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Cash Matters
Cash and working capital
management in China

ADVI SO RY
2     Cash Matters: Cash and working capital management in China




Introduction                                         ...
Cash Matters: Cash and working capital management in China                                             3




             ...
4     Cash Matters: Cash and working capital management in China




Executive summary



      In 2009, KPMG China conduc...
Cash Matters: Cash and working capital management in China                                             5




Key findings
...
6     Cash Matters: Cash and working capital management in China




Liquidity in China


      Companies around the world...
Cash Matters: Cash and working capital management in China                                             7




According to ...
8     Cash Matters: Cash and working capital management in China




                                                     ...
Cash Matters: Cash and working capital management in China                                             9



Case study:

S...
10 Cash Matters: Cash and working capital management in China




The need for cash flow
forecasting

   Visibility and co...
Cash Matters: Cash and working capital management in China 11




                                                        ...
12 Cash Matters: Cash and working capital management in China




                                                        ...
Cash Matters: Cash and working capital management in China 13




                                                        ...
14 Cash Matters: Cash and working capital management in China




Managing cash and
working capital

   The formation of w...
Cash Matters: Cash and working capital management in China 15




of a working capital programme. The                     ...
16 Cash Matters: Cash and working capital management in China




Working capital metrics
for Chinese-listed
companies
   ...
Cash Matters: Cash and working capital management in China 17




track. In this example, a company
may introduce a proces...
18 Cash Matters: Cash and working capital management in China




Treasury for corporates


   From a liquidity management...
Cash Matters: Cash and working capital management in China 19




hand, only 30 percent of businesses                     ...
20 Cash Matters: Cash and working capital management in China




   model is traditional”, which effectively             ...
Cash Matters: Cash and working capital management in China 21




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KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
KPMG Cash & WC China 2009
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KPMG Cash & WC China 2009

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Cash Matters - KPMG\’s China Cash & Working Capital Survey 2009

