Over the years, the De Jaeck family gradually built the family lighting business, Massive, into a European market leader in the consumer lighting sector. The group has consolidated sales of EUR 342 million and 4,790 employees worldwide. In 2004 Modular Lighting Instruments, specialist in architectural design lighting joins the group. In 2006, this was followed by the acquisition of the German Trio Leuchten, giving PLI access to the furniture store segment.

Centralised cash management: not without its problems

Jean-Pol Van de Velde, Legal & Banking Manager of Partners in Lighting International, explains how Massive turned to a centralised cash management.

The family business has undergone a number of radical changes in just a few years. Its financial policy has been overhauled. In the past, Massive’s policy used to be based upon a decentralised structure, giving the local management autonomy to determine not only their sales policies, but also their financial policies. Because each country had its own banking traditions and practices, Massive often worked with local banks: Commerzbank in Germany, La Caixa in Spain, etc.

“Everyone could handle as they wished, but locally the finances were optimised. Because the parent company was sitting on a mountain of cash and there was hardly any long-term debt, we were given very favourable rates everywhere, and as a result we saw no reason to centralise our finances.”

The acquisition of Massive by CVC Capital Partners totally altered the financial picture, because a higher burden of debt on the balance sheet meant that favourable rates became a thing of the past.

“The margin on our short-term debt immediately rose to 2.25%, which meant that five years ago we were obliged to centralise our cash management. This was an extremely difficult exercise because after many years of being autonomous the local finance departments had to give up part of their autonomy.”

Zero balancing: the best option, but labour intensive

There are a number of methods for centralising and, therefore optimising, cash management. In the case of zero balancing, all of the group’s accounts are swept daily into one master account. In this way, the credit and debit balances offset each other, thereby avoiding unnecessary debit interest. This method therefore makes the group’s cash management as efficient as possible, but the disadvantage is that it involves considerable additional administration. For example, the group has to repost all of the transactions every day. In addition, this method means that more time has to be spent on the resulting tax issues.

Notional pooling: user-friendly, but less flexible

In the case of notional pooling, the funds remain on the local accounts instead of being transferred to the master account daily. Interest is calculated on the merged balance.

“This is not the best solution because let’s say that you have a debit balance of EUR 5 million in one country and a credit balance of EUR 5 million in another country, then you will pay a charge to the bank because it is carrying a debit balance on its books. In the case of zero balancing you will pay no charges in the same situation.”

Another drawback of this method is the fact that credit lines have to be allocated.

“As part of the syndicated loan, we have a credit line of EUR 35 million to cover our working capital requirements. Of this, EUR 2.5 million has been allocated to Massive Germany and the same amount to Massive Italy. If there is a need for additional working capital in Germany, while the credit line in Italy is not fully utilised, then it is not possible to simply allocate the surplus in Germany to Italy and the surplus credit line has to be formally reallocated through the bank.”

Juggling with different currencies

In spite of these drawbacks, Massive nevertheless opted for the notional pooling method because it is an international player with many foreign operations. Its local entities are often fairly small and therefore the group deals with a large number of foreign currencies: dollars, Swiss francs, Polish zloties, Slovakian koruna, Czech koruna, pounds sterling, etc. Because all funds are actually transferred to a central account under a system of zero balancing, each foreign currency must actually also be converted into euros and the next day must be converted back into the local currency. In practice, this meant an even heavier administrative burden. Notional pooling, however, allows you to work with a number of currencies in the same pool. The foreign currencies are converted into euros purely for interest calculation purposes, without the need for physical conversion.

Greater local involvement

The principal reason for choosing notional pooling was a psychological one, however.

“In order to centralise cash management successfully, you always need the full support of the local people, particularly given the decentralised structure of the group. If the local entities get the feeling that they no longer have a say, there is a risk that they will neglect their working capital management (debtor and stock management, supplier payments, etc.), which will have an adverse effect on working capital and on the group’s cash position. At the same time, cash is an important measure of value for a shareholder-venture capitalist. The temptation to ignore working capital management is particularly high in the case of zero balancing because the balance on the local account is transferred every evening to the central account, which means that the local account is closed every day with a nil euro balance. Local people will be less inclined to make the effort because they don’t see the results of their efforts. In the case of notional pooling, the management of the account and the monitoring of the local credit line are still carried out at local level, which means that the involvement of the staff is much greater.”

An efficient Internet platform

Jean-Pol Van de Velde is more than satisfied with the working relationship with Fortis International Notional Pooling.

“In parallel we also have a small pool made up of a few Eastern European companies where we co-operate with another financial partner, but this system is much less user-friendly; at the end of the month we receive a package of interest calculations on paper, whereas with Fortis we have an efficient Internet platform that we can use to monitor our positions on a daily basis. For example, we can look at the interest amount for each country with and without the pooling system and in this way, are able to demonstrate the benefits of the system to each country’s management team.”

Cost savings

Experience shows that a cash pool operates most efficiently if debits and credits offset each other as far as possible. For Partners in Lighting International, the countries whose accounts are traditionally in credit are Spain, Switzerland, and the Netherlands, while Germany and Italy regularly have debit balances.

“However, every country benefits from pooling. In order to be acceptable from a tax perspective, the entities that are in debit continue to pay interest, but pay slightly less than in the absence of a pool, while the entities that are in credit receive slightly more interest than before.”

The switch to a centralised management system was a very smooth one.

“As soon as the decision had been taken to centralise cash management, all of the group’s finance directors were invited to the head office (Kontich, Belgium) to have the new method explained to them. In the final analysis, not that much has changed. With regard to operations, the local entities are allowed to continue to work with their local financial partners if there is a need to do so, such as petty cash requirements, and local payment practices (e.g. “recibos” and “pagares” in Spain). In addition, we have opened a Fortis account in each country to accumulate surplus cash.”

Using the Fortis Internet tool it is easy to show the cost savings.

“Assuming a debit interest rate of 8% and a credit interest rate of 0.5%, our system delivered cost savings of EUR 53,000 in September. Admittedly, we have assumed fairly extreme rates, but even if the cost savings had only been half of what they were, it would still have been worth our while to use cash pooling.”

Cash pooling outside Europe

The merging of accounts from different countries will be confined to the group’s European operations for the time being because legal restrictions mean that cash pooling systems cannot be set up in China or Hong Kong. The disadvantages for Partners in Lighting International should not be underestimated because major manufacturing facilities in China mean that there is also a large amount of cash is circulating in China and Hong Kong, which is not currently included in the notional pool.

“Fortis is currently setting up a structure in Hong Kong. The intention is to set up a notional pool there and to build a bridge to the European systems from there.”

Optimum cash management is evolving

Even though Jean-Pol Van de Velde is very satisfied with the existing notional pooling system, he does not rule out the possibility of Massive switching to zero balancing in due course. In recent years, Massive has evolved from being a decentralised to a more centralised group, which has also brought about a change in the mentality of the local employees. A test project has even been started this year involving a pool that includes Massive France and Modular Lighting Instruments. Mr Van de Velde is also playing with the idea of bringing Germany into this pool.

“Three factors are important if zero balancing is to be implemented successfully: efficient administration systems, compliance with internally agreed procedures (e.g. keeping within internal credit lines), and, above all, local people who pay attention to the interests of the group as well as those of the local entity.”