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Sibos 2011

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The credit crisis and precariousness of the global economy has turned the spotlight on liquidity management. Previously, many corporations looked at the profit and loss (P&L) statement as the true indicator of the success of the company, but today, more than ever, the expression 'cash is king' is in the forefront of most treasurers' minds.

The fundamental issue comes down to a company's ability to fund and run their operations - and liquidity management is a key component of that. As treasury moves its activities to centralised operations, or even in some cases to a shared service centres (SSCs) model, one of the recurring themes is a greater emphasis on operating on a centralised platform in order to help manage the liquidity aspect of the operation.

Treasurers need to know exactly what their cash demands are at any given moment in time. They need to have a good grasp of their cash inflows and the ability to properly schedule an outflow. By taking a centralised view, the treasury can gain visibility and transparency that organisations need in order to profitably manage liquidity. This then translates to more efficient FX management, better interest rate management and improved commodity hedging capacity.

And yet even when the global economy began to slow at the beginning of last year and the market experienced significant losses, SSCs were still considered to be a cost centre by many senior executives. But as the year progressed, corporate treasurers have been able to leverage regional or even global centres of excellence for efficiencies, effectiveness and ultimately transparency in order to get the data that they need to streamline their operations. This trend will continue as the credit crisis continually stresses the need for transparency and liquidity management.

Is it possible to have more emphasis on liquidity management? The answer is yes and treasurers are going to have to find ways to be smarter and gain greater visibility of their cash. In the company boardrooms there will be greater acceptance of some of the financing alternatives to help organisations manage their liquidity.

New Technologies Help Treasury Centralisation

When focused on liquidity management, it is important for a corporate treasurer to have an accurate picture of cash flows. They need to understand their short-, medium- and longer-term obligations in order to be able to develop new ways to make funds available.

Most corporate treasurers have already centralised treasury activities - at least the general oversight and high-level treasury functions - at the home office, but they also use remote locations and different centres across the world, e.g. for payments. New technologies have allowed the corporate treasurer to bring together those functions that feed the treasury, such as the cash inflows and outflows, all of which can be centralised in one main centre or, at the very least, in regional centres, which could also be consolidated in the future.

With a centralised approach, it is much easier for treasurers to truly understand what inflows they have across their operations. At a high-level, the treasurer wants visibility on all the cash that the company generates from its treasury functions, whether from short- or long-term investments. For example, trade receivable collections have been - and continue to be - distributed in many companies; in centralised operations, it is much easier for the treasurer to understand what those are, and to accurately and consistently predict when those inflows will come in.

Combining visibility with significant advancements that the industry has made in the payment space, for example the payment batch concept, means that treasurers can centralise payments in the payment batch and completely control the payments. This is because not only do they understand the workflow around where the payments need to go and how they need to improve the process, but they can also fulfil the significant regulatory compliance obligations.

Now they are able to understand what currencies they currently have, what currencies they should pay in and what bank accounts they should pay out of, because all this information is centralised. They don't have to rely on the distributive infrastructure that they had previously for payments. Furthermore, with the payment batch technology, they can control all aspects of the outflows as well.

Consolidation is the Path to the Future

Over the past 12-18 months, and looking forward to the future, an increasing number of corporate treasurers will consider consolidating all aspects of cash inflows and outflows. This may be done solely at a regional level, where a corporate has a SSC in Europe, one in Asia and one in US, but there has to be a unifying element that cuts across all of these disparate systems.

In order to do this, treasurers must migrate to a centralised model: from the business-unit level, or in-country organisations and local banking connections, to a higher level. Only then will the treasurer truly control the cash flow and have a granular view of liquidity. This level of control is crucial at a time when liquidity management is at the forefront of every CEO and CFO's mind.

Treasurers no longer need to 'sell' the efficiencies of moving to a centralised model to the board - the senior level executives are demanding it because they are in dire need of a single view of liquidity. Every single senior executive across the globe is now focused on liquidity like never before.

