Electronic Payments and Cash Forecasting

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Electronic Payments and Cash Forecasting

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Electronic Payments and Cash Forecasting

Realizing cost savings and more precise cash forecasting at the Celanese Americas Corporation

The author is responsible for the content of this paper. The copyrights of this paper are founded on the author

Author: Arthur de Groot

Student Number: 0998346

Professors: Dr. W. Westerman, mr. drs. H.A. Ritsema Coach Celanese: Kevin Stock

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Preface

This Thesis is the outcome of the research that was conducted during an internship between the 9^th of October 2003 and the 30^th of April 2004 at the Cash Management Department of the Celanese Americas Corporation in Summit, New Jersey. It was written during the remainder of 2004 and the first half of 2005. The thesis was part of the last stage of the study Management and Organization at the Rijksuniversiteit Groningen. In order to obtain my Masters degree I had to conduct an independent research project of approximately half a year in an existing organization and write a report on this research. Because my specialization is financial value management it needed to be an interesting financial subject.

The choice for an internship in the United States was made because this is still a country that takes a leading role in the world’s economy and the financial world. I also always wanted to do a part of my studies abroad and this seemed like a perfect opportunity. The fact that Summit lies in the proximity of New York made it even more interesting. This great city was unlike any other I ever visited and made a huge impression on me and everybody that visited me during my stay in the US.

This thesis would have never been written without the assistance, coaching and critical feedback of numerous people. First of all I would like to thank Dr. H.E.J.

Kruisheer for his efforts that resulted in my internship at Celanese. I am very grateful that he made this possible for me.

I would also like to thank Marcel van Amerongen and Judy Yip. Despite their busy schedules at Celanese they took the time to find the perfect environment for to do my research. I owe a great deal of thanks to all the people of Celanese in Summit that made it possible for me to conduct my research, especially my colleagues at the Cash Management Department. There are two persons I owe special thanks. Kevin Stock and Cheryl Crawford supported and coached me enormously during my internship, were always available for questions and tried their very best to introduce me into the subject. I will never forget them for all their help and making me feel truly at home.

Another word of thanks goes out to my professors Dr. W. Westerman and mr. drs.

H.A. Ritsema, who gave me the right critical feedback to ensure the scientific relevance of this thesis, even though this thesis turned out to be a much longer process than I had anticipated.

Last but not least I would like to thank my parents and my girlfriend for supporting me during the writing that took place in Summit (US), Amsterdam (NL), Willemstad (NA) and Holten (NL). They have always believed in me and their support helped me to find the motivation to finally finish this thesis.

I hope you will enjoy reading this paper.

Arthur de Groot

Holten, July 20^th 2005

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Executive Summary

The United States is known for its excessive reliance on checks. While this situation will ultimately change due to market forces and regulation, the current opportunity is for a forward-thinking corporation to convert its North American payments to electronic payment forms. In addition to enabling better cash management and diminishing risks, the straight-through processing associated with electronic payment processing reduces costs.

This thesis provides recommendations to the Celanese Americas Corporation (CAC) Cash Management Department about realizing cost savings and more precise cash forecast capabilities by improving its payment system. The questions that have to be answered to achieve this are: What electronic payment form should CAC use, how can the company convert its North American payments to this payment form and what will be the impact on cost and cash forecast?

Concerning the electronic payment form, CAC has the choice between paying by check, by electronic wire or by Automated Clearing House (ACH) payment. The cost analysis shows clearly that the ACH is the more cost effective payment method for CAC. The variable cost of an ACH is less then one tenth the variable cost of a check.

Wires are much more expensive. The savings if 100% of the checks and US wires are moved to ACH would be approximately $75,000 a year.

Another big advantage of an ACH payment over the check is that a check relies on the hard-to-predict mail and check clearing system. The greater predictability of cash flows because of ACH payments results in better cash management forecasting.

To obtain the information needed to be able to do future payments by ACH, a large mailing to all the vendors of Chemicals was prepared. In this mailing the vendors were asked to enrol for the Celanese ACH payment method by filling in the needed information and send this back to CAC. Nine month after the enrolment forms were send out, the check is still the mostly used payment method at CAC. In January 2005 a payment is in 78% of the transactions done by check and only 22% is an ACH. This means the use of ACH’s is only up 8% since Q3 2003.

This increase in the use of ACH payments can however not have had a positive impact on the preciseness of the cash forecast. The reason why more ACH’s would have improved the accuracy was the greater predictability of cash flows when using this electronic payment form. To be able to take advantage of this increased predictability it is necessary to use automatically updated (‘live’) data from the Account Payable (A/P) and Account Receivable (A/R) Departments in the forecast. In Q3 2003 CAC wasn’t doing this and only used historical data. This didn’t result in very trustworthy forecasts. Information from the Cash Management department confirms that in January 2005 CAC is still only using historical data.