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KPMG Cash & WC China 2009

  1. 1. Cash Matters Cash and working capital management in China ADVI SO RY
  2. 2. 2 Cash Matters: Cash and working capital management in China Introduction Our Fergal Power contributors Partner Cash Management Advisory Li Qiang Partner KPMG China O’Melveny & Myers LLP Henry Ma Treasury Director Emerson Electric Asia-Pacific Philippe Jaccard Managing Director The global economy is emerging from one of the most difficult times for eighty Liquidity and Investments Asia Pacific years, yet domestic and multinational corporates in China continue with their Global Transaction Services growth investment plans. As organisations strive for more market share in Citi China’s expanding economy, increasing pressure is being placed on their cash Karl Davies resources. These pressures for additional resources provide an opportunity to Vice President, RIS Finance implement new and effective cash management strategies. Asia Pacific Avery Dennison According to KPMG’s 2009 China Cash Management Survey, in excess of 90 percent of respondents highlighted management of cash as one of their Zhao Zi-gang top priorities for their organisation. However, only 14 percent said they had CFO Simcere Pharmaceutical Group adequate visibility of their cash. John Gu This startling contrast in results, suggests that whilst most corporates recognise Partner, China Corporate Tax the importance of effective cash management, very few of them have the KPMG China necessary tools, processes and structures to provide them with the visibility they require to execute an effective cash management strategy. Egidio Zarrella Global Partner-in-Charge, IT Advisory KPMG China Regardless of industry or economic cycle, this report and its underlying research demonstrates the importance of effective cash management and Nigel Hobler highlights the benefits that can be derived. Recognising the somewhat Corporate Tax Partner uniqueness of the China economy, we have looked beyond the traditional areas KPMG China of cash management and also focussed on issues impacting growing domestic Anton Abraham and multinationals, particularly in the areas of treasury, tax, technology and Cash Management Advisory, Manager regulations – all of which impact on developing a cash management strategy for KPMG China a flourishing new, yet highly regulated economy. Nina Mehra I would like to thank Oracle for their generous support and assistance with the Media and Client Relations Manager publication of this report. I would also like to thank all of our contributors for KPMG China their insights and input. © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3. Cash Matters: Cash and working capital management in China 3 Contents Introduction 2 Executive summary 4 Liquidity in China 6 Case Study: Simcere Pharmaceutical Group 9 The need for cash flow forecasting 10 Managing cash and working capital 14 Working capital metrics for China-listed companies 16 Treasury for corporates 18 Investing in cash operations and technology 24 Embedding a cash culture in China 27 Steps towards effective cash management 29 About KPMG 30 About Oracle 31 © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. 4. 4 Cash Matters: Cash and working capital management in China Executive summary In 2009, KPMG China conducted a Respondents had an average turnover The survey was developed in order survey of executives involving 180 between USD 500 million and to gauge the level of importance multinational and large corporates USD 5 billion. Fifty-nine percent of that organisations in China place on based across mainland China. Two- respondents’ businesses operated cash, as well as to determine how thirds of respondents were from in either the Industrials or Consumer they execute their cash management PRC domiciled companies and markets; 51 percent of respondent strategies. one third from multinationals. The businesses’ latest consolidated respondents spanned a range of turnover in China was under USD 1 industry sectors, but with close to billion; 68 percent of those interviewed 60 percent operating in either the worked for companies domiciled in Industrial or Consumer Markets. the PRC; 89 percent of respondents’ organisations are sensitive to changes in commodity pricing. In what industry does your What is the consolidated annual What percentage of your business organisation operate? turnover of the group in China in operations are based in China? USD million? 0.6% 2.8% 7.2% 10.7% 10.0% 18.5% 14.4% 13.9% 40.0% 38.8% 18.3% 32.0% 73.3% 19.4% Industrial Markets <US$500m 0-25% Consumer Markets US$500m-US$1bn 26-50% Other US$1bn-US$5bn 51-75% Information, Communications & >US$5bn 76-100% Entertainment Property & Infrastructure Financial Services Source: Unless stated otherwise, all graphs and statistics are based on research conducted for KPMG China by mergermarket. © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  5. 