A Tailored Approach

What's sometimes lost in the discussion about the growing commercial ties between the United States and China and India is the fact that European businesses remain major trading partners of many North American companies. Exports from North America to Europe totaled $216 billion in 2004; imports were valued at $367 billion, reports the World Trade Organization.

For many treasurers, then, managing their company's European cash flows is a critical job responsibility, and one that's made more complicated by the mix of languages, cultures and regulations on the continent. However, as these two case studies show, an effective cash and treasury management strategy designed to accommodate Europe's complexities can result in significant efficiencies, enhanced investment returns and more effective tax management.

Avnet Distributes Its Cash Management

With locations in more than 70 countries, Phoenix-based Avnet Inc. distributes computer products and electronic components to just about everywhere around the globe. Until the early 1990s, most of Avnet's operations stopped at the borders of the United States, says Ray Sadowski, CFO of the $16 billion company. Since then, Avnet has acquired about 45 other companies. Twenty-five or so of the acquisitions bolstered Avnet's European operations, and about one-third of the company's revenue now comes from Europe. Avnet now has more than 100 active legal entities in Europe, Sadowski says.

In 2000, Sadowski and his team began developing the treasury structure that's currently in operation in Europe. First, they hired three treasury professionals to run Avnet's European treasury center in Belgium, and another employee who is based in Germany. These professionals partner with the finance teams that are housed within the operating units, where they provide business support and handle financial operations.

This organizational structure enables these treasury professionals to work with the business units to provide cash management information and assist in identifying and hedging foreign exchange exposures. At the same time, it offers the tax and cash management efficiencies of a centralized treasury function. "If you look at the complexities, as well as the need for tax and cash efficiency, you have to do some treasury on a centralized basis," says Sadowski.

Avnet also established cash pooling bank accounts in about a dozen European countries. Each of these master accounts receives funds from 10 to 12 sub-accounts; because Avnet has multiple legal entities in each country, it needs a separate bank account for each entity. The sub-accounts are designed to zero out at the end of each day; any cash remaining in the account is transferred to the master account for the particular country. If a sub-account is short of cash, it can draw from the pooling account to bring its balance to zero.

In setting up Avnet's banking structure, Sadowski chose to work with one bank in each country, rather than using a single bank for all of Europe. One reason for this arrangement is the fact that Avnet occasionally needs to borrow up to about $1 billion in working capital at the corporate level. "You need a lot of banks to do this," Sadowski says, adding that Avnet's credit syndicate includes about 20 banks. These banks gain a share of Avnet's cash management business as well. "They're willing to participate in the lending side of the business," says Sadowski. "Part of the partnership is asking where we can use those banks so they can make money."