Fit for purpose cash management vital as macro shocks take hold

Visibility, control and optimisation remain core objectives for treasurers but the pandemic and subsequent, dramatic changes in the macroenvironment demand they now place much greater emphasis on refreshing cash management practices, according to Lori Schwartz, global head of liquidity and account solutions at JP Morgan.

Schwartz says corporate treasurers are experiencing “a dynamic shift” in the types of cash they are required to manage, adding to their considerations when reviewing cash management practices. In particular, she points to the increasing prevalence of “third party monies” (3PM) due to the rapid growth in ecommerce and direct-to-customer business models, including online marketplaces. Such funds are typically held by ecommerce companies in digital wallets on behalf of third parties and as such cannot, for legal and ownership reasons, be managed in the same way as the companies’ own cash, for instance working capital or investible proceeds.

“3PM requires corporate treasurers to think differently and adapt to an environment that includes safeguarding requirements,” according to Schwartz “Solutions exist to help them on this journey, but we often see that treasurers are brought into the business strategy discussions later than ideal.

“Any business strategy that includes interacting with your client’s money should have treasurers front and centre, they are critical for capitalising on ecommerce opportunities.”

With global ecommerce growth having accelerated during the pandemic and expected to continue powering ahead, albeit at a more moderate pace, treasurers will have to deal with third party monies more and more.

According to eMarketer’s Global Ecommerce Forecast 2022, global ecommerce sales are expected to total $5.5trn worldwide this year, accounting for 20.3% of total global retail sales 2022. At $5.5trn, worldwide ecommerce sales this year would be more than 80% higher than that achieved in 2018 ($3trn).

eMarketer further predicts that by 2025 global retail ecommerce sales will exceed $7.3trn with its share of total global retail sales rising to 23.6%.

Counting the cost of cash

More broadly, Schwartz warns that high inflation and quantitative tightening, coupled with rising interest rates, means that cash will become more scarce and more expensive, as will the cost of inefficient liquidity management – a further reason for treasurers to ensure their cash management is fit for purpose.

In such an environment, corporate treasuries will continue to benefit from centralised cash management and prioritisation of self-funding models.

“Automated solutions, like physical cash concentration and notional pooling, continue to be the foundation of optimized liquidity management – in our experience when a company transitions from decentralized to centralized liquidity management cash on account can be reduced by upwards of 50%, cash which can then be re-deployed elsewhere in the company or used to pay down debt,” she says.

Schwartz also encourages treasurers to make greater use of virtual accounts as they can provide them with a multitude of benefits, including immediate liquidity concentration, eliminating the need for physical cash sweeps, and a reduction in overall banking costs. Virtual accounts are also now being adapted to 3PM in the form of wallets which has the combined benefit of optimising treasury and supporting business growth, she says.