Corporate Cash Management in Latin America
In an increasingly globalised economy, treasurers and financiers are starting to seek cash management best practices that optimise their profits beyond country-specific and regional borders. Cash management practices have evolved and now include not only account balances and inflow/outflow management but also retirement trusts, investment portfolio management, bonds, financial caveats and guaranteed cheques.
On the other hand, clients not only seek trustworthy investments but also expect a high profit return. In this context, treasurers and financiers should take advantage of evolving technology and communication tools, and consider the potential to find a local partner able to provide a deep insight into the Latin American financial market. Controlling a cash management portfolio requires 360º vision in order to optimise the benefits, take into consideration regional differences, economic balances and technology support.
Treasurers face two different barriers when looking at cash management in Latin America. First, different languages, currencies, laws and tax policies must be considered before setting up a cash management policy. A solid plan must include the different cash inflow/outflow regulations and laws present in each country, as well as the financial regulatory restrictions applied by different governments. Second, corporates must consider how to manage their assets in a temperamental region both politically and economically.
In order to avoid economic losses, treasurers must take into consideration currency disparities within countries and also different languages. In addition, each country has its unique sets of laws regarding tax withholding and different financial treaties between Latin American countries, the EU and the US. As a result, being aware of the currency in which the transaction takes place is vital.
Inflationary rates may affect investments if made in the local currency. In some cases, it is actually better to invest in a strong currency such as the euro, which has a narrower margin of profit when compared with local currencies but is much more stable. For example, the Argentinean economy crashed in December 2001 and the government declared default and payment suspension in the same month. External debt and bonds obligations were interrupted and, in January 2002, the Argentinean currency, the peso, was devaluated with severe capital losses for those with savings and investments in pesos.
Local analysts will sometimes recommend short-term high-risk investments in local currencies when they are confident the market will remain stable.
Today, technology offers a myriad of alternatives to maximise profits. Process automation, electronic banking and financial tools are convenient for process management, such as payments, collections and cash balances. CFOs must have a reliable and time-proven IT platform and integrated financial solution that will avoid any capital losses due to IT problems. Solid integration between the IT platform and financial tools is critical when operating electronically and deters data or information loss. Even though the Internet and other sophisticated communication methods are the main basis of financial operations, CFOs and CIOs must keep a close eye on their performance and run constant performance tests with strong protection against malicious intruders.
According to Oscar Schmitz, director of CXO Community, a Latin American technology community focused on delivering IT best practices and IT support to different industry sectors: “The financial industry today requires complete alignment in order to adequately adapt the internal operations of the company to the ever-changing market conditions. This market is becoming more demanding by the day, and companies request IT solutions with higher performance rates, speed and transactional security.”
Furthermore, regulatory entities constantly define new control regulations to protect economic assets, stockholders and clients. “That’s why the IT platform must be generated within an IT governance framework to combine the technology and information to generate business value,” he says.
Analysts also suggest to companies that want to start their operations in Latin America that they seek global financial companies with physical presence (offices) in the region. They can then provide a constant update about any changes, new regulations and financial news concerning the Latin American market, as well as their operational expertise. A regional partner will also provide a strong and stable infrastructure, regional business experience and deep relations with different governments and the interbanking environment. Regional integration between companies and financial firms is vital and contributes to effective cash management practice.
“It is always advisable to work with experts who are aware of the new regulations the client is focusing on, either from a legal, financial or accounting perspective,” says Juan Ignacio di Santo, financial analyst from Puente Hnos, an investment and financing provider in Latin America.
Outsourcing repetitive and non-critical operations has also proven to be crucial when reducing costs. Regional outsourcers demonstrate a proven background in financial operations management and business processes at an appropriate cost. Furthermore, global outsourcing of certain business processes will ensure that operational efficiency and time-saving processes are standardised throughout the entire system, delivered by an outsourcer familiar with your business practices and corporation’s values, vision and mission.
Latin America is a very attractive financial market to invest in due to the growing economies in the region. It offers different investment options, and consultants recommend developing an investment profile and portfolio that obviously suits the client. “We take into consideration the asset’s liquidity (marketability), salvage period of the investment and, according to the market context, we choose from different cash management options”, says di Santo at Puente Hnos.
It is also surprising that high-risk investments do not always reap the highest profits. According to di Santo: “Surprisingly, in recent times, the higher profit investments have been those that we call ‘conservative’ because the stock market has been affected by the recent global market crisis and regional conflicts, such as the one Argentina faced a few months ago. Short-term investments have proven to be stable and that is what we are currently recommending.”
Analysts recommend that cash management best practice should be based on an on-demand investment portfolio based on the company’s needs and the profit margins it wants to obtain, as well as the type of assets it wants to invest in. Knowing the financial, economic and political market share in which the company is investing in, along with a solid regional partner and a well-defined investment portfolio, will secure profits across all cash management operations.