral may be mispriced or simply impossible to sell due to adverse market conditions. This is made worse in the world of structured finance where, with the lack of transparency of the underlying assets, money managers have stopped investing in these assets thereby drying up liquidity.
2. Funding liquidity risk - the funding and funding costs associated with the lending books. Reflecting the lack of transparency in the industry banks have limited lending lines in the interbank market leading to a drying up of funds affecting most credit markets.
3. Counterparty-driven liquidity risk - the liquidity risks related to a counterparty's unfulfilled obligations, missed or overdue settlements. Causes can stem from either financial problems with the counterparty, connectivity failures and especially from data mismanagement. The latter occurs across straight-through processing (STP) systems linking risk takers with their execution venues, brokers, custodians and administrators. These systems require complex and frequent database alignment. Failure to process transactions in a timely manner may result in payment failures which, in times of extreme market conditions, can disrupt the firm's liquidity management. 

--------------------------------------


Funding Liquidity Risk 


In Funding Liquidity Risk: Addressing the Challenges, Robert Smith, of Lepus, looks at the latest industry trends in this area. Smith describes how research into funding liquidity risk in the past six months has shown that the way it is perceived in the financial services industry is beginning to change. It is now a high profile area of risk management and, as such, it is receiving greater attention from banks and regulators than ever before. "One industry source that Lepus has spoken to recently stated that they felt regulators are inevitably beginning to focus on liquidity risk in a bid to prevent a repeat performance of the current liquidity crisis," states Smith. 


With this greater focus, financial services organisations need to establish or enhance their metrics for measuring and managing funding liquidity risk. The approach to this can vary quite significantly depending on the characteristics of the organisation. However, Lepus's Smith defines three main methods: 

1. Liquid assets approach - the organisation maintains liquid instruments on its balance sheet that can be drawn upon when needed.
2. Cash flow matching approach - the organisation attempts to match cash outflows against contractual cash inflows across a variety of near-term maturity buckets. 
3. Mixed approach - a combination of the previous two. 

In his article, Smith highlights the importance of the diversity of measures used, as they all offer slightly different insight and visibility. The approach of an industry source that he spoke to includes holding a stock of liquid assets as a percentage of liabilities, while having detailed rules in place to define a liquid asset. This source also monitors its projected cash flow against various stress scenarios. In terms of the organisation structure, funding liquidity risk metrics are usually part of board-approved documents that identify liquidity limits and approval levels. These will also highlight the individuals accountable for setting limits and exceptions. 


Planning for when the funding liquidity risk metrics have their limits breached, Lepus's Smith highlights that it is vital to have a flexible response strategy that is able to cope with a variety of possible risk events - such as default probability, credit spreads or stock market volatility. A rigid step-by-step plan may not be able to cope with the variety of these risks, but having a series of different scenario responses prepared can allow management to decide on an appropriate response. This response can also then be tailored to the risk event on an ongoing basis. 


Counterparty-driven Liquidity Risk 


One of the other main sources of liquidity risk that Thomson Reuters' Carrel identifies in his article is counterparty-driven liquidity risk. This is related to a counterparty's unfulfilled obligations, missed or overdue settlements. A recent ruling in the US courts related to counterparty-driven liquidity risk is the focus of How Can US Oversecured Creditors Receive Interest at Default Rate?, an article written by John Francis Hilson and Professor Stephen L. Sepinuck from Paul Hastings. In a decision favourable to secured lenders, the US Court of Appeals for the Ninth Circuit ruled in General Electric Capital Corp. (GECC) versus Future Media Productions, Inc. (Future), that oversecured creditors are entitled to receive interest on their claims at the default rate set in their contract. 


The roots of this ruling go back to March 2005, when Future went into default on a US$10.5m term loan and a US$5m revolver from GECC. The loans were secured by a first-priority security interest in substantially all of Future's assets. The default event caused the interest rate on these loans to increase by 2% per annum. Then, in February 2006, Future filed a Chapter 11 bankruptcy petition. Pursuant to a stipulation agreed to by the parties, GECC agreed to allow the debtor to use its cash collateral and the debtor acknowledged that it owed GECC about US$5.4m, which sum included interest at the default rate. The Creditors' Committee objected to that stipulation, but to facilitate a resolution of the matter, all of the parties agreed that the debtor's assets would be sold and about US$5.7m of the proceeds would used to pay off GECC in full, including interest at the default rate through 20 April 2006, subject to a later determination regarding what amount of interest was allowable. 


Later, the Creditors' Committee wanted GECC to return US$165,000, which was the amount it was claimed to have collected over the pre default interest rate. The Bankruptcy Court ruled that GECC was not entitled to interest at the default rate, based on a previous decision from the Ninth Circuit but, when GECC appealed, the Ninth Circuit reversed the decision of the Bankruptcy Court. 


This ruling by the court benefits secured lenders in this area of counterparty-driven liquidity risk. As Paul Hastings' Hilson and Sepinuck explain, the ruling "unquestionably allows oversecured creditors to recover interest on their claims at the default rate, at least in some instances." However, they are left with a couple of important questions from the ruling: 

• Which oversecured creditors are entitled to interest at the default rate? Could a creditor whose loan agreement provides for double or treble the interest after default find they have their claim disallowed, either under state law or some bankruptcy principle of equity? 
• If some oversecured creditors are denied interest at the default rate, does that apply only to both pre-petition and post-petition periods, or only to the accrual of interest post-petition? 

No doubt there will be future legal actions in the area of counterparty-driven liquidity risk as oversecured creditors find out how much, if any, interest at the default rate they are entitled to. It's certainly something worth checking with your lawyer! New developments in the legal and regulatory world, such as this ruling by the Ninth Circuit, occur on a regular basis at national level and also internationally through the regulators. It is therefore important for organisations to keep up to date with these developments in order to ensure that their liquidity risk strategy is compliant and follows best practice. 


Mitigating Liquidity Risk 


When it comes to a framework for mitigating liquidity risk, Thomson Reuters' Carrel suggests that organisations should not only prepare liquidity buffers as a counterbalance to the risks, but that they should also carry out a fundamental review of risk factors and their alignment with the risk policy of the firm. "This is not straightforward as the risk factors a firm is exposed to may not be immediately visible, especially where securitisation and derivatives are involved," advises Carrel. 