Because of the low conversion rate it is recommended that CAC undertakes another attempt to switch more vendors to ACH payments. This doesn’t have to be done all at once, but certain arrangements have to be made to gradually convert all the check payments to the electronic ACH. To make this attempt more successful it is very important that the senior management supports the project. This support has to be clearly communicated to all involved parties and the necessary resources should be made available. Secondly the parties involved have to be told why this is

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upon so that the people and departments that carry out the operation can be held accountable for meeting these quotas.

Celanese still uses a very basic manual Excel spreadsheet based on historical data to compile its cash forecasts. Because of this Celanese’s level of forecasting accuracy isn’t very high and as a consequence the company is not making full use of the amount of money it holds. Bad cash flow forecasting is making Celanese less efficient than its peers. This is why Celanese should try to improve her cash forecasting. Known barriers for successful accurate cash forecasting that have to be kept in mind are inadequate inter-departmental coordination and communication, poor systems integration, and the awareness of all parties of the importance of accurate cash forecasting. A crucial aspect to overcome these barriers is the endorsement by senior management. This means senior management gives accurate cash forecasting priority, allocates necessary resources, management is involved in continuous improvement of the process and can clearly articulate and endorse the cash forecasting process.

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1 Celanese and Cash Management

1.1 History

In 1863 Carl Friedrich Wilhelm Meister, Eugen N. Lucius und Ludwig August Müller set up a production facility in Höchst am Main to manufacture coal tar dyes¹. The chemist Adolf Brüning, who became a co-partner in 1865, five workers and a clerk, formed the company's first workforce. Hoechst's first product was fuchsine, a purple- red dye, earning the young company the nickname of the "Red Factory" among its neighbors. Based on hard coal products, a wide range of dyes were developed and sold throughout the world. The company modernizes its legal structure by becoming a joint stock company and lists its shares on the Frankfurt stock exchange in 1888.

In 1912 Henri Dreyfus, working for Hoffmann La Roche at the time, asks the entrepreneur Alexander Clavel-Respinger for financial support and assistance in the production of fireproof celluloid out of cellulose acetate. On December 28, 1912, Clavel and the two Dreyfus brothers set up "Cellonit Gesellschaft Dreyfus & Co." in Basle. Cellonit contributes greatly to the development of new film materials and finds a sponsor in the Parisian film industrialist Pathe. The product line is diversified to include paints for German airplanes and Zeppelins. The British Government invites the Dreyfus brothers to Britain to produce their new airplane paint along with the intermediate product acetic acid which was being imported from Canada at the time due to the First World War. The British Government patented the process developed by Henri Dreyfus which lowered the costs of acetic acid anhydride production.

"British Celanese & Chemical Manufacturing Co." is set up. Henri Dreyfus manages the company with its workforce of up to 14,000. Under the guidance of Camille Dreyfus, "The American Cellulose & Chemical Manufacturing Company", known as

"Amcelle" for short, is founded in New York with a production facility in Cumberland, Maryland. The company gets into difficulties when all its paint contracts are cancelled after the First World War. The Dreyfus brothers concentrate on the production of acetate fibers. "British Celanese & Chemical Manufacturing Co."

changes its name to "British Celanese Limited".

In 1921 British Celanese begins commercial production of acetate yarn, taking advantage of a number of its new inventions, ranging from the technique used to spin thread to the treatment of dyed fibers. This change in direction ensures the company's survival. The Dreyfus brothers' U.S. subsidiary changes its name from Amcelle to "Celanese Corporation of America" in 1927. The company, which produces fibers, plastics and chemicals, becomes one of the largest chemicals manufacturers in the country. In 1926, Celanese Canada is founded.

Between 1945 and 1960 Celanese establishes production plants in the Texan cities of Bishop in 1945, Corpus Christi in 1946 and Pampa in 1952 for the production of acetaldehyde, formaldehyde, methanol, and acetone. But Celanese fibers remain the company's most important product line. The use of acetate tow in cigarette filters opens up a new business area.

In 1987 Hoechst AG acquires Celanese Corporation for $2.85 billion. After the approval of the friendly takeover by the U.S. cartel authorities on February 20, 1987, Celanese and American Hoechst Corporation join forces to form Hoechst Celanese Corporation in the U.S. Celanese strengthens Hoechst's fiber, organic chemical and specialty chemical businesses.

1 http://www.celanese.com/index/about_index/history

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In 1994 the project "Transition '94" starts: the beginning of the realignment of the Group and the introduction of a new organizational structure. As a result of the strategic realignment of Hoechst AG, the various businesses are transferred to independent companies. The global basic chemical, cellulose acetate, phosphorous and chlorine businesses become part of Celanese. The independent company Ticona - market leader in the field of polyacetals - runs the technical polymers business.

In May 1997, the Annual General Meeting approves the realignment of the Group.