5. Cash Matters: Cash and working capital management in China 5 Key findings Corporates that performed stress testing of cash flow forecasts were less impacted by the credit crisis than those who did not. Organisations with strong visibility and control over their cash and working capital have fared better in recent times due to performing scenario planning, stress tests and cash flow forecasts. Profitability pressures and tight The property and infrastructure sector, 48.3 percent said they plan on financing conditions in the current which sees more of an emphasis on increasing their investment in economic downturn have meant that large, capital-intensive projects, is the cash and treasury management visibility into cash and working capital most common user of cash pooling, technology. Meanwhile 54.2 and improvement programmes around with 61.5 percent of respondents percent expect to see reduced these areas are a top priority for having used entrustment loans in the access to finance while 41.6 corporates in China. past. This compares to an average percent have highlighted the risks 43 percent of corporates from other of increased bad debt exposure in However, in managing their cash only sectors. the coming 12 months. 43 percent of respondents said they use cash pooling in China. Those that Just under 90 percent believe that have not used cash pooling, said this Chinese growth fundamentals are still was because they do not understand in place. Of these, 94.7 percent also the concept. say that their company is going to expand their cash operations in China A large majority, 74 percent, expect to in the future, in terms of investing in see a decline in customer demand in treasury management technologies. China over the coming twelve months, despite continued GDP growth in the PRC. © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  6. 6. 6 Cash Matters: Cash and working capital management in China Liquidity in China Companies around the world are placing more emphasis on cash and working capital as they tackle the ongoing credit crunch while positioning themselves for an expected upturn in the global economy. The situation in China, however, has the past year, achieving 8.7 percent The changes in the global environment been somewhat different, where GDP growth as at the end of 2009.2 have provided additional impetus for an abundance of liquidity would However, many of its key export finance executives to review their seem to have caused working destinations are still struggling to cope cash and working capital management capital levels to rise substantially with falling consumer demand and strategies. over the last 12 months. This has rising unemployment. led to less of a focus on active cash management and is contrary to Is the credit crunch impacting Are you of the view that growth what is being seen elsewhere, i.e., the growth of your operations in fundamentals are still in place in a tighter management of cash and China? China? working capital1. 1% While much of the world has been grappling with a severe credit 13% 9% 14% crunch, in China money supply levels have risen significantly, in part triggered by stimulus measures. These developments 32% are helping to fuel current liquidity 41% growth and add an interesting dynamic to the efforts of Chinese 90% organisations to improve their cash management strategies. Significant impact on operations Yes This is still important because Some impact on operations Don’t know China has not been immune to the Slight impact on operations No global credit crisis and economic No impact on operations downturn. China’s economy has maintained strong momentum over 1 KPMG LLP’s survey of large European and US organisations (‘Cash is back in fashion, but it is here to stay?’ Insights from 2009 research into cash and working capital management) 2 The National Bureau of Statistics of China (www.stats.gov.cn) © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  7. 7. Cash Matters: Cash and working capital management in China 7 According to KPMG’s China cash 42 percent highlighted the risks of management survey, a majority (74 percent) of respondents expect to see a decline in domestic demand for their products and services over the coming twelve months, despite continued GDP growth. increased bad debt exposure in the coming 12 months. The downturn is impacting some more than others. Export-oriented businesses such as textiles and manufacturing have suffered, for example, while industries 74% of respondents expect to see a decline in domestic serving the domestic market, including There could still be excess capacity in petrochemicals and the IT sector, have demand for their products China due to low consumer demand fared relatively better. and services over the in Europe and the US, as indicated by coming 12 months, despite the December 2009 retail figures. In The rising importance of managing continued GDP growth addition, many companies in China working capital as liquidity tightens, not – both multinationals and large local least in precarious economic times, is corporates - have grown significantly in a message that has not been lost on size over the past decade. They now Chinese companies of late. A corollary have turnovers of hundreds of millions of this is that cash management is of dollars and thousands of employees. In many cases, the finance function and other supporting processes may not have grown and developed at the “Organisations tend to miss same pace. opportunities to release liquidity through improving working Regulatory issues tend to impact large organisations doing business in China, capital management, as they as they are not “in theory” permitted do not consider the implications to lend inter-company without the use for the entire cash conversion of entrustment loans. cycle. For example, a sole focus Executives in China, however, are far on payments efficiency, fails to from complacent about the prospects address liquidity implications or for the year ahead. Fifty-four percent of respondents said they expected to supply chain risk. ” see reduced access to finance while – Philippe Jaccard - Managing Director, Liquidity and Investments Asia Pacific, Global Transaction Services, Citi © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  8. 