Silke Reimers, Director Global Treasury Operations Unilever, at the Association of Corporate Treasurers 2019 Cash Management conference, explained how with sales in more than 190 countries and a sales turnover €51.0 bn in 2018, there are plenty of places where cash can be trapped. The team at Unilever knows that releasing trapped cash takes persistence, patience and constant attention to detail over the long term to release the maximum amount of trapped liquidity.  

Unilever’s strategy

Given Unilever’s 2x net debt/EBITDA target gearing, it is crucial that cash balances are not left idle. At the end of 2017, Unilever had €3.3 billion in cash and cash equivalents. A small part of that amount (€0.2 billion) is considered restricted or trapped cash. 

There are two key focuses of Unilever’s strategy for minimizing trapped cash, what to do:

1. Before cash gets trapped
2. When cash gets trapped.

1 - Before cash gets trapped or restricted

Reimers recommended that the actions that corporate treasury departments could do before cash gets trapped include:

• Reviewing regularly:
  • The business model, e.g. do you want/need to produce in the country? If yes, only for local consumption or also for export? (Obviously not a decision corporate treasury can take on their own, but where treasury can play a valuable advisory role); is the business model still suitable under the current circumstances or not?
  • Capital structure: is it right for the entity? Is it conducive to avoiding trapping cash? In case you use inter-company loans: beware that in some countries you may then not be able to hedge the loan.
• Having flexible and brilliant basic systems and policies in place for:
  • Dividend distributions which can be used to minimise trapped cash
  • Settlement of liabilities, e.g. inter-company liabilities, 3rd party liabilities, etc. to ensure that you minimise trapped cash so you do not have unnecessary cash
  • FX sourcing: partner with several banks because they typically have different access to the currency you need depending on their customer base
  • Safeguard financial assets: choose carefully how you want to invest your cash
• Communicating regularly with:
  • Subsidiaries worldwide
  • A range of banks to understand what options are available
  • Your peers so you keep up-to-date as what others are considering
  • Key stakeholders to ensure they know what is going on, e.g. regulation change, increased levels of risk – also in the area of business continuity.

2 - When cash gets trapped

The actions that corporate treasury departments could do when cash/liquidity is trapped in a country include:

• Safeguarding your assets by regularly reviewing:
  • Each counterparty where you hold cash
  • Whether to hold cash in local currency or hard currency, be aware of possible restrictions of holding cash in hard currency
  • Other local investment opportunities beyond cash, e.g. real estate
• Thinking outside the box, look for new opportunities to minimise trapped cash including:
  • Review your business configuration: imports vs. local production, local or off-shore sourcing of materials, etc.
  • Investments: could you hold gold? I.e. Consider options that would not apply in normal times.
  • Payments-on-behalf-of: could your local entity pay on behalf of an offshore entity?
  • Capital injections or (intercompany) loans might sound counter-intuitive, but might be the right thing to do if your key issue is FX liquidity and you do not want to risk business continuity
  • Housekeeping and controls: ensure you pay regularly your foreign liabilities when FX is available rather than wait for the ‘right’ forex rate 
• Communicating regularly with:
  • Country subsidiaries to ensure full understanding of the situation
  • Banks to understand what is happening in the market and what options are available
  • Peers to keep up-to-date as what others are considering
  • Key stakeholders to ensure they know what is going on.

Key messages

Reimers closed by saying that in managing trapped cash there is no magic wand and there is no way to avoid trapped cash altogether. However, it is vital to:

• Have brilliant basics combined with good controls and good housekeeping
• Safeguard your cash by being careful where you place it and with which banks
• Think unconventionally, look ahead and be flexible
• Remember that superb communication and good market intelligence are vital.

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CTMfile take: This talk was a brilliant reminder of the basics of minimizing trapped cash and how vital it is to have persistence, patience and pay constant attention over the long term, not just every now and then. AND to develop separate strategies for 1) preventing it from building up in the first place, and 2) managing trapped cash.