On July 1, Hoechst AG becomes a Strategic Management Holding company and no longer does any operating business itself.

At its autumn press conference in 1998, Hoechst announces plans to demerge most of its chemical activities to the new Celanese AG because it is the most direct, quickest and simplest way to speed up the transformation of the Group. On December 1, Hoechst and Rhône-Poulenc S.A. announce their plans to merge their life science businesses into the new company Aventis S.A., based in Strasbourg.

At an Extraordinary General Meeting of Hoechst AG on July 16, 1999, the overwhelming majority of shareholders agree to spin off Celanese AG into an independent company. The so-called demerger is part of Hoechst's strategy of focusing on its life science businesses. On October 25, 1999 Celanese AG becomes a publicly traded German stock corporation listed on the New York and Frankfurt stock exchanges.

After a voluntary public takeover offer for all outstanding shares in Celanese AG by the New York based company Blackstone Capital. The Board of Management announced on March 29, 2004 that the minimum acceptance conditions for the takeover have been met. In a reaction to substantially decreased trading volumes at the New York Stock Exchange, the Board of Management also authorized the submission of all filings with the NYSE and the U.S. Securities and Exchange Commission necessary to de-list the company’s shares from the NYSE.

In November 2004 Blackstone Crystal Holdings Capital Partners (Cayman) IV Ltd.

(the controlling legal entity of Celanese subsequent to the successful takeover of Celanese AG by Blackstone) changes its name to Celanese Corporation. Celanese Corp. is headquartered in Dallas, Texas, and is the parent company of Celanese’s North American operations and Celanese AG. Henceforth Celanese AG is the holding company for Celanese’s European operations and most of its Asian activities.

Following a successful initial public offering (IPO) in January 2005, Celanese Corp.

becomes a publicly traded corporation again on the New York Stock Exchange.

1.2 Profile

Celanese AG is a global chemicals company with leading positions in its key products and world class process technology. Celanese generated sales of around € 4.1 billion in 2003 and has about 9,500 employees. The company has 24 production plants and six research centers in 10 countries mainly in North America, Europe and Asia.

Celanese Corporation shares are listed on the Frankfurt stock exchange (stock exchange symbol CZZ) and the New York Stock Exchange (CE).

Celanese focuses mainly on basic, intermediate and specialty chemicals, emulsions,

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hold No.1 or No.2 global market positions. Strengths include its global market presence, comprehensive know-how in process and production technology, application development expertise and a competitive cost structure. The Celanese portfolio consists of four main businesses: Chemical Products, Acetate Products, Technical Polymers Ticona and Performance Products. The Performance Products business consists of Nutrinova sweeteners and food ingredients.

Chemicals Products is the largest segment, with 66 % of total segment sales. The product range of this segment consists of basic chemicals such as acetic acid and vinyl acetate, performance chemicals such as polyvinyl alcohol and emulsions, and specialty chemicals. The most important customers are in the chemical, paint and coatings, construction, and adhesive industries.

With Ticona’s technical polymers (16 % of total segment sales), Celanese is well positioned at the upper end of the chemicals value chain. Ticona offers value-adding products and services for its customers, e.g. in the automotive, electronics, telecommunications, and medical industries.

Acetate products business of Celanese is one of the world’s largest producers of acetate tow and filament. The segment makes up 14 % of Celanese’s total segment sales. Acetate products are primarily used in cigarette filters, as well as in the production of fashion apparel and linings.

The food ingredients business Nutrinova makes up 4 % of total segment sales.

Nutrinova produces the high intensity sweetener Sunett®, the preservatives Nutrinova® Sorbates, and health-promoting food ingredients.

These four main businesses are controlled by corporate staff departments which are mainly located in Kronberg, Germany, and in Summit NJ and Dallas TX, in the USA.

1.3 Corporate Treasury

One of the staff departments is the Corporate Treasury Department. Corporate Treasury operates as a service centre and not as a profit centre. Therefore, profit generation is not a primary objective. Corporate treasury supports the legal entities owned by Celanese, by providing financing and financial services at competitive cost, ensuring that financial risks are kept within limits. The Corporate Treasury operates as one Department with two Locations, Kronberg in Germany and Summit, New Jersey in the USA. “Kronberg” giving support to Europe, Asia, Africa and Australia, while “Summit” is giving support to the Americas

Solvency

Sufficient liquidity is to be maintained to ensure that all payment obligations of Celanese can be fulfilled at all times. For the purpose of this thesis, liquidity is defined as cash and cash equivalents plus liquidity reserves, the latter comprising temporary overdraft, Commercial Paper programs, asset backed securitizations and long-term committed bank facilities. A pro-active cash management is to be pursued including cash flow projections and cash pooling/cash concentrating on a country or regional level, whenever legally feasible and economically justified, to avoid idle cash balances in order to optimize the net interest result of Celanese.

