All-Encompassing, Finely-Honed Treasury
TYROLIT is one of the world’s leading manufacturers of bonded grinding, cut-off, sawing, drilling, and dressing tools, as well as a pioneering supplier of tool and machine systems for the construction industry. The family-owned company forms part of the Swarovski Group and is headquartered in Schwaz, Austria. It was founded in 1919 and employs over 4,400 people, generating an annual turnover of EUR 643 million. TYROLIT has a very international profile with 29 production companies in twelve countries on five continents, and a global network of sales companies with subsidiaries in Africa, the Americas, Asia, Australia and Europe. The Group comprises the divisions Metal/Precision, Industrial Trade, Construction as well as Stone/Ceramics/Glass and produces 80,000 different products, sold by over 35 sales companies and additional distributors in 65 countries worldwide.
Not every business as large as TYROLIT has a treasury that can match the professionalism of this Austria-based corporate group’s. TYROLIT is globally active and has a very distinctive financial setup. Even though the responsibilities of Peter Dollinger, Executive Vice President Finance & Administration, have moved beyond treasury years ago, he’s still very attached to the discipline. This explains the way the department is positioned within the group: when BELLIN first started working with Peter Dollinger some years ago, TYROLIT didn’t have a dedicated treasurer yet. Today they do, and he is enabled by the sharing of the treasury’s workload across over 50 subsidiaries worldwide. TYROLIT is a perfect example of the Concept of Load Balanced Treasury®: each and every employee, whether at headquarters, in a Shared Service Center or in one of the many subsidiaries, makes a valuable contribution to liquidity optimization, FX, and interest risk management in the group.
Load Balanced Treasury: centralization and localization
In the late 1990s, TYROLIT started introducing measures to centralize global responsibilities, including treasury. From the start, Peter Dollinger had the (sometimes thankless) task of “streamlining” the group’s bank accounts – held at around 100 banks. The first stage of the project saw TYROLIT optimize their banking communication and reduce the number of banking partners down to 30. For specific requirements, TYROLIT continues to work with a few select local institutions. On the whole, however, the group now works with five main banks, and the treasury department has a close relationship with them. “These banks have been at our side through years of company growth and stuck with us during difficult times,” explains Peter Dollinger.
The risk of depending on banks
TYROLIT has always had a good relationship with the banks they work with. Nevertheless, they took a significant step a few years ago: the group introduced the strategy of only working with one single bank for cash management. Their aim: simplify daily operations. TYROLIT was aware that following a one-bank strategy would pose a certain risk because it would make the group very dependent on this bank. That said, no one could have foreseen what was going to happen in the banking landscape.
When this central network bank was forced to concentrate on domestic business almost without warning, TYROLIT was in trouble. Practically from one day to the next, the group was told that the bank would be discontinuing its services for accounts everywhere else around the globe. At short notice, they had to find new banking partners for international accounts and cash pools.
Opportunity for a new banking strategy
TYROLIT made a virtue of necessity and used this opportunity to retender banking contracts and to fully standardize payments worldwide – with a setup that made them independent of banks. Within two years, over 90% of global payments were transferred to a standardized, group-wide platform, guaranteeing this independence. TYROLIT also applied for a SWIFT BIC, enabling the group to securely exchange data with banks even in “far-off corners” of the planet. Group companies in countries such as the US, South Africa or even China now use this central platform, and responsibilities are shared: payments are entered and authorized locally, while TYROLIT Finanz AG releases them and submits them to the connected banks. The process is very convenient: the responsible employee could even release a payment via his Blackberry while skiing in the Alps around Schwaz. He’s automatically notified of any payments that need to be released on his mobile device, and can then check and confirm them.
Sleeping soundly thanks to security measures
Next to having a bank-independent solution and great flexibility, security issues are another top priority for Peter Dollinger, who is also responsible for group-wide IT. “Fake President” frauds are commonplace nowadays. TYROLIT’s treasury, however, would be able to fend off any attempted fraud in time, should they ever be confronted with such a payment. When Peter Dollinger’s role was reviewed, the auditor was surprised that he can still sleep at night, given that his responsibilities span accounting, treasury, risk management, insurance management, logistics and IT. “But when the auditor realized which systems and processes we have in place to guarantee security, he relaxed considerably,” Peter Dollinger tells us and smiles at the memory. The rest of the team is also intricately familiar with such issues because it takes awareness on behalf of each and every employee to boost security group-wide.
Switching to a standardized payments system uncovered some surprising truths at TYROLIT: it has been 20 years since “paper-based” payments were phased out in the group. However, when the new system was introduced it emerged that some group companies – despite careful control from headquarters – had continued establishing and “cultivating” their own, often rather complex, manual and paper-based processes. The standardization has allowed the group to tackle these processes. This in itself shows how important and beneficial the step of standardizing the global payments setup has been for the group.
Highlighting cash positions and risks
Overall, payments only make up a small part of TYROLIT’s sophisticated “treasury realm.” When new technology was introduced to restructure treasury management (essentially in 2007 with the establishment of a group-wide TMS), other issues took center stage. The first phase of the project was dedicated to achieving a group-wide liquidity overview and to monitoring liquidity development. Each group company was requested to update their forecast following the monthly close, highlighting not just funding needs but also currency risks – also and in particular for the group company in question. “You don’t make the forecast for headquarters, but for your own business,” Peter Dollinger kept pointing out. Not every group company was enthusiastic about this or could see the added value that was in it for them. A year later came the financial crisis and changed everything. It wasn’t until then that everyone truly understood the crucial role of the established liquidity planning in coping with these troubled times: on one hand, it guaranteed that there was sufficient liquidity; on the other hand, forecasts drawn up in transaction currency within the framework of FX management formed the basis of simulations of potential currency fluctuations and the resulting changes to cash flows. TYROLIT was fully prepared for the crisis and was able to adjust to the dynamic environment in the best possible way.