Every organisation should tailor its own counterbalancing framework in the context of its own exposure, exposure of its clients, and the nature of the business and then align it with the approved risk policy. In order to make this framework operate successfully across the entire organisational structure, there also needs to be transparency. "As the sound management of such sensitivities and the capacity of the risk managers to pre-empt on those risks will be eventually rewarded or punished with liquidity implications, we can conclude that the most important aspect of the new risk management is transparency," explains Carrel. This transparency should cover pricing models, clarity of processes, counterparty relationships, connectivity and IT setup, regulatory compliance and the adequacy of the overall framework with the shareholders' collective appetite for risk. 


Hopefully, in light of the current sharp focus on liquidity and liquidity risk, the new risk mitigation and management techniques discussed across industry sectors today will be implemented in a thorough and transparent fashion across the entire enterprise, consigning departmental or siloed risk management to the past.

Short-term Investment Strategies for Treasurers

Publication: gtnews.com


Short-term investments made by treasurers have come under a great deal of scrutiny over the past year, as many previously sound instruments have under-performed or collapsed. Which investment instruments should treasurers be considering, and what value should be placed on security, liquidity and yield in an overall investment strategy? 


The sub-prime mortgage crisis in the US and the ensuing liquidity crisis have had a profound effect on short-term investment options for treasurers around the world. CFOs, CEOs and boards are scrutinising treasury departments closely to see which investment instruments have been selected. Treasurers in turn have been in closer contact with their asset managers and banking partners to understand what is happening in the financial markets and how this is affecting their own liquidity. In this period of uncertainty, what strategies should treasurers be employing in order to achieve security of investment, maintain liquidity and create yield? 


A good start would actually be to keep in regular contact with your fund manager. The liquidity crisis may have meant that you put names and voices to the people helping to manage your cash investments for the first time, by building on these relationships, treasurers can learn much more about the instruments that their cash is invested in. 


The Investment Strategy Risk Conundrum for Treasurers 


Due to the market problems of the past year, it is understandable that security and liquidity are the main qualities that treasurers look for in a short-term investment instrument. But what about yield? Different fund types and investment instruments were falling over themselves to offer investors the best yield ratios up until a year ago, but is this still important? Well, it should be, but it is important that treasurers understand how the yield projections they are being shown have been put together and, as always, if something looks too good to be true then it probably is. This is a theme picked up by Mark Rimmer, from BlackRock, in the Guide to Money Market Funds - Part 1: The Current Landscape, which discusses key issues to keep in mind when choosing a cash manager. "The underlying investment dynamics of a top-yielding fund might be based on some unattractive investments from a long-term perspective and this is the type of investment information that you should ask your fund manager for," says Rimmer. Once again, it is clear that developing a good relationship with your fund manager is vital, as this can help avoid any nasty surprises further down the line. 


The balance between security, liquidity and yield that treasurers face when making short-term investments is something that François Masquelier, honourary chairman of the European Association of Corporate Treasurers (EACT) tackles in his article, Post Sub-prime: The Impact on Treasurers Managing Liquidity. All investments should ideally bring a return in terms of yield, but in the current climate this can be easier said than done, as treasurers need to also ensure that their investment strategy diversifies risk, remains liquid and also favours the corporate's main bank relationships. Remaining liquid can represent a cost in terms of failure to earn interest, and Masquelier identifies the fact that corporate strategies and objectives are not always aligned in this regard, something that can have a serious effect on a company's bottom line. "It's a subject that CFO's may have neglected too often in Europe. Last summer's events reminded everybody that this market could present considerable risks because of a lack of visibility on certain funds that qualified as dynamic, or even because fund managers were frantically searching for a higher return," says Masquelier. Higher returns, by their very nature, have a higher underlying risk profile, so it is vital to remember this when looking at short-term instruments to invest in. 


Even basic bank deposits are exposed to significant risk, as Alain Kerneis, from Goldman Sachs Asset Management, discusses in his article, Managing Corporate Cash Reserves During Turbulent Times. Corporates with large allocations in bank deposits are exposed to significant counterparty risk since the market in the UK and US significantly re-priced the risk of default from financial institutions. "Although a survey published in 2006 showed that European non-financial corporations held on average 60% of their reserves in bank deposits, we believe that the recent market events will prompt many corporations to limit their allocation towards bank deposits," says Kerneis. He also expects treasurers to spread their bank deposits across a larger number of counterparties or diversify across other low risk asset classes such as short-dated government bonds. 


A corporate's risk management policies are tightly linked into its short-term investment strategy, more so today than ever before. David Rothon, from Northern Trust, looks at the risk aspect of MMFs in his article, Cash Management Perspectives on Short-term Investments. He makes the point that enhanced and short bond funds can be just as appropriate for investors as MMFs, providing that their appetite for risk and the objectives of their funds' strategy are in line with one another. "As this process of risk reappraisal evolves, investment strategies in the short duration space will become more clearly defined, enabling investors to better manage their risk budget," says Rothon. A broader, better-defined product array will give investors the confidence and conviction to tactically manage their cash going forward. 


Regulations Helping Growth of MMFs in Europe 


In Europe, the MMF market has lagged behind the US in terms of assets under management, but recently it has been catching up quickly. A major reason for this has been a shift in the regulatory landscape. Changes to the Basel II capital adequacy framework and the introduction of the European Union's Markets in Financial Instruments Directive (MiFID) has made investing in MMFs an attractive prospect for banks. Under the original Basel Accord, financial institutions were required to make large provisions against these investments. MMFs were also treated the same as higher risk equity funds, making them relatively expensive for banks to hold. However, this has now changed, as Kevin Thompson, from Fidelity International, discusses in his article, Money Market Funds Weather the Credit Storm. With the new framework, the risk weighting of MMFs has been reduced to 20% from the earlier 100%. Banks are also required to hold far less capital in highly rated MMFs, which makes these instruments an attractive option for short-term cash placements by banks. 


"Additionally, under MiFID, banks will be allowed to invest client money into AAA-rated funds, earning a higher return than just relying on bank deposits," explains Thompson. "With these structural and regulatory changes coming into place, we expect the market in Europe to grow significantly over the coming years." As cash from banks floods into the MMFs, this adds to the security of the market from the perspective of the corporate treasurer. 


Need For a Better Definition of MMFs 


The downturn or even collapse of some short-term investment markets has lead to many calls within the industry for a better definition of what an MMF actually is. As EACT's Masquelier says, it is important not to confuse treasury-style MMFs with similar looking products that actually have a greater risk profile. "It is unfair and even dangerous to claim that the risk would be the same when the duration of underlying investments is longer (greater than three months) and that the return on investments is clearly greater than the reference indexes (e.g. EONIA, EURIBOR, LIBOR)," explains Masquelier. 