8. 8 Cash Matters: Cash and working capital management in China Please rate the following scenarios stemming from the financial crisis in terms of their adverse impact on your business Increased cost/reduced availability of credit Customers delaying payment of bills Suppliers demanding earlier payment of invoices Increased pressure from stakeholders to improve cash generation 0 10 20 30 40 50 60 70 80 90 100 % of respondents Extremely adverse impact Very adverse impact Adverse impact Minor adverse impact No adverse impact becoming an increasingly important importance to their operations. This component of the day-to-day running point resonates with the results from a of Chinese businesses. The survey similar KPMG survey conducted across results also confirm that many of its Asia-Pacific in 2008. At that time, 81 respondents recognise the strategic percent of China and Hong Kong-based importance of cash management respondents said they viewed cash to their operations, as the lending management as a matter of strategic momentum slows. importance. According to the China survey, 97 percent of respondents said cash management was of strategic © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  9. 9. Cash Matters: Cash and working capital management in China 9 Case study: Simcere Pharmaceutical Group’s view on liquidity management in China Zhao Zhi-gang, Chief Financial Officer Simcere Pharmaceutical Group is a Therefore, while liquidity and cash firms are conducting forecasts on a manufacturer and supplier of branded flow management isn’t much of a quarterly basis and are not stress- generic and innovative pharmaceuticals problem for our company, I staunchly testing their findings.” in China. The group listed on the advocate the continued development New York Stock Exchange in 2008 of Simcere’s cash management With regards to entrustment loans, and has been continuously expanding strategy.” Zhao says: “We utilise entrustment through acquisitions. Its most recent loans frequently and work closely acquisition, in Q2 2009, saw it buy a In line with Zhao’s commitment to with our banking partner, who 37.5 percent stake in Jiangsu Yanshen Simcere’s liquidity management supports our transfers by providing Biological Technology, which recently programme, his budgeting team various instruments and structural became one of the six licensed conducts cash flow forecasts on a deposits for us. At the same time, producers of the H1N1 vaccine in monthly basis with a forecast period we enjoy an enhanced flexibility China. of one month. Every quarter, these when it comes to cash transfers, as estimates are published in Simcere’s well as preferential interest rates. The CFO of Simcere All in all, I’m a big Pharmaceutical Group “Chinese businesses are, in particular, not doing advocate.” is Zhao Zhi-gang, who enough stress-testing, which I think should be joined the company in “Entrustment conducted on at least a monthly basis in order to 2006. loans deserve effectively manage cash.” more attention in When asked about his China. I agree that views on cash management in China, financial statements. These forecasts the concept might be difficult to Zhao said that he remains committed to are stress-tested with an average understand but it is definitely useful maintaining a strict and robust liquidity variance of 10 percent. for large-sized businesses insofar as regime despite the fact that Simcere it allows for their better allocation is essentially a defensive play. “As a Zhao also notes that Simcere’s of cash and, ultimately, more healthcare company, I’m not particularly various departments all utilise key streamlined cash management worried about falling customer demand. performance indicators, allowing his processes,” he adds. Healthcare is a rapidly developing team to further examine cash flows sector in China and we are supported within the company and – ultimately – Zhao’s strong support for cash flow by government policies. As a result, I’m produce accurate budgeting and cash management processes extends optimistic about the future prospects flow forecasts. to incentives for employees. While for Simcere, as well as the sector as a staff remuneration schemes are whole.” However he does not believe that cash not explicitly related to working flow forecasting practices are being capital performance, Simcere’s However, Zhao is keen to note that widely used across China. “Chinese senior management’s salaries his optimism should not be mistaken businesses are, in particular, not doing and bonuses are correlated for complacency. “I understand that enough stress-testing, which I think to benchmarks including the some industries will be more adversely should be conducted on at least a company’s cash flows over the impacted by the expected fall in monthly basis in order to effectively previous period. customer demand over the near future. manage cash. At the moment, most © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  10. 10. 