Financial independence and flexibility

It is Corporate Treasury’s goal to reduce financial dependence from Celanese’s lenders at any time. Financial flexibility is to be ensured through a broad base of banks and debt capital markets, as well as various financial instruments.

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The objectives for corporate treasury at Celanese made visual:

Cost of funding

External short- and long-term financing has to be secured at cost in accordance to Celanese’s rating or better. Tax-efficient financing structures for Celanese have to be established in co-ordination with the Corporate Tax Department. Corporate Treasury arranges group-internal borrowing and lending at arm’s length, in order to optimize the use of internal funds and to reduce external interest.

Financial risk management

Corporate Treasury emphasizes an active monitoring of financial risks (FX and changes in interest rates) to ensure that risk exposures are transparent and managed considering market views. FX and interest rate risks arising out of legal entity operations are concentrated at Corporate Treasury.

Financial image

Corporate Treasury actively pursues a frank and constructive dialogue with its banks and debt capital-markets and also maintains a close relationship with its rating agencies.

These treasury objectives are being realized by the treasury activities; financial risk management, asset management, treasury controlling, banking policy, external financing, inter-company borrowing and lending and cash management (see figure 1.2).

1.3.1. Financial Risk Management

All financial risks (currency risk, interest risk, credit risk and counter-party risk) are managed centrally by Corporate Treasury. The goal of financial risk management is to monitor and measure the major financial exposures of Celanese and to set targets for the limitation of financial risks in order to reduce negative impact on cash flows and earnings. The use of hedging instruments is only used in the context of underlying positions in order not to expose Celanese to additional risks.

Solvency

Financial Targets System at Celanese Group Financial

Image

Financial Independence and Flexibility

Financial Risk Management

Cost of Funding

Figure 1.1: Treasury objectives Source: Celanese Americas Corporation

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1.3.2. Asset Management

Corporate treasury is responsible for the management of liquid assets and defines a global strategy. Surplus funds are invested into highly liquid assets with counter- parties that have a rating of “A” or better by Standard & Poor’s or compatible. In the US Corporate treasury also manages pension fund assets.

1.3.3. Treasury Controlling

It is Corporate Treasury’s goal to have a standardized treasury reporting and controlling process for the whole of Celanese. The reporting is an information tool for financing, risk and asset management decisions. It allows monitoring the liquidity and risk positions of Celanese as well as the treasury performance.

Treasury is in charge of:

• Developing reporting and analysis tools

• Defining standards for legal entity treasury reporting

• Monitoring risk positions

• Validating forecasted financing plans and budgets of legal entities

• Optimizing treasury processes.

1.3.4. Banking Policy

It is Corporate Treasury’s goal to ensure that all legal entities always have access to reliable and efficient banking services. Celanese works with a selected number of core banks and a limited number of approved non-core banks. Corporate Treasury ensures that financial independence towards banks is maintained.

Corporate Treasury is responsible for the maintenance and support of bank relationships from the beginning of a relationship to its exit and defines the criteria for core banks. It reviews the bank relationships on a regular basis. An updated List

7. Banking Policy

Corporate Treasury Activities

3. Financial Risk Manage- ment

2. Treasury Controlling

1. Cash Manage- ment 5. Inter-Company

Borrowing and Lending

6. External Financing

Figure 1.2: Treasury activities

Source: Celanese Americas Corporation 4. Asset

Manage- ment

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of Core Banks and Approved Non-Core Banks is made available regularly. In order for Corporate Treasury to review the performance of banks, legal entities will provide regular feedback on the quality of services obtained from their banks.

1.3.5. External Financing

External financing (Corporate Finance) of Celanese can be achieved through debt and equity. The key goals are to optimize cost of external debt, minimize low and non-interest-bearing liquidity to reduce gross financial debt, assure that CG always has access to different funding sources and maintain investment grade credit rating.

Corporate Treasury initiates, negotiates and finalizes all external debt instruments with banks and debt capital markets.

1.3.6. Inter-company Borrowing and Lending

It is Corporate Treasury’s main goal to maximize the use of internal liquidity for inter-company borrowing and lending. This allows Celanese to reduce external debt and optimize cost of funding. Therefore, group internal financing has priority over external financing sources.

1.3.7. Cash Management

The goals and principles of cash management can be summarized as:

• Minimize low/non-interest bearing liquidity by concentrating cash on a group level

• Utilize surplus cash to reduce interest-bearing debt

• Establish cash pooling structures in each country where feasible and sensible and include legal entities in local cash pool arrangements

• Obtain global, daily transparency of Celanese’s cash position

• Ensure a cost effective process (lean structure).

These goals and principles result in a number of tasks that are part of Cash Management: first of all the monitoring of Celanese’s cash situation and the identifying of liquidity positions at an early stage, secondly the managing of cash positions, the third task is the managing of cash pools and the fourth is executing all payments that are done at corporate level.