Meaningful representation of group-wide interactions
“We produce locally for local regions” – this is how Peter Dollinger sums up the organizational setup of his group, which has 28 different production locations and another 25 sales companies. The plants in the US, for example, cater to the US market but also supply the sales company in Canada, as there’s no dedicated production site there. The TYROLIT sales companies in the Middle East are supplied with items from various production sites and countries. Production is all about sharing: the production plants trade tools internally and can get them from nearly any site. This illustrates the strong intercompany relationships at TYROLIT.
Liquidity planning needs to reflect these interactions, and group company planning data needs to be reconciled to create a consolidated forecast that shows the group’s net exposure to the euro. This data is then taken to analyze the impact on cash flows at headquarters based on several rate scenarios, taking into account volatilities of the past 200 days. This provides TYROLIT with an overview of the risk that can be reported to management, so counter-measures can be initiated. Taking all cash flows combined, it often emerges that the analyzed FX risk from transactions only plays a minor role for TYROLIT’s overall risk management. Translation risks arising from exchange rate fluctuations when converting FX turnover, profits and assets (and not from the actual exchange of foreign currency) present a bigger danger. TYROLIT has decided to hedge neither transaction-based FX risks nor translation risks.
“Sometimes you win, sometimes you lose. In both cases, we need to accept how this impacts our P&L and save time and effort when it comes to administration and management,” explains Peter Dollinger. At the beginning of his career as a treasurer, he had access to permanently up-to-date market data, monitored the markets and hedged on a daily basis. Based on this experience, he can safely say that the effort this takes is not justified in TYROLIT’s case.
Intercompany netting saves time and money
Strong intercompany relationships are of relevance for group-wide liquidity planning and the corresponding monitoring of risks but also gave rise to the group’s netting project. At one point, all payments between group companies were counted, resulting in the impressive figure of over 600 payments via bank accounts per month. These were mainly international payments and entailed both float and considerable bank fees. Moreover, many payments were effected in foreign currency, making for significant translation costs that were hard to calculate as the banks offered very different margins. The introduction of intercompany netting has reduced payments via bank accounts notably. Having reduced the number of transactions to around 5% of the original amount is a clear success for TYROLIT. It allows them to save a good EUR 500,000 on bank fees and translation costs each year.
50 group companies are integrated into the monthly, system-based netting process, starting with the reconciliation at invoice level. This in itself improves the intercompany trade efficiency of each group company and simplifies their work. The reconciliation process ends in a settlement, i.e. the actual netting of all payments. At the same time, this data is fed back to the different accounting systems, leading to the automated settlement of all open invoices. This saves each entity’s accounting time and money. Another positive effect of netting is that the group companies no longer make any payments via bank accounts. The net sum resulting from intercompany receivables and payables is posted on intercompany accounts and settled. This means there’s no longer a time lag, and no action is required from the group company. TYROLIT acts as the in-house bank and cash-settles directly via the intercompany settlement accounts.
Doing away with group company FX risk
Another way in which local entities benefit is the fact that netting eliminates FX risks resulting from intercompany trade in a very simple and effective manner: within the framework of netting, the conversion rate is fixed early on and available to all group companies who stick to the standardized process. Shortly before the end of a month, treasury fixes the “TYROLIT rate” which serves as the basis for the posting of any invoices in foreign currency for the following month. TYROLIT’s standardized process also stipulates that invoices issued in a certain month are settled in the following month’s netting run to consolidate FX sums. For the group companies, this means guaranteed rates because the rates used for the previous month’s posting are also used for netting. All invoices in foreign currency from other group companies are settled at exactly the rate at which they were entered by accounting. In addition, invoices always need to be issued in the beneficiary’s domestic currency. In the past, sales always had to monitor exchange rates and adjust prices in line with rate developments. Now, they can make use of purchasing prices that are fixed once a year to calculate sales prices – even if exchange rates fluctuate during this time. Consequently, group entities are freed of FX risk, which is transferred to the netting center. In accordance with company guidelines, rates are not hedged, so the netting center compensates surplus FX funds or deficient cover by means of spot deals via an external trading platform at the end of a cycle. The difference between netting rate and spot rate is posted in TYROLIT Finanz AG’s P&L.
A broad range of responsibilities and in-depth expertise
TYROLIT’s treasury is responsible for a broad range of responsibilities: liquidity planning, cash management including the administration of cash pools in USD and EUR (the main currencies), group-wide netting and centralized payments. So it does come as a bit of a surprise that they still have time for trade finance and working capital management. The latter is complemented very well by another one of Peter Dollinger’s responsibilities: global logistics at TYROLIT. Decisions such as reducing stock or building a central warehouse in the Czech Republic are a result of treasury activities. Moreover, the management of receivables and payables is not just considered in an intercompany trade context but also optimized overall. Thanks to the treasury department’s efforts, standard conditions for payment terms were defined for each country. A dedicated spreadsheet specifically for this purpose shows the sales employee in question the cost of extended payment terms, which would need to be offset by either adjusting margins or prices. This is another element of the treasury that makes a significant contribution to optimizing cash flows, and it illustrates that TYROLIT’s treasury strives to provide top service quality to group companies.
In all of this, the TYROLIT treasury team lives up to the demands of internationalization without compromising their maxim of working locally. With an extremely streamlined organization, the treasury of the medium-sized company manages a broad range of responsibilities. At the same time, the team’s in-depth expertise goes a long way in ensuring that TYROLIT’s financial organization is truly “finely-honed.”
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