10 Cash Matters: Cash and working capital management in China The need for cash flow forecasting Visibility and control of cash is the single biggest issue around managing cash in China. In the absence of freely available debt, working capital and trapped cash on the balance sheet can help to provide corporates with an opportunity to unlock much needed cash. According to the survey, 45 percent of respondents said they had limited or inadequate visibility of their cash flows. Accurate forecasting is a crucial tool to identify seasonal trends and risks in cash management as accurate cash and assists in managing stakeholder flow forecasts can help companies to expectations. achieve more efficient use of capital through management of receipts Companies should therefore revisit and payments. It also enables more forecasts more often, monthly rather proactive management of cash, helps than quarterly, for example, and Do you think the management of Are cash flow forecasts cash is of strategic importance to subjected to stress testing or your operations? sensitivity analysis? 3% 34% 66% 97% Yes Yes No No © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  11. 11. Cash Matters: Cash and working capital management in China 11 What are your organisation’s three biggest challenges in terms of managing cash? Collections 37.8% Adequate visibility and 37.8% control of cash flows Dealing with banks 29.4% Government regulations 28.7% Unreliable forecasts 19.6% Payments 17.5% Limited ability to pool and sweep cash 12.6% Lack of adequate electronic 9.8% banking platforms and solutions Availability of timely data 8.4% 0 5% 10% 15% 20% 25% 30% 35% 40% % of respondents towards shorter-term forecasts and times due to performing scenario rolling forecasts. planning, stress tests and cash flow forecasts. Stress testing is also a critical component of cash flow forecasts. According to the survey, 97 percent The KPMG survey confirmed that of respondents noted that they those companies that have conducted now prepare cash flow forecasts. stress tests and maintained a strong It also highlights that 47 percent of cash culture have fared better in the respondents who stress-tested their economic downturn, compared to cash flow forecasts reported that the those that have not. credit crisis had more than a slight impact on their Chinese operations, Companies with strong visibility and compared to 60 percent of those control over their cash and working who did not. capital have also fared better in recent © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  12. 12. 12 Cash Matters: Cash and working capital management in China How often does your organisation Meanwhile companies with higher prepare cash flow forecasts? turnovers are more likely to stress test their cash forecasts – 86 percent of 2% 3% businesses with over USD 5 billion in turnover do so, compared to just 55 9% percent of firms with turnovers of less 11% than USD 500 million. 13% Smaller companies may have less access to expertise or resources to carry out cash flow forecasting. They may also have simpler business 62% models, which may suggest forecasting is less important to them. Conversely however, they may Daily also have weaker balance sheets Weekly which make accurate forecasting of Monthly cash flows all the more necessary. Quarterly Smaller companies may also be Annually more vulnerable to the effects of Don’t prepare cash flow forecasts any disruptions in cash flow, such as delays or shortfalls. “We are observing a renewed focus in improving cash management processes through enhancing visibility of cash flows and managing liquidity risk by stress testing the balance sheet. In essence, companies realise that no firm is immune to the challenging market conditions, but many still operate with rudimentary cash management processes. – Philippe Jaccard ” - Managing Director, Liquidity and Investments Asia Pacific, Global Transaction Services, Citi © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  13. 13. Cash Matters: Cash and working capital management in China 13 Cash flow forecasting plays an liquidity management and identify important role in effective cash opportunities for improving management and raising profitability. cash flows. A regular cash flow Being able to better forecast the forecasting review process also amount of available cash needed enables a company to assess how at any given time, helps companies closely its forecasts match the to better plan and execute their actual flows of cash. Companies with higher turnovers are more likely to stress test their cash forecasts 85.7% of businesses with over USD 5 billion in turnover tend to do so compared to just 54.5% of firms with turnovers of less than USD 500 million © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  14. 14. 14 Cash Matters: Cash and working capital management in China Managing cash and working capital The formation of working capital programmes and accurate, accountable forecasts are all ingredients of efficient cash management, which can directly link through to improved profit margins and share price. Over the past few years, expansion An additional challenge in China is that According to the survey, 60 percent through acquisitions has left some of over-trading. Around 85 percent of of multinational respondents have companies in China with high respondents said they plan to expand undertaken a working capital trade receivables and inventory. To their operations in China; while their improvement programme in China; 71 realise improvements, companies working capital is increasing, other percent of PRC domiciled businesses are turning their attention to facilities are being drawn down. This have also done so. working capital levers: inventories, leads to heightened risk, particularly receivables and payables. And in the export sector, of over-trading, Of those respondents whose as pressure increases on CFOs as the global economy recovers. This businesses prepare cash flow in China to strengthen their therefore enhances the need for forecasts on a weekly basis, 50 companies’ cash measures, greater visibility over cash flows. percent note that their working capital managing working capital is performance improved by more than increasingly a focus. 