"With an AAA-rated stable net asset value (NAV) MMF, corporate treasurers can be confident in the knowledge that they have access to their money on a T+0 basis and they are able to maintain this flexibility,"says BlackRock's Rimmer. This type of MMF, often referred to as a 'treasury-style' MMF, has been a success story of the past 12 months, as treasurers have been attracted by the relative security and liquidity they offer as opposed to enhanced cash funds or bank deposits, for example. 


The credit crisis has created an inflection point in the MMF industry regarding how investors view MMFs, perhaps permanently. Karen Dunn Kelley, from Invesco, describes in her article, Money Market Funds Evolving from Market Turmoil, that since last summer, her company's cash management team has conducted hundreds of meetings with investors who have been surprised by the impact of the credit market crisis and now have a heightened awareness of the risks in their MMF investments. 


Trade organisations agree with the IMMFA in calling for clarity of definition for MMFs in order to avoid previous errors of judgement regarding the underlying asset risk of different short-term investment instruments. François Masquelier says that the EACT, like many national treasurer associations, thinks that distinguishing a treasury-style MMF from other cash funds such as enhanced, cash-plus or dynamic MMFs is crucial. "Turning to 'pure' monetary funds with an AAA rating (IMMFA funds) has shown during the crisis that it was possible to guarantee liquidity while offering a solid return greater than the EONIA index (for euro funds)," he explains. 


This clearer definition is beginning to take shape, as Kathleen Hughes, from J.P. Morgan Asset Management, highlights in her article, Short-term Investors Get Smart. She refers to how the treasury-style MMFs have also been defined as qualified money market funds (QMMFs) by IMMFA. QMMFs are the most conservative of the broader MMFs category, which is widely used in Europe to describe everything from stable NAV funds to enhanced yield funds, short-term bond funds and even total return style funds. "The differentiating factor between all of these types of fund has always been liquidity," says Hughes. "QMMFs are buy-and-hold strategies that invest solely in securities maturing in the near-term. Therefore they do not normally rely on the presence of market participants to buy securities from them in order to meet the liquidity demands of their shareholders." 


This undivided attention on very short-maturity instruments is a big distinction between QMMFs and other MMFs with higher risk profiles. Some longer-term enhanced, dynamic or total return funds implement active strategies that can buy securities maturing as far out as 30 years, which means they have been at the behest of market liquidity when it comes to meeting shareholder redemptions. J.P. Morgan's Hughes notes: "Such strategies worked perfectly well until market liquidity vanished in the summer of 2007, forcing the fund's to sell securities at discounted prices." These losses were then passed onto investors, which is the last thing treasurers want. 


Which Funds to Choose? 


Treasurers have started to differentiate between the MMFs that are available to invest in, and the asset managers that are offering the product, with risk factors now being a key factor in fund selection. The size of the fund, its portfolio holdings and the strength of the provider are increasingly under scrutiny. This is something that J.P. Morgan's Hughes points out in her article. "The size of the fund, in particular, directly addresses large investors' fears of being a big fish in a small pond. If you make up too much of the fund, how confident are you that adequate liquidity will be provided?" she says. 


The financial strength of the provider is now also a consideration when looking at which short-term instruments to invest in. While mutual fund investments are 'ring-fenced' in terms of the fund provider's balance sheet, the funds themselves are not guaranteed by the asset management company, or the parent bank entity, if one exists. Despite this, many investors believe that if the stable NAV of an AAA-rated fund is in jeopardy, the provider will act to prevent any losses being passed onto shareholders. If this assumption is correct, the provider can only do this if their balance sheet allows it - which is why there is a focus on the financial strength of the provider. This is even the case when investors look at treasury-style MMFs. As J.P. Morgan's Hughes states: "These changes have been profound and are likely to be permanent." 


Taking Advantage of Technology 


While treasurers can benefit greatly from an active working relationship with their fund managers, technology can also help when it comes to investment decisions. This is a topic that Basak Toprak, from Citi, highlights in What Now? What Next? - Part 3: Harnessing Technology to Simplify Investment Decisions. Investment portal technology is one such advance, which allows corporates to access information about all of their investments online through one channel. "The convenience of seeing all of their investments on one screen with the ability to compare them in terms of their assets under management, ratings, yield and average maturity is a significant advantage," says Toprak. MMF portals are provided by both banks and independent operators and, at a time when transparency of products and investment is critical, portals can provide visibility, mobilisation and optimisation of corporate cash. 


In his article, Investing Through the Liquidity Crisis, Kirk D. Black, from the Bank of New York Mellon, shows a practical example of how an MMF portal can benefit the investor. The US Federal Reserve recently reduced its funds target rate significantly in an attempt to ease the liquidity crisis. This has helped MMFs to outperform most short-term issuers of commercial paper and other corporate discount notes and government securities. As a result of this, many investors are moving their portfolios from individual security issuers into heavier concentrations of MMFs. "An investment portal allows the investor to efficiently purchase a market of MMFs, taking advantage of their current out-performance. Should the Fed pause easing for an extended period or reverse course into a tightening posture, portal users can redeem their MMF positions and re-enter securities markets on the portal, purchasing instruments such as commercial paper and other discount notes," explains Black. Keeping ahead of the market curve is important, especially in the current turbulent climate, and managing your short-term investments through one of the many available portals can be a helpful. 


Significantly, Citi's Toprak points out that "while adoption of portal technology grows in the transaction space, they do not replace existing relationships with fund managers or the need to have someone at the end of the phone to answer questions on the investment offering or provide feedback on market developments." 


Conclusion 


As the market turbulence of the past 12 months has dealt blows to competing short-term investment instruments, the security and liquidity that treasury-style MMFs afford has seen their popularity rapidly increase, particularly in Europe. Going forward, it is important that investors do not revert to a laissez-faire approach to short-term investments - security and liquidity are the vital components at the moment, but to neglect yield could cost corporates in the longer-term. It is important for treasurers to arm themselves with as much knowledge of the market as possible, which can be achieved by having a good relationship with fund managers, as well as utilising any technology that can simplify and enhance investment decisions, such as MMF portals. The funds industry itself needs to ensure that it is catering for investors by providing accurate and up-to-date information on the investment instruments it offers, and that these are clearly defined with transparent risk profiles. The growth of treasury-style MMFs has shown that, even in tough economic times, there are good short-term investment opportunities out there and, if the industry learns from previous mistakes, these can grow. For example, at a recent conference looking at MMFs, Donald Aiken, the chairman of the IMMFA, said that he would not rule out the return of enhanced cash funds given time, albeit in a slightly different format. By keeping up with industry developments such as these, treasurers can be in a position to take advantage of future market alterations and add value to their company by doing so.

