Finding Buried Treasure

Middle Eastern economies may be expanding, but growing pains are showing when it comes to treasurers' ability to manage working capital and unlock trapped cash. By JR Brandstrader

Corporate treasurers in the Middle East are just like their cohorts elsewhere, except for their threeday workweek. They have to locate the money, make it work harder and come up with an easy-to-understand financial report for their bosses. But they have only a narrow window within which to do that. Needless to say, they are very busy individuals and are more accountable than ever for overall corporate results.

Alexandra Ellison, director of treasury and governance, risk and compliance solutions, at enterprise resource planning vendor SAP, works with many Middle East corporations who partner with foreign firms doing business in the region. "There is no common weekend in the Middle East," she explains. "Most international corporations work Monday through Friday. But the work week in the Middle East varies."

Friday is a holy day for Muslims. Some countries take Thursday and Friday off while others take Friday and Saturday. During Ramadan, hardly anyone is to be found round the office in the afternoon. Vive la différence? Well, not so much.

Getting a counterparty to sign off on anything (a deposit, a trade or a swap, which is the favored available insurance against default) in a timely way is challenging when you are not working at the same time or even on the same day.

The complexity of the region keeps some investors away. London-based Thomas Clarke, an associate with William Blair, a global investment banking and asset management firm, is one of them. "The Middle East is very complicated. The region will probably remain unstable, so we are not in that market," he says.

WHERE IS THE CASH BURIED? Choosing not to be in the Middle East is a luxury not everyone can afford. "The Middle East is strategically placed and always has been a trade route, especially for the Gulf states," says Ellison. These days the region is firing on all cylinders. A recent survey of Middle East market sentiment by the CFA Institute, a global association of investment professionals, found that 80% of respondents expected their local economies to expand, while only 67% saw the global economy growing in 2014.

Even if you don't go to the Middle East, its businesses are likely to come to you. Gulftainer, a wholly owned subsidiary of United Arab Emirates-based Crescent Enterprises, will operate a container and cargo terminal that is under construction at Port Canaveral, just south of the Kennedy Space Center in Florida. It's a first, but it probably won't be the last such venture by a Middle Eastern company.

Robust growth and a venerable history, however, don't necessarily ensure a mature transaction banking market. A recent Aite Group survey of approximately 120 corporate treasurers operating in the Middle East found that nearly half of respondents spent at least 75% of their time using spreadsheets and manual processing for cash management. Finding where the cash is buried is timeconsuming, especially on a three-day week. If you don't know where all your cash is, you can't put it to work.

GROWING PAINS

Unsurprisingly perhaps, producing better cash forecasting is a top priority. According to a survey by research firm Aberdeen Group, corporations with the best cash visibility are 76% more likely than others to have the capability to invest surplus cash at the end of the day. However, that sunny situation is still a mirage for many treasurers in the region.

"Treasurers in the Middle East are facing growing pains as corporations emerge onto the global stage," says Enrico Camerinelli, a senior analyst at research firm Aite Group. He says keeping spreadsheets in vogue is a matter of money, not will. "Buying an in-house finance system that can pass a remittance data file to a translator for formatting is expensive," says Camerinelli. "You also need software for encryption and verification."

But failing to speed up and automate processes can also be costly. Camerinelli cites the following example to illustrate how much money manual processing leaves on the table. A cash management system that accelerates collection can save a $1 billion company with $250 million in outstanding credits approximately $3.5 million for every day of its reduced cash-conversion cycle.

Many corporations and banks in the region have yet to invest in the information technology needed to talk to each other in real time. One sign of progress is that SWIFT, the financial messaging provider for payments, securities, treasury and trade, says its business growth in the Middle East far outpaces it global growth.

More-sophisticated technology that brings the accounts of all subsidiaries onto one dashboard would allow treasurers to see where they can save money on bank charges and reduce the time that money is in transit. Aberdeen Group says that the best-run corporations are already keeping track of transactions in a single database.

SAP's Ellison says it would also help if companies in the region pooled all money with treasury. "Every separate account carries costs, and if cash is distributed among several accounts, you are not earning as much interest as you could," she notes. "Plus, the cost of each check falls as volume rises."

Rethinking metrics can also facilitate business. "In particular, working capital is often underemphasized when the performance of a business-and of its managers-is evaluated primarily on income-statement measures such as earnings before interest, taxes, depreciation, and amortization (Ebitda) or earnings per share, which don't reflect changes in working capital," states research published by McKinsey's Ryan Davies and David Merin.

TREASURIES AS PROFIT CENTERS

A better measure of working capital is free cash flow at the plant level. By distributing inventory metrics to frontline supervisors, one manufacturer saw inventories fall quickly. That's because managers were able to decide on the right level of stock and coordination among plants. The rewards of shifting focus can reduce the time it takes to sell inventory, collect receivables and pay bills, says McKinsey. The rewards are rich and fairly quick-two to three months.

"The global aluminum company Alcoa made working capital a priority in 2009 in response to the financial crisis and global economic downturn, and it recently celebrated its 17th-straight quarter of year-on-year reductions in net working capital," wrote Davies of McKinsey. "It cut its net working capital cycle-the amount of time it takes to turn assets and liabilities into cash-by 23 days and unlocked $1.4 billion in cash."

That may be why Alcoa was able to complete construction recently on the lowest-cost aluminum production facility in the world in Saudi Arabia. Alcoa says its Saudi Arabian joint venture is integral to its strategy of increasing the cost competitiveness of its commodity portfolio.

Davies of McKinsey states that freeing up cash can provide a lifeline for distressed companies and be a windfall for healthy firms. Money saved can be "reinvested in ways that more directly affect value creation, such as growth initiatives or increased balance-sheet flexibility," he says.

The technology is available now to help transform treasuries from cost centers to profit centers. It's just a question of more treasurers in the region buying into the concept. *

"The Middle East is very complicated. The region will probably remain unstable."

-Thomas Clarke, William Blair

"The Middle East is strategically placed and always has been a trade route, especially for the Gulf states."

-Alexandra Ellison, SAP