Cash & Liquidity ManagementCash ManagementCash ForecastingManaging Your Cash as Recession Looms

Managing Your Cash as Recession Looms

One of the biggest risks facing corporate treasurers at the moment is liquidity risk, since global economic growth is severely challenged and some firms are beginning to struggle for survival. Cash is also at risk from the high debt levels of some western companies and short-term sovereign debt risks are worrying too, particularly for investors with large exposures towards, for example, Greece and other vulnerable eurozone countries. Even for those multinationals that have a cash surplus, finding a good, safe investment home for it is not easy. Treasurers should tread carefully at the moment. Identifying and protecting available cash reserves and using them wisely has never been more important in the face of these multiple challenges.

Supply chain risk is always present as well, particularly as globalisation and the ‘interconnectedness’ of companies is expected to continue despite the present economic difficulties. Interdependence between regions is growing, not diminishing, as the impact of last year’s earthquakes in Japan and the Arab Spring political upheavals proved. Cross-border cash management and extended supply chains are now a prerequisite for business.

To prepare for the unexpected, always ask yourself ‘what if?’. What happens if there is a natural disaster or the euro breaks down? What happens if the European Central Bank (ECB) announces that a country is out of the euro? These questions – and their potential impact on cash reserves – need to be considered by corporate treasurers during these turbulent times.


The major specific cash management risk, rather than a more general treasury risk, can perhaps be summed up by the word ‘globality’. As more and more firms go global they require workable liquidity concentration solutions – and this can be difficult in very ‘legislated’ markets such as Russia and China, although the latter is opening up to some extent with the internationalisation of the renminbi (RMB) and other liberalisation moves. Payment processing is becoming increasingly complex too, as is the aforementioned international supply chain with even small companies relying on eastern labour these days.

Banks too are facing challenges, so treasurers increasingly need to focus on bank relationship management as well. Make no mistake, banks are heavily pressured by regulations, with Basel III and many other fundamental changes on the horizon. These regulations could impede the ability of some banks to invest in the next generation of technology solutions, instead causing them to hoard money just when the new post-crash stipulations are demanding even more visibility, control and relevant risk management solutions. Treasurers need to ensure that their banking partners are prepared for this new environment. Most banks want to use their investment money for more than merely complying with the latest regulations, especially when some of them differ from country-to-country. Although compliance is necessary, enhancing efficiency via technology and freeing up working capital with innovative solutions and communities – such as SEB’s Benche forum – is a much more attractive prospect.

Basel III will increase the cost of capital and consequently the cost of trade. The single euro payments area (SEPA) is another regulation on the horizon, which will impact treasurers as the February 2014 end date nears and the requirement to use SEPA Direct Debit (SDD) and Credit Transfer (SCT) instruments becomes mandatory.

From a cash management perspective, SEPA can be a benefit allowing treasurers to identify hidden pools of cash for concentration in small subsidiaries situated around the continent. The Nordic countries are well prepared for SEPA. Finland is often cited as an exemplary case in compliance matters. Denmark and Sweden are part of the EU, but not the euro with the latter outsourcing its compliance to an external payment processor, while Norway remains out of both. Nordic treasurers are, therefore, used to dealing with various cross-border challenges.

Regionally speaking, Nordic treasurers at domestic companies are also used to operating in an international, globalised marketplace. The domestic markets are not large, which means that the big Swedish and Norwegian companies are accustomed to operating in other markets. That has pushed Nordic banks to not only concentrate on the region but to develop further flung global partnerships, capabilities and reach, to better serve client needs.

Gaining Greater Control and Visibility Over Cash

The first step corporations need to take to gain greater control and visibility over their cash is centralisation. They should introduce either a central process or system, or an organisational structure that centralises certain roles and responsibilities, or even both. The next step is to select a few core banks that support this process and then implement a harmonised connection to these banks, covering the relevant markets.