Treasury in Latin America: Diversity and Growth

Publication: gtnews.com


Latin America is a diverse region for treasury operations, with many different economic models, regulatory regimes and technology infrastructures spread over the continent. This commentary examines some recent developments in treasury issues here. 


Treasury operations and processes in Latin America can differ wildly from country to country depending on a whole host of factors, such as economic integrity, local regulatory factors and technology infrastructure, to name a few. This week on gtnews we have published six new articles that examine a variety of Latin American treasury issues, covering regional and country-specific developments. 


Latin America is one of the more complex places in the world in which to manage cash, liquidity and risk. However, strides are being made across the region to improve payment infrastructures. This topic is covered by Nancy Russell, from NLRussell Associates, in her article, Payment Systems in Latin America: Advances and Opportunities. She describes how advances in national payment systems have progressed since 2000, pointing out that central banks in more than half the countries in the region have now implemented real-time gross settlement (RTGS) systems. "These countries include: Argentina (1997), Bolivia (2003), Brazil (2002), Chile (2004), Colombia (1995), Costa Rica (1999), Ecuador (2004), Guatemala (2006), Mexico (1995 and 2004) and Peru (2000). Several other central banks in Central and South America are also planning to implement RTGS systems in the next few years," explains Russell. 


Argentina, Brazil and Chile have also established private sector high-value clearing-houses: Interbanking in Argentina (1998), Camara de Pagamentos Interbancaria de Pagamentos (CIP-Sitraf) in Brazil (2002) and Camara de Compensacion Interbancaria (Combanc) in Chile (2005). These are supervised and regulated by their respective central banks and use a similar model to the Clearinghouse Interbank Payments System (CHIPS) in the US. As they use prefunding, bilateral and multilateral netting, banks are better able to manage their liquidity costs. End of day settlement of net positions is affected through participants' accounts at the central banks using their respective RTGS systems. 


Many countries in Latin America have established automated clearing-house (ACH) systems, most of which are privately owned and operated but authorised and regulated by the central banks. The exceptions to this are Colombia, Costa Rica, Ecuador and Venezuela, where the central banks serve as operator of the ACH systems. In Colombia, besides the government-run ACH, there is a second privately operated system that is owned by the banks - ACH Colombia. 


Countries that have implemented ACH systems for interbank electronic credit transfers and/or direct debits include: Argentina (2002), Bolivia (2006), Chile (1999), Colombia (1999), Costa Rica (2001), Ecuador (2002), Honduras (2007), Mexico (1996), Panama (1998), Peru (2001) and Venezuela (2007). "Guatemala's new ACH system is in the testing phase and expected to become operational during the second half of 2008," adds Russell. 


While many Latin American countries have advanced their payments infrastructure, Russell also points out that additional opportunities still exist. Local governments and companies operating in the region, including multinational companies with subsidiary operations in the region, need to assess and review their in-country cash management operations on a regular basis to make sure that they are taking advantage of the most efficient payment and collection methods available. For multinational companies, for example, it is important to evaluate local country and regional cash management banking partners on a regular basis. "Despite the challenges and with all the positive changes in the region, there are almost always opportunities to increase the use of electronic payment methods and to reduce costs," notes Russell. 


Collecting the Cash 


As a corporate operating in Latin America, how can you actually get your hands on the cash a customer owes you? This subject is tackled by Fernando Lardiés, from Banco Santander, in his article, The Puzzle of Collections in Latin America. Lardiés argues that a practical collections approach to the region means that you need to look at other collections instruments beyond just electronic payment instruments. "The widespread use of cheques makes the automation of collection processes more complicated, when compared, for instance, with Europe (with honorable exceptions like France). In some countries digital cheque truncation is possible (Brazil, Mexico, Argentina), but in others (Chile, Venezuela, Colombia) this is not yet the case." 


Many countries in Latin America have restrictions in their legal and regulatory environments, particularly in regard to credit/debit taxes and restrictions on the movement of funds. This makes it difficult to replicate the cash management practices that are seen in other regions, mainly cash pooling combined with collection processes conducted in parallel by different banks. Latin America also still has a high reliance on retail branch networks. Most people prefer to pay their debts in person at a bank branch, although they could just as easily use an electronic transfer or, in some countries, even have their accounts directly debited. 


Banco Santander's Lardiés points out that banks with a local presence in a number of countries can offer corporates common communication interfaces and protocols, in case a corporate seeks centralised or standardised collection handling. "The underlying local collection instruments might have whatever specific features are needed in each country, but a common communication protocol can be designed jointly by the corporate and the bank based on open standards," suggests Lardiés. He uses the example of EDIFACT DIRDEB and CREMUL, which provide the flexibility to handle different local collection instruments under a standard umbrella solution. 


Corporate Cards Evolving in Mexico


Corporate card schemes and programmes are evolving all over the world from different levels of sophistication and this is particularly the case in Latin America. As a payment instrument, the corporate card has had difficulties breaking into a market that is so dominated by cash and cheques. However, as David Chevrel from Aconite reports in his article, The Corporate Payment Cards Market in Mexico, this is changing in Mexico. 


There are four bank issuers in Mexico, three of which offer corporate credit cards, one that offers debit cards and one financial services company, which markets several corporate products, including gasoline, purchases and meeting cards. In order to qualify for these services, companies must have an impeccable record and hold accounts with these institutions in order to benefit from these services. 


The problem that corporate card programmes were faced with was that, until a couple of years ago, credit and debit cards were not accepted by many vendors, such as petrol stations. This influenced companies against giving cards to their executives and meant that they had to provide them with paper bonds or other means of payment. Today, however, cards are accepted in most of the stations, which has been an important catalyst in the spread of corporate payment cards. The cost of petrol is tax deductible and corporate cards have simplified the process of calculating these deductions, saving management time in administrative and financial departments. "The opportunity to reduce costs related to calculating tax deductions should help drive corporate card growth in Mexico," explains Aconite's Chevrel, pointing out that access to a tool that simplifies this process is important to corporates of all sizes. 


