Treasury functions in large enterprises of PP plastic products” 

Why treasury functions are becoming critical for polypropylene producers

Treasury functions at large enterprises of PP plastic products today determine not just financial stability, but the very possibility of survival in conditions of volatility in commodity markets. In our practice, we have seen how the lack of a single liquidity management center led to the shutdown of extrusion lines due to the inability to promptly pay for a batch of granulate, despite the presence of accounts receivable. A large polypropylene processing plant is a machine with a huge appetite for working capital, where the gap between paying for raw materials and receiving money from the client can be up to 90-120 days. This is where treasury ceases to be an accounting function and becomes a strategic risk hedging tool.

We work with manufacturers who face dual pressures: propane and oil prices are dictated by global exchanges, while selling prices for finished products are often fixed in long-term contracts. Without a professional treasury, margins disappear within one quarter. In this article, we will look at how to implement an effective cash flow management system, what mistakes 80% of Russian factories make when switching to a centralized model, and why standard banking products do not work for specific PP production cycles.

Specifics of liquidity management in the polypropylene production cycle

The polypropylene (PP) products industry has a unique cash flow structure that is fundamentally different from other light or heavy industry sectors. The main challenge is the high dependence on the cost of raw materials, which accounts for up to 75–80% of the cost of the final product. Treasury functions at large PP plastics plants must be set up to respond instantly to spreads between Brent crude oil futures and propylene spot prices. If the CFO is waiting for a monthly report from the accountant, he is already late: the decision to purchase a batch of raw materials must be made in a window of opportunity of 4-6 hours.

The second critical factor is seasonality and logistics. Companies that produce packaging, pipes or automotive components from PP often work with deferred payment for large retailers or automakers. At the same time, polymer suppliers require advance payments or letters of credit. A classic cash gap arises. In one of the projects, we were faced with a situation where the plant had an order book worth 400 million rubles, but could not start a third shift due to the lack of 15 million rubles for fuel cards and electricity payments. This resulted in a penalty for failure to deliver in the amount of 2% of the contract amount daily. This scenario is repeated regularly where the treasury is reduced to the function of a “payment order”.

The third aspect is currency risks and imported equipment. Even with localized production, many large extrusion lines, injection molding machines and automation systems require foreign currency maintenance or the purchase of original spare parts abroad. A 5% fluctuation in the ruble exchange rate can completely eliminate a workshop’s operating profit for the month. An effective treasury should use swaps and forwards that are tailored to the equipment payment schedule rather than to the abstract forecasts of macroeconomists. We recommend linking hedging not to a calendar month, but to the production cycle of a specific batch of goods - from the purchase of granules to the shipment of the finished product.

Working capital structure: where money is lost

An analysis of the balance sheets of ten leading plastic products manufacturers shows that the industry's average cash conversion cycle (CCC) is 68 days. For comparison, in metallurgy this indicator is often negative due to working with prepayment. In the PP segment, the situation is the opposite: raw materials stocks are in the warehouse for 20 days (a necessary buffer against supply disruptions), work in progress is 5 days, and accounts receivable hang for 43 days. The Treasury Department must work aggressively to reduce this latter indicator.

A common mistake is trying to solve the problem of cash gaps through short-term loans at a high rate. This is the path to debt. It is much more effective to introduce factoring with recourse only to reliable counterparties and use dynamic discounting for your own suppliers. One of our clients introduced a system of early payment to polypropylene suppliers with a 1.5% discount. The math is simple: the annual cost of money at the bank was 18%, and the discount from the supplier gave the equivalent of 22% per annum. This is pure arbitrage profit obtained through competent management of payment terms.

Organizational model: from accountant to internal banker

The transformation of the financial block of a large plastic products plant begins with a change in the organizational structure. The traditional model, where the chief accountant is responsible for all payments, and the financial director is only involved in strategy and investment, does not work in modern realities. Treasury functions at large PP plastics enterprises require the establishment of a separate unit - the Treasury Department, which reports directly to the CFO, but is operationally independent from the accounting department.