1.4 Cash Management

This research was focused on the Cash Management activity of Celanese and to be more precise on the Cash Management activities at the Corporate Treasury location in Summit NJ, USA, which supports al legal entities in the Americas. This treasury department is part of Celanese Americas Corporation (CAC), which was at the time of this research fully owned by Celanese AG (CAG). The hierarchy of departments can briefly be seen in figure 1.3.

The heart of corporate short-term financial management is the efficient collection, movement, and disbursement of cash. Effective management of payables, inventories, and receivables frees up cash, but the ultimate benefit is predicated on the effectiveness of the company’s cash management system [Maness & Zietlow, 2002].

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Figure 1.3: Celanese treasury departments Source: Celanese Americas Corporation

An important part of the cash management system is the methods used to collect and disburse money. The means by which most payments in the USA are processed through the payment system are by paper Check, by Automated Clearing House (ACH), or by Wire transfer. Of these three payment methods the ACH and the Wire transfer are electronic payments.

The United States is known for its excessive reliance on checks. (In 2003, the Federal Reserve processed 36.7 billion checks.)² While this situation will ultimately change due to market forces and regulation, the current opportunity is for a forward- thinking corporation to convert its North American payments to electronic payment forms. In addition to enabling better cash management and diminishing risks, the straight-through processing associated with electronic payment processing reduces costs [Skerritt, 2003]

It is estimated that generating a paper check can cost more than $2.00. With exceptions and dispute management, plus banking charges, the cost can rise to over

$8.00. Moreover, paper checks rely on the hard-to-predict mail system. This prevents cash or treasury managers from effectively planning their cash position and freeing up more funds for investment or debt reduction [Babb, 2003]. In other words: paper checks are cost inefficient and make it harder to do an accurate forecast.

Liquidity and credit constraints have been a primary focus of many treasurers during the economic slowdown since 2001. The combination of tight credit availability and a significant number of rating downgrades has focused attention on liquidity and access to credit. While not the sole answer to liquidity and credit difficulties, effective cash flow forecasting can provide an improved understanding of the liquidity dynamics of an organization and the actual amount of external credit required.

Companies that have implemented effective cash flow forecasting have found that they are able to manage their borrowing activities more effectively and plan liquidity needs more precisely [Skerritt, 2003].

Also Celanese is struggling with the difficult economic environment. As a chemical company, it suffers greatly from the high and volatile raw material and energy

2 http://www.federalreserve.gov/boarddocs/press/other/2004/20041206/default.htm Corporate Treasury CAG

Corporate Finance &

Cash Management CAC (Summit)

(

Corporate Finance &

Cash Management

Other Treasury Functions

Corporate Finance Regions Cash Management

Corporate Finance CAC (Summit) Cash Management CAC

(Summit)

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prices. Add to this the fact that profits significantly suffered from the weak dollar because most of its turnover is generated in North America. In the beginning of 2004 this resulted in the company being downgraded by Standard and Poor’s from a BBB to a B+ credit rating which makes it more expensive for the company to borrow money.

The above stated considerations, together with the in paragraph 1.3.7 stated goals and principles: - Obtain global, daily transparency of Celanese’s cash position - and - Ensure a cost effective process (lean structure) - made it desirable for the CAC cash management to do this research. The structure of this research will be presented in the next chapter which describes the research methodology.

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2 Methodology

This chapter will describe the methodological core of the thesis. First, it defines the type of research. The next step is the problem definition. The problem definition consists of three parts: the research goal, the research question and the essential preconditions. After the problem definition the sub questions are presented. These sub questions form the basis of the following chapters of this research. The sub questions are derived from the conceptual framework. This framework graphically sets out the steps to be taken in the research.

2.1 Type of Research

This research is done because the cash management department thinks that a conversion from paying with paper checks to an electronic payment system would have a positive effect on payment costs and cash forecasting. The object of this research is to analyze this presumption, by executing part of the conversion and then test the results. This implies that this research will include both an analysis of the current payments and payment possibilities, as the implementation plan of the conversion to an electronic payment method. The research can therefore be typified as problem solving research [Leeuw de, 2001]. It intends to deliver a set of measures that aim to solve the entire problem instead of only delivering a part of the total knowledge necessary. In this case the problem is: “Can it be done better?” and if yes: “How?”

2.2 Problem Definition

In short, the problem definition expresses what exactly you want to know and why.

It tells the intended research product, who you are making it for, what the quality aspects are and what essential preconditions apply. The problem definition consists of three components [Leeuw de, 2001]:

• Research goal (2.2.1)

• Research question (2.2.2)

• Essential preconditions (2.2.3) 2.2.1 Research goal

The goal of this research can be defined as:

To provide recommendations to the Celanese Americas Corporation (CAC) Cash Management Department about realizing cost savings and more precise cash forecast capabilities by improving its payment system.

