Cash & Liquidity ManagementCash ManagementNetting/PoolingDevelopments in Liquidity Management: Seeking New Working Capital Solutions

Developments in Liquidity Management: Seeking New Working Capital Solutions

Given the ongoing credit crisis, corporate treasurers are focusing on how best to manage liquidity and they are focusing on the role technology can play. Treasurers can use technology to gain the best oversight of all cash positions. Moreover, they can use technology to analyse cash positions on an intraday basis to determine the best end-of-day options for short-term investments. Cash needs to be invested. The challenge is how to best manage the daily liquidity flow and achieve best practices when making short-term investments.

In these uncertain times, some treasurers are investing cash almost exclusively in treasuries or near-term cash equivalents, and shying away from many kinds of commercial paper or asset-backed securities. The ensuing liquidity crisis not only pushes treasurers to safer short-term investments, it also makes many senior managers ask their treasurers what liquidity management entailed, and whether their treasury departments were following best practices in liquidity and associated risk management.

The Expanding Role of Liquidity Management

Liquidity management is a function within treasury, which, in the past, has been viewed by many as a silo. But, much as treasury has evolved over the last years, so too has liquidity management. Today, treasury is helping corporate executives have a better understanding of the financial impact of operations and the financial health across all sectors of a corporation.

Along with the demand for increased data and analytics, has come the demand for better and increased visibility. On the front end, treasurers want more flexibility on how the data may be viewed and how they wish to configure their own dashboard to better manage cash and liquidity. On the back end, treasurers want more standardised solutions, and, somewhat, less customisation of third party vendor solutions.

All available accounts must be subject to review, settlements must be confirmed, reports have to be generated, and a host of reconciliations must be completed to prepare for the key end-of-day determinations. Treasury must determine what high-value payments need to be made, what accounts payable and payroll matters need to be reviewed and resolved, and then how to invest excess cash. Once allocations are determined and investments are executed, reports are generated, settlements and confirmations are reviewed, and numerous back office tasks must be completed.

Given the evolution of the treasurer’s responsibility, and the increased importance of overseeing a corporation’s working capital, it becomes more and more important for treasurers to have the best tools to access the data, quickly and securely, as well as to be able to integrate individual data streams into a master view of the current, and projected, cash position.

Below is a summary from Celent’s research of what corporate treasurers want today:

  • Data consolidation: Fewer sources of data from more dependable providers.
  • Standardisation: More standardisation and uniformity in data languages used to transmit financial information.
  • Global solutions: Vendor solutions that can handle all currencies, and connect with all key banking providers.
  • Integration: Along with more standardised data and protocols, treasurers want to more easily tie the data to their general ledger and ERP system.
  • Analysis: Once treasurers have good data, they want to be able to use analytical tools to better understand their options.
  • Execution time: The need for standardised, globally translatable data is all due to treasurers wishing to have the maximum amount of time to analyse data, and then execute investment decisions based on the data.

During each of the last three years, the Association of Financial Professionals
(AFP) conducted a liquidity survey that has provided a number of pertinent findings. The goal for liquidity managers is to have centralised oversight over all accounts and funds, and to be able to have more time to make the best short-term investment decisions.
In 2008, 11% of respondents to the AFP survey expressed a “significant change” in their US cash position, when compared to the results of the 2007 survey. The shift represents the biggest swing in three years, and represents an exodus from US cash.

The seizure in the credit markets, and flight from cash, was not limited to US cash. In 2008, non-US cash holdings were much smaller than 2007 holdings. Thus, holding cash – whether US cash or non-US cash – was apparently viewed, by many, as having limited upside, while short-term instruments, with the benefit of yielding some returns, were seen as somewhat of a safe haven in the current market.

What is the view of treasurers vis-à-vis cash going forward? Non-US cash growth is projected to grow, while US cash growth is only expected to increase 6%. Thus, if corporate treasurers are planning on holding cash going forward, their preference is to hold more non-US cash.

Companies with over US$1bn in annual revenue are only authorising short-term investments – outside of bank deposits and treasury bills – by decreasing investments in all short-term instruments other than money market mutual funds, and Eurodollar deposits. Otherwise, their short-term investment policies are restricting the overall access to other instruments. Companies with revenues under US$1bn annually had, apparently, already moved funds into safer investments. They similarly fled the auction-rate securities market, but took a more diversified approach to short-term investments.
The expectation is that the short-term investment funds will continue to be invested in money market mutual funds and bank deposits.

One of the drivers toward more conservative, and low-risk, investment vehicles is the collapse of the auction-rate securities market. Many corporate treasurers believed that auction-rate securities were, at least implicitly, supported by the dealers. When that market seized up, and the dealer support did not materialise, losses were incurred, or funds were set aside to cover expected losses.

Given the perceived challenges in today’s market, treasurers of large global corporations are exploring three key areas as they seek to improve liquidity management:

  1. Re-visiting physical and notional pooling, and cash forecasting.
  2. Exploring better connectivity of financial data with back-end ERP systems.
  3. Investigating the benefits of a direct feed from SWIFT.

Revisiting Physical and Notional Pooling

Treasurers are re-evaluating how best to accomplish balancing of global cash positions, including ways to best tackle liquidity forecasting. One of the techniques, zero-balance accounting, focuses on sweeping funds into accounts so to leave a zero balance. Corporations can employ various methods to sweep and replenish funds. However, all options are dependent on accurate and timely data. Pooling allows a corporation, with both positive and negative end-of day cash balances across numerous accounts, to pool funds to both generate a higher return on the collective credit balance, and limit the interest paid for short-term bank loans, necessary to cover short-term negative balances. Rather than monitoring a wide array of interest rates being paid/charged by various banks covering numerous accounts, pooling allows for the aggregation – either physically or notionally – of numerous accounts. The corporation and the bank pooling the accounts, then negotiate one credit rate to apply to all positive balances, and one debit rate to apply to all negative balances.