Accounting records the past: what was paid, what taxes were assessed, how the acts were closed. The Treasury manages the future: how much money will be in 3 months, what rate to include in the contract price, where to place the free overnight balance. Mixing these functions leads to the fact that the company lives “after the fact,” reacting to problems after the fact. For large enterprises with a turnover of over 3 billion rubles, we strongly recommend implementing the Shared Services Center model for routine payments, freeing up treasurers for analytics and working with capital markets.

The key objective of the new structure is to create a single window for all cash flows. All accounts of the enterprise, including foreign exchange, deposit and loan accounts, must be visible in a single system in real time. We observed a case where a holding of three factories producing PP pipes had money in the accounts of one legal entity at 4% per annum, while another legal entity of the same holding took out an overdraft at 21%. The lack of internal refinancing cost owners millions of rubles annually. The introduction of an internal capital market (in-house bank) makes it possible to level out such imbalances without the participation of external banks.

The role of IT systems in treasury management

Manual liquidity management through Excel tables is only possible for small businesses with one current account. For a large manufacturer of plastic products with dozens of counterparties, multiple currencies and a complex cost structure, a specialized software package of the TMS (Treasury Management System) class is required. Integration of TMS with an ERP system (for example, 1C:ERP or SAP) is a prerequisite for obtaining reliable data.

The system should automatically collect statements from all banks via DirectBank or API protocols, reconcile them with the payment plan and signal any deviations. The most important module is Cash Flow Forecasting. It should not be built on the basis of historical data, but on the basis of the production plan and confirmed orders from customers. If the production plan changes (the extruder breaks down, the customer order changes), the cash flow forecast should be recalculated automatically within 15 minutes.

We recommend paying attention to limit management modules. The system must strictly block payments if they go beyond the approved limit for the counterparty or cost item, even if the director’s signature is present. This protects against human error and fraud. In one of the companies we audited, the purchasing manager accidentally indicated an extra zero in the payment amount for a batch of additives. Only the presence of an automatic limit in TMS, which blocked the transaction as exceeding the average monthly purchase volume by 10 times, saved the company from losing funds.

Risk Hedging: Protecting Margins in an Uncertain World

For a manufacturer of polypropylene products, the price of raw materials is the main risk. Quotes for propylene can change by 10–15% during the month. If a company sells products at fixed prices under annual contracts with chains or car factories, any increase in the price of PP granules eats up all profits. Treasury functions in large PP plastic products enterprises necessarily include the development and execution of a commodity risk hedging strategy.

The most accessible tool for Russian companies is working with SPbMTSB exchange instruments or concluding forward contracts directly with oil refineries. The essence of the method is simple: by fixing the price of purchasing raw materials for future periods, the company insures its cost. However, there is a nuance here: basis risk. The futures price on the exchange and the actual price of shipment from a particular refinery may diverge due to logistics leverage, quality of raw materials or regional imbalances. Our experience shows that a perfect hedge is impossible, but covering 70–80% of the volume of needs allows us to stabilize the budget.

The second level of protection is currency hedging. Even if the revenue is in rubles, part of the costs may be tied to the currency (depreciation of imported equipment, license fees, foreign service). The use of currency swaps allows you to fix the exchange rate on the date of future payment. The mistake many CFOs make is trying to speculate on the exchange rate instead of hedging. The task of the treasury of an industrial enterprise is not to make money on the difference in exchange rates, but to make this difference predictable and include it in the cost price. Trying to “guess” the direction of the ruble often leads to losses exceeding operating profit.

Interest rate risk management

In an environment where the central bank's key rate is high, the cost of borrowing becomes a critical factor. Large enterprises often have a portfolio of loans with a floating rate (key rate + margin). An increase in the rate by 1–2 points immediately increases the financial burden. Converting part of your debt to a fixed rate through interest rate swaps (IRS) allows you to plan your expenses years in advance.

However, this tool requires highly qualified treasury employees. An incorrectly calculated swap can lead to the fact that when rates decrease, the company will overpay the bank. We recommend using hybrid models: fixing the rate only on that part of the debt that serves long-term investment projects (construction of new workshops), and leaving revolving loans with a floating rate, since their term is short and volatility is less dangerous. Diversification of funding sources is another important aspect. Dependence on one creditor bank creates the risk of license revocation or unilateral tightening of conditions.