30 percent after the implementation Have you implemented/are you If so, by what percentage are you expecting to improve working capital implementing a working capital performance? improvement programme in China? 80% 40% 70% 67% 35% 28.7% 60% 30% 50% 25% 23.3% 20.9% 40% 20% 33% 30% 15% 13.0% 20% 10% 7.4% 6.7% 10% 5% 0% 0% Yes No 0 Less than 10% 10-20% 20-30% 30-40% >40% © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  15. 15. Cash Matters: Cash and working capital management in China 15 of a working capital programme. The Organisations that conduct stress programmes. More than one- comparative percentage for those who testing and scenario planning in quarter of respondents (30 percent) prepare forecasts on a quarterly basis times of crisis, have fared better and stated that despite implementing a is 14.3 percent. subsequently may have less need for working capital programme, capital additional funds. Stress testing also performance improved by less Implementing and enhancing working helps to mitigate the risk of covenant than 10 percent. When asked the capital programs can benefit Chinese breaches. same question in the KPMG 2008 based firms in a variety of ways. For Asia Pacific survey, just 13 percent example, anecdotal evidence from the Demonstrating strong cash of those polled noted that capital survey shows that those firms who management can also help performance had been enhanced by have implemented a working capital organisations secure more competitive less than 10 percent. programme are more likely to be able lending rates if credit is required, to source local funds. Furthermore, and may help to persuade lenders to The survey results suggest that over half of those surveyed this year extend credit even in an economic working capital programmes come who stress tested their cash flow downturn. into their own during an economic forecasts went on to say that the slowdown, even when they cause credit crisis had only a slight impact Nonetheless, managing working capital capital improvement of less than on their operations, compared to 40 has undoubtedly become more difficult 10 percent – which, in this climate, percent of those that did not perform in the current economic climate, even could mean the difference between stress testing. for China-focused businesses who a business’s survival and its have implemented working capital ultimate demise. Which of the following scenarios do you expect are likely to occur to 50% Chinese corporates over the next 12 months? Weakening of customer demand 73.5% Reduced access of respondents note to finance 54.2% that their working capital performance improved by Restricted investment 47.6% more than 30 percent after Increased bad debt 41.6% the implementation of a exposure working capital programme 35% 40% 45% 50% 55% 60% 65% 70% 75% % of respondents © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  16. 16. 16 Cash Matters: Cash and working capital management in China Working capital metrics for Chinese-listed companies Given the abundance of liquidity, it would seem that Chinese companies have loosened their control of working capital in the past 12 months. No doubt much of this has been forced upon them as a consequence of the global financial crisis. Going forward however, as liquidity tightens, it will be important for these companies to retain tight control and visibility in order to maintain performance and sufficient levels of liquidity. A recent year-to-date assessment Many organisations in China are Companies need, therefore, to look at of working capital metrics for engaged in exporting goods offshore. the balance sheet and improve internal listed companies in China3 show They may not however, have processes in order to get a better a significant deterioration in the factored in how to properly assess grip on receivables and payables. This Days Sales Outstanding (DSO) or manage their inventory levels. involves looking at the end-to-end from 2008 to 2009, compared to Chinese corporates have therefore process and understanding how cash previous years. For year 2009, listed perhaps taken their eyes off the flows around the business to look companies in China took 20 percent ball on inventory and supply chain for opportunities in the various cash longer to collect their debts. management as they may be more cycles. For instance this may include focused on sales and production. looking at the collections process and At the same time, there has been may involve assessing whether or not deterioration in the time taken for The turnover of inventory in China to extend credit to a customer who companies to pay suppliers. The eroded by 20 days in 2009 from does not necessarily have the ability numbers point to a 39 percent 2008, according to Capital IQ to pay back at the start of the sales increase in the time taken to pay statistics, indicating companies are process, rather than dealing with a suppliers, as companies attempt to becoming less efficient in managing delinquent debtor problem down the stretch payment terms. This may be their inventory. In 2007 the average because they are facing difficulty in inventory turnover for Chinese It took Chinese companies paying or may have requested more companies was 100 days while in 2009 favourable terms. it leapt to 121 days. This indicates that 20% it took companies 20 percent longer Companies also need to be aware to turn over their inventory in 2009 of having too much cash tied up in compared with two years ago. This inventories or receivables, as the represents a significant opportunity cost of financing those inventories for Chinese corporates to assess their longer to turn over their can erode profit margins. inventory management practices with a view to more efficient management. inventory in 2009, compared to 2008 3 Based on financial statements of listed companies in China (Shanghai Stock Exchange and Shenzhen Stock Exchange, excluding the financial sector), as reported by Capital IQ © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  17. 