 |
|
|
Cash Management
|
|
 |
|
|
||||||||
   sponsors
|
In the current economic climate, visibility and control over liquidity is more essential than ever. In late 2009 gtnews conducted a survey to provide insight into the thoughts and opinions of corporate treasury and finance professionals. The survey sought to gain an understanding of the steps taken by corporates to manage their liquidity processes, and how those processes had been affected by the recent market conditions. The majority of the 225 respondents were based in western Europe (89%) with the remainder in central and eastern Europe. Nearly two-thirds came from organisations with annual revenue of more than US$1bn, while just under a third came from organisations with annual revenue exceeding US$10bn. The survey highlights that in general companies are now focused on keeping cash liquid and they are using investment instruments with very short maturities. Most organisations would like to be able to use flexible investment instruments that provide access to liquidity while generating increased yield. Just over half of all respondents said that their organisation would be likely or very likely to use such an instrument if it were available. Key findings:
One of the most important considerations for those surveyed was access to liquidity. It is probably now more important than it has ever been in the past. The management of liquidity risk is now uppermost in a treasurer’s mind following the recent market turmoil. Investment PoliciesIn the wake of the credit crisis, investment priorities have shifted. Credit risk is seen as a critical factor by many companies. This is supported by the results of the survey which indicate that 87% of respondents rank ‘instrument credit rating’ as a top three factor - up from 76% 12 months previously. Respondents also continue to rate ‘overnight liquidity’ as a key factor in potential investment policies, while ‘investing with credit providers’ is also ranked consistently highly. Although yield is not as important as it has been, it is still a key consideration. Having the ability to access their cash on a daily basis is now a top three factor in companies’ investment policy. Within the current interest rate environment, companies require instant access to their cash, but also need to generate a return on it that is typically better than rates associated with instant access. The resulting yield reflects the fact that firms’ cash is effectively available daily. Companies will have a core fixed balance that they can invest for a specific time period but they still want the comfort of daily access to it. They also have to consider the non-core element of that cash - the fluctuating daily balance - where they would expect a daily return. The difficulty lies in balancing all those factors. Working Capital Funding The survey revealed that the distribution of the sources of companies’ working capital funding has remained relatively constant. External working capital funding continues to be expensive, unreliable and less readily available in the market. As a result, most organisations have increased their reliance upon use short-term liquidity (i.e. cash flow from operations) as their primary means of working capital funding. Over a 12-month period, the survey revealed that there was a slight drop in the use of short-term borrowing for both overdrafts and commercial paper from 5% to 4%, and 4% to 3% respectively. Over the same period, marginally more organisations used long-term loans as a funding option - 14% from 12%. It is no surprise that cash is still king - having efficient liquidity solutions to gain access to your own cash has always been important but in today’s market environment, it is absolutely vital. It is clear that the way in which corporates manage their working capital in the short-term has not really changed, although they remain focused on visibility and control. That has always been important, probably more so now than it has ever been. Figure 1: Types of Working Capital and Change of Use Over 12 Months to August 2009
 Source: RBS Boosting Cash FlowIt stands to reason that many corporate treasurers are keen to boost cash flow from operations, although some methods are proving more popular than others. One of the most commonly used appears to be the renegotiation of terms with suppliers to gain more access to cash. Other methods reported in the survey included increasing short-term liquidity through selling receivables and the divestment of long-term assets. According to respondents, these options are being supplemented by a number of other measures such as delaying strategic investments or reducing the tenor of investments. These strategies are not designed to increase cash but give comfort that more is available at short notice. This view that cash is desirable has long existed. It is just the case that prior to the market turmoil, the focus was yield. Yield used to be a lot more important. In the current economic climate, security and flexibility through instant access to cash seems to be more desirable to corporate treasurers than potential returns. Figure 2 : Methods of Increasing Short-Term Liquidity
 Source: RBS Planning Liquidity RequirementsThe visibility of existing cash and an accurate oversight of predicted cash balances is a critical early warning indicator in identifying potential liquidity problems and taking necessary corrective actions. As a result, it’s no surprise that financial professionals plan their liquidity requirements in order to respond to the future needs of their businesses. An interesting result of the survey was just how far ahead each respondent judged they were able to do this. Although most respondents had reasonably good cash visibility and could accurately predict their liquidity position one to four weeks in the future, nearly a quarter of those surveyed could only predict up to one week ahead confidently. Distribution of Investment VehiclesWhen choosing investment vehicles, the gtnews survey highlighted the fact that organisations keep the majority of their liquidity in operating accounts and short-term time deposits. It appears that short-term investment vehicles with a maturity horizon of one year or less are among the most popular. In fact, according to respondents, 88% of firms’ excess liquidity was being taken from short-term investment vehicles. On average, those surveyed said that they keep 38% of their liquidity in operating accounts, while another 32% of their liquidity on average is kept in short-term time deposits and 18% in money market funds (MMFs). Organisations keep far less of their liquidity in savings accounts and long-term time deposits of more than one year. A key reason for this is a requirement to keep their short-term liquidity to meet cash flow and working capital finding requirements. Keeping Cash to HandThe length of time an organisation keeps ‘cash on hand’ varies widely, ranging from hours to months. Organisations keep 84% of liquid balances for less than 31 days, with a significant portion (47%) kept only overnight. An average of 18% of organisations’ liquidity is kept in deposit for two to seven days, with 19% for eight to 31 days. An average of 16% is kept in deposit for more than a month. Figure 3: Average Distribution Short-Term Deposits by Tenors
 Source: RBS The costs and administrative burdens of rolling overnight deposits, coupled with the current low interest rate environment, can make it difficult for short-term deposits to be profitable. There is typically a core element of these overnight deposits that could be placed out longer term if allowed, making a flexible investment product that combines access to liquidity with enhanced yield an attractive option. Shorter Time HorizonsIt’s clear that the majority of companies do not place their cash in longer term deposits. In some cases there are internal restrictions preventing this option. Of the remainder surveyed, just under a third indicated that a requirement to have cash on hand for internal funding was the reason they did not use such instruments. This is a clear indication that companies are attracted to an instrument that can provide increased potential returns with the flexibility of daily access to cash if required. ConclusionIn highlighting the changing requirements and limitations that corporates face in the current economic environment, the RBS Liquidity Survey 2009 demonstrates that firms are focusing more closely than ever on putting safeguards in place to reduce their liquidity risk while maintaining high levels of operational agility. More than ever, cash is king. Efficient liquidity solutions that enable organisations to gain access to their own cash have always been important, but in today’s market, they are absolutely vital. As corporates address changing investment priorities regarding risk, return and liquidity, banks that can provide flexible investment solutions that effectively combine enhanced yield with ready access to liquidity will be an attractive option.
|