Chevrel also uses the results of the Aberdeen Group's study to show how further growth in the use of corporate cards will come from outside of the travel and entertainment area. The study showed that, in Latin America, 83% of companies plan to use cards for advertising and marketing services and 53% are looking to expand commercial card use to non-travel categories as a means of driving growth. 


Do Argentina's Numbers Add Up? 


While the corporate card market in Mexico appears to be looking up, another article issues a warning for the economic health of another Latin American country. In his article, Back to the Future for Argentina's Economy, Martin Krause from ESEADE Graduate School, argues that the current commodities export boom is overshadowing deep-rooted problems in the economy of Argentina. The country is now enjoying the benefits of high prices for the commodities it exports - it shows twin surpluses and US$50bn in reserves at the Central Bank. "This has led many to believe the country is immune to an international crisis… though probably not one of its own making," says Krause. 


The bad economic indicators that Krause points to start with inflation. It is only three years since Argentina went through the largest debt restructuring in its history, yet price inflation seems to be running out of control and debt concerns have returned. Price and debt are also related through the new bonds the country issued after the default. They are adjusted to a price index, but one that ultimately relies on the consumer price index (CPI). "The government has found no better way to deal with increasing inflation than cheating on the index. No wonder the country risk has been going up since February 2007, the time when it started to become evident that the government was tampering with the statistical process and removing independent officials at the statistical agency," comments Krause. 


So what are the numbers behind this bad economic position? During the last year of de la Rúa's government in 2001, foreign debt was 54% of GDP (US$144.2bn). Today it is over 56% of GDP (US$144.7bn). Why is this the case if the economy has been growing at an average rate of 8% during the last few years? "The answer lies in the deep devaluation that reduced GDP in dollars, a figure that it is now only recovering in dollar terms. If we also include the amount of debt due to holdouts, the number goes to US$170bn, 67% of GDP," states Krause. 


ESEADE's Krause goes on to suggest that Argentina is paying the price for its close ties with the Chavez government in Venezuela and its failure to access the international capital markets, which could particularly help in solving the holdouts issue. He uses Argentina's neighbour, Brazil, as an example of what could be achieved by following a different economic model: "Brazil has achieved investment grade, receives more than US$30bn of foreign direct investment (FDI) every year and has just placed a 10-year bond for US$500m at a rate of 5.3%." 


Soy Source of Optimism 


As ESEADE's Krause has mentioned, if it were not for the rising prices of Argentina's commodity exports, the country's economy would be looking ill. Ana Belluscio takes an in-depth look at one of the unlikely economic heroes in her article, Secure Profits For Argentina's Soy Investment Funds. By using its roots as an agricultural country, Argentina has found a new way to use an old practice for profit. The catalyst behind this has been the growth of soybean sowing pools. These are headed by experts (who usually have fields themselves) who organise procedures, seek tenants to rent fields and prepare planting, spraying, harvesting and sales plans. Once the business plan is defined, they seek external investors (private capital, whether from individuals or corporations) that agree to invest in return for a percentage share in the profits. These small number of large soybean sowing pools now own over 80% of the soy market's share. "Since they handle large planting areas and production volumes, these pools can negotiate better prices with suppliers of raw materials and services, thereby increasing the profit margin for investors," points out Belluscio. 


The sowing pools usually offer investors closed operating systems, meaning that they can only withdraw their invested capital (plus earnings) once the crop is sold. The open system, where investors can withdraw their capital at any given time of the process, is not common in Argentina. This method obviously helps to add certainty to the financial process for investors in this commodity and can prevent a 'run' on soybeans. 


"The cultivation of soybeans produces statistically a net profit of approximately US$2.15 per US$1 invested (2006 statistics) whereas, comparatively, the net profit of corn culture is US$0.45 per US$1 invested," explains Belluscio, which shows why soybeans are such a popular commodity to invest in. And the soybean is set to become even more popular - as alternative fuel sources become highly soughtafter, the development of soy biodiesel from soybean oil is sure to lead to an escalating soy demand for the future. As soy demand increases around the world, from the European Union to China, and international prices for soybeans continue to rise, there will be greater gains for soybean sowing pool investors. 


Trade Finance in Latin America 


In his article, Factoring and Trade Finance Services Continue to Increase in Latin America, Jack Villacis, from Surecomp, casts an eye over trade finance services in the region. Villacis talks about how he has seen an evolution in trade financing requirements in Latin America where local companies are no longer producing exclusively for their own markets but are now fighting for global presence and market share. Surecomp's Villacis describes how, in terms of trade finance banking products and practices, Latin American corporates still depend heavily on letters of credit (LCs). "This is a result of the need to mitigate risk, as well as the need for immediate access to funds, explains Villacis. For many years, exporters as well as importers relied heavily on trade-related loans to finance their working capital needs and it still is a common practice in Latin America for most LCs and collections to be converted into trade-related loans. 


Other improvements in the Latin American trade finance market include greater automation, compliance, anti-money laundering (AML) initiatives and Internet banking. Many regional banks have started the process of either improving or implementing automated trade finance departments and factoring. Currently, banks are investing heavily in technology thanks to the fall of import and export barriers and the need to enhance systems comparatively with their North American and European counterparts. Villacis says that countries including Argentina, Panama and Costa Rica are beginning to catch up with the rest of the world in terms of Internet-based trade finance technology. In contrast, he states that Bolivia, Uruguay, Paraguay and El Salvador remain slow in offering these products, with banks and corporates appearing to be reluctant to undertake the required changes. 


Conclusion 


One point that is clear from all six of the Latin America articles published on gtnews this week is that, if you don't recognise the differences that exist between individual countries in terms of economy, cash management processes, regulatory regimes and legal requirements, you will struggle to do business here. Entering the Latin America 'market' is not the same as entering western Europe or north America, for example, where there has been greater harmonisation of systems and practice. Individual countries here are at radically different stages of development and maturity so it is sensible to have a country-by-country strategy built into your more general regional business plans.

How to Optimise Treasury Strategy and Your Career

Publication: gtnews.com


At the AFP's recent Global Corporate Treasurers Forum in Chicago, topics such as treasury strategy, organisational structure and career progression took centre stage, against the backdrop of the liquidity crisis. 


From 19-21 May, the Association for Financial Professionals (AFP) hosted its annual Global Corporate Treasurers Forum in Chicago. The event, which is limited to treasurers, chief financial officers, controllers, VPs of finance and assistant treasurers, provides attendees with the chance to learn strategy and techniques from industry experts and offers the opportunity to network with treasury peers. 


