Cash & Liquidity ManagementCash ManagementPracticeInvesting in Cash Management for the Long-term

Investing in Cash Management for the Long-term

The recession has had a major impact on the way companies manage cash and short-term funding, and the corporate treasury has felt this change more than any other corporate function. While the current environment continues to be challenging, it may also prove to be an opportunity to re-engineer treasury operations in such a manner that will have a long-lasting, positive impact, especially on enterprises with a global footprint.

Currently, organisations are being challenged in their funding operations by the overall lack of credit available in the market. Depending on their credit rating, corporates are finding that formerly secure sources of short-term funding, such as the issuance of commercial paper, are increasingly unreliable, with cautious institutions displaying little appetite for such investments.

Commercial banks are also tightening the availability and limits of syndicated credit facilities, further depleting short-term funding options. Corporates that still have availability in these markets are finding that increased spreads have raised the short-term funding costs. Longer-term funding options have been dramatically affected as well, with reduced availability and spread increases of three to five times the norm in some instances.

From a treasury perspective, this has vastly increased pressure to somehow drive greater performance in cash management and collections, areas that have been hit at least as hard by the global slowdown and increases in perceived counterparty risk. Corporate treasurers truly have been caught between the proverbial rock and a hard place.

Navigating the Minefield of New Solutions

Traditionally, the credit markets were used to bridge economic slowdowns by providing the working capital necessary to maintain the business. This is no longer the case and corporates can find themselves in an insurmountable cash flow deficit. One solution will be a more robust application of basic cash management techniques. Consolidated global bank reporting, cash pooling and cash forecasting will improve working capital management and allow corporates to fund a greater proportion of their liquidity requirements through the use of internally generated cash, but corporate treasurers need to make a watertight case for investment in the technologies needed to turn these processes into bona fide cash generators.

Such solutions are far from failsafe, and need to be considered strategically if they are to deliver maximum return on investment. For example, a majority of corporates use some form of cash pooling, but structures often tend to be regional in nature and only include a portion of all commercial accounts. Business units around the world are often responsible for maintaining and managing bank accounts for receipt and disbursement purposes.

These entities may build cash surpluses that remain within the business unit or region and may be invested locally, leaving a significant portion of the corporate’s total cash balances in bank account structures that are not systematically pooled through target or zero balance techniques. If used properly, this unpooled cash is potentially a major source of funding for the corporation. If not, it constitutes a missed opportunity.

There are two main prerequisites for creating an optimal global liquidity management solution: first, accurate and timely reporting of balances and transaction data from all bank accounts; and second, a robust and scalable treasury management system (TMS) that is capable of capturing this data to provide a global view of cash positions, and that has the tools to analyse and manage liquidity.

The reality is different. Corporations have typically captured bank-reporting data through a disparate system of bank stations, websites and treasury workstation applications. Multiple channels of communication and reporting formats are sometimes maintained with individual banks. Communications are often unsecure and require manual intervention to capture and record balance and transaction data. Bank account data is often delayed and largely incomplete. The negative ramifications of such inefficient bank communications are inaccurate cash position calculation and inappropriate liquidity management decisions.

Consolidation is Key

To combat market volatility and liquidity concerns, corporate treasurers require a single consolidated view of all funds available. The most efficient method available to obtain streamlined delivery of global bank account balance and transaction data is through a direct connection to SWIFT, which is now a realistic and best-in-class financial information management option, thanks to its aggressive marketing to corporates.

Information is half the battle, but liquidity management requires greater efficiency in the use of cash. Utilisation of physical pooling structures, using target balancing and zero balance accounts, as well as notional pooling arrangements, should be a bare minimum for complex global enterprises.

In addition, many corporates could greatly benefit from the creation of in-house banking structures. The in-house bank will collect revenues and disburse payments on behalf of member business units, and track participation in the pool through the use of virtual current accounts. This not only facilitates a permanent reduction in the total cash needed for short-term liquidity, but it can also assist behavioural change by using tools such as interest payments on surpluses and negative balances to reward prudence and well-planned investment.

Any TMS needs to be scalable, functionally rich and have the ability to communicate seamlessly with core enterprise resource planning (ERP) systems – all outcomes that have become far more achievable thanks to advances such as the delivery of software-as-a-service (SaaS), developments in open source standards and the move to building solutions using a service-oriented architecture (SOA).

Ultimately, a more complete utilisation of cash and liquidity management techniques across the enterprise will provide global corporation with the opportunity to fund a greater portion of their ongoing liquidity requirements with internally generated cash. The true value of a modern TMS lies not in the immediate impact it will have on corporate liquidity, however, but on the long-term improvement in financial performance that such systems will bring, even as we climb out of the current recession.

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