Electrocomponents PLC, the world’s leading high service distributor of electronic and maintenance components, with a £1.2bn turnover, works in a very competitive industry, in which it is essential to keep a vast number of stocked products (550k), from many different suppliers (2,500), and to be able to dispatch orders if possible on same day as order received to the >1 million customers. Not only this, there is a low average order value with a relatively high gross margin, and they operate in nearly 70 countries world-wide (subsidiaries in 32 countries and distributors in 37). Currently 57% of Electrocomponents’ business is generated by e-commerce and the rest by 800k catalogues.

To prosper in such a business, Electrocomponents PLC - treasury operate a highly centralised cash management operation as Graeme Hancock, group corporate treasurer, explained in his fascinating talk at the Association of Corporate Treasurers Cash Management Conference in February. Their key objectives are:

• security: group cash kept safe at all times
• liquidity: group liabilities always met as they fall due
• control: cash under central control
• interest/ funding: Interest and bank charges minimised; cash offset against debt to minimise funding and balance sheet grossing up.

Electrocomponents have two different approaches, one for managing the ‘free’ currencies - $, £, €, JPY, etc., and the other for the ‘restricted’ currencies - RMB, PHP, MYR, etc.

Managing the ‘free’ currencies

The cash concentration structure for the ‘free’ currencies is:

• Asia-Pacific: bank accounts swept daily, to zero, into cross-currency notional pool with HSBC Singapore.
• EMEA & N America: swept daily, as close to zero as possible, into cross-currency notional pool with BAML London
• RS UK has single currency pools with HSBC London.

The main benefits of this structure are that all cash is pooled daily to two secure locations whilst at the same time subsidiaries are given ample overdrafts within the pool, treasury has full visibility and control, interest is minimised and the net pool balance can be reported in the Group accounts. Graeme stressed that it takes time to set up these structures, and to make it work subsidiaries are required to: minimise the number of bank accounts; move banking and/or payments to pooling banks, if possible; and provide weekly cash flow forecasts. Subsidiaries’ buy-in and support is critical.

Managing the ‘restricted’ currencies

In managing the ‘restricted’ currencies Electrocomponents has two objectives:

• keep subsidiary just in overdraft or, (if local overdrafts expensive), just in cash, at all times, so minimising cash not under direct Treasury control
• ensure subsidiary always has sufficient liquidity.

To achieve these objectives, Electrocomponents found that is vital to: 1) understand the currency restrictions which are changing, 2) move subsidiaries to relationship banks to facilitate reporting and management, and 3) agree plan to manage cash to target balance using intercompany loans, dividends, capital restructuring etc. Graeme’s overall conclusion was that managing ‘restricted’ currencies is time consuming, but critical. 

Critical importance of cash flow forecasting and WCM 

Electrocomponents have found that good cash flow forecasting is vital in their cash management. They use a short-term (weekly) for daily cash management, and a longer term (upto 18 months) for funding and capital structure. To carryout cash flow forecasting requires a strong partnership with the business, a deep understanding of the commercial factors, flexibility to respond as business circumstance change, and a rigorous review of performance.

Electrocomponents is also tasked with reducing working capital and liberating cash. Again this requires a strong partnership with the business combined with a deep understanding of the commercial factors, and a willingness to innovate to adjust to the rapidly changing business environment.

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CTMfile take: Corporate treasury’s driving focus at Electrocomponents on ensuring that their cash and treasury management operating model matched and complemented the changing dynamics of the electronic and maintenance components distribution business is most impressive.