While many banks recognise that corporate treasury departments will, periodically, review their liquidity management practices, including pooling arrangements, the perception is that, in the current environment, the analysis is more detailed, and efforts to optimise processes, and maximise savings, are more pronounced.

Notional pooling makes sense for corporations who wish to balance out interest earned in accounts with credit balances, against interest to be paid for negative account balances.
Given multi-currency pooling, the complexity has increased and is providing many corporations an impetus to review their pooling arrangements. In the meantime, the role of consultants has become so pronounced that some banks are hiring specialists away from consulting firms, in order to work more effectively with outside consultants.

Celent believes that pooling will remain in favor with many corporations. The vast majority of corporations derive value from pooling, because the banks can address shortages with pooling solutions in a way that is beneficial to all concerned.

Cash Forecasting: An Ongoing Challenge

Cash forecasting remains a challenge for corporate treasurers at all levels. For large global corporations, the involvement of numerous subsidiaries, with potentially different modeling approaches, is just the beginning of the cash forecasting challenge. The number of treasury operations that continue to use Excel as a primary forecasting tool remains largely undiminished.

There are two big challenges:

  1. Cash forecasting involves input from many individuals, and the models can quickly become unmanageable.
  2. Excel is not a very good tool for monitoring the input of external data input and amendments to the data.

All constituents – banks, corporations, workstation providers, and ERP companies – are developing tools to improve cash flow forecasting. Celent predicts that, given increased regulatory scrutiny and heightened demand for better liquidity management, cash flow forecasting is bound to see some major transformational improvements in the coming 18 to 24 months, due in part to a change in existing mindsets.

Improvements in cash forecasting are linked to an interesting development in attitudes towards Excel. In the past, some treasurers were waiting for a revolutionary change in cash forecasting tools that might ring the death knell for Excel. However, when that did not occur, it slowly became apparent that Excel could be seen as part of the solution. Once they recognise that Excel will remain part of cash projections, treasurers were able to explore ways to work with Excel, and technology providers were free to continue their embrace of Excel.

Exploring Better Connectivity of Financial Data with Back-end ERP Systems

Treasurers, whose general ledger systems are part of their ERP system, are looking to better integrate liquidity management data and tools with their back-end ERP system. Celent sees 2009 to 2010 as a period when corporate treasurers can expect further advances in the integration of general ledger systems, ERP systems, specialty workstations, and solutions offered by specialty integration providers.

Role of Workstations in Liquidity Management

Banks continue to improve portal functionality, and provide tools and analytics to assist with liquidity management. ERP providers are enhancing their financial suites. Thus, for smaller and mid-size corporations, a treasury workstation (TWS) may not be a required solution to effectively manage liquidity. Larger corporations are more likely to have a workstation.

Celent anticipates heightened competition among ERP providers and TWS providers. Larger companies will continue to use specialised TWS, but more and more will be open to functionality offered by ERP providers, so that competition will intensify between vendors.

Investigating the Benefits of a Direct Feed from SWIFT

Corporations looking to streamline information flow associated with the flow of funds are determining that getting a data feed directly from the Society for the Worldwide Inter-bank Financial Telecommunications (SWIFT) through their banks – as opposed to getting the data via a feed from their bank – is useful, and provides them with some additional time to better manage liquidity.

In order for corporate treasurers to improve and maximise systems and procedures to achieve the highest and best levels of liquidity management, data has to meet three prerequisites: the data needs to be accurate, timely, and secure. Additionally, corporate treasurers want to have a holistic view of all accounts, so they wish to have a single, comprehensive view of their accounts. This is where SWIFT provides one component of the solution.

SWIFT provides corporations with a single gateway to communicate with their banking partners, establishing an international network, available to banks and corporations, across which to send and receive messages. These commonly accepted messaging standards allow better straight-through processing. SWIFT also provides a community of users who can share information, and have the common goal of improving and encouraging further adoption of the solution.

The solution overcomes the issue faced by many corporations and their banks, who still communicate via a host of data lines from a disparate group of third party participants. Dependency on a number of disparate providers results in delay, if even one provider does not deliver the information in a timely manner. This leads to, both, an inaccurate understanding of cash positions, and incomplete data from which to make appropriate liquidity investment decisions.

The largest groups of SWIFT corporate users are internationally recognisable companies. Once complex technology offerings are adopted at the high end of a market, Celent believes that SWIFT’s offering will naturally be embraced by middle-market corporations and smaller corporations, especially as the two large ERP providers – Oracle and SAP – provide interfaces between their ERP systems and SWIFT.


The Holy Grail of liquidity management is one consolidated view of all funds available, and the ability to act on the data in a timely manner. Within the next five years, Celent predicts that the technology will be developed for that goal to be achieved. More interestingly, that goal will be achieved by different constituents in different ways, and end up benefiting a wide array of corporate clients.

ERP providers, workstation providers, and banks will all work towards providing corporations with a global view of cash positions, the tools to analyse the data, and the tools to manage liquidity. Corporate clients want access to their cash positions, securities, and supporting information. Additionally, while they wish to consolidate the networks on which data is routed to them, once the data has been reviewed and incorporated in the corporation’s back-end systems, they will want several ways to execute investments.

The challenge for banks is to further integrate applications in such a fashion, as to allow corporations a user-friendly experience, as well as provide the greatest level of transparency over all the data. The pace of change is picking up, and corporations are clamoring for unified solutions. The coming years should see positive changes for liquidity management.

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