Visibility can be obtained with an internal system or via one of the core banks with excellent consolidation and monitoring capabilities. It’s fairly easy to get control and visibility over cash nowadays, as most banks across the world are connected to SWIFT which allows them to broadcast and display account balances.

Electronic bank account management (eBAM), which is being supported by SWIFT and others, is a good initiative which will further support the drive for better visibility, efficiency and control. Simplifying the account opening and mandate structure, and making it more standardised will be a benefit to everyone. It can be very frustrating for a Nordic company, which has good straight-through processing (STP) technology and procedures, to open an account in southern parts of Europe or in China or Russia. eBAM can help smooth procedures and it should be useful in helping to deal with the raft of new anti-money laundering (AML) and sanctions screening rules, not to mention the Know Your Customer (KYC) stipulations and the supranational Foreign Account Tax Compliance Act (FATCA) emanating from the US.

Communication is Crucial

To ensure liquidity isn’t tied up as working capital, the first thing is to communicate with your banks and other partners. One suggestion is to set up a council or formalised information-sharing structure to ensure that the key decision-makers and little heard ‘doers’ are listened to. It is important to gather treasury people, covering credit, collections and every aspect of the business together with global supply chain operatives, procurement controllers, bankers and shared service staff. Although getting everyone in the same room could be challenging it will be worth it. For example, SEB uses our global financial value chain approach, which is an assessment methodology, to help score companies from a working capital perspective. By doing that a treasurer can identify and create a joint road map and make sure that working capital is at the top of the management agenda. Subsequently, the treasurer needs to involve relevant suppliers and partners in the process and rollout efficiency plans together.

There is a lot of tied up capital unearthed when doing these exercises. For example, a multinational automotive company will have many thousands of suppliers that contribute to the production and distribution of its vehicles. Some will be major organisations of an equivalent size to the company itself, while others will be small and medium-sized enterprises (SMEs). The stronger the physical and virtual links, such as their contractual and commercial agreements and information integration between the car firm and its suppliers, then the better the working capital management is.

The needs of the suppliers will differ according to the services they provide and the aim of the business. Some of these suppliers will also be customers, therefore the relationship is complex and a ‘one-size-fits-all’ approach may not work. However, having open lines of communication will work. It also gives extra resilience against natural or political upheavals, strengthening the treasurer’s position. Opening up virtual forums and using social networking technology, so that every stakeholder can talk to each other, can also help to encourage effective co-operation. One way that a bank can help is to share relevant information across the various client sectors, promoting best practice by encouraging people to meet each other via the Benche online community and various mobile apps.

Working Capital

World trade flows have changed with the rise of China and eastern countries. Working capital and cash flows have altered as manufacturing has increasingly moved away from developed markets, increasing the role of shipping and freight communications, and emphasising the importance of foreign currency and financing procedures such as letters of credit (L/Cs), flexible invoice discounting and so forth. Emerging markets are also providing new cash flows themselves. There is a new world out there, even compared to 10 or 15 years ago. Treasurers need to look at where their production capabilities, warehousing, key partners and skill base is. This is an extremely interesting starting point for delivering effective working capital, especially considering how the world will look in five or 10 years from now and how much more complex things could still get.

Treasurers need to drive efficiencies across the order-to-cash (O2C) cycle in this new globalised environment and one of the best ways to do this is to truly understand the quality of your accounts receivable (A/R). It is important to segment the customer and supplier base on the general value of the relationship and creditworthiness, using credit scoring and other metrics. The treasurer can then start offering more or less favourable terms to initiate other activities that improve their position. Enterprise resource planning (ERP) systems and analytical software can help. The answers to a lot of questions can be found internally if you just look and ask a couple of new questions.

Once the treasurer has got internal focus and planning in place they can combine it with the data gleaned from external discussions with suppliers, financiers and partners. Joining everyone together will help develop an extremely effective corporation that maximises its cash management capabilities and truly knows where every penny is, to deliver optimum performance.

To learn more about SEB, visit the company’s gtnews microsite.

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