This was the first Global Corporate Treasurers Forum since the sub-prime market crash in August 2007, so the after effects of this event naturally had an influence on the discussions and presentations in Chicago. However, the overall tone of the three days reflected broader treasury issues, concerns and best practice. The main sessions covered a wide variety of topics, such as managing a global treasury with an eye on strategy, how treasury can drive a reduction of global effective tax rates, what treasurers should be doing to make the leap to CFO, as well as a look at risks in investing liquidity. 


Global Treasury Strategy 


Michael Richard, senior vice president and treasurer at McDonalds, got session proceedings underway with a whistle-stop tour of how he believes McDonalds manages its global treasury with an eye on strategy. He explained how the treasury at McDonalds believes in three key strategies for success: 

1. Constant change. 
2. Creating competitive advantages. 
3. Building relationships. 

These ideals are goals that most companies try to apply in their business plan, but the challenge McDonalds faces in implementing these strategies comes from its business structure. The McDonalds structure is made up of the corporation, suppliers, and franchisees, or "three legs of the stool," as Richard described them. For the company to be successful, all three need to be strong. It is the job of Richard and his treasury colleagues to provide liquidity to all legs of the stool, not just the corporate leg and Richard explained how the treasury works strongly with franchisees. 


While McDonalds is a mostly decentralised company (summed up by their catchy phrase, 'glo-cal'), the treasury department itself is still centralised. From this position, the role of the treasury includes funding, risk management, franchisee and supplier finance, cash management and the sale of non-core assets. With this range of activities, Richard stressed the importance of strategic planning in order to meet the treasury and business objectives. The McDonalds strategy here revolves around five 'Ps' that are included in their 'plan to win': 

1. People. 
2. Product. 
3. Place. 
4. Price. 
5. Promotion. 

Focussing on these core areas has seen McDonalds bottom-line results increase in the US and even faster globally. However, Richard did point out that there are still many challenges that the company currently faces. These include credit and funding; rising commodity prices; shareholder relations; accounting rule changes; continuing expansion and internal relationships with other departments, to name but a few. The vast majority of treasurers around the world will have these concerns, so maybe they can draw some comfort from the knowledge that one of the world's most iconic brand names shares these headaches. 


Career Progression 


One of the most popular sessions at the Global Corporate Treasurers Forum was the chance to hear from three CFOs about their current roles and how they had arrived at this position after a career in treasury. The three CFOs in question were Chris Kreidler from C&S Wholesale Grocers, Ira Birns from World Fuel Services Corporation and Don Mulligan from General Mills. Andrew Busch from BMO Capital Markets was the lively moderator for this session. 


In keeping with one of the major themes of the event, Busch asked how it is possible to balance the treasury function with strategy. Kreidler referred to strategy as a full-time job in itself and that he dedicates a set amount of time for this in his working week as he knows his CEO will want to talk about strategy. This was seconded by Birns, who looked slightly pained to add that his CEO is in the office every day and all he usually wants to talk about is strategy. It clearly came across from this part of the discussion that strategic experience is crucial if you want to make the leap from treasurer to CFO. Mulligan, at General Mills, added that smaller is better in terms of the size of your strategy team and that the execution of your strategy is key. He tied this in with the role of treasury, that capital strategy has to be aligned with commercial strategy. 


When asked about the key factors in progressing from treasurer to CFO, all of the CFOs present agreed that it is crucial to build up a broad portfolio of skills. Kreidler described how, when working for Yum! Brands, he took a lot of different jobs and, in his case, marketing experience and field jobs were what the board were looking for. He had line management and international experience and so he ticked all of their boxes for this specific job. While he was thought of as a strategist, he confessed he was really the 'deal man', which involved executing a small part of the strategy. Birns, from World Fuel Services Corporation, also said that it was his deal making that stood out for his first CFO appointment, but he again underlined how important it is to build up a broad portfolio of skills. He pointed to a time he spent working in investor relations, which gave him a whole new insight into the business. 


--------------------------------------------------- 
Don Mulligan, CFO at General Mills, pointed to five attributes treasurers need to have in order to make the step up to CFO: 

1. Make sure your functional expertise is up to scratch. 
2. People development - keep evolving to develop. 
3. Communication and influencing skills - treasury doesn't have the final call on decisions, so use your influence. Explain your point of view to the board, don't just show them the latest numbers. 
4. Be the voice of the shareholder. 
5. Know the business, become a business partner. 

---------------------------------------------------


The issue of character also came across as vitally important in making the step up to CFO. If you have a strong character, your reputation will precede you with the board. C&S's Kreidler described this as an important measuring stick, while Birns made a good case of how you can add value to your department by being a 'straight shooter'. Underlining the importance of having and maintaining an unimpeachable character, General Mills' Mulligan simply stated that if you don't have character and integrity, you won't make it as a CFO, there is zero tolerance in this regard. 


The Q&A session between the three CFOs and the delegates offered the audience a valuable chance to pick the brains of those who have successfully made the leap from treasurer to CFO. In response to a question about the importance of accounting skills when becoming a CFO, C&S's Kreidler noted that there has recently been a swing away from accounting CFOs to strategic CFOs. Accounting is not a prerequisite to being a strong CFO, but if you don't have this background then make sure you have a strong controller. World Fuel Services Corporation's Birns added the caveat that, even though he agreed that the tide is turning, he thinks that accountancy skills are still probably preferred at the moment. 


Possibly eager to enhance their career upon returning to the office, one delegate asked about the qualities that CFOs look for in their treasurer. Mulligan from General Mills explained that he likes to see an understanding of capital markets and how these fit with the overall business plan. He also encouraged the treasury department to communicate directly with the board, not to just speak to them through the CFO. By taking an active role in the company in this way, the treasurer will aid their future career prospects. 


Finally, a question about the inter-company relationship with IT provoked a useful suggestion from Birns. While none of the CFOs had responsibility for their IT departments, he noted that you have got to watch the expense coming out of IT, which can make a big dent in your profit and loss. You need to find out what the returns are on the products that IT may buy. Birns' suggestion was to place someone from treasury into the IT department who, knowing the business strategy, would be able to make sure that IT sees the bigger picture. 


