On March 31 1999, the balance sheet of Pilkington, the UK-based glass manufacturer, showed loans and overdrafts of 656 million. A year later, the figure was down to 594 million on a total turnover o…
On March 31 1999, the balance sheet of Pilkington, the UK-based glass manufacturer, showed loans and overdrafts of 656 million. A year later, the figure was down to 594 million on a total turnover of 2.7 billion. A major reason, according to Adrian Marsh, head of group accounting and treasury at Pilkington, is better working capital management across the European operations: a liquidity management system has been put in place to maximise the advantages of the single European currency. Pilkington produces glass for the building and automotive industries. The company, which has processing/manufacturing activities in most eurozone countries and sales in all of them, was one of the first UK plcs to reorganise in advance of the introduction of the single currency. As well as improving working capital management, it has also been possible to reduce treasury overheads substantially: “We used to have treasury operations in three countries (Germany, Italy and the UK), now we do everything from St Helen“s (Lancashire) with fewer staff,” says Mr Marsh. The restructuring has been achieved without interfering with local banking arrangements which were already in place to meet the transactional needs of the businesses in each country. Technology is an important element of the solution, but the operating environment created by the single currency provides the savings by making it possible to centrally manage the balances from different countries and accounts. Pilkington“s automated, euro cash management solution works like this: at the close of each day any surplus funds sitting on the operating accounts in the eurozone countries are moved to a parallel account held with Deutsche Bank in each country. This can happen automatically, without the treasury needing to calculate balances and give specific instructions. If any accounts happen to be in deficit, they can be automatically topped up from the Deutsche Bank account, so the end of day balances on the operating accounts are always at zero. Now the balances held on the different Deutsche Bank accounts are pooled in London. This means that the funds are transferred to separate accounts in the names of the different operating companies, but the balances are treated as one for the calculation of interest: any negative balances are offset against positive ones and the resulting single euro balance earns interest at a pre-agreed rate. The interest is applied back to the separate accounts of the different operating units. According to Mr Marsh, the savings result from the fact that all balances are actively “working” – that is, either earning interest or reducing overdrafts elsewhere. Previously, balances would be left on accounts earning no interest because the costs of converting them to another currency were too high. The treasury team in St Helen“s monitors all the accounts, including the accounts held with the local operating banks, using db-direct, Deutsche Bank“s corporate electronic banking service. Again, it is a matter of technology and the single currency environment combining to provide benefits: “We now know our net position no later than one hour into each day,” says Mr Marsh. “Previously, because of the complications of the two-day foreign exchange cycle and a multitude of different systems, we would be struggling to make accurate funding decisions by early afternoon.” There are three distinct systems elements to the solution: software installed on PCs in the treasury and at each of the operating companies gives users access to the accounts for monitoring. Db-direct is also used to initiate payments from the accounts as required. (Users at each site only have access to the appropriate accounts and payment authorisations.) Connection to Deutsche Bank is via standard phone lines. The second element is the cash pooling “engine“, located at Deutsche Bank, Frankfurt, which initiates the daily zero balancing and calculates the pool balance for interest purposes. Thirdly, the Swift interbank message network carries the instructions to debit/credit the accounts with the local operating banks. Deutsche Bank is only one of a number of banks that have tailored cash concentration and pooling services specifically for euro liquidity management. Such solutions can be highly efficient for companies, although the lack of tax and legal harmonisation in Europe means the documentation involved can be onerous and needs care. According to David Aldred, vice president, global cash management sales at Deutsche Bank in London, the bank has 130 multinationals operating such structures across 48 Deutsche Bank branches, moving billions of euros every day. Pilkington was ahead of the pack, says Mr Aldred, “but we are now seeing an increasing number of UK companies implementing such solutions. It“s the difference between being euro compliant and euro competitive”. The next step for Pilkington will be to migrate to the browser-based version of the Deutsche Bank electronic banking software. This will bring further advantages, says Mr Marsh. It will be easy to add more countries since there will be no software to install and remote access will be possible, for example, to add second authorisations to payment instructions.