17. Cash Matters: Cash and working capital management in China 17 track. In this example, a company may introduce a process whereby “As a result of the economic crisis, we are focusing customers are segmented in terms on collections more so than in the past. Our sales of their credit risk and managed people are told to go out and collect, so our Days accordingly. Sales Outstanding (DSO) is actually better. Then we The strongest and most resilient work Days Payables Outstanding (DPO) and we try organisations are those that adopt a to extend as do other companies. I think therefore continuous sustainable improvement regime. This enables them to there is more focus now on the balance sheet and respond quickly to changes in market our cash flow is significantly stronger as a result. – ” conditions. Our analysis indicates Regional treasurer of an electronics company in China that working capital presents a real opportunity for companies to unlock cash and improve profitability. Avg. Days Sales Outstanding Avg. Days Inventory Outstanding 70 140 63.93 64.38 60 58.68 120 115.0 56.3 50.95 95.0 98.75 50 100 90.13 87.55 40 80 Days Days 30 60 20 40 10 20 0 0 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 80 Avg. Days Payable Outstanding Avg. Cash Conversion Cycle 72.58 70 140 61.33 61.35 63.15 59.95 60 120 106.8 50 100 95.1 90.15 90.53 Days 40 80 79.73 Days 30 60 20 40 10 20 0 0 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 Source: Based on financial statements of listed companies in China (Shanghai Stock Exchange and Shenzhen Stock Exchange, excluding the financial sector), as reported by Capital IQ. © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  18. 18. 18 Cash Matters: Cash and working capital management in China Treasury for corporates From a liquidity management perspective, China has a raft of regulations in place, including monetary exchange controls, tax regulations and general trade regulations, which have implications on organisation structures. Control over interest rates by However, if a company plans to move loan framework in order to pool cash the central bank, the People’s cash to a separate legal entity within amongst the different entities. Bank of China and restrictions the group or a joint venture operation governing inter-company lending are then it must utilise the entrustment KPMG’s recent survey found that in challenges for organisations trying loan framework. managing their cash, over 56 percent to establish an optimised liquidity of respondents said they do not use structure in China. With the evolving Multinationals and large Chinese cash pooling in China. Businesses with market in recent years, a few corporates have tended to expand larger annual turnovers are more likely major foreign and domestic banks in China via acquisitions or joint to have utilised entrustment loans in have been successful in providing venture arrangements, which create the past, with 67 percent of those effective cash-pooling solutions multiple legal entities and joint venture corporates with a combined annual to help companies improve their relationships. Therefore the majority turnover in China of USD 5 billion or liquidity management. of organisations use the entrustment more having done so. On the other Conceptually, cash pooling allows Have you used cash pooling in If no, what was the main reason companies to move cash freely China (cash entrustment loans)? why? amongst their legal entities and their business units. In China, 5% however, in order to move cash 6% to other legal entities within the 8% 33% group, companies must utilise the 44% entrustment loan framework which 14% 56% is facilitated by financial institutions such as banks, while pricing is at arm’s length. 15% 19% Cash pooling in China can be used without the need for an No Do not understand the concept entrustment loan, if an organisation Yes Administrative burden has one legal entity with operating Cost outweighs any benefit subsidiaries or units which are part Complexity of that entity – in this instance it Absolute cost is possible to move cash freely Bank fees and charges amongst those business units. Tax issues © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  19. 