Canadian Treasurer Magazine MarApr 2012

The Magazine of Risk Capital and Credit.

March / April 2012 • www.canadiantreasurer.com

Payments

Succession Planning

Achieving efficient payments processing

Call to action for Canadian private business owners

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Navigating a Basel III world Collaboration wins in supply chain finance Financing harder for small Canadian public companies

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Departments & Columns 4

Editorial

15

Calendar

Derivatives 6

Navigating a Basel III world: a guide for corporate derivative users

By Jim Scott and Jamie O’Reilly, Citibank Canada, Derivatives & Structured Products Group

14 Features 10

Collaboration wins: payables financing programs foster growth for buyers, suppliers and banks

By Bob Stark, Vice President, Marketing Strategy at Kyriba Corp.

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How much is your firm leaving on the table for processing your payments?

By Terry Wellesley, Executive Managing Director, BMO Spend & Payment Solutions, BMO Financial Group

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Payments factories: driving control, centralization and cost-savings

By Dennis Gniewosz, a senior advisor with the J.P. Morgan Treasury Services Advisory Solutions team

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International cash management in today’s economy

By Charles Miller, Vice President and Director of International Strategic Initiatives at Fifth Third Bank

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Top tips for cutting your corporate telecom tolls

By Haley Field, Vice President of Sales at Phone Bill Cutters

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Study findings trigger call to action for Canadian private business owners By the Canadian Financial Executives Research Foundation

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Financing harder for small Canadian public companies

By Laura Bobak, Canadian Financial Executives Research Foundation

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Regulatory Editor's letter news

Achieving efficiencies in the current economic cycle

W

elcome to the MarchApril 2012 issue of Canadian Treasurer, the magazine of risk, capital, and credit.

‘Navigating a Basel III world: a guide for corporate derivative users,’ by Jim Scott and Jamie O’Reilly of Citibank Canada’s Derivatives and Structured Products Group, presents alternative strategies for navigating the new regulatory landscape. With the advent of Basel III, it is possible to continue hedging without necessarily incurring higher costs, and it may even be possible to hedge at a lower cost than was historically possible, the article says.

In ‘Collaboration wins: payables financing programs foster growth for buyers, suppliers and banks,’ Bob Stark, Vice President, Marketing Strategy at Kyriba, explains the concept of Supply

March / April 2012 Volume 25 Number 6 Editor Robin Arnfield robin@canadiantreasurer.com Editorial Board Thomas L. Evans, CMA, ICD.D, Chief Agent & Business Leader, GE Employers Reassurance Corporation Ross Corcoran, MBA, Vice President Finance & CFO, GLOBAL Railway Industries Ltd. Ron S. Matthews, Manager Cash Operations, Treasurers Department, Imperial Oil Ltd. Dave Mason CIM FCSI, Vice President, McLean Budden Jonmichael Moy, Country Product Manager, PayPal Canada Samson Lim, B.Com, C.A., Chief Financial Officer & Vice President Administration, Peoples Trust Company Linda Hartley, Director, Ontario Corporate Global Transactional Banking, Scotiabank

Chain Finance (SCF). Stark shows how payables financing, an SCF method that has been gaining traction with large corporations, provides benefits to buyers and vendors. When executed effectively, a payables financing program helps buyers optimize working capital while reducing counterparty risk in the supply chain. Buyers can use the program to help their suppliers achieve greater financial stability, positioning suppliers to grow as buyers grow.

‘How much is your firm leaving on the table for processing your payments?’ by Terry Wellesley, Executive Managing Director, BMO Spend & Payment Solutions, BMO Financial Group, argues the case for moving corporate payments from cheques to electronic methods. For an optimized payment strategy, corporate cards and direct payments – via EFT, ACH or wire transfers – should make up at least 80 percent of all transactions. While the transition isn’t always easy, the savings and cash flow benefits are essential to weathering today’s uncertain economy, Wellesley says.

In ‘Payments factories: driving control, centralization and cost-

savings,’ Dennis Gniewosz, a senior advisor with the J.P. Morgan Treasury Services Advisory Solutions team, explains how payments factories can drive efficiencies and reduce costs globally for multinationals.

Payments factories are a hybrid of two models commonly used by global corporations, the shared service organization (SSO) and the in-house bank (IHB), providing the SSO’s operating efficiency and the IHB’s control, consolidated volume and cash management benefits.

The article provides guidance for corporations trying to decide whether a payments factory is the right model for them.

‘International cash management in today’s economy’

by Charles Miller, Vice President and Director of International Strategic Initiatives at Fifth Third Bank, provides insights for treasurers on how implementing an international view of their cash management program can help develop a long-term financial strategy focused on growth, expansion and risk mitigation.

In ‘Top tips for cutting your corporate telecom tolls,’ Haley Field, Vice President of Sales at Phone Bill Cutters, provides guidance for companies on how

to get the best service from their telecoms providers.

In ‘Study findings trigger call to action for Canadian private business owners, the Canadian Financial Executives Research Foundation says it is vital for private companies to have a succession plan. Only 40 percent of Canadian private companies have a clear business ownership succession plan in place, says the CFERF. In ‘Financing harder for small Canadian public companies, the CFERF’s Laura Bobak says Canada’s small public companies struggled to secure financing in 2011. Credit continues to be much easier to obtain for companies already flush with cash, which could make 2012 a challenging year for smaller public companies hoping to grow.

I hope you are enjoying your subscription to Canadian Treasurer. Please send me any comments or ideas for contributed articles.

Contributors Jamie O’ Reilly CFA, Director, Global Markets, Derivatives & Structured Products, at Citi Canada.

reative Direction / Production Demigroup info@demigroup.com

Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to: Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadiantreasurer.com www.canadiantreasurer.com

Jim Scott CFA, Managing Director, Derivatives and Structured Products, at Citi Canada.

Bob Stark, Vice President, Marketing Strategy at Kyriba.

Laura Bobak of the Canadian Financial Executives Research Foundation (CFERF).

Terry Wellesley, Executive Managing Director, BMO Spend & Payment Solutions, BMO Financial Group.

Dennis Gniewosz, a senior advisor with the J.P. Morgan Treasury Services Advisory Solutions team.

Charles Miller, Vice President and Director of International Strategic Initiatives at Fifth Third Bank.

Haley Field, Vice President of Sales at Phone Bill Cutters.

Photographer Gary Tannyan Publisher Mark Henry mark@canadiantreasurer.com Senior Account Manager Jennifer Bishop jennifer@canadiantreasurer.com President Steve Lloyd steve@canadiantreasurer.com For subscription, circulation and change of address information, contact subscriptions@canadiantreasurer.com

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March / April 2012

Canadian Treasurer Magazine & TMAC Canada

------------------------------------------------------------------ Present ------------------------------------------------------------------

The Canadian Treasurer Summit 2012 find out more at:

www.canadiantreasurer.com

---------------------------------------------------------------------------------------------------------------------------------------------------------Insights, Trends & Solutions for Financial Executives A One-Day, All-Keynote Executive Forum ----------------------------------------------------------------------------------------------------------------------------------------------------------

The National Club, Toronto • May 17, 2012

---------------------------------------------------------------------------------------------------------------------------------------------------------The Summit gives CFOs, VP Finance, Treasurers and Controllers with a top-level overview of some of the key issues in risk management, liquidity, credit management, payments & billing, cash and capital markets.

This all -keynote one-day conference features five high-profile speakers who are preparing special presentations exclusively for the Summit.

Co-produced by Canadian Treasurer magazine and the Treasury Management Association of Canada Toronto Chapter, this event coincides with TMAC’s post-conference networking event and wine-tasting.

Speakers: Mark Henry Publisher, Canadian Treasurer Magazine Linda Hartley CTP Director, Ontario Corporate Global Transaction Banking, CIBC & President, TMAC Patti Perras Shugart Managing Director, Head of Corporate Banking, RBC Capital Markets Jamie Feehely Managing Director, Canadian Structured Finance, DBRS Ltd. Kristy Duncan President, Duncan Consulting John Stubbs Vice President & Relationship Manager, Treasury & Securities, JP Morgan Mo Jansons Director, Interbank Operations & Industry Affairs, Royal Bank of Canada

---------------------------------------------------------------------------------------------------------------------------------------------------------Special Registration rates for members of TMAC • Special Group Rates ---------------------------------------------------------------------------------------------------------------------------------------------------------Don’t miss this conference. Bring your team.

Find out more and sign up at our website www.canadiantreasurer.com

Derivatives Regulatory news

Navigating a Basel III world: a guide for corporate derivative users

By Jim Scott CFA and Jamie O’Reilly CFA, Citibank Canada, Derivatives & Structured Products Group

B

y now, every corporate treasury team in Canada has likely heard of Basel III. In our experience, the mere mention of it usually elicits an adverse initial reaction. However, in our work with treasurers and corporate risk managers across the country, we have found there are various strategies one can use to navigate the new regulatory landscape and continue hedging without necessarily incurring higher costs. And, in some cases, it is possible to hedge at a lower cost than historically possible.

Keeping in mind that there are no “one size fits all” solutions when it comes to dealing with Basel III, this article is intended to provide an overview of some of the key issues and alternative strategies worthy of a treasury team’s consideration.

Basel III for derivatives: where do we stand today?

For corporate hedgers and other derivative end users, the relevant Basel III regulatory changes officially come online in January 2013.

However, most banks operating in Canada have already fully (or partially) implemented Basel III compliant policies and pricing models.

An obvious fall-out from the new regulatory changes is higher costs associated with most types of hedging activity.

As practitioners of risk management, we would also draw your attention to the consistency of pricing that you are receiving from your banks – as many banks experiment with the new models (and their various new inputs), we have noticed that the output of pricing models can change dramatically (higher or lower) as refinements take place. This is one of the benefits of dealing with an “early adopter bank” – most, if not

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CANADIAN TREASURER

all, of the kinks have been worked out of the system already.

Why are hedging costs higher under Basel III? The short answer is that under Basel III banks have to hold more capital for the hedging products they execute with their corporate clients – and more capital means more costs.

The longer answer is more nuanced, but gets to the same place – higher costs for unsecured derivatives (representing the majority – but not all – of the derivatives used by corporate end users). Under Basel III, banks will be required to increase their Tier 1 common equity from the current minimum level of 2 percent of risk-weighted assets to up to 7 percent by 2019.

The intention is for banks to maintain a larger buffer as protection against potential future financial losses. When looking at the Basel III derivatives pricing model, this “buffer” concept manifests itself through a larger Counterparty Credit Risk (CCR) charge.

CCR, DRC, and CVA No derivative article would be complete without the liberal use of acronyms, so we will now discuss the CCR (Counterparty Credit Risk) charge and its two principal component charges; the DRC (Default Risk Capital) and the new CVA-variability charge (capturing the sensitivity of Credit Valuation Adjustments to changes in credit spreads). These “buffer” charges are designed to protect the banking system against the risk that the corporate counterparty will default prior to the expiration of the financial contract - thus failing to make any net future payments, or deteriorate prior to the expiration, with banks suffering mark-tomarket losses through variation in

their CVA. The new charges do not reflect the economic risks faced by banks, and are more calibrated to a target capital level. In doing so, the distribution of the capital burden across derivative products is uneven, leading to higher charges for certain products.

As you would expect, the charges are the most sensitive to the following factors: ◉◉ Company credit rating: lower ratings = higher charge; ◉◉ Tenor of the contract: longer term = higher charge; ◉◉ Underlying asset: more volatile asset = higher charge.

The DRC and CVA charges reflect the market’s recent experience in the 2008 downturn, where a significant driver of mark-tomarket losses was the serious decline in a counterparty’s credit rating (with or without an actual default occurring).

How can we make Basel III work for us?

In addition to the factors mentioned above, the CCR charges are also quite sensitive to a few other model inputs. However unlike those mentioned above, the factors mentioned below can be used to reduce the cost of hedging under Basel III: ◉◉ Trading of Credit Default Swaps (CDS) on your name; ◉◉ Ability to post collateral with the bank; ◉◉ Inclusion of netting provisions in your ISDA (International Swaps and Derivatives Association) agreement; ◉◉ Inclusion of mandatory early termination or re-couponing provisions.

The next section provides an overview of how these (and other) strategies can be used to reduce the cost of hedging, while still be-

ing compliant with the realities of the new regulatory environment.

Strategies to reduce counterparty credit charges Even within the same industry sector, there is no cookie-cutter approach to selecting the best method for reducing counterparty risk as a way to reduce hedging costs.

Each solution should be tailored to a corporation’s unique situation, which will be determined in part by factors such as its cash position, credit rating, overall risk management philosophy, CDS status and the ability to post collateral.

The table on page 7 illustrates some of the alternatives available to corporate hedgers to help reduce counterparty credit risk charges, outlining the advantages and disadvantages of each method.

Key terms: Default risk capital charge: This charge is intended to cover the expected losses that occur when the counterparty defaults within the capital horizon. This is also referred to as a Jump-to-Default (JTD) charge.

Credit value adjustment (CVA) risk capital charge: This charge covers the expected losses due to changes in counterparty credit worthiness – excluding default - to the end of the capital horizon. This is also referred to as credit mitigation or CVA change risk.

International Swaps and Derivatives Association (ISDA): An ISDA agreement provides standardized terms under which counterparties can conclude derivative transactions.

March / April 2012

Regulatory Derivatives news Conclusion Canada has historically always adopted Basel guidelines conservatively and on time . As such, Canadian corporate risk managers need to be prepared for the realities of hedging under Basel III today. While the additional complexity and associated costs of Basel III may make even the toughest treasurer grimace, as we have highlighted via the sample strategies above, there are many viable techniques that can be used to allow for the continued use of costefficient corporate risk management.

Alternative

Advantages

Disadvantages

Two-way collateral posting arrangement with bank counterparty

◉◉ Collateral agreements require counterparties to periodically mark-to-market their positions and to provide acceptable collateral (e.g. cash, government bonds, etc.) to each other as exposures exceed pre-established thresholds. ◉◉ Posting collateral will significantly reduce counterparty credit risk charges under Basel III and protect both parties against default.

◉◉ Cash calls can introduce liquidity risk. ◉◉ Requires the negotiation of a Credit Support Annex (CSA) agreement. ◉◉ Administration may require additional resources to monitor and manage collateral posting. ◉◉ Posting collateral may conflict with other existing agreements (e.g. bank credit facility agreement).

Incorporate mandatory early termination provisions into hedging contracts

◉◉ Mandatory early termination provisions reduce credit exposures by shortening the effective maturities of hedge positions (e.g. a 30-year interest rate hedge of a long lived asset that can be unwound at the then-current MTM at year 10). ◉◉ Derivatives with these provisions are less creditintensive.

◉◉ Can create a mismatch between the derivative hedge and the underlying exposure ◉◉ If the corporate owes the MTM to the bank, this can introduce liquidity risk.

Incorporate re-couponing provisions

◉◉ Periodic re-couponing of derivatives trades whereby the then-current MTM is reduced via cash payment and the coupons (or notional) of the trade are adjusted to reflect the MTM paydown. ◉◉ Derivatives with re-couponing provisions are less credit intensive.

◉◉ Re-couponing payments can introduce liquidity risk. ◉◉ Hedge accounting analysis may need to be updated periodically following each recouponing.

Transact hedges in the name of entities that have a single-name CDS, i.e. the parent rather than subsidiary names

◉◉ A CDS contract will allow the bank to transfer a portion of the CCR into the capital markets – thus attracting less capital – and so lowering the cost of hedging. ◉◉ This strategy will also result in less “bank credit capacity” being used.

◉◉ CDS may not be available for the parent or any of its subsidiaries.

Hedge with structured solutions with known worst-case mark-to-market

◉◉ Custom products that incorporate optionality can be designed to minimize MTM exposure and thus CCR charges.

◉◉ Can involve an additional layer of complexity compared to “vanilla” products.

Hedge exposure with purchased options (e.g. put, call, call or put spread)

◉◉ Purchased options do not have any credit charges.

◉◉ Paying option premium is challenging for some companies.

Jamie O’ Reilly CFA (jamie.oreilly@citi.com) joined Citi in 2009 and is a Director, Global Markets, Derivatives & Structured Products for Citi Canada. He is responsible for consulting and transacting with Citi’s key corporate clients across major asset classes in order to achieve their risk management and financing objectives.

Prior to joining Citi, Jamie was Vice President, Institutional Client Group at a global dealer in Toronto and previously held positions in investment and corporate banking at a Canadian bank.

Based in Toronto, Jim Scott CFA (jim.scott@citi.com) has been with Citi since 2010 and is Managing Director, Derivatives and Structured Products, responsible for Citi’s Canadian corporate derivatives and structured products practice. For over 17 years, Jim has worked closely with companies in Canada, the US and Europe to provide financial risk management advice and equity, interest rate, currency, commodity and credit risk management solutions.

March / April 2012

CANADIAN TREASURER

7

Private Company Growth Creates New Risks Small to midsize companies encounter new risks as they grow. They evolve and their operating environment changes.

Yet few of these private companies are prepared for the new risks that also come from these changes.

A recent national Canadian survey by Chubb Insurance revealed that private companies are getting more exposed to changing risks, but only one in four has taken action to protect themselves. The risks can come as employee head count increases; as new areas of the business grow; and, as the company expands into new jurisdictions which may have different legal requirements.

Risk exposures related to employment practises liability, employee theft, errors and omissions and Directors & Officers (D&O) liability can become significant. These risks, even when managed through processes and procedures, can lead to allegations that alone are costly to defend.

Evolving employment standards, growing employee bases, expanding partnerships with customers, suppliers and capital providers create new exposures for private companies.

Allegations and potential lawsuits can come from investors, debtors, customers, employees, competitors and regulators.

The Chubb Survey showed an average cost of an employee practises loss of almost $60,000, with one case reaching up to $1 million. As the workforce grows in diversity, issues like sexual harassment or discrimination can add to the probability of allegations against the corporation. Expansion into the US, for example, can also significantly increase the risk of costly employee practises litigation.

As a Director or Officer of a company, your personal assets, if left unprotected, can be exposed to the liabilities you assume in either of those roles. The average loss disclosed in the Private Company Survey related to D&O liability (settlement, judgment and legal costs) approached $230,000. Smaller companies were less likely to purchase insurance coverage to protect themselves, despite the fact that even a small event could have major financial consequences.

Workplace crime losses can be even greater. One recent private company loss was approximately $2.5 million. These kinds of losses and related legal costs can stagger a growing company.

As the company grows, the addition of an employee benefit plan may be required. With it comes fiduciary responsibilities and added risks. Smaller companies should consider Fiduciary Liability insurance to protect themselves before the risk becomes too great.

Professional Errors and Omissions (E&O) also become more significant as the size of a company changes. The Chubb Private Company study revealed that 50% of companies that perform services for a fee reported costs associated with E&O allegations or claims with an average cost of $63,000.

While all private companies are seeking to grow, companies should be aware of the risks they are acquiring with the rewards they seek. These risks include the cost of defense against actions and complaints.

Company leaders should review the results of the Chubb Survey by visiting www.privatecompanies.controltheoutcome.ca and get a better understanding of their exposures.

Get better informed of the risks and discuss them with your broker and trusted advisors to be in better control of your private company's success.

CO N T R O L the

OUTCOME

With our focus on growth we overlooked some of the personal risks that built up. But our broker understood the priorities of a private company like ours and had us covered by Chubb."

Private company growth often takes you to the edge of control. You expect growth but you aren’t always ready for personal risks to directors or

CO N T R O L t he

OUTCOME

officers, or even costly lawsuits. Your broker and insurance company expertise is critical to protecting you and reducing uncertainty. ForeFront

by Chubb leads the way in Private Company insurance coverage. Better addressing your risks keeps you in control.

Manage your risks with ForeFront by Chubb, insurance built specifically for Private Companies and their executives. Ask your broker.

www.privatecompanies.controltheoutcome.ca Chubb Insurance refers to Chubb Insurance Company of Canada.

The precise coverage offered is subject to the terms, conditions and exclusions of the policy as issued.

Supply Chain Regulatory news Finance

Collaboration wins: payables financing programs foster growth for buyers, suppliers and banks

By Bob Stark, Vice President, Marketing Strategy at Kyriba Corp.

T

oday’s treasurers and CFOs are constantly looking for new and better opportunities to maximize working capital and minimize counterparty risk in their company’s physical supply chain. As organizations become more global and increase the scope and complexity of their supply chain, this is a challenge that is becoming more relevant every day.

In response to these challenges, many organizations have implemented Supply Chain Finance (SCF) programs in an effort to provide financial benefits for their suppliers and their own working capital.

What is Supply Chain Finance?

SCF is the management of cash and capital to support a company’s physical supply chain. The objective of SCF is to provide supplier financing to enable companies to trade on open account terms, without the use of traditional trade financing methods such as letters of credit – which are expensive, timeconsuming and paper-intensive. One SCF method that has been gaining traction in recent years with

large corporations is Payables Financing (or Reverse Factoring).

How are Payables Financing programs structured?

By utilizing Payables Financing, a third-party bank will fund the supplier the full value of approved invoices, less any financing costs, typically within days of invoice approval. The buyer pays the full value of the invoice to the bank on the due date of the invoice. The financing costs associated with the discount are based on the buyer’s credit. This method allows buyers to maintain or extend payment terms, while ensuring that their suppliers have access to capital based on the buyer’s credit.

From an operational viewpoint, the buyer: ◉◉ Sets up its Payable Financing program on a secure, easy-to-use technology platform where the buyer, its suppliers and banking partners have complete visibility of invoices approved for payment; ◉◉ Determines which suppliers should be on-boarded to the program; ◉◉ Invites its banking partners to join the program and, in conjunction with the banks, establishes financial terms for the early payment of invoices.

Suppliers can view approved invoices on the platform and have the option of selecting invoices to obtain early payment financing from participating banks in the program.

Benefits for buyers Well-managed Payables Financing programs yield three important benefits: Improved working capital A good Payables Financing program gives buyers access to additional sources of unsecured liquidity.

In essence, it uncovers free cash for the time period between the extended payment date and the original payment date of the invoices. When spread over the entire payables “bucket,” the value of unsecured liquidity can be tremendous. This technique also allows buyers to improve their payment terms without impacting the liquidity of their suppliers.

Greater visibility Visibility into cash and liquidity is the cornerstone of an effective Payables Financing program. From the buyer’s perspective, when CFOs and treasurers have greater visibility into their cash and liquidity positions, they can make more informed working capital decisions. All internal stakeholders – the treasury, accounts payable, procurement and other departments – require concurrent access to the same data to ensure better decision-making. The most effective programs integrate the needs of the buyer’s internal stakeholders with its external partners – all with the goal of fostering better collaboration.

Risk management A Payables Financing program can also help buyers

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CANADIAN TREASURER

March / April 2012

Supply Chain Finance minimize potential disruptions in the supply chain due to lack of cash or liquidity. While many supply chain risks are beyond the control of the buyer, ensuring suppliers have the cash and liquidity to maintain and grow their operations is an area which the buyer can positively affect.

Ironically, there is a risk that Payables Financing programs become too successful and outgrow the funding limits of a single financing partner. As a result, many buyers choose to diversify their programs across multiple banking partners so that the program is not limited by one bank’s ability to offer financing to all suppliers. Further, for global programs, the buyer can partner with banks and other lenders that specialize in certain regions, which may encourage supplier participation in those parts of the world.

Benefits for suppliers Perhaps most importantly, SCF programs, including Payables Financing, give the supplier access to cash earlier, improving their working capital at a better financing rate than they can achieve on their own.

In most cases, the participating banks will fund 100 percent of the approved invoices less any financing costs, often Libor (London interbank offered rate) or a similar index plus a small spread. This is a significant value when compared to other forms of financing such as factoring, which will only advance 70-80 percent of invoice value to the supplier – and at a higher finance charge. More cash at a lower cost is good for suppliers.

Benefits for financial partners There are many advantages for banks that offer Payables Financing programs, not the least of which is the opportunity to generate new business opportunities from supplier organizations that may not previously have been customers. Payables Financing is also a friendly form of financing as it is short-term and with limited risk, given the bank has only loaned funds to the supplier based on preapproved invoices. Because there is a limited impact on liquidity ratios and reduced default risk, banks are more attracted than ever to offer Payables Financing.

The right technology is a ‘must’ Technology is an enabler to achieving a company’s goals for their Payables Financing program. Whether it is treasury or another department tasked with managing the program internally, technology provides the productivity and connectivity to allow a small team to manage the requirements of a growing program. Adding new headcount every time new suppliers are on-boarded or new banks are added to the program simply isn’t necessary when technology can provide that scalability.

Key technology features ◉◉ Multi-bank : Buyers need the flexibility to work with multiple banks, without adding complexity or

March / April 2012

significant hours (or days!) to the team’s workload.

The platform should make it as easy to connect to multiple banks as it is to connect to a single bank. ◉◉ Global : Large corporations today have global supply chains, so they need to be able to administer global Payables Financing programs. The technology platform, just as the program itself, should support multiple geographies, currencies and languages. Technology should facilitate, instead of limiting, the program’s geographic reach.

Easy to use, easy to on-board suppliers: Without supplier involvement, an organization cannot run a successful Payables Financing program. A good, intuitive user experience will encourage, rather than hinder, supplier use of the system and, as a result, supplier participation in the program.

Suppliers need pure web-access, minimal mouse clicks and a structured workflow to effectively use the system. ◉◉ Automation: The platform should automate a variety of tasks and workflows so that buyers, suppliers and banks have full visibility of invoices; can effectively make working capital decisions knowing the impact on the cash forecast; and eliminate all re-keying to approve and release payments. A scalable solution will improve productivity without an increase in staffing. ◉◉ Web-based . A pure web (or Software-as-aService) solution enables companies to launch their program more quickly, without making significant financial or IT investments.

With these key features, companies will have a platform in place to launch and manage a global Payables Financing program.

“When executed effectively, a Payables Financing program helps buyers optimize working capital while reducing counterparty risk in the supply chain. Buyers can also use the program to help their suppliers achieve a more stable financial foundation.”

Bob Stark, Vice President of Marketing Strategy for Kyriba Corp.

Bottom line: positioned for growth When executed effectively, a Payables Financing program helps buyers optimize working capital while reducing counterparty risk in the supply chain. Buyers can also use the program to help their suppliers achieve a more stable financial foundation, positioning the supplier to grow as the buyer grows.

Banks benefit by entering into financial partnerships that can yield a growing revenue stream as the supplier network grows.

Technology is the catalyst that makes this collaboration feasible in a today’s global economy.

Bob Stark is the Vice President of Marketing Strategy for Kyriba Corp. and is responsible for all global marketing, including new product and market development. He is a 13-year veteran of the treasury technology industry, having served in multiple roles at Wall Street Systems, Thomson Reuters, and Selkirk Financial Technologies, including marketing, product management, and strategic account management. Bob is a regular guest speaker at treasury conferences and an active member of the Association for Financial Professionals.

CANADIAN TREASURER

11

Payments Regulatory risk management news

How much is your firm leaving on the table for processing your payments

By Terry Wellesley, Executive Managing Director, BMO Spend & Payment Solutions, BMO Financial Group.

E “For an optimized payment strategy, corporate cards and direct payments should comprise at least 80 percent of all transactions.”

Terry Wellesley, Executive Managing Director of BMO Spend & Payment Solutions.

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CANADIAN TREASURER

very year, Canadian businesses leave millions of dollars on the table because they continue to use manual, error-prone, expensive and inefficient cheques to process their payments.

Cheques are still the most widely used choice of payment for most businesses. Even with mandates to increase efficiencies, drive hard dollar savings, free up working capital, and improve spending visibility, the typical Canadian business still pays 74 percent of transactions through paper cheque processes.

What should that percentage be? Five percent.

For an optimized payment strategy, corporate cards and direct payments – via electronic funds transfer (EFT), automatic clearing house (ACH) or wire transfers – should make up at least 80 percent of all transactions. While the transition isn’t always easy, the savings and cash flow benefits are essential to weathering today’s uncertain economy.

Moving from paper to electronic payments requires commitment, but it’s worth it.

Why is paper still so popular? One reason is that change is hard, and the process of implementing new payment systems seems daunting. In addition, some purchase order (PO) based systems are unaccommodating to corporate cards.

Optimizing a business’ payment strategy is a two-

way street between the buyer and the supplier. But the right strategy and mix of payment solutions offers benefits to each of them, including reduced costs, improved efficiencies, and better cost visibility and control.

Direct payments and corporate cards benefit buyers and suppliers.

For the buyer, some of the more common alternatives to cheques such as EFT, ACH, and wire transfers can dramatically reduce the costs associated with manual processes, human error and the opportunity for fraud.

For the supplier, many e-payment solutions include a self-service portal provided either by a buyer to all its vendors or an e-invoicing specialist such as Ariba.

The portal gives the supplier direct access to payment status information, allowing them to maintain control and visibility into purchases, and making it easier to resolve remittance and reconciliation challenges.

Furthermore, the portal allows suppliers to maintain their own contact and payment-related banking information, making the transitions from paper cheques to other direct payments faster and easier.

Procurement card (P-card) usage is rapidly growing as businesses use P-cards to streamline the purchasing process, especially for high-volume, lowdollar transactions. In addition to many of the benefits of direct payments such as fewer manual processes, reduced costs, improved process efficiencies, and increased spend visibility and control, buying organizations get paid for putting more spend on their card through corporate card rebates.

The supplier, while also realizing many of the same cost and efficiency improvements, often gets paid faster – a significant benefit.

Buyer-Initiated-Payments can fill the gaps.

But what about the PO processes that do not easily facilitate payments by corporate cards? For those cases, a Buyer-Initiated-Payment (BIP) solution offers a practical alternative. BIP is a fast-growing payment method that combines corporate cards and direct payments to the supplier.

With BIP, businesses can extend the benefits of a corporate card program to electronic payments. The buyer uses the corporate card process, but the bank funds and pays directly to the supplier account. Buyers get the same benefits of a card – rebates, payment terms, visibility and control – as well as better control over payments, since only those invoices that have been approved for payment processing will be charged to the card. For the supplier, the transaction is no different to any other credit card transaction they process.

The bottom-line benefits could be in the millions While benefits to the supplier are certainly critical to transitioning off cheques, the dollar value that an optimized payment strategy presents to the buyer is equally critical.

March / April 2012

Regulatory payments news

A New Payment Distribution occurs by Optimizing a Payment Strategy 100%

ePayment

%

ePayment

"%

Card

Paper Cheques

!%

Card

% ! %

0%

Source: BMO Spend & Payment Solutions, BMO Financial Group

The above chart is based on the average payment method mix of 50+ BMO clients.

For businesses with a typical annual spend profile ($1 billion spend, 240,000 total transactions), the payment process savings of an optimized payment strategy are easy to determine: Total annual payments = 240,000 ◉◉ 74 percent paper cheques: 177,600 transactions @ $1.57 = $278,832 ◉◉ 5 percent paper cheques: 12,000 transactions @ $1.57 = $18,840 ◉◉ Annual savings opportunity: $259,952 But as the chart suggests, an optimized payment strategy isn’t just about moving more transactions off cheque – it’s about finding the ideal payment for each type of transaction, opening up opportunities for discount management, rebates, and effective payment terms that can unlock working capital.

It’s with these benefits where the biggest impact is felt. The $259,952 scratches the surface: dynamic discounts can save a typical

March / April 2012

business $2.5 million, accounts payable automation can save $1.3 million, and card and BIP rebates can save $950,000 – which add up to savings of more than $5 million a year.

Where to start your transition to direct payments and corporate cards.

Optimizing payments starts with analyzing the current payment mix – looking at transaction size and number of transactions – and comparing that to industry benchmarks. Once the optimal payment strategy is in clear view, the next step is to identify the suppliers that are the best fit for those payments.

One company found that it was using its P-card for far fewer transactions than the industry average, and mostly for ad-hoc purchases, such as flights and office supplies. At the same time, the company found that many of its suppliers were being paid by invoice and cheque, even though the other divisions paid the same vendor through cards, or the supplier accepted the company’s P-card provider.

In this case, mandating P-card use for certain types of transactions and suppliers dramatically increased the level of spending on the corporate card, ultimately saving the company millions in process efficiencies and earning thousands of dollars in rebates. The supplier, on the other hand, got paid faster – without having to change its processes.

The right mix of payment solutions can deliver significant value to a business. How much is your company leaving on the table?

Terry Wellesley is Executive Managing Director of BMO Spend & Payment Solutions, and has more than three decades of experience in helping organizations manage their spend with corporate cards. A division of BMO Financial Group, BMO Spend & Payment Solutions is a leading commercial card and payment solutions provider in North America. Visit www.bmo.com/spendandpayment.

CANADIAN TREASURER

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payments

Payments factories: driving control, centralization and cost-savings

By Dennis Gniewosz, a senior advisor with the J.P. Morgan Treasury Services Advisory Solutions team

S

pying new opportunities to globalize operations and reduce costs, treasury executives are on the hunt for the ideal operating model to manage payments. In years past, they’ve pursued a number of strategies, including shared service centers and in-house banks, to consolidate and centralize payables.

Now there’s a new model to consider - the payments factory - a concept that’s getting a lot of attention, especially among multinational corporations targeting redundancy and strengthening control. As with every new idea, it’s critical to analyze what this structure really offers, how the concept can be implemented and which companies are best suited to become payments factory managers.

Clearly, there’s increasing demand for streamlining the payables process. And each of the two more commonly used models, the shared services center and the in-house bank, has made progress in reducing costs.

Because the payments factory concept represents a complex, hybrid approach combining aspects of both models, the first step in considering a payments factory is to recognize the value that the shared service organization (SSO) and in-house bank (IHB) deliver independently.

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The SSO model has proven itself within many global corporations. Here, a centralized payments operation makes all payments (including treasury and accounts payable) through a single operating entity, standardizing process, leveraging process efficiencies and reducing costs. Other benefits include centralized expertise, which delivers better service, quality and timeliness, tight alignment with the corporate strategy, and the opportunity to expand treasury activities at lower marginal costs.

Specifically, the SSO can reduce the number of systems interfaces, increase financial transparency, lower transaction fees, lower fixed operating costs, aggregate liquidity positions, and better leverage foreign exchange. The SSO can be run as a large subsidiary, an independent service company (the most prevalent model) or as a finance company that serves as an agent. Governance of the SSO is aligned with the organization’s strategy through service-level agreements (SLAs) and activity-based charges.

Companies that have been successful with the SSO model typically have top executive sponsorship and a customer-centric/metric-centric culture.

In-house bank: greater control The IHB structure, on the other hand, promises and delivers control at the highest level with funding and liquidity and distributes funds through sophisticated methods. Effectively, the IHB serves as a “captive bank” for the parent and subsidiaries, able to take deposits, pay interest, make loans, and charge interest.

Therefore, the IHB must be fully auditable and fully transparent, adhering to regulations and capital requirements in every country in which it operates.

With this model, a treasury management system or enterprise resource planning (ERP) platform maintains virtual bank accounts to track transactions executed by the IHB. The main benefits of this approach include simplifying cash flow, gaining visibility and improving liquidity. There are no duplication of efforts, and also big benefits to having fewer bank relationships and fewer bank accounts. Because of standardization, the company gains visibility and control, tapping new opportunities for cross-currency hedging and other risk management tactics. The IHB also delivers improved cash utilization, which allows for intercompany netting and pooling, improved liquidity and intercompany funding benefits.

Companies that have leveraged the IHB model often have multiple legal entities and operate with multiple tax regimes. Handling the regulatory and statutory issues can be an issue for companies considering the IHB model.

The payments factory: combining brawn and brain Simply put, the payments factory combines an SSO (“the brawn”) with an IHB (“the brain.”) It’s a complex treasury structure that consolidates payments with efficient funding, concentrates company cash

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payments

Calendar

April 17-19 at the highest level, and disburses funds through sophisticated methods designed to minimize crosscurrency and bank fees. In summary, you get the operating efficiency of the SSO with the control, consolidated volume and cash management benefits of the IHB. The payments factory is actually more efficient than shared services, in that it: ◉◉ Minimizes the number of actual transactions; ◉◉ Minimizes cross-currency exposure and transactions; ◉◉ Minimizes the number of fees and risks; ◉◉ Aggregates and nets liquidity for improved performance; ◉◉ Increases visibility and control across the enterprise; ◉◉ Maximizes the use of available cash and reduces overall funding costs.

In the hierarchy of functions, the payments factory drives cost savings by: ◉◉ Serving multiple legal entitles; ◉◉ Promoting netting (inter-company, cross-currency, third-party); ◉◉ Managing incentives and disincentives to hold cash; ◉◉ Reducing group funding costs.

Incorporating all the SSO and IHB functions, the payments factory can handle payables and receivables on a worldwide basis, including the payable-on-behalf model. With this model, for example, payment can be made in USD out of a US account on behalf of a UK entity.

Is a payments factory right for you?

Before deploying the payments factory model, there are many factors to consider. A payments factory is likely to be advantageous to your company if you have the following institutional factors related to currencies, cash balances and organizational structure.

In the area of currency, you should consider a payments factory when you have large amounts of payments or receipts in different currencies, when you are long in some currencies (and short in others), and when your operations include restricted, volatile or less frequently traded currencies. This is because the aggregation and the coordination features of the payments factory will allow you to maximize liquidity, offset costs and minimize risk in these currencies.

In the area of cash balances, you should consider a payments factory when you have excess cash levels or deficient cash in different regions. Here the payments factory delivers benefits by allowing the group companies to offset balance levels to minimize bank borrowings, increase liquidity yields and provide lower cost funding to individual group companies.

Lastly, it’s smart to look at your organizational structure and use the payments factory to maximize liquidity and minimize costs. For example, a payments factory makes the most sense for companies with

March / April 2012

diversified business entities (i.e., different cash needs), or when the different entities use the same suppliers and vendors or do third-party netting on high-value contracts. The ability to disburse funds on a net or consolidated basis can lower processing costs and increase group liquidity.

As with any strategic approach, there are significant costs involved in operating a payments factory. These costs, particularly those related to technology and systems, need to be evaluated in light of the above advantages.

The bottom line Overall, the payments factory can be an excellent model for companies that want to improve control, centralization and cost savings. It will streamline the operation, reduce bank transactions and reduce the number of accounts. The process, however, demands a good deal of organizational discipline: Corporations need will power to address the internal and external issues that come with structural change.

That said, technology advances, combined with the pressures to do more with fewer resources on a global basis, are prompting more companies to build a treasury structure that will carry them into the future.

Tips on designing and implementing a payments factory: ◉◉ Make sure that all major stakeholders collaborate on the design process, with each group playing a key role. ◉◉ When consolidating functions, work closely with tax and legal advisers. The co-mingling of funds on top of compliance considerations translates to complicated tax issues. You need a transparent process that’s auditable. ◉◉ Understand group companies’ needs explicitly – make no assumptions – and design a process to meet those needs. Highly specialized processing should be assessed to determine whether it truly meets a need or is just a legacy practice. ◉◉ Flow the process on paper and take honest feedback from stakeholders. Revise the design multiple times to agree on the optimal process. ◉◉ Look for “proofs of concept”, processes that can migrate first to deliver quick savings and help drive the implementation process. ◉◉ This is one of the most complex structures you will ever create: phase in change at levels that ensure success.

As a senior advisor with the J.P. Morgan Treasury Services Advisory Solutions team, Dennis Gniewosz works with his internal and external partners to develop, market, and sell global solutions to multinational corporations and financial institutions. His areas of specialty and expertise include international tax-account structuring, technology, internet/e-commerce and portals, investment and debt management, business process redesign, and partner development and contracting. The Treasury Advisory Solutions team can be reached at 212-552-1795.

Electronic Transactions Association ETA Annual Meeting & Expo San Diego, CA www.electran.org

April 25-26 The Canadian Institute Anti-Money Laundering Toronto, ON www.canadianinstitute.com

April 29-May 2 NACHA, The Electronic Payments Association, Payments 2011 Baltimore, MD www.nacha.org

May 2-4 ABA Risk Management Forum New Orleans, LA www.aba.com

May 5-9 Credit Union Central of Canada Canadian Conference for Credit Union Leaders Vancouver, BC www.cucentral.ca

May 13-17 Institute of Financial Operations Fusion 2012 Forum & Expo Nashville, TN www.financialops.org

May 16-18 AFP Global Corporate Treasurers Forum Phoenix, AZ www.afponline.org

May 20-22 FEI Leadership Summit Financial Executives International Orlando, FL www.financialexecutives.org

CANADIAN TREASURER

15

Cash Management Regulatory news

International cash management in today’s economy

By Charles Miller, Vice President and Director of International Strategic Initiatives at Fifth Third Bank.

I

t is no surprise to any financial executive that today’s domestic and global landscape has changed remarkably over the past few years. The recession, advancements in technology, and increased global competition all have played contributing roles to these changes. This article addresses some of the top concerns of CFOs today and provides insights on how implementing an international view of your cash management program can help develop a long-term financial strategy focused on growth, expansion and the mitigation of risks.

Facilitate growth and enhance profitability As financial conditions have changed over the past few years, growth plans have shifted for many Canadian businesses. The Canadian economy has fared better in recent years than many of its trading partners, including the US and especially Europe. Global economic conditions have drastically changed the way that a Canadian business approaches its product mix and expansion plans.

Due to the changes in market conditions, competitors and customers, organizations are re-evaluating their current footprint and growth strategies along with potential mergers and acquisitions. The only constant is that

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these conditions will continue to change. Senior financial executives are faced with different pressures than before, and the risks have evolved.

Where to begin in the midst of all of this change? Engage top leadership and banking partners in discussions over long-term needs and growth goals for the organization.

Discussion topics need to include: ◉◉ Where is the business or industry now? ◉◉ Where is the business or industry going? ◉◉ What growth opportunities exist for our company? ◉◉ Are we willing to look internationally for significant growth opportunities? ◉◉ Do we understand what it will take to be successful?

If you determine that your organization will pursue international opportunities as part of its growth strategy, you should initiate a review of what new financial needs and processes may be required.

Once new markets and business partners have been identified, work directly with your banking partner to address other considerations such as which currencies your business will need, how to manage payables and receivables involving foreign accounts, whether your current financing structure will facilitate your international growth plans, or

whether potential modifications specific to countries or transactions are needed. You will also need to consider what is required to help employees relocate and establish a presence in an emerging market.

Mitigate risks As the long-term growth strategy for an organization is developed, in today’s global business climate it is imperative that businesses perform a financial risk assessment.

Senior financial executives should review all current and potential risks including scope, footprint and the expansion into new markets as a buyer or a supplier. This includes taking into account risks for the current size, footprint and growth plans.

The number of potential financial risks can dramatically rise as organizations expand into new markets, engage in international trade and financing and utilize new technological platforms. Your banking partner can help mitigate these risks through financial strategies and trade products.

For organizations currently working in or establishing a global footprint, there are unique risks to consider, including currency value fluctuations, country risks, competitive risks and the risks associated with managing a multicurrency business across borders.

CFOs should develop and regularly review with top leadership and their international banking partner a risk management strategy that helps mitigate currency fluctuations through the incorporation of foreign exchange and global treasury management products that complement each other. The development of this risk management strategy will help reduce currency fluctuations that can negatively affect the company’s bottom line. It can also provide the ability to efficiently deploy cash located in other countries, as well as help educate the organization on the economic conditions and competitive landscape of international markets.

When considering new markets and suppliers, Canadian importers should ask themselves these questions: “how reliable is the supplier?” and “how long have they been in business?”

Exporters should consider how creditworthy any new buyers are and whether or not they have demonstrated the ability to pay promptly.

Both importers and exporters should review the value of transactions with new partners and determine what concentration risk they hold with them.

Executives should discuss these questions with their banking partner to uncover trade products and strategies that may be available to help reduce the financial risks when working

March / April 2012

Regulatory news Cash Management with a new international supplier or customer.

There are various options that can be used to accomplish this which include, but are not limited to, Letters of Credit, Collections, Bankers Acceptances and structured trade finance products.

Another way an organization can help mitigate potential risks is to review its current process for reporting customer information and payables and receivables data management across the organization. Look for ways to streamline processes and review how frequently reports are generated.

Accurate and timely reports help alert staff to potential fraud and accelerate account reconciliation. An optimized process for financial reporting can benefit the organization in a variety of ways, including saving valuable employee time, enhancing audit controls and allowing for more accurate, timely access to financial data to help with projections, risk mitigation and anticipated cash flow.

Maximize cash flow and customize solutions to meet customer needs Generating an integrated working capital management program that helps to streamline

accounts payables and receivables processes is a vital step to improving cash flow for an organization of any size. Many companies have mastered this on a domestic basis, but have not given the same level of thought to how they will accomplish this across one or multiple borders.

Depending on the volume and frequency of payments and collections, there are different cash management platforms available to meet individual needs. Many banks and financial services vendors can provide tailored crossborder solutions to meet the ever-changing needs of today’s businesses.

Working capital management programs improve cash flow and allow organizations to continually optimize their payables and receivables processes. Banks and financial services vendors can review the needs of the organization to provide a single platform or a collection of integrated platforms that are scalable with the flexibility to change with growing business needs.

For example, the establishment of a cash pooling structure to facilitate the collection of receivables can include multiple currencies and in-country accounts to facilitate the dayto-day needs of foreign operations and provide

a natural hedge to offset currency risk. Having this capability may also provide comfort to banks or government agencies interested in providing financing.

As companies look to capitalize on international opportunities and develop a comprehensive working capital management program, they need to incorporate financing, cash management, foreign exchange and trade products into their growth plans and risk management considerations. These products should not be looked at individually but as a package of inter-related components playing critical roles in the strategies to be deployed by Canadian businesses looking to successfully navigate through the changing global economy.

Charles Miller is a Vice President and Director of International Strategic Initiatives for Fifth Third Bank, a US$117 billion financial services company headquartered in Cincinnati, Ohio. Fifth Third operates a Canadian office in Toronto, which provides comprehensive corporate banking products and services to Canadian, US and international clients with operations in both Canada and the US.

190 Reasons to be a CPA Member Payroll is responsible for understanding and complying with the 190 regulatory requirements related to the $810 billion in wages and benefits, $250 billion in statutory remittances to the federal and provincial governments, and $90 billion in health and retirement benefits that Canada’s 1.5 million employers annually pay, as well as the 25 million T4s, 9 million T4As, and 7 million RL-1s they annually produce.

The CPA is committed to providing payroll professionals and their organizations with the payroll-related services required to keep compliant and knowledgeable!

For more information visit: www.payroll.ca/go/?ct

March / April 2012

� Unlimited Access to CPA’s #1 Service, Payroll InfoLine – This telephone and email ‘hotline’ answers over 32,000 inquires each year. � Member Pricing for Professional Development Seminars on 20+ topics and monthly web seminars � Payroll Resources at www.payroll.ca and other publications � Enhance your staff’s payroll knowledge through the only payroll certifications in Canada: ● Payroll Compliance Practitioner (PCP) ● Certified Payroll Manager (CPM) CONTACT US: 1-800-387-4693 or 416-487-3380

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17

Telecoms Regulatory news

Top tips for cutting your corporate telecom tolls

By Haley Field, Vice President of Sales at Phone Bill Cutters

I

t’s the New Year and the number 1 resolution on your list is “trim the fat”. A great place to start is your company’s telecom costs, and the best part about it is you can do so without having to go to the gym.

It is guesstimated that most companies in Canada are overpaying for their telecom services by a minimum of 15 percent.

Canadians aren’t pleased with their telecom services. In 2011, Canada’s Commissioner for Complaints for Telecommunications Services (CCTS) received over 70,000 thousand email and telephone calls about wireless phone, Internet access and long-distance providers. Consumers filed 8,007 complaints with CCTS in 2010-11, up 114 percent from 2009-2010.

Overcharges, illegible bills, and lack of customer service are the most common complaints made by Canadian companies about their telecoms service providers. Paying your company’s telecom bills should not be exasperating, confusing or time-consuming.

So, in an attempt to alleviate some of the frustration involved, I’ve gathered some tips to help you tackle your telecom tolls.

Billing errors 80 percent of corporate telecom bills are incorrect. Of that amount, 98 percent go undetected, according to US-based consultancy Gartner. Care to guess whom those errors usually favor? Hmmm, one wonders.

Where billing errors often occur: ◉◉ Companies with multiple locations are often billed for services they don’t receive;

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March / April 2012

Regulatory telecoms news ◉◉ Services have been cancelled but haven’t been removed from your bill; ◉◉ Your company moved or closed a location and telephone lines weren’t disconnected; ◉◉ Phone or fax lines were disconnected but continued to be billed.

Finding an error is only the first step.

Getting a refund from your telecom provider can be a daunting challenge, but patience and perseverance pays off.

Toll fraud In 2011, toll fraud (theft of long-distance service by a third party) in Canada was estimated to be as high as $100 million annually, according to Telus (http://about.telus.com/community/ english/about_us/for_our_customers/ customer_safety/scams_%26_toll_fraud/ toll_fraud_risk_minimization).

Toll fraud has become epidemic in the past few years. Week after week, we at Phone Bill Cutters uncover calling cards, VOIP systems and PBX voicemail systems that have been compromised, often to the tune of $10,000 or higher. What’s more disturbing is that your company may be stuck picking up the tab because your telecom provider isn’t liable. Read your telecom service contracts. Signs that your system may have been compromised range from an increase in international calls, high calling traffic after business hours, and customer complaints that lines are often busy.

On their websites, Canadian telecoms operators such as Allstream (www.allstream. com) and Rogers Communications (www. rogers.com/business/ab/en/) offer very useful advice for protecting your business against toll fraud, for example through effective password management.

Wireless Canadians pay the highest cellphone rates in the world, according to Q1 2010 research by Bank of America Merrill Lynch.

Is this because we’re too polite to complain?

Once again, one wonders.

For most businesses, wireless telephony is the main telecoms expenditure, and the category where Phone Bill Cutters hears the most complaints. There are multiple causes of dissatisfaction, such as hidden fees, keeping up with changing rates, hardware upgrades, multiple contract dates, reception issues (“can you hear me now?”), and bills that only a PhD could decipher. It’s no wonder that this particular topic can twist your IT and Accounting Departments into a knot.

Here are some tips from the Phone Bill Cutters website that will help you get better service from your wireless telco.

March / April 2012

◉◉ Always get past the first line of Customer Service and ask to speak to a department called Customer Relations or Loyalty and Retention; ◉◉ Knowing your usage patterns for data, text and voice is the key to choosing the right plan(s); ◉◉ Most vendors won’t charge you for texting pictures and video; ◉◉ Beware of “free upgrades” and “unlimited add-ons”, as these often require signing a new long-term contract; ◉◉ Know your contract renewal date and find out if it “automatically renews” without a signature; ◉◉ Find out what other vendors are offering and whether there is a penalty for leaving your carrier; ◉◉ Make sure your company’s “calling zones” are covered by your carrier. This is especially important for companies with multiple locations; ◉◉ Many offers that you see on TV or media aren’t as they seem, and are often aimed at the individual consumer and not the business user.

Roaming Roaming is the most costly area of wireless telephony, but it doesn’t have to be. With a little pre-planning, you can lower your roaming costs by 50 percent or more.

There are a few keys to success: ◉◉ Designate which person(s) in the company is responsible for ordering roaming plans; ◉◉ Make sure that person is patient as it’s common to call your carrier five different times with the same information and receive five different roaming suggestions; ◉◉ Order roaming packages PRIOR to travel.

Seems simple, but you’d be amazed at how many people try to order a roaming package AFTER they’ve returned; ◉◉ Know how much usage is required for text, data and voice; ◉◉ Any potential problems with the hardware at the destination?

Conference calling/ web conferencing Corporate cost-cutting has taken a big bite out of executive travel budgets, and satellite offices in people’s homes are on the rise, so it’s no surprise that tele- and web-conferencing is a growing business. There are several good providers to choose from, and rates have decreased substantially in the past few years.

But, before you commit to one provider, here‘s some advice: ◉◉ Make a few test calls to note the connection, and ease of instructions;

◉◉ Check rates for various countries and user fees; ◉◉ Does the provider require a long-term contract?

Last, but not least, an important but often overlooked tip for company security is to update the “authorized person” list with your telecoms carrier. An authorized person has the ability to make changes and access billing information.

Time is money, so you and your staff won’t want to play “name that employee” with your telecom customer service representative trying to guess who IS currently on the list.

Most often, the authorized persons are in the IT, Accounting or Procurement Departments.

Haley Field is the Vice President of Sales for Phone Bill Cutters, a completely independent corporate telecoms expense reduction company. Phone Bill Cutters does not get paid by any telecom carriers or sell any products, and only gets paid if it save money on behalf of its clients. hfield@phonebillcutters. www.phonebillcutters.com. Phone: 1 877 837 7262

AFP corporate fraud survey Large companies and their corporate payments systems remain the prime targets for fraudsters, according to the 2012 AFP Payments Fraud and Control Survey (http://www.afponline.org/ fraud) published by the Association for Financial Professionals (AFP).

The survey, sponsored by J.P. Morgan, found that two-thirds of companies were hit by attempted or actual payments fraud during 2011, but few incurred financial loss because they took measures to mitigate exposures.

“The survey reveals that cheques remain highly vulnerable to fraudulent activity, which has spurred many companies to switch to less vulnerable electronic payments,” said Jim Kaitz, AFP’s president and CEO. “Now fraudsters have shifted their focus to higher-value payoffs, including attempting to hack into corporate accounts.”

AFP surveyed 5,000 AFP member corporate practitioners in January 2012 for its survey, as well as nonmember corporate practitioners.

CANADIAN TREASURER

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Succession Regulatory newsPlanning

Study findings trigger call to action for Canadian private business owners By the Canadian Financial Executives Research Foundation (CFERF) Like any entrepreneur, Navin still enjoys being involved, according to Sheena. “He has left the daily activities for us to handle, allowing my siblings and I to divvy up the responsibilities,” Sheena says, speaking of her brother and sister. “My brother stepped into the CEO role at our company, and he has an incredible passion and drive to lead Conros forward, which worked out well for us. In terms of responsibility, all three of us are equally responsible for the company, so there’s no competition amongst us, as we all have the same goals in mind.”

Is a clear exit/transition plan in place for exiting owner(s)?

Source: The CFERF.

T

he Chandaria family, which owns and run Conros Corporation in Toronto, saw a smooth transfer of responsibilities about five years ago from founder Navin Chandaria to his three children.

Conros, which currently manufactures mailing and packing supplies, has a history of developing a market for a product and then being given an opportunity to exit at a valuation that cannot be refused. For instance, the company popularized the glue stick in North America as an alternative to liquid glue in the 1980s, then sold Ross Adhesives to Elmer’s Products Inc. According to Navin’s daughter, Sheena, a director at Conros, the family plans to continue that business approach of developing and divesting, a business strategy which inherently involves succession planning.

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Smooth succession Conros can be highlighted as an example of a relatively smooth family succession that so far seems to working efficiently. Not every Canadian company will have the same success story. Only forty percent of Canadian private companies have a clear business ownership succession plan in place, which could leave them unprepared and at risk in the event of unforeseen circumstances.

This and other findings were published in a recent study prepared by the Canadian Financial Executives Research Foundation (CFERF), titled Private company succession planning: Where do you stand? The research was sponsored by Grant Thornton LLP. CFERF is the research arm of Financial Executives International Canada (FEI Canada).

The results are a concern for a country that relies on small and medium-sized business to generate as much as half of its GDP, and is preparing for a significant shift as baby boomers retire and a new generation takes the reins of ownership in this vital area of the Canadian economy.

Risks “The risks of companies not having succession plans in place are enormous, both for the economy and for the owners themselves,” says Michael Conway, Chief Executive and National President of FEI Canada. “In addition to putting the businesses at risk by alienating potential successors and buyers, owners may fail to realize the full value of their life’s work. Families ties could be damaged and it may even be difficult to obtain long-term financing, if lenders perceive there has been inadequate business planning.”

As company owners age along with the rest of the

March / April 2012

succession Regulatory planning news population, many are finding they are ill-prepared for the inevitable transition that lies on the horizon.

Reasons include: lack of foresight; owners who refuse to let go; limited resources; and struggles to either manage growth or simply survive.

The research is based on a survey of more than 100 financial executives conducted in July 2011 by the CFERF. The survey was complemented with insights gathered via an executive research forum held simultaneously in Toronto and Vancouver.

“The study also points to specific challenges for family-run businesses, which employ half of the survey respondents,” adds John Harris, a partner in the Vancouver office of Grant Thornton LLP and National Leader of the firm’s Privately Held Business practice.

“In many cases, business owners hope their children will take over their companies, but it appears that this may be an unrealistic expectation. While the majority of family businesses had appointed designated successors, some of those had not gone through any training or education programs to prepare them for their future responsibilities, the survey found.”

The CFERF survey also revealed: ◉◉ The lack of widespread succession strategies may be partly due to a lack of overall business planning: 30 percent of respondents said business owners did not have a five-year vision for their business, and 20 percent didn’t even have a clear overall strategy. ◉◉ More than half of respondents said the company owner had not expressed concern about the future of company employees after he/she had sold or transferred ownership. ◉◉ Of those who said they worked for a familyowned business, just over half said the current owner planned to transfer ownership to the next generation of family, but of these, only 60 percent said a specific family member had been identified. ◉◉ Just over half (55 percent) of survey respondents at family businesses said there were clear plans as to how family members outside the business would share in the profits, and less than half said there were mechanisms in place to address family conflicts. ◉◉ Most respondents (58 percent) said no formal valuation had been conducted, and that no measures were undertaken to enhance the value of the business in anticipation of a future sale.

Uphill battle Private businesses face an uphill battle regarding ownership transition, which could translate into a large number of businesses that may be negatively impacted. Some of this potential for turmoil might be avoided or at least minimized by following some best practices, such as: ◉◉ Don’t wait until there is a “trigger” event such as critical illness or death. Succession planning needs to be an ongoing process that is started early and revisited regularly – ideally yearly. ◉◉ Draft clear job descriptions of key responsibilities

March / April 2012

Is the identified successor(s) ready to take on the challenge of running the business?

Source: The CFERF.

and tasks required to run the company. ◉◉ For a family business, ensure the roles of active and inactive family members are clear. ◉◉ Ensure there are appropriate successors to fill in vacancies when senior managers move up. ◉◉ Offer opportunities to train and develop internal candidates now. ◉◉ Prepare for post-succession issues. ◉◉ Involve senior financial executives in planning, and consider retaining outside help.

CFOs are well-suited to turn the company leadership’s attention to this kind of long-term planning. Succession planning is one way of forcing owners to cast their sights on the future of the organization and to look at the steps needed to get there.

“The CFO really needs to be engaged and aware of the owner’s succession plans - what their intent is, whether they want to go public or sell, and what the timeframe they’re looking at is - because there is so much work that has to be done by the CFO and they need to get working on it right away, especially for a smaller business,” says Nancy Lala, CFO of Torontobased About Communications. “There’s so much that has to be done in order to prepare for due diligence. So it’s really critical that the CFO is engaged early.”

The Canadian Financial Executives Research Foundation (CFERF) is the research arm of Financial Executives International Canada (FEI Canada).

CANADIAN TREASURER

21

Financing e-Invoicing

Financing harder for small Canadian public companies

By Laura Bobak, Canadian Financial Executives Research Foundation

D

espite Canada’s relatively stable economic landscape, small public companies are still struggling to obtain access to credit - a critical cornerstone in their ability to succeed - says a Canadian Financial Executives Research Foundation (CFERF) study.

Credit availability barometer: 2011, published

by CFERF, the research arm of Financial Executives International Canada (FEI Canada), and sponsored by Ernst & Young, shows that credit continues to be much easier to obtain for companies already flush with cash. That could make this a challenging year ahead for smaller public companies hoping to grow.

“Access to financing is the key to smaller businesses’ ability to foster innovation, attract the best and brightest talent, create jobs and — in some cases — to survive,” says Michael Conway, FEI Canada’s Chief Executive and National President. “Companies caught in the wake of today’s tightened credit market must look further afield for financing opportunities that enable them to grow their company and push our economy forward.”

The report, based on responses from 117 senior financial executives, representing all sectors of the Canadian economy, found a majority of these businesses are turning to organic growth - including growing their customer base and increasing their sales rather than focusing on M&A as a growth source.

“Building a strategic plan that incorporates new sources of funding and is dedicated to improving company performance is crucial for smaller companies looking to capitalize on growth opportunities in this tough environment,” says Brian Allard, Partner at Ernst & Young.

Cost-cutting and identifying operational efficiencies, are already focus areas for 76 percent of companies this year, as well as cash flow and liquidity, identified as an area of focus by 63 percent of those surveyed.

With investors’ decisions often weighing on profitability, revenue, cash flow and credit history, firms across Canada were unanimous in saying that those with access to credit should line up as much financing as possible before market turmoil beyond our borders drives Canadian lenders to scale back their financing

22

CANADIAN TREASURER

activities.

“Companies are taking the view that they need to negotiate the financing when it’s available, not necessarily when they need it,” says Tim Zahavich, St. Joseph Communications’ CFO. “If you can get the financing done, get it done. Chances are we’ll never use 100 percent of our revolving line of credit. We’re paying for the availability, but probably we won’t need all of it.”

Since working capital is generally not difficult to obtain for stable, large public companies, they tend to take advantage of that availability. For example, BCE ensures it has plenty of credit availability, as the company and its board are always concerned about liquidity, not only for corporate reasons but also to fund operational requirements, potential M&A opportunities, or making special voluntary pension contributions, says Paul Stinis, BCE’s Senior Vice President and Treasurer. “Liquidity is front and centre,” he says. “Even if there’s an incremental cost to actually get that liquidity, this shouldn’t be the primary concern.”

Similarly, having credit readily available has been a priority for Enbridge Pipelines. Bill Ross, Enbridge’s Vice President of Finance, says the firm plans to ensure cash is available to mitigate weather-sensitive, seasonal business cycles, without stockpiling it. “Liquidity is important to run your business on a day-today basis,” he says. “You have to build in a scenario for the downside. We’re trying to keep enough working capital to keep in business, but generally, we don’t hoard the cash to hold it for a rainy day. We tend to use it.”

Having liquidity for a rainy day helped Hartco during the 2011 postal strike, says CFO Carl Gauvreau. “We got hit probably by $15 million of accounts receivables that we were supposed to collect and we didn’t,” he says.

“We managed and we made it okay, knowing we had available financing. If the strike had continued, we would have had to borrow. For similar companies that didn’t plan ahead and secure financing, this could have put them in real difficulty.”

Dessau, a growing Canadian private engineering and construction company with 4,700 employees at 68 offices worldwide, negotiated a three-bank syndicate revolving line of credit, with a “good” interest rate, in early 2011, for both working and long-term capital.

“We use our credit facility for our dayto-day operations,” says Lucy Porporino, Dessau’s Principal Advisor, Treasury. “But it’s always there for us in case we find a good acquisition opportunity. However, we do incur fees, but that’s the cost of doing business and the advantage of cash availability. Our line of credit includes a swing line which is very effective as it manages our cash quite easily.

So, at the end of the day, if we have any excess cash, it goes directly to our repayment on the credit facility. It works quite well. As well, we have in place many advance payments against advance letters of credits on our projects with our international clients. We also use the credit facility for issuing our letters of credit.”

Some fortunate companies are simply sitting on capital as they browse for acquisitions and joint ventures. For instance, CGI Group, a large public IT consulting company, has a $1.5 billion credit facility with an accordion (optional additional credit) of $250 million, arranged through a syndicate of 20 financial institutions from Canada, the US and Europe, says CFO David Anderson.

“The credit facility is really just a place holder so that, if we want to do acquisitions, we have the power to do so,” Anderson says, noting that CGI started negotiating for a new, improved facility of the same amount well before its current one was set to expire. “One of the strategies that we employed was to ensure that we weren’t going to end up running out of time and then having to take what was going to be given to us in the way of a new facility,” Anderson says.

In terms of pursuing acquisitions, CGI has been conservative and selective, looking for growth with companies with the right cultural fit, and at the right price, Anderson says. “We do generate cash and about a third of it goes into debt repayment, with two thirds into share buyback right now,” he says. “It’s good financial practice to be able to go back to the markets and show that you’re paying down debt rather than just buying back shares all the time.”

Whether it’s for working capital or acquisitions, the consensus was that, if CFOs haven’t looked to ensure cash is on hand when their companies need it, they might be looking for a job sooner rather than later.

March / April 2012

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