Taxing Times 


The relationship that treasury has with the tax side of business has come under increasing scrutiny over the past 12 months, as companies target wholesale efficiencies in response to the tightening of liquidity. A straw poll of the delegates in a main session looking at treasury and tax showed that around one-sixth of the audience had a tax background, so most attendees were keen to learn more about this side of treasury relations. Dan Munger, partner in international tax services at Deloitte, began the proceedings with an examination of how treasury can be a driver of global effective tax rate (ETR) reduction. Sustained ETR reduction requires a balancing of tax and treasury objectives. Without an appropriate level of continuous co-ordination between tax and treasury, it is impossible to have an effective ETR strategy. Munger pointed out that tax and treasury will always be linked by tax traits, capital structure and the operating model of the business. 


When questioned, a number of treasurers in the audience said that they carry out long-term cash planning on a geographical basis. This important issue for treasury today includes the optimisation of offshore cash and also ensuring the efficient repatriation of this cash. International sales are growing exponentially for US companies (as was mentioned in the talk given by McDonalds' Richard), so US treasurers have to look at their structure to ensure that they are maximising their tax savings. These tax savings can pay for other items that are on the tax department's wish list, so practical steps such as setting up a structure that repatriates overseas cash can provide real value to the company. Deloitte's Munger advised that to build an effective strategy for this, treasurers should forget ideas and 'what ifs' and instead really get into the practical details of the planning. 


One member of the panel for this tax talk, R. Davis Maxey, treasurer and vice president of tax at Ion Geophysical, explained how his company had actually moved US activity outside of the US to Luxembourg for tax reasons. The factors behind this switch were that it led to rapid growth, minimal leverage, while 80% of Ion's customers are international. The savings that this change of location gave the company could then be ploughed back into annual investments in research and development and data libraries - an example of the use of savings that was mentioned earlier. 


The final speaker at this session was George Zinn, corporate vice president and treasurer at Microsoft. His presentation looked at how to simplify treasury management by looking at the lifecycle of the dollar and trying to make flow more efficient. Zinn described how the Worldwide Credit Services Group is the largest Microsoft treasury group. They receive the dollar and need to pass it on to the cash management and treasury operations departments, using SWIFT to provide electronic transparency to all accounts. 


Zinn explained how he thinks that it is critical to have a capital markets long-term portfolio going forward, but that it is important to take the right approach in managing these portfolios. One challenging area that Microsoft has identified is incremental risk, which goes hand in hand with the incremental yield in investment instruments such as money market funds (MMFs). With MMFs, there is a regulatory subtlety that exists between the markets in the US and, for example, Europe. The Securities and Exchange Commission (SEC) strictly regulates which funds can be named and traded as MMFs in the US, under SEC regulation 2a-7. In Europe, the regulations are not defined so strictly and, consequently, some funds that have been trading here as MMFs would not be able to in the US under the same title. When the liquidity crisis hit last year, some of these less-regulated funds failed, while in the words of Zinn, the "somewhat innocuous" US funds held up. Therefore a visibility to risk is crucial when you are heading into more diversified investments. 


---------------------------------------------------
What elements do you need in your investment strategy in order to manage risk while maximising yield? George Zinn, corporate vice president and treasurer at Microsoft, identified four key areas that he suggested treasurers must include in this strategy: 

1. Value at risk (VaR). 
2. Stress testing - how would this investment hold up should the worst happen? 
3. Scenario analysis - test any number of 'what if' possibilities to see if it is an affordable investment.
4. Counterparty risk - who else does this investment expose you to? 

---------------------------------------------------


Risks in Liquidity Investing


To round off proceedings at the Global Corporate Treasurers Forum, Simon Mendelson, managing director at BlackRock, gave a presentation summing up what has gone so wrong in the markets since last August and what treasury should look out for when investing in liquidity products today. The initial credit crisis became a confidence problem in structured products, with Mendelson choosing to use 'liquidity crisis' as a more appropriate phrase for the market turmoil. In his opinion, we are mostly through this crisis, judging the volatility to be in "the seventh or eighth innings." (For those of you not in North America or Japan, this is baseball terminology - there are nine innings in a regulation game. So, we're nearly there, providing no extra hits are required!) 


Mendelson described how, in the search for yield, securitisation and leverage were encouraged by Wall Street and that the ratings agencies may have played their part in this encouragement. The domino effect this started led to the housing market changing from being an engine of the economy to being a drag on growth. This led to the sub-prime spread - people went to re-price mortgage securities, which was easier said than done. Hedge funds pulled their liquidity out from anywhere, such as enhanced cash funds and, as explained earlier, many of these collapsed. However, MMFs held up, something that Mendelson made clear everyone should be grateful for - if MMFs had not halted the dominoes collapsing then who knows where the economy would have ended up. Would there have been a new 'Great Depression'? He rightly pointed out that it is probably best not to speculate too wildly on this given the uncertainty still apparent in the markets today, but it was not beyond the realms of possibility at the time. However, as the MMFs passed the initial test, people ran to invest in them. However, Mendelson noted how we're not back to normal yet, citing the fact that the asset-backed securities market is still struggling. 


So, going forward, how should treasury behave? Mendelson said that classifying pools of cash is important and noted the three pillars of the treasury cash position: working capital (unpredictable daily liquidity); strategic cash (hoarding, i.e. for an acquisition in the long-term); and core cash (for six months plus). 


When it comes to planning your cash position, the message from the BlackRock MD was to not be too conservative, that it is important for treasury to live for the future as well as living for the here and now. Nevertheless, he drew attention to the paradigm shift that has occurred in investment objectives, with the emphasis now on thinking about risk first, yield last. 


---------------------------------------------------
Simon Mendelson, managing director at BlackRock, signed off his presentation with a seven-point plan of items to remember going forward in any investment strategy: 

1. Incremental yield is accompanied by incremental risk. 
2. SEC 2a-7 - know what you are investing in. 
3. Ratings are not everything - AAA is not without risk. 
4. Liquidity matters. 
5. Access to information is important - disclosure. 
6. Cash investing is not a low risk activity. 
7. Remember the past, learn from it! 

---------------------------------------------------


A number of these items echo the thoughts and ideas mentioned in other sessions at the Global Corporate Treasurers Forum, from both the presentations and delegates that I spoke to. It feels like liquidity has never been a more important attribute to find and manage in treasury. However, it is crucial to remain vigilant of all risks while pursuing this goal. Next year the Global Corporate Treasurers Forum will be held in Dallas - it will be fascinating to see how the treasury agenda evolves in the 12 months until then.

Finding the Extra Value in Accounts Payable

Publication: gtnews.com


Accounts payable (A/P) is an area where treasury needs to increase efficiency, contain costs and focus on compliance. How can you best approach these multiple goals in a way that adds value? 