2.2.2 Research question

The main research question can be defined as:

What electronic payment form should the Celanese Americas Corporation (CAC) use, how can the company convert its North American payments to this payment form and what will be the impact on cost and cash forecast?

This research question will be divided into several sub questions (2.3) based on the conceptual framework presented in paragraph 2.4.

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2.2.3 Essential preconditions

The preconditions can be divided into two categories. These two categories are:

preconditions that apply to the final product and preconditions applying to the research process.

Preconditions in relation to the product are:

• Celanese has recently implemented a new company-wide information system known as the OneSAP platform. To guarantee the integration of the cash management and accounting systems, it has to be possible to process the electronic payment form with the help of this new platform.

• Any information relating to clients or the Celanese Americas Corporation that is not public in nature has to be kept strictly confidential. In order to fulfill this condition, but also to meet the university’s demand that at least a major part of the thesis with the main findings has to be public, this thesis is a version that contains no confidential information.

Preconditions in relation to the research process are:

• This research is performed as an assignment of the CAC Cash Management Department to give recommendations about the conversion to an electronic payment form. Therefore it should meet their requirements.

• The research is also the researcher’s final assignment (thesis) for the completion of his Master of Science ‘Financial Value Management’ degree at the faculty of Management and Organization in Groningen, the Netherlands.

Therefore it should meet the scientific demands that apply to this final assignment.

2.3 Sub Questions

The sub questions as derived from the conceptual framework are as follows

1. By which means is it possible to process payments through the US payment system and what is the basic theory of Cash Forecasting?

Sub question 1 is answered in chapter 3. To be able to comprehend the cash management slang and make proper recommendations about payment forms and forecasting, the US payment system and cash forecasting is explained from available literature on this subject.

2. How and in what volumes are the entities of CAC currently paying its vendors and in what way does the Cash Management department forecasts its Cash position?

Sub question 2 is answered in chapter 4. To get a good view of the possibilities and restrictions of CAC payments an analysis is made of payment volumes and dollar amounts of all CAC entities. Another analysis will be made of the way the Cash Management Department is forecasting its cash position. This data together with the data collected in chapter 3 will form the basis of the choice of electronic payment form best fit for CAC.

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3. What payment form should CAC use and what would be the expected advantages?

Sub question 3 is answered in chapter 5. This is where the choice of payment form will be made, based on the data collected in the previous two chapters. It will be made clear what electronic payment form would be best for the entities of CAC to cut cost and improve their cash forecast accuracy. The figures and arguments used are all based on the specific CAC situation but would probably also apply for most same sized US companies. This makes the conclusion a contribution to the general cash management issues within US based companies.

4. How can CAC convert to the selected payment form and what are the actual results of the conversion?

Sub question 4 is answered in chapter 6. This chapter presents the process of the conversion to the selected electronic payment form. With “the conversion” is meant:

the process of changing as much as possible paper based payments to the selected electronic form. This conversion involves planning, management and controlling of the progress. The chapter also shows the results of the conversion based on the data collected. The results will be compared to the payment situation before the conversion and to the predictions made in Chapter 3.

5. What recommendations can be made to the CAC Cash Management Department concerning its payment en cash forecasting system?

Sub question 6 is answered in Chapter 7. This Chapter will contain recommendations to the Celanese Cash Management department about cost savings and cash forecast accuracy improvements trough the conversion to an electronic payment form.

2.4 Conceptual Framework

One can say that a good research needs to be anchored in two directions. These directions are the world of theory and in world of concrete observation. To get this dual anchoring, one should do the conceptualisation and operationalisation in close relation with the problem definition [Leeuw de, 2001].

The conceptual framework is a pragmatic instrument to look at reality and to visualize the research. The conceptual framework of this research is stated in figure 2.1.

The conceptual framework as stated shows the steps to be taken to acquire the knowledge to answer the research question. These steps lead to the subquestions that form the basis of the chapters of this thesis.

2.4.1 Literature on: US payment forms and Cash forecasting

To get a good view of the payment form possibilities CAC can choose from, it has got to be clear what sort of payment forms are available for North American payments.

This part of the research will therefore survey the major types of depository financial institutions, and identify the means by which most payments are processed through the payment system. Because the cash forecast capabilities of CAC will be an important evaluation aspect of the success of the electronic payment form, this section will also look into the basic literature on this cash management function.

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2.4.2 Celanese Americas Corp. analysis

An analysis of the current payments and payment system of CAC will have to be presented. This should be done to be able to select the best alternative out of the possible payment methods. Another aspect of the analysis of the CAC payments is the evaluation. To be able to properly evaluate the impact of a conversion to an electronic payment form, it is important to have a clear ‘before’ view of the payment cost and forecast capabilities of the cash management department.

