Corporates are constantly working to reign in on spending and create new efficiencies – yet as economic and socio-political uncertainty continues to intensify across the globe, treasury departments are now facing more pressure than ever to spend wisely and demonstrate the ability to produce big savings.
According to the 2019 Treasury Perspectives Survey Report compiled by consultancy Strategic Treasurer, there’s been a sharp increase in the number of firms displaying a negative outlook for 2019. Not only are a majority of treasurers anticipating further rate rises across 2019, but 44% of companies are expecting the economic conditions within their respective home countries to remain static or deteriorate over the coming months. Between this increasingly stormy climate, America’s intensifying trade war with China and the UK’s impending EU departure, it goes without saying companies need to start making their balance sheets work harder for them than ever before.
That work inevitably begins by making a concentrated effort to boost operational effectiveness within treasury departments. Fortunately, there are several key areas in which treasurers can leverage new technologies in order to drastically simplify complex procedures and alleviate the mounting pressures weighing down organizational operating budgets.
- Centralize and consolidate
Until fairly recently, a large proportion of multinationals preferred to silo their treasury activities so that individual business units or regional offices were allowed varying degrees of financial autonomy. Yet while that autonomy has always been fantastic for local teams needing the authority to make quick, market-specific decisions at the drop of a hat, it also tends to generate wasteful duplications of effort and cripples boards at HQ with fragmented views on their organization’s broader portfolio activity.
By consolidating treasury function, firms are empowered with the ability to better set and monitor centralized policies, execute decisions and make better informed decisions thanks to the added benefit of real-time aggregate snapshots and accurate forecasts of global cash flow and risk positions. Centralization also protects multinationals from stagnating regional economies by rationalizing in-country cash management and reducing costly bank charges by concentrating funds across fewer financial institutions.
Bearing that in mind, it’s hardly surprising 83% of more than 200 corporates surveyed in PwC’s Global Corporate Treasury Benchmarking Survey 2017 reported now harboring a dedicated central treasury department to better manage cash, investments and FX – and because a whopping 65% of teams involved in treasury are distributed across a range of departments, the implementation of a centralized treasury function relies upon the presence of a dynamic TMS or ERP solution.
Treasury departments can now utilize a range of innovative SaaS and cloud-based solutions designed to streamline and centralize treasury activity with the help of advanced cash pooling and in-house banking functionality. As a result, treasurers benefit from maximum visibility in terms of exposures and cash positions.
- Improve cash flow forecasting
If an organization is looking to boost operational effectiveness within its treasury department, sharpening up cash flow forecasting capability has got to be a top priority. After all, an accurate snapshot of cash flow enables a company to better manage its debt obligations, understand its capabilities and guide direct future investments. Treasurers need a crystal-clear view of their organization’s future cash requirements in order to safely navigate regional volatility and inform operational strategy.
That’s why corporates must integrate a reliable cash flow forecasting solution with the ability to act as an early warning system against liquidity gaps. Most ERP and TMS software providers have now extended their offerings to include vertical specializations that support a range of sector-specific forecasting models. Likewise, the addition of a cash flow forecasting solution will allow teams to automate and streamline a huge proportion of their clunky legacy data collection and harmonization processes.
Better yet, an increasingly large crop of innovative start-ups have recently injected the cash flow forecasting space with a hearty dose of artificial intelligence. A number of AI-powered cash flow forecasting solutions can now be integrated with existing TMS software solutions in order to identify hidden patterns, trends and anomalies within a company’s accounts in real-time and offer unprompted baseline forecasts and analysis.
Cash flow forecasts will also become more accurate over time as AI solutions learn and adapt to source data – which means treasury departments will be able to improve their debt management abilities and steer data-based investment decisions without needing further resource.
- Unlock working capital
Working capital is without doubt one of the best tools with which to assess a company’s overall efficiency and investment potential because it measures a company’s assets against its liabilities in order to figure out the capital a company is able to use within its day-to-day operations. As a result, any action treasurers can take to unlock or boost working capital will enable a company to reinvest in operational activities without squeezing cash flows.
According to PwC’s Annual Global Working Capital Study, if all organizations were able to boost their working capital efficiency up to the level of the next performance quartile, it would generate a global cash release of €1.3 trillion and enable corporates to boost their capital investment by 55%.
Unlocking that potential can be incredibly difficult for multinationals operating in developing markets, where business culture, payment terms and accounting practices often vary dramatically. As a result, plenty of organizations end up saddled with excessive levels of working capital trapped across low priority markets. In order to free up that working capital and reinvest it elsewhere within the organization, treasurers need to understand the payment patterns and customer behaviors present in regional business units.
One of the easiest ways in which to get a grasp on working capital and subsequently boost operational effectiveness is to integrate dynamic TMS modules within existing systems that are capable of offering real-time aggregate accounts receivable information, streamlining dispute resolution and generating crystal clear snapshots of cash conversion activities. By automating these processes using a TMS or ERP solution, firms are able to settle invoices and disputes faster without needing to waste time or resource chasing – in turn bolstering accounts receivable performance and freeing up working capital.
Another option worth exploring includes supply chain finance, or reverse factoring. Reverse factoring is when a company brings in a financial institution or fintech to pay its invoices to suppliers at a much faster rate in exchange for a discount. By implementing a supply chain finance programme, companies are then able to accelerate accounts receivable receipts for their suppliers and optimize working capital without taking on costly debt. Better yet, reverse factoring helps to insulate firms from financial tremors by diversifying a company’s funding mix across multiple sources.
Treasurers are certainly facing a dizzying array of hurdles in 2019. Optimism is shrinking, regulatory divergence has complicated compliance obligations and political upheaval has made it more difficult than ever to manage global working capital. Yet by focusing on a centralized treasury strategy, powering up cash flow forecasting capability and implementing tools to optimize and better manage working capital, organizations should be able to substantially boost their operational effectiveness in order to deliver value and achieve growth.