The financial crisis has fundamentally changed the way that corporate treasurers manage the liquidity and risk management needs of the business. One of the most significant features of the crisis was the speed with which it struck, giving treasurers little time to take action to shore up financing and ensure that appropriate liquidity management structures were in place. Consequently, treasurers became more reliant on their key banking partners, and many discovered the hard way the banks they could rely on and those they could not.
Changing Corporate Priorities
Access to liquidity was taken for granted by most organisations before the crisis, but as the capital markets dried up and banks reviewed their lending strategy, liquidity optimisation became a major consideration. The importance of liquidity as a prerequisite for business survival meant that the board increasingly scrutinised treasurers’ activities, and led to a growing recognition of the important contribution that treasury makes to the business. It also led to a change in the relationship between treasury and the rest of the company. Firms that had previously maintained a decentralised approach to cash management, funding and hedging sought to centralise these activities to improve control over cash flow, reduce the cost of funding and manage credit, interest rate and foreign exchange (FX) risk more effectively. Although counterparty credit risk has always been included in treasury policies, documentation was dusted off and became a major factor in corporates’ investment and cash management decisions.
Many organisations also recognised the importance of leveraging internal cash positions more fully in order to use surpluses in one part of the business to finance deficits in another, reducing funding costs and ensuring that credit lines could be used for more strategic activities rather than financing working capital. Every treasurer looked around the business to find out where their cash was and how it could be put to use. With day-to-day cash flow becoming a priority, treasurers increasingly took an overview role in the financial activities that contribute to working capital, in particular the order-to-cash (O2C) and purchase-to-pay (P2P) processes that comprise the financial supply chain. This expanded role meant that working capital management became a strategic rather than operational responsibility, as treasurers sought to optimise and align O2C and P2P processes to maximise working capital. Cash flow forecasting, which has been on treasurers ‘to do’ list for so many years became a ‘must-do’, which in many cases necessitated a concerted campaign to impress upon other departments and subsidiaries the importance of accurate, timely forecasting, and new or enhanced technology to enable forecast information to be consolidated, reported and utilised for financial decision-making.
The Role of Banking Partners
The relationship between corporate treasurers and their banking partners was shaken by the crisis. No bank could rely on size or heritage as a guarantee of future stability and at the same time, many reviewed their funding strategy, leaving some corporates without access to capital or at a prohibitive cost. Banks and corporates recognised their reliance on each other and the importance of trusted, open relationships that reflected the needs and constraints of the other.
Furthermore, the differences between banks became more apparent. In the years before the crisis, cash management products offered by the banks grew in sophistication and flexibility, and, ultimately, these products became commoditised as they became largely equivalent. With most corporate treasurers therefore having access to comparable products from their banks, the banks that are most successful in satisfying their clients’ requirements are those which have invested in advisory services, delivery capability and client support. In this way, banks can design solutions that meet clients’ liquidity and working capital objectives, provide these services in the most convenient, efficient and cost-effective way possible, and ensure that clients are equipped to take best advantage of them. To be successful in all three of these areas requires a commitment to technology innovation and an investment in the skills and expertise on which clients can rely.
Technology for Strategic Differentiation
The provision of secure, robust technology is an essential element of every competitive cash management offering, but although commonplace to some degree, there are differences between banks’ approaches to providing technology to their clients. Banking technology, however sophisticated, is of no benefit in itself; it only becomes valuable as a means of communicating information between bank and corporate that is required to inform decision-making, and as a channel for banks to deliver excellence in customer service. This could mean that banks develop their own proprietary technology; in addition, banks that are committed to providing the best tools available to their clients in a timely manner will also partner third-party technology firms to leverage the right skills and expertise.
From Product to Solution
With myriad cash management products available, how do companies select the right combination of products and services to satisfy their business objectives, maximise efficiency and minimise risk? The key is to be able to structure combinations of products and services into client-specific solutions that successfully align bank capabilities with client challenges. This requires a close relationship between a bank and its clients in which the bank is focused on anticipating, understanding and responding to the evolving needs of its clients. Such relationships are built over a number of years and are not negatively affected by the ebb and flow of economic fortunes.
Having developed a clear understanding of clients’ needs, aspirations and constraints, an effective bank can then design solutions that satisfy current and future objectives. This is not simply a case of constructing a combination of products and services; it requires a clear business case, budget, implementation strategy and resource plan. For example, if a client has identified specific working capital objectives, it is not enough for a bank simply to provide a payables solution, however sophisticated it may be from a technical perspective. Rather, a true partner bank will understand the specifics of their client’s industry, strategy, business organisation and culture, and work proactively to identify potential improvements across the financial value chain, designing cross-product solutions that deliver a holistic solution to a holistic problem.
From Solution to Strategic Advantage
However well a solution is designed to meet a client’s needs, it will not satisfy the company’s objectives unless employees are well-trained in the use of the technology used to deliver it, and know how to use the information that is produced. This is particularly the case when individuals change roles, and new people take over. Furthermore, while a solution will be implemented to meet the company’s current and anticipated needs, these can change over time, as a result of changing internal or market conditions, mergers and acquisitions, etc. Constant communication between corporate treasurers and their banking partners is essential to ensure that in-house skills are maintained and that both parties have a clear appreciation of the other’s strategy.
The European Cash Management Landscape
With most banking products and services delivered using technology, it no longer matters where a bank is located in relation to its clients to deliver the vast majority of the transactional requirements of multinational corporations. Furthermore, with harmonisation of payment products now in progress through the single euro payments area (SEPA) and legal harmonisation with the implementation of the Payment Services Directive (PSD), companies now have the opportunity to select their banking partners for payments and cash management irrespective of location. This means that companies can take advantage of innovative, convenient technology that is easy to use, together with expert advisory services, in order to leverage banking products and service most effectively to satisfy today’s business challenges.
- The financial crisis has resulted in corporate treasurers making greater demands on banking partners, particularly in order to optimise liquidity.
- Strong, long-term relationships between corporates and their banks are now a priority for both parties. Such relationships need to be based on trust, and recognise the needs and constraints of the other.
- Banks that will be successful in the new financial landscape are those with a clear investment in advisory services, delivery capability and client support. These are all essential elements to satisfying clients’ short-term and ongoing objectives.
- With harmonisation across the eurozone as a result of SEPA, companies have the ability to select their banks based on these features of their service as opposed to their geographic location.
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