2.4.3 Choice of payment form

In this section of the research, a well grounded choice of payment system has to be made. As shown in the conceptual framework this decision is based on the input from the two above stated analyses. The choice will be based on the pros and cons of the payment forms in general, as well as specific for CAC. If the CAC Cash Management Department wants to go through with a conversion, it is important to be able to give a detailed and reliable overview of the cost savings and other advantages. This is important because the department will have to be able to explain its actions to its superiors and it will also need the cooperation of other departments, which will be much easier to obtain with proper arguments.

Literature on:

-US Payment forms -Cash forecasting

Professional knowledge on:

-Cash management -Cash Forecasting

Conversion to electronic payment form Choice of payment form -Predicted cost savings -Other advantages

Celanese Americas Corp.

Analysis of:

-Payments

-Cash forecast

Results of conversion -Number of conversions -Cash forecast

improvements

Recommendations concerning the Payment and Cash

Forecast System

Figure 2.1: Conceptual Framework Conceptual Framework

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2.4.4 Conversion to electronic payment form

The actual conversion to an electronic payment form has to be planned and managed. This will have to be done in cooperation with other departments but also with CAC vendors. Because of this actual conversion to a new payment form the predictions made earlier in the research will be put to the test. To be able to do the evaluation it is important that there is a system in place to collect data of the conversion progress.

2.4.5 Results of conversion

This section will contain the results of the conversion. In this stage it will become clear if the conversion has achieved the predicted cost savings, forecast improvements and other possible advantages. The results will also have to be compared with the payment situation before the conversion and it is now possible to evaluate the conversion process. This feedback is shown in the conceptual framework by the dashed line.

2.4.6 Recommendations for CAC cash management

As the final product of the research recommendations are made to the CAC Cash Management Department concerning the payment and cash forecast system.

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3 US Payments and Cash Forecasting

This chapter explains the US payment system and Cash Forecasting with the help of available literature on this subject. The chapter starts with a general explanation of the US Payment system and it will go into the concept of float, which is an important subject for cash managers. After this the several paper based and electronic based payment methods will be discussed and the chapter ends with a discussion of cash forecasting literature.

3.1 US payment system

The US payment system consists of two components: The banking system (which includes the Federal Reserve System) and a set of non-cash mechanisms.³ This system is unique in that most other countries have only a handful of banks and use the postal system to assist in collecting and depositing payments (Giro). The US payment system is the backbone of the US banking and financial markets, which in turn facilitate the growth and stability of the US economy. In this paragraph, the major types of depository financial institutions are presented, the payment responsibilities of the Federal Reserve System are explained, and the means by which most payments are processed through the payment system are identified.

3.1.1 Financial institutions

The financial institutions that participate in the economy’s payment process are commercial banks, savings and loans associations, mutual savings banks, and credit unions. All four of these depository institutions, which can be simply referred to as banks, are involved in handling checks as well as electronic payments. Roughly 9,000 commercial banks continue to operate in the United States, compared with 1,600 savings and loans associations, 400 stock or mutual savings banks, and 11,200 credit unions. Because so much of a company’s cash management activity is linked to bank and banking regulation, the regulatory environment is a key component of the payment system. Important aspects of these financial institutions are the product differences and geographic restrictions.

First a look at the product differences: each type of financial institution has a slightly different core competence. Commercial banks are more oriented towards corporate services, savings and loans banks tend to real estate and mortgage finance, mutual savings banks mostly do mortgage finance, and credit unions prefer consumer loans and deposit services. These institutions are becoming more like one another as result of deregulation. A regulation that is still in place and has a distinct effect on cash management is Federal Reserve Regulation Q. During the Great Depression, the Fed had implemented Regulation Q, which limited the interest commercial banks could credit on savings account deposits. Its purpose was to prevent bidding wars between banks trying to grow their depositor bases⁴. One of the most important principles of cash management, that of minimizing idle cash balances, is premised on the opportunity cost of foregone interest linked to Regulation Q. Businesses with deposit account balances large enough to justify the fixed monthly cost, use daily transfers into sweep or concentration accounts to get paid overnight interest on deposit balances.

Geographic restrictions like regulatory limits on interstate branching are the major reason corporate cash management systems have included multiple banks.

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Interstate branching refers to the ability of a bank headquartered in one state to open branches in other states. If one bank can set up branches wherever it whished, there may not be a need for the cash manager to establish relationships with multiple banks for check clearing and cash concentration. Originally, limits on interstate branching were linked to fears of a concentration of financial power and a reduction of lending to businesses in small towns. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed and was going to change the US banking landscape. Federal law now allowed full nationwide banking across the country, regardless of state law. Another provision of the Riegle-Neal Act allows affiliate banks within bank holding companies to effectively act as branches for each other, accepting deposits, collecting payments, and providing other customer services⁵. With interstate branching allowed, corporations use far fewer banks, making it possible to do business with one large bank that has nationwide branches to both accept deposits and clear checks. Because of this, short term financial management should become less costly and more efficient as deposits are granted immediate or next day availability.