19. Cash Matters: Cash and working capital management in China 19 hand, only 30 percent of businesses understanding. In fact, eight years after Does your treasury division follow with annual turnovers of USD 500 they were first introduced, entrustment a centralised or decentralised loans in China still continue to divide model in China? million or less have previously used entrustment loans. cash management specialists. Some believe that the entrustment loan China-based companies are process – while helpful in allowing 16% comparatively less likely to businesses located in China to transfer be dissuaded from utilising funds between subsidiaries – is unduly entrustment loans because of complex and, as a result, inefficient. their complexity – only 35 percent of China-based firms who have In contrast, others believe that such not used them ascribe this to a process forms a crucial component 84% the fact that they found the of China’s cash liquidity landscape process complex and/or difficult to compared to other transfer procedures understand. such as transfer pricing and leading Centralised and lagging techniques, ultimately Decentralised A number of foreign-based allowing firms to use cash pooling respondents noted that their techniques in China. business has not previously set ‘at arm’s length’. However, given utilised entrustment loans. Other On the face of it, entrustment loans that the rates used for entrustment businesses noted that they did not offer an effective way for business loans generally match the PBOC rates, require entrustment loans because subsidiaries located in China to arm’s length pricing issues should in they generated enough operational transfer funds between themselves most cases not arise. cash flow from local operations to as well as overseas divisions. The fund themselves. entrustment framework is considered One of the tax issues to be mindful of more efficient than alternative is that business tax of 5 percent will be In addition, organisations that are transfer methods on the basis that it payable on interest charged on funds less sensitive to commodity price reduces interest and administrative on-lent by the bank to the associated fluctuations, meanwhile, are more costs, ultimately resulting in better entity. Interest received on deposits likely to use cash pooling or cash liquidity management. Interest placed with banks are not subject to entrustment loans, as they may get costs fall because cash surpluses in business tax, therefore, the additional margin calls or need to have cash one area of the business can now tax charge needs to be factored in to on call if they are using hedging supplement cash deficits in others, the overall cost of the entrustment techniques. ultimately removing the need for loan arrangement. external financing. At the same time, Banks, therefore, play an important entrustment loan rates can also be One China-based firm surveyed stated role in educating their customers set at a discount to the country’s that “our enterprise is an old state- on the benefits of cash pooling, as benchmark rate – as long as they are owned company and the management there tends to be a general lack of © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  20. 20. 20 Cash Matters: Cash and working capital management in China model is traditional”, which effectively Furthermore, the introduction of practical considerations may meant that cash pooling was too the Pudong Nine measures (where mean that implementation is much of an administrative burden to selected businesses headquartered in anything but. Corporates looking be worthwhile. Some respondents the Pudong District of Shanghai would to enhance liquidity through such explained that cash pooling had benefit from relaxed foreign currency a framework should ensure that not been used in the past because restrictions) has also done little to they fully understand the underlying entrustment loans require a high boost entrustment loan utilisation by complexities of the process before level of credit worthiness, precluding foreign-based companies. embarking on such an exercise, their firms from utilising the process. preferably seeking professional Another respondent noted that “cash It is therefore clear that while the advice in order to avail of China’s pooling is too complex a procedure entrustment loan framework is – in entrustment framework. to coordinate over a business with 20 theory – a simple and robust process, subsidiaries”. What practical difficulties do you face when moving cash within China, remitting cash out of China or remitting cash into China? 1.0% 1.2% 0.9% 100% 90% 18.8% 22.4% 29.2% 80% 70% 28.1% 25.9% 60% 23.9% 50% 40% 30% 52.1% 50.6% 46.0% 20% 10% 0% Remitting cash out of China Remitting cash into China Moving cash within China Other Security Restrictions on amounts Time delays © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  21. 21. Cash Matters: Cash and working capital management in China 21 If you have used cash pooling If you are required to submit surplus outside China, has the introduction funds to parent businesses outside of the new PRC tax rules concerning China, what form will this take? controlled foreign companies, impacted how you manage your cash outside China? 3% 3% 3% 13% 19% 6% 37% 31% 85% Significant impact Dividends Marginal impact Service fees Minimal impact Interest No impact at all Royalties Entrustment loans “We have had cash pooling in China since 2005. The investment holding company in Shanghai runs the cash pooling for our group of companies. We have found that cash pooling is a very critical component for us for managing cash in China. We can centralise the cash in one location to support various corporate objectives. We also found that after setting up two- tier cash pooling, we are in a much more effective position to manage counterparty exposure. – Henry Ma, Treasury Director, ” Emerson Electric Asia-Pacific © 2010 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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