Interaction with banks and optimization of commissions

A large enterprise is an attractive client for banks, but only if it knows how to negotiate. Standard tariffs for the retail and even corporate segment often contain hidden fees, which, with millions of transactions per year, result in significant amounts. Treasury functions in large PP plastic products enterprises include continuous auditing of bank expenses and tendering of bank services.

A banking consortium is the optimal model for large businesses. The presence of 3–5 partner banks creates healthy competition for the right to service the company’s accounts. This allows you to achieve individual tariffs for cash settlement services, reduce fees for currency control and obtain better conditions for overnight deposits. We recommend an annual review of terms with each bank, using competitors' offers as leverage.

Special attention should be paid to salary projects and acquiring. For factories with more than 500 employees, the commission for transferring wages can be a saving. An agreement with the bank on free cash settlement in exchange for a salary project is standard practice. It is also important to control the costs of collection and maintenance of cash registers if the company operates in cash (which is rare, but occurs in some sales segments).

Automation of reconciliations and document flow

Routine work on reconciliation of mutual settlements with counterparties takes treasurers up to 40% of their working time. The introduction of electronic document management (EDM) and robotic process systems (RPA) allows you to automate these tasks. The robot can independently request reconciliation reports from suppliers, compare them with data in 1C and create registers of discrepancies for human analysis.

This not only saves time, but also improves data accuracy. The human factor when processing thousands of payment orders inevitably leads to errors: an incorrectly specified TIN, an erroneous amount, a lost scan of a document. Automation minimizes these risks. In addition, a transparent archive of documents speeds up audit processes and interaction with tax authorities, reducing the risk of blocking accounts.

Common mistakes and lessons from practice

Implementing professional treasury is a complex process, fraught with staff resistance and technical difficulties. Analysis of unsuccessful projects shows a number of typical mistakes that managers of industrial enterprises make.

Mistake #1: Treasury as a “cash register”. Many managers believe that the treasurer is simply the person who presses the “pay” button at the client bank. This is a fundamental misconception. Treasury is an analytical function. If an employee does not build models, does not analyze risks and does not plan flows, but only executes payments, then he is an operator, not a treasurer. This substitution of concepts leads to the fact that a money management system is not created at all.

Mistake #2: Ignoring the human factor. The introduction of strict limits and approval procedures is often perceived by the commercial and purchasing departments as bureaucracy that gets in the way. Sales managers want to give any client a delay in order to fulfill the plan, and buyers want to buy raw materials now, while the price is low, without thinking about the cash gap. The job of the CFO and treasurer is to explain and implement a culture of financial discipline. Without the support of the owner and CEO, the treasury will turn into an “enemy of business” that everyone will bypass.

Mistake #3: Lack of data integration. Buying an expensive TMS system without establishing a connection with production planning is useless. If the treasurer sees a payment plan that does not correspond to the actual shipment schedule from the warehouse, his forecasts will be wrong. Data must flow seamlessly from the shop floor to the finance department. We have seen cases where, due to data desynchronization, an enterprise kept millions of balances in its accounts “just in case,” losing income from placing these funds, although the real need was three times less.

Development prospects: treasury 4.0

The future of financial management in industry involves the use of big data and artificial intelligence. Modern algorithms are able to analyze thousands of factors - from the weather in oil production regions to geopolitical news - and predict movements in commodity prices with high accuracy. Treasury functions in large PP plastic products enterprises will evolve towards predictive analytics.

Instead of reactive management (“there is not enough money, we need to borrow”), proactive management will come (“in 3 weeks there will be a deficit, you need to attract a line in advance or transfer payments”). Blockchain technologies can revolutionize the handling of letters of credit and guarantees, making settlements between counterparties instant and transparent. Smart contracts will be able to automatically initiate payment when the IoT sensor detects the goods have been accepted into the buyer’s warehouse, eliminating delays due to paperwork.

For business owners, this means a transition from managing money as a resource to managing money as an asset that generates additional value. A well-designed treasury can generate additional income for an enterprise, comparable to profit from core activities, by optimizing taxes, reducing interest on loans and effectively investing temporarily available funds.