3.1.2 Federal Reserve System

The Federal Reserve System (or the Fed) act’s as the nation’s central bank. As the bank of banks the Fed has eight major functions⁶:

1. Control the Money Supply.

2. Supply the Economy with Paper Money (Federal Reserve Notes) 3. Facilitate the payment mechanism.

4. Hold Depository Institutions’ Reserves 5. Supervise Member Banks

6. Serve as the Government’s Banker

7. Serve as a Lender of Last Resort for banks suffering liquidity problems.

8. Serve as a Fiscal Agent for the Treasury

The Fed, unlike the single central bank in most countries, is comprised of 12 district Federal Reserve Banks, with 25 regional branches spread across the country. There are also 11 regional check processing centres (RCPCs) set up to help clear checks.

The Federal Reserve Banks differ from commercial banks in that their primary responsibility is to promote society’s interest, not the interest of member bank stockholders who contribute the capital.

The Federal Reserve’s official role in the payment system is “to promote the integrity and efficiency of the payments mechanism and to ensure the provision of payment services to all depository institutions on an equitable basis, and to do so in an atmosphere of competitive fairness”⁷. The Fed’s participation in the payment system includes [Maness & Zietlow, 2002]:

• Processing approximately 16.5 billion checks a day, this consists of moving sorting, and tabulating the checks, and debiting and crediting the proper depository institutions account.

• Supporting several private clearing systems by offering settlement services through its nationwide network of account relationships.

• Providing a nationwide electronic network for small-dollar electronic payments (Automated Clearing House).

5 http://www.state.ct.us/dob/pages/abcs-5.htm

6http://economics.uta.edu/facpages/JHimarios/Spring%202005/Chapter%2012%207th%20edition;%2013%

206th%20edition.doc

7 Federal Reserve. 1990. Federal Reserve in the Payment System. Federal Reserve Bulletin May: 293.

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• Providing a way for depository institutions to quickly transfer large dollar amounts using wire transfers via “Fedwire”, a nationwide wire transfer system.

• Regulating the availability schedules of banks, which indicate when checks or electronic deposits become available to the customer.

3.1.3 Clearing Mechanism

To get a proper understanding of check clearing it is best to look at the life of a check. When a person (payor) writes a check to purchase an item or service outside his own Federal Reserve Bank district, this is what happens: The receiver of the check (payee) deposits it at its bank referred to as the collecting bank. This bank first encodes the dollar amount in magnetic ink on the bottom right hand side of the check and then batches this check with many others it has received that were written outside of the banks area. It then transports the checks to the nearest Federal Reserve Bank (this could also be a correspondent bank or a local clearinghouse). The Federal Reserve Bank then sorts these and all the other checks it received according to the check’s destination (drawee banks). Then the Fed settles accounts, crediting the collecting bank’s reserve accounts according to a prearranged availability schedule. After settlement, checks drawn on banks in the same district are grouped and sent to this district’s Federal Reserve Bank. Around the same time the collecting bank credits the payee’s account. The Federal Reserve Bank in the district the check was sent to now returns the check to the payor’s bank and debits it reserve account. Finally, the payor’s bank debits the payor’s checking account.

The above stated check clearing is one of many routes a check might follow as it clears from the receiving bank where it is first deposited back to the drawee bank on which it is written. There are two basic forms of check collection cycles⁸: on-us checks and transit checks. On-us checks are checks that do not have to be sent to another depository institution for payment. Transit checks are checks that must be sent to another depository institution for collection, sometimes using one or more intermediary financial institutions in the process. There are two forms of transit checks: local and non-local. Local checks are drawn on a paying bank located in the same Federal Reserve check processing region as the collecting bank. A transit check may be collected by several different means. These collection mechanisms included clearing houses, the Federal Reserve Banks, and presentment directly to the paying bank or through a correspondent bank. Commonly, two or more of these mechanisms may be employed to collect one check (e.g., a check is presented to a correspondent bank which, in turn, exchanges the check through its clearing house.).

3.2 Concept of Float

The fact that the Fed grants the depositing bank credit according to a preset availability schedule but is not always able to present the check (debit the drawee bank) within the same period results in float. Float has made it profitable for depositors or banks to try to get quick availability on deposits and slowed presentment on checks written. A treasurer has to make a distinction between collection float and disbursement float. Collection float refers to the elapsed time between when a customer writes a check and the company is granted available or collected funds after depositing the check. Disbursement float is slightly different: it is the delay between the time when the company writes the check and the time when its bank charges the checking account for the amount of the check. There are

Electronic Payments and Cash Forecasting