With the global economic problems of last year showing no sign of dissipating any time soon, corporates are looking to their treasury departments to contain costs while at the same time increase productivity and comply with a raft of regulatory initiatives. Efficiency is the watchword across every aspect of today's treasury. This is particularly true within the accounts payable (A/P) function, where the Sarbanes-Oxley Act (SOX) has put a magnifying glass up to the way A/P operations are run. 


As Nicole Buehler, from Hyland Software, notes in her article, Accounts Payable: Time to Automate, "SOX has increased senior managers' focus on the A/P function, by drawing their attention to the compliance risks inherent in manual, paper-based processes." 


It is not just US corporates that are facing such scrutiny. In Europe, SOX is seen in some corporate quarters as a 'best practice' guide to aspire to, even if their European domicile means that they are not formally bound by it. The focus is also indirectly reflected through the specific regional compliance burdens that European companies face. 


So, under such scrutiny, how can corporates make sure that the A/P function not only complies with every legal detail required of them, but also reduce costs and add to the bottom line takings? 


Outsource Your A/P? 


One option that corporates could choose to take is to outsource the A/P function. Companies and banks that offer A/P outsourcing solutions claim to provide lower costs, observation of strict auditing standards such as SAS 70 Type II, focused expertise and access to the latest technology. The results can enhance your A/P function, as David Schnitt, from IQ Backoffice, explains in his article, Optimising Accounts Payable to Ride Out a Recession. "The average in-house A/P department has a 2% error rate versus a high-quality outsourced provide with a 0.03% error rate." Companies can outsource individual finance processes, such as A/P, rather than outsourcing the entire accounting function. This allows corporates to take a targeted approach to managing the A/P function, meaning that they can quickly improve their cash flow process without over commiting resources. 


Outsourcing can also add a new level to the relationships that corporates have with their banks. By providing outsourcing services, banks now interact with procurement managers and A/P managers, a new development that Nancy Atkinson, of Aite Group, describes in her article, The Topsy-Turvy World of EIPP: Embraced by Payables Functions. "Companies provide their payables file electronically to their outsourcer and direct their trading partners to send invoices to the outsourcer's facilities. The outsourcer converts paper invoices to electronic format, accepts electronic invoices, and compares both against the payables file." From here, the outsourcer communicates matched purchase orders and invoices to the A/P system at the corporate. The paying company initiates the payment or schedules it for a specific date. Unmatched items are extracted by the outsourcer, who then sends this to the company for research and resolution. 


While outsourcing providers make a convincing case for the merits of optimising the A/P function, how convinced are corporates? According to recent survey results, there is still some way for the providers to impress their potential clients. Drew Hofler, from Ariba, explains in his article, Look to Accounts Payable to Add Value that, while process improvements and better technology are seen by CFOs and treasurers as the best way to boost A/P, "far fewer respondents cite either shared services or outsourcing as the best way to improve A/P performance in any area." But despite this, open-ended responses to the survey found that some finance executives intend to pursue outsourcing as one of a variety of A/P improvement techniques that also include process and technology improvements, shared services and centralisation. 


Enhancing A/P Through Automation 


As with most areas of treasury, automation is a way to help lower costs in A/P. One example of this is electronic invoice presentment and payment (EIPP). Conceived as a way to benefit supplier's receivables processes, Aite Group's Atkinson points out that it is actually the A/P organisations that are demanding EIPP. "Receiving invoices in electronic formats or converting paper invoices to digital files automates payables processing." This results in a number of benefits - digital files result in fewer misplaced invoices, more timely payments that reduce late fees, and fewer exception items. As suppliers are more willing to lower pricing if the buyer makes payments earlier, applying these factors to A/P can help corporates reduce their overall processing costs. 


EIPP can also provide the opportunity for buyers to facilitate trade financing for their suppliers at improved interest rates. In open account trade financing, the supplier takes the risk in terms of finding funding for materials, manufacturing and transportation. EIPP allows the buyer's bank to access the buyer's payments systems and know the approved date and amount of payment to a given seller - something that wasn't previously possible. "The buyer's bank can offer the seller a loan on more favourable terms than even the seller's bank due to the assurance of payment of specific invoices by the buyer," explains Aite Group's Atkinson. 


Automating invoices is one thing, but automating payments is also necessary to create a fully automated A/P function. Payables automation still has a considerable amount of work to do to gain full market saturation, especially in the US. In its most recent survey on US electronic payment adoption, the Association for Financial Professionals reported that 26% of all business-to-business payments are now electronic. ACH and p-cards are finding increasing take-up for large and small payments respectively. But in the middle of the US payables landscape between these two electronic payment methods is the paper cheque. This is a big problem for US corporates that are seeking to create efficiencies in their A/P, telling a supplier that an invoice has been approved is one thing, but being able to tell them that a payment has been made is something entirely different. Vince Bahl, from Bottomline Technologies, covers this topic in his article, Electronic Invoicing + Electronic Payments = Successful A/P Automation. "Relying on paper cheques for supplier payments greatly limits an organisation's ability to manage the timing of their payments, and therefore their ability to get the most out of their cash," cautions Bahl. 


Another example of the inefficiencies caused by paper processes is given by Sush Koka, from Paystream Advisors, in her article, Strategic Impact of Accounts Payable Automation. She notes that an average organisation is unable to capture anywhere between 50-60% of discounts offered because the A/P department cannot process and pay the invoice within a 10-day discount window. 


Basically, the benefits of automating A/P processes can be broken down into four areas: creating efficiency, containing costs, secure invoice storage, and ease of compliance management. It is these linked benefits that should eventually see automation spread throughout your A/P department. Hyland Software's Buehler predicts this is the case, "A/P currently occupies only a small proportion of the massive imaging, workflow and web invoicing automation market, but it is likely to expand rapidly as organisations turn to automation to streamline and optimise their A/P operations and adapt to changes in the regulatory environment." 


According to the Ariba survey, A/P professionals tend to agree with this statement. Over the next year, respondents mention plans for automation of processes such as invoice scanning, electronic invoicing and payment, automatic generation of purchase orders, and electronic approvals. The goal of a paperless environment appears to be driving plans for IT improvements that support electronic scanning and processing, such as increasing digital storage capacity. Those corporates that are already operating in a paperless environment are reaping the rewards, which seems like a smart move at a time when every treasury function is under pressure from the knock-on effects of the credit crunch.