Working Capital Management: How to Free Your Trapped Cash -- for Free

At the 5th CFO Innovation Asia Forum in Singapore in July, DBS Bank’s Vivek Batra caused a stir when he said that an estimated US$600 billion of cash is “trapped” inside ASEAN companies. If that money is somehow freed, Southeast Asian companies would be much more profitable than they are today.

CFO Innovation’s Jefferson Mendoza spoke to Batra (pictured below), who is Global Head of Sales at DBS Transaction Services, to learn more about trapped cash, currency fluctuations and other issues around cash management in the Asian context. Edited excerpts:

There was an audible gasp when you asserted that some US$600 billion in cash is trapped in ASEAN companies.

There are many definitions [of trapped cash]. I will focus on just two. The first is trapped cash in a company’s working capital cycle. This represents unoptimized working capital from the account receivables or payables.

The other has to do with liquidity management  . . . within groups of companies. [Cash may get trapped] if there are several entities of the corporate in a domicile or in several countries.

So how can companies free their trapped cash?

DBS has a working-capital advisory program. It helps clients identify and scope out the size of what the opportunity is [to free trapped cash] . . . We provide benchmarking and we jointly define what the opportunities are to improve their cash conversion cycle.

We talk to clients and analyze their specific working capital sources with our proprietary data analysis tool. Within this, we look at both their physical and financial supply chains.

From the analyses, we can then suggest best practices and identify actionable steps that customers can take to access this cash trapped.

We also offer liquidity management capabilities, which are done slightly differently from the working-capital side of it, to help the corporate manage the funds within their group of companies.

Tell us more about the liquidity management service.

We bring together several entities of a corporate in the same domicile or in several countries and give them greater visibility of their cash flow. We then help them optimize the interest owed, or in the case of negative balances, the interest cost reduction.

What we provide is the net group position of all these cash accounts. The CFO [gains the ability to] access the cash, which can then flow into various complex supply and distribution chains.

All the accounts that come into the liquidity structure can be utilized as additional funds or can contribute [towards settling obligations] up to an aggregated number, which is pre-agreed or pre-determined, for the intra-day payments [of the entities].

It effectively gives the client possible efficiencies out of balances in several accounts which could otherwise have been trapped. 

How much will CFOs and treasurers need to pay for this advisory service?

There is no cost to the customer.

Really?

Banking is a relationship game and the relationship has to be mutually beneficial. The way we look at it, this is [getting] share of mind.

What we really try to do with working capital is to work with the customer and then to embed [DBS] in their operating cycle.

We look into long-term relationships. Our approach is not to do the deal and move on to the next customer. It’s a long-term investment into the relationship.

We are committed to serving our customer in a deep and holistic understanding of their needs.

These programs may work in Singapore, Hong Kong and other markets where there are relatively few restrictions. What about cases where CFOs cannot easily move funds out of the country?

Where there are restrictions involved, we have other tools and capabilities, such as our Internet banking platform, IDEAL.

Clients can view and utilize their cash more efficiently. In one viewing, they can actually manage their cash flows across several countries.

What IDEAL does is, it optimizes the yields of all the participating accounts, which are often multi-currency and multi-country, without any change to the account structures. It’s actually [layered on] to the existing account structure.

IDEAL can be accessed globally?

DBS IDEAL is our user-friendly global internet banking platform. It gives the client visibility of cash balances and transactions in real-time across countries and currencies.

It allows easier scalability, for instance, a new subsidiary account, a new related company account, and also manages cash flows. It provides flexibility for the client to give transfer funds from other banks as well, via a third party MT940 methodology.

The reports that can then be generated via the platform comprise several views tailored to the client for his reporting and consolidation needs.

So when you’re talking about visibility as well as managing various countries, [the IDEAL] platform enables real-time management within the DBS network.

Why can’t banks just limit the number of bank accounts to a manageable number? Can DBS help them with that?

There are two parts into this. The number of bank accounts varies at the customer’s discretion. We would happily open any number of accounts that they want, given that their operations may be in a more complex and multi-division entity.

However, some corporates may want to limit the number of accounts because each account involves paperwork, permissions and signatory, and so forth. What we’ve done is develop a solution that allows them to operate as per their operating processes, but not necessarily open a large number of accounts.

We call this the DBS Virtual Account solution. Clients are able to reconcile their collections via separate virtual accounts, without increasing the number of [actual] bank accounts. The virtual account structure allows collections in various routes or through various pipes, but those accounts don’t need to be opened.

Eventually we provide reconciliation information and we transfer the funds into the actual bank account.

Some clients offer their products in various regions. If you’re a company with one currency, is it advisable to have another one? What’s the best currency mix in a company? What to do?

Each company or most companies have their own FX risk policy. In some cases, it could be a full hedge, it could be no hedge or it could be linked to their currency of operations, either costs or sales, or both, depending on which currency they are operating in.

The best currency mix takes into account the company’s operations, its payments or collections, its strategies and risk management approaches. It’s a mix of all these. Generally, the principle is to match the receipts currency and payment obligations, so that there is lower risk undertaken by the customer.

But using a multi-currency account, it’s possible for the client to have only a USD or Singapore dollar account and then use this account to make payments in different currencies. So if the client has both local currency payments and collections, it will be able to use the multi-currency account to reduce FX charges.

This raises the issue of the rising usage of the renminbi as a currency of trade and settlement. What’s your take on this?

It’s a commercial decision. As the RMB grows as a trade currency and its importance grows, the liquidity grows. China itself is facilitating a larger adoption of the renminbi as a global currency.

What is the most commercially attractive for a customer will drive that decision. The two key factors that will really drive this are, No. 1, liquidity of the RMB, so that the swap or the conversion is at market rates, which are quite transparent.

No. 2, the currency of operations of the company. If I’m buying or selling in RMB and I find that it’s a currency which I can manage best, or which is the most liquid, then I might convert my exposure into RMB.

I might convert my sales or purchasing into RMB. Typically, it would be one of the two legs of the company’s operations being in RMB before it is adopted.

Let’s talk about the Shanghai Free Trade Zone (FTZ), which allows companies on a pilot basis to move renminbi in and out of the country. Has DBS set up there?

We were one of the first foreign banks to set up and operationalize our branch in the FTZ. So we are able to facilitate cross-border cash management models for all qualified companies. This includes cross-border cash pooling, cross-border netting as well as centralized settlement.

What this means is, across entities and across countries, you can actually pool balances as well as transact from those balances. We are also one of the first banks to start RMB cross-border lending for several clients, including some Fortune 500 companies.

We’re very closely engaged with the regulators. We ensure that the processes we are following are up to speed in terms of what the regulations permit. There is a strong and close alignment with the local regulators to make sure we are able to leverage the flexibilities that the FTZ provides.

In fact, some of the FTZ initiatives are apparently being rolled out to the rest of the country.

In June, the People’s Bank of China released the guidelines on the implementation of [a State Council opinion on supporting the stable growth of external trade]. The guidelines will make possible RMB cross-border cash management models via FTZ entities and even non-FTZ entities.

When engaging with customers, we ask them to speak to us on this, because here we are able to understand and interpret the regulations and also to manage the relationship with the regulators so that we know what is permissible and the thinking behind permitting various types of transactions.

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern