In a newly formed merger of several manufacturers of packaging films with 10 international locations and a turnover of around 300 million euros, it was necessary to define the integration and control of financing tasks in the new management holding company. Key target processes were not yet in place at the holding level or had not been thought through to the end. In order to achieve the operational earnings targets, the task for the current interim manager (who was in permanent employment at the time) was to Setting up an internal bank.
The condition for setting up the internal bank was to focus on a purely operationally managed hedging strategy. The aim was to hedge operational planning minus a confidence interval. Own financially driven positions were not held. Instead, the internal bank was to meet the payment obligations of the subsidiaries and use incoming payments for self-financing and to reduce peaks in liquidity requirements. Another task was to develop financing strategies for investments and working capital and to implement these across the Group. In addition, risk positions from interest rate transactions and currency sales were to be identified and managed. This was urgent, as the holding company previously had no knowledge of the subsidiaries' cash movements, credit, interest and currency transactions or financial planning.
Walking the tightrope between centralization and decentralization succeeds by building trust
In the first step, the manager determined the circumstances in the subsidiaries - and encountered resistance. Not all commercial managers supported the plan to set up an internal bank, as they considered the relationship with the previous commercial banks to be their sovereign task. However, with the necessary tact and great commitment in personal discussions, the interim manager was able to achieve a cooperative partnership in the implementation of the objectives. Above all, his transparent approach created trust among the holdings. It was also helpful that the commercial managers retained the task of personally maintaining contact with "their" local banks.
Internal bank creates transparency about daily and future liquidity development
After these preparations, the internal bank was basically ready to work. It had complete transparency about the daily situation and future liquidity development and structured planned financing and desired hedging positions for interest rates and currencies. The subsidiaries transferred the implementation to the holding company. In order to effectively manage the cash, financing, interest and currency positions, the manager implemented the following individual steps, among others:
- Selecting, implementing and operating a modern cash management system
- Drafting contracts between the holding company and subsidiaries for all financial transactions, borrowings and cash investments, also for the granting of collateral
- Conclusion of interest rate and currency hedging transactions and passing on any peaks to the subsidiaries
- Development of rolling planning for liquidity and financing tasks, including currency positions, taking into account operational planning
- Continuous valuation and reporting of existing positions for interim and annual financial statements and annual financial statements
Realizing significant financial and accounting effects
For a portfolio company with market activities in different countries and currency zones, not only linguistic but also cultural, (tax) legal and financial peculiarities. This project succeeded in doing so. The financial and accounting effects are resounding. The annual comparison of the costs of the "internal bank", its added value and the improvement in balance sheet structures were clear. The successful implementation of the "internal bank" project was confirmed not only by the expansion of liquidity scope at improved conditions, but also by the increase in corporate governance in the management of the company. Last but not least, this all led to better ratings from commercial banks and a better reputation on the capital market.
