A Netting Story
How Logwin reconciles and settles internal and external receivables and payables
In several Treasury Matters articles, we have recently been looking at the theory behind netting. This guest article by Andreas Schwarz, Director Group Treasury, takes us “into the field:” how does Logwin AG, a global logistics company, use netting to settle both internal and external receivables and payables in an intelligent and efficient way.
Best practice: Netting at Logwin
As a global logistics company, Logwin provides comprehensive services worldwide. 68 subsidiaries operating from 190 offices in 35 countries and 120 external partner companies in over 80 countries transport around 140,000 tons of air cargo and 600,000 containers (TEU) every year. This makes for impressive cash management and FX figures:
- Logwin’s treasury team processes over 5,000 single payments worth more than 500 million euros as well as 120,000 bulk payments of a similar value a year.
- We also conclude around 1,700 FX deals worth 470 million euros with banks as well as 1,500 internal FX deals worth approx. 150 million euros every year.
To stay on top of things and remain efficient, we need to put a concerted effort into consolidating and automating wherever we can. One way to achieve this is an intelligent reconciliation and netting process for the receivables and payables resulting from logistics operations.
When we established “our” netting system, we had two main objectives: to centralize processes and to reduce invoice and transaction costs. Little did we know that we would also optimize our FX management as a positive “side effect” – but more on that later.
The Logwin netting concept: integrating internal subsidiaries and external third parties
What makes Logwin special is our strong network of partner companies in countries and places where we don’t have an office. From a legal point of view, these agents are external third parties. However, given the close collaboration we wanted to include them in our netting process. This meant drawing up a clearly defined legal framework ahead of the implementation of a netting solution. This was the only way to roll out the system globally and as comprehensively as possible.
For Logwin subsidiaries and agents, netting is based on consolidated balances, i.e. not on reconciled individual invoices. This is the basis for payments and bookings as well as the hedging of FX positions. A special feature: the netting process and balance reconciliation are linked to the month-end close. This saves us another round of matching, as internal “payments” are booked directly on the subsidiaries’ clearing accounts. Agent balances, however, are offset directly, either in euros or US dollars.
The Logwin netting calendar: a mandatory cycle for all participants
While the netting process is linked to the month-end close, the preparations for a netting cycle start much earlier than that. We have established a clearly structured process that “suits” all participants, which in turn, makes it run smoothly:
- On the first business day of each month, all netting participants receive a “welcome email” that invites them to this month’s netting run. It contains all the relevant information, including a list of all participants and contact details as well as a netting manual. This is important as the staff turnover with so many subsidiaries and agents is high, and we need to ensure new employees can learn the ropes quickly.
- On “notification day” – the deadline for our subsidiaries to upload receivables and for the agents to submit receivables to the netting center – Logwin’s centralized treasury and netting tool, tm5, takes center stage. Around 70 subsidiaries import their data directly in tm5 by uploading files. For the around 70 external agents, the netting center completes the upload as a service.
- Following the upload, participants have one week to check and confirm receivables from other subsidiaries and agents. Any discrepancies can be resolved. On “reconciliation day,” the netting center confirms all submitted receivables, including those that have yet to be confirmed/resolved. Why do we do that? We don’t want to interrupt the netting process and get bogged down in discussions. If there really are discrepancies that need to be resolved, then we will push them to the next netting run in the following month. The counterparties are asked to clarify the situation between them. The netting center only serves as an intermediary.
- The following day, the netting center creates a preliminary netting statement. Conversions are made using this day’s FX rates. This preliminary netting statement is automatically accessible to all internal participants in tm5, and is sent to external agents by email. The information in the netting statement is a key source for short-term forecasting at Logwin, at subsidiary level but also for agents.
- For the final netting run, sums are recalculated using the current FX rates and then processed. What is interesting are the automatic booking processes that run in the background. Each netting participant only makes one final netting payment, but this results in hundreds or thousands of invoices being closed in the ERP system – despite the fact that the netting run is based on balances rather than individual positions.
- For subsidiaries, new balances are booked on IC clearing accounts, i.e. there is no “physical” cash flow. External agents are paid to offset their current netting position.
Positive netting side effect for Logwin: centralization and hedging of FX risk
An unexpected benefit of Logwin’s netting concept is the centralization of FX risks. Incoming and outgoing payments to and from agents might be limited to two currencies, but in intercompany dealings, we must contend with as many as 24 currencies.
At Logwin, only the Group Treasury concludes hedging deals. We analyze and evaluate the risk and select suitable measures and instruments. Internal requests in connection with core business activities are submitted to the Group Treasury and confirmed by us directly in tm5. They are processed at maturity or wherever possible through netting.
As part of the netting process, Logwin reconciles over 17,000 intercompany payments amounting to 250 million euros every year. Reduced transaction costs allow us to make significant savings. In addition, we avoid cash management uncertainties and have boosted FX management efficiency. And the icing on the cake? Logwin’s multilateral netting concept is completely straightforward and user-friendly! The process creates transparency and visibility for all participants and is easy to follow, despite participants having different legal status.
Logwin is a global logistics provider with two business segments: Air + Ocean and Solutions. Air + Ocean manages international shipments by air and sea. Solutions offers logistics solutions based on individual contracts and industry-specific transport networks, mainly in Germany, Austria and Switzerland and the rest of Europe. 4,200 employees worldwide generate a turnover of over 1 billion euros. Business is conducted from 190 locations in 35 countries on all continents. In order to extend their services to every corner of the planet, Logwin has built a network of agents: independent, external partner companies that support Logwin and vice versa.
Interested in finding out more about whether netting is the right solution for you? Give us a shout or check out tm5, our intuitive treasury management system.
Have questions? Give us a shout.