For example, this is particularly true when it comes to debt covenants. A company has covenants associated with its loans and if it can't meet those, or its funds dry up, then the company won't be able to get more credit from its banks - or certainly not at the rate that they had in the past for long-term loans. It is crucial for the business that the corporate treasurer has plans in place to ensure that these funds are available.

The treasurer doesn't have to sell efficiency and visibility to the board, since it is the board that is pushing these themes down to the treasurer to ensure that they have every single 'i' dotted and 't' crossed when it comes to liquidity management.

Leveraging Best Practices in SSCs

Looking back at the topics covered earlier in this series - general ledger reconciliation, application hosting services, back-office transaction processing, benefits of global payment factories and best practices in collections - each one plays a significant role in allowing the treasurer to consolidate and manage liquidity. Each one of those parts needs to truly correspond when it comes to new technologies and centralisation.

For example, a corporate can put in place a payments factory at a centralised level - and many organisations are doing this now probably because the enabling technology is easier to use - but they also have to implement general ledger reconciliation in order to reap the benefits of a payments factory. A corporate is not going to be able to just roll out a payments factory and control all its outflows from one centralised location without having automated reconciliation for each one of those disparate accounts. Therefore, the sum of the parts is much greater than the whole, and a corporate will gain greater value by bringing these parts together than it could solely by automating them individually.

In today's economic climate, many expect that the industry will see more regulatory requirements. It is hard to predict what these will be or what form they will take, but there will certainly be more regulations, such as greater reporting demands from regulatory officials and more requirements around an organisations' liquidity, including notifications, certain ratios, etc. There will also be an increased focus on working capital and the ability of companies to fund their operations.

It is almost impossible to effect change across a large organisation when things are distributed or decentralised. From a regulatory standpoint, it could take up to 18 months to get up to speed in all aspects of payments if a corporate has a decentralised process across its entire organisation. Whereas with a payments factory, an organisation can create workloads, with checks and balances in the process, and it has everything needed for a regulatory environment at a high level. It also covers all aspects of the business and automatically moves the process down to every piece of the business.

Best practices in collections, treasury management and payments, etc are significant value generators for an organisation - whether it is properly managing the accounts receivable (A/R) so that a company can turn those receivables over more quickly and generate cash for the company; whether it is properly managing the credit limit of each customer so that a company is not exposed to customers that could result in significant loss; or, just as importantly, whether it is properly managing exposures in a specific industry or a specific region of the world.

The aim is to be able to centrally manage this disparate information from various sources and understand what the corporate's risks are, so a treasurer can then understand which work orders have been processed, which ones need to be fulfilled, and how credit can be freed up for those customers. Because most companies are not going to extend customers more credit lines at this stage in the economy, the question then becomes how can the existing credit lines be freed up so that they have what they need to do their job in order to generate cash flow?

Therefore, from the collections perspective, a corporate can gain value from best practices whether on the receivables or payments side. For every best practice on the inflow side, there are best practices on the outflow side. For example, whether that is to ensure regulatory requirements are met or proper internal processes are followed, or whether, in a local consolidated payment, the company is not paying the same vendor 50 different times when one payment would have sufficed for multiple invoices and provided significant cost savings.

Conclusion

In 2009 and beyond, corporate treasurers are going to try harder to bring together payments and receivables. Treasurers understand that they need these pieces to actually have liquidity management at a high level. Until recently, they have been able to bring in some of the high-level functions to a centralised treasury, but now, with the technology available, the regulatory requirement, etc, many will aspire to have the very detailed, day-to-day operational aspects of treasury being rolled into SSCs, so that all aspects of cash inflows and outflows are managed centrally.

The driver of change is the liquidity shortage. The visibility provided by a treasury management system will enable the corporate treasurer to understand the company's cash position, short- and long-term obligations, and then help the treasurer provide adequate and timely funding of those obligations. Therefore, the value of a SSC is being centralised and having intraday transparency.

And then if on top of that is put best practices, reaching down to a lower level with each one of those functions, the significant value as a treasurer moves up the chain of activities - best practice after best practice is incalculable. Although it is difficult to calculate the exact value that a SSC can bring to a company, a large corporate can generate millions of dollars every year by properly managing collections, payments and the entire liquidity management aspect of the business.