Strategic partnership in the petrochemical supply chain

Effective financial management is impossible without a reliable technological base and stable suppliers of key equipment. In the context of the development of the oil refining and chemical industries, where polypropylene producers operate, suppliers of high-tech heat exchange equipment play a special role. A striking example of such a partner isWuxi Kaisheng Electric Power and Petrochemical Equipment Co., Ltd..

The company specializes in the design and manufacture of critical components for the petroleum refining and petrochemical industries, including titanium shell-and-tube heat exchangers, ASME-standard high-pressure units and 316 stainless steel corrugated tube bundles. Constructed from corrosion-resistant alloys (marine brass C46400, copper-nickel alloys, nickel N06625), Wuxi Kaisheng products provide trouble-free operation. operation of cracking and polymerization units, which directly affects the implementation of production plans and compliance with financial obligations to customers.

The use of certified equipment (PED, ASME) with high thermal efficiency and resistance to extreme pressures allows plants to minimize downtime due to emergency repairs - one of the main causes of unexpected cash gaps. Cooperation with With proven suppliers such as Wuxi Kaisheng providing customized solutions for desalination, shipbuilding and energy conservation, it becomes part of an overall enterprise risk management strategy, ensuring predictability of operating costs and long-term stability of production.

Frequently Asked Questions

What is the minimum number of staff to create a separate treasury department?

The establishment of a separate department is advisable if the financial service has a staff of 5 people and the company’s annual turnover is over 1–1.5 billion rubles. On a smaller scale, the functions of the treasurer are effectively performed by the chief accountant or financial director with the assistance of one specialist. However, even in a small business, separation of duties is necessary: ​​the one who approves the payment should not have the technical ability to process it at the client bank without a second signature.

How quickly does the implementation of a TMS (Treasury Management System) system pay for itself?

The payback period depends on the scale of operations and the current degree of chaos in finances. On average, for an enterprise with a turnover of 5 billion rubles, the implementation of a TMS pays off in 12–18 months. Savings come from reducing cash gaps (and therefore reducing the need for expensive overdrafts), optimizing bank fees, getting better deposit rates and preventing payment errors. In addition, financial staff's time is freed up for analytical work.

Is it possible to use cryptocurrencies for payments in the international trade of plastic products?

Currently, the use of cryptocurrencies for payments in the B2B sector of Russian industry is associated with high legal and tax risks. Legislation in this area is at the stage of formation. For large enterprises that operate “in white” and undergo regular audits, this method of calculation is unacceptable due to problems with confirming expenses for taxation and currency control. It is recommended to use traditional instruments: letters of credit in the national currencies of partner countries or barter schemes formalized in a legally competent manner.

What to do if the bank refuses to open a foreign currency account or tightens compliance?

This is a common problem in the current environment. The solution lies in diversification and transparency. Firstly, it is necessary to have relationships with several banks, including those that specialize in foreign trade with specific countries (China, Türkiye, CIS countries). Secondly, the treasury must prepare a dossier for each foreign trade transaction in advance: contracts, specifications, logistics documents. Proactively providing information to the bank before the request reduces the risk of blocking. In extreme cases, it is worth considering opening accounts with banks in friendly jurisdictions, but this requires careful consideration of tax residency and transfer pricing.

How does treasury affect the cost of attracting investments?

A transparent and professional cash flow management system significantly increases the investment attractiveness of the company. When assessing creditworthiness, investors and banks look not only at earnings (EBITDA), but also at the quality of cash flow (OCF) and the strength of the financial model. The presence of a well-structured treasury signals low operational risks and management’s ability to manage crises. This allows the company to obtain loans at lower rates and raise capital on more favorable terms, as the risk premium is reduced.

Implementation of effectivetreasury functions in large PP plastic products enterprises- this is not just a fashion statement or a regulatory requirement, it is a matter of strategic business security. In an industry where margins are thin and risks are high, control over every ruble and every day of the cash cycle becomes a major competitive advantage. Companies that ignore this aspect risk losing market positions to more efficient players who are able to flexibly maneuver financial resources.

Whether you would like to audit your current cash flow management system or discuss the implementation of modern treasury tools, our experts are ready to share their experience in implementing similar projects in the chemical and process industries.Book a consultation with a financial expertto assess the potential for optimizing your working capital as early as the next quarter.