New Horizons for Cash Management

Perhaps now more than ever before, for today’s corporate treasurer, cash matters. No one wants to lose money. Equally, no one wants to be associated with decisions that lead to unforeseen losses.

Cash invested in a money market fund should never be redundant; within explicit guidelines and a framework designed to protect capital, investors’ money is put to work. The use of funds therefore simplifies both accessibility to and liquidity of surplus cash. But how can treasurers take the logical next step and simplify their cash management processes even more, thus creating maximum efficiency?

The Quest for Automation

Corporate treasurers continue to demand more automated solutions for the cash management function. This is certainly not a new development; over the past few years, corporate treasurers have pursued various automation initiatives. Early initiatives focused on streamlining of settlement processes, enabling many corporate treasury departments to settle transactions automatically via treasury workstations or direct interfaces with their banks.

A second wave of automation initiatives focused on automating the cash position and liquidity forecasting processes. Corporate treasurers asked their banks to build interfaces directly into their treasury workstation or ERP systems in order to provide timely cash positions and liquidity forecasts.

The next logical step for treasurers today is to tie in their investment processes as well. This ultimately means that once a treasurer knows his/her cash position, he/she is able to invest liquidity in real time – ideally through an automated trading platform which communicates with the present treasury system infrastructure. Treasury departments that are working on these automation initiatives want to achieve the following process flow:

1. Daily cash positions and liquidity forecasts are determined through the utilization of a treasury workstation and data supplied by banks (and subsidiaries) in near real time. This allows the treasury department to understand liquidity positions quickly and ultimately enables efficient placement of funds. Moreover, a treasurer who understands his/her daily liquidity position, including future payment obligations, is able to place funds further out on the yield curve and achieve better investment returns.
2. In a second step, and based on daily cash positions, the treasurer can use an electronic platform to research efficient investment alternatives such as money market funds. In this context an electronic platform should ideally provide access to fund performance information of multiple fund companies and current holdings, as well as additional research information such as white papers and market snapshots. Access to real-time performance information and research information helps enable the treasurer to make an informed investment decision and potentially achieve better investment returns.
3. In a third step, the treasurer places trades electronically, choosing from a range of funds and/or fund families. This reduces manual intervention, saves costs and increases efficiencies through automation. Transaction reports on the trading platform provide for audit trails and allow for real-time monitoring of current transactions.
4. The trade information is fed back into the treasury workstation to provide an updated liquidity forecast and settlement details. This eliminates the need to record trades in spreadsheets throughout the day and provides consolidated (and therefore cost efficient) settlement information.
5. At the end of the business day, settlement of investment transactions is initiated automatically via the treasury workstations. This reduces settlement costs further and minimizes settlement errors caused by manual intervention.
6. Lastly, the electronic platform feeds back an end-of-day position which is used for end-of-day transaction and balance reconciliation.

The Bottom Line Impact

When treasurers consider the merits of cash management automation, the key issue is whether the implementation will yield tangible, i.e. bottom line, results. Will automating cash management really reduce costs and / or increase returns? Let’s take this in two parts.

First, for a firm that has already connected its systems to provide the treasury with accurate, timely cash flow data, integrating a platform that allows the treasurer to invest automatically and which feeds reports back into the treasury system is relatively quick and simple. Systems integration can undoubtedly a challenge, but one that potentially yields significant benefits:

• Reduction of operational risk and the likelihood of manual errors;
• Automatic audit trails;
• Cost and time savings through efficient trade processing; and
• Higher investment returns through better and more timely investment decisions.

Second, the following example can demonstrate the benefits to investment returns of an automated approach that allows flexibility.

Company A receives cash flow information from its subsidiaries and banks via a variety of systems and formats; some of the information is received daily, but not all. It takes several hours for the assistant treasurer to establish that he has an approximate surplus of EUR 75m to invest.

Contrast this with Company B, an almost identical company that has revised its cash management process in tandem with a systems integration project. Company B, the integrated system, enables cash flow data to be sent to the treasury in near real time. Because of the accuracy of the information, the treasurer knows at 08:00 that he has EUR 100m to invest.

What happens in many overnight markets, such as the market for EUR 1-day time deposits, is that liquidity dries up as time progresses throughout the day. Bid/offer spreads widen and rates for overnight investments decrease – large market participants run funding and investment processes early in the day.

A realistic example at current levels would be the rate for EUR 1-day time deposits of 2.02 in the morning and 1.96 in the afternoon – a difference of 6 basis points!

This leaves company A with an investment return of approximately EUR 1.47m per year and company B with EUR 2.02m EUR per year – a difference of EUR 505,000 per year.

Even more importantly, Company B is completing the day’s investment process early enough to devote more time to that tricky funding issue in Latin America…

The process described above needs to be realized with as little manual intervention as possible in order to achieve the stated goal – to enable corporate treasures to spend time planning their cash management strategies rather than implementing them.

A New Horizon

Promoting automation in corporate treasury (1) streamlines the back office of a company’s clients, which helps to maximise efficiency gains, (2) can reduce risk and (3) lowers operating and settlement costs. Clients are furthermore exposed to the benefits of consolidating their trading activity on one system platform – such as treasury workstations in combination with internet trading platforms. This consolidation empowers the corporate treasurer with a flexible tool allowing him/her to view a rich amount of data regarding both regional and global investments.

For example, leading market players, including Goldman Sachs Asset Management, are providing a solution that allows clients to take this next step in more efficiently managing the investment of daily liquidity. In some cases, institutional money market funds are processed ‘straight-through’, thus saving time and potentially reducing errors by automating a key linkage in the liquidity process.

As systems such as these continue to evolve, the corporate treasurer’s tasks will continue to be streamlined. Integrated systems, automatic balancing and straight-through access solutions are only the beginning – much more waits on the horizon.

Copyright © 2004, Goldman, Sachs & Co. All rights reserved.

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