All treasurers are on a journey. That sojourn includes identifying ways to manage risks, optimise liquidity and reduce costs to bring value to their organisations – and their shareholders. Their journey also involves demonstrating what is possible when they think strategically across their entire enterprise, operationally and geographically.
Their quest begins by taking an objective look at the current state of their treasury operations and benchmarking it both in relative terms against similar companies and in absolute terms of liquidity and risk.
Liquidity Improvements: A Full Itinerary
Treasurers who have travelled the long and winding road to liquidity improvement will attest that there is no silver bullet when it comes to cost savings, efficiency gains, higher yields, or better management of working capital. What’s more, while virtually all treasuries share a final destination, the routes they follow can be quite different because they must be harmonious with their company’s unique needs and culture.
That said, there are three items that eventually land on the itinerary of every treasurer embarking on liquidity process, policy and performance improvements:
- Rationalising bank relationship to benefit from scale economies.
- Improving cash flow forecastingto create a corporate cash discipline that naturally identifies opportunities to reduce cash buffers and makes people accountable for liberating excess cash.
- Mobilising excess liquidity to streamline access to ‘organic’ liquidity.
Rationalise Bank Relationships
It’s no secret that the first step on the roadmap to efficient liquidity management involves rationalising bank relationships. However, this step is often discounted or relegated to a low priority which can create bumps in the road and sabotage improvement efforts. Rationalising bank accounts and bank relationships serves three main purposes:
- Reduces bank costs: focusing banking services with key providers strengthens a company’s position for negotiating better pricing for combined services.
- Enhances operational efficiency: fewer banks means fewer points of contact for service and data exchange as a company evolves to a more bank-agnostic format.
- Contains risks: with fewer relationships and accounts to manage, it is easier to enforce bank account management policy and monitor potential fraud and losses.
Rationalising bank accounts and assessing counterparty usage begins by surveying subsidiaries and business units to identify the location and purpose of their accounts.
Once opportunities to rationalise accounts have been identified and steps taken to consolidate relationships with key banking partners, a policy related to opening accounts with approved banks must clearly be enforced. This can be achieved by making treasury the key point of control for account openings and closings, which also ensures that account and liquidity structures remain in line with liquidity and risk objectives.
Organisations also should periodically benchmark the performance of their banks to assess the distribution of their business with them.
Figure 1: Treasury’s Control of Account Openings and Closings
Although best practices call for treasury maintaining control over all account openings and closing, only 54% of the multinational corporations that participated in Citi Treasury Diagnostics benchmarking research reported that their treasuries have exclusive rights over the opening and closing of their company’s bank accounts.
Improve Cash Flow Forecasting
No journey toward liquidity improvements would be complete without addressing cash flow forecasts. Reliable and timely forecasts are absolutely critical to reducing cash buffers and keeping liquidity from getting stranded across an enterprise. This starts with knowing the sources and uses of cash and generating holistic forecasts.
While all enterprises produce cash forecasts, across the board there is room for improvement. In fact, recent Citi research revealed that 84% of the companies that participated use manual inputs to prepare their forecasts.
Citi Treasury Diagnostics’ findings show that 84% of corporations surveyed still manually input data into spreadsheets and consolidate information by email.
Key factors in a successful cash flow forecasting programme include:
Make sure that the organisational benefits of forecasting are understood and that the process is manageable.
Establish an automated controlled loop process to capture and standardise forecast data.
Combine top-down and bottom-up approaches to develop the most complete forecasts.
Reduce the forecast time horizon, preferably to one month, to boost the potential for accuracy; also match the forecast horizon to the profit and loss (P&L) forecast cycle.
Perform variance and statistical analyses to engage subsidiaries and business units when addressing their performance and liquidity needs; implement key performance indicators related to forecasting accuracy in corporate scorecards and performance reviews.
Finally, and perhaps most importantly, treasurers need to close the loop by helping internal business units and subsidiaries identify sources of variance to minimise.
Implement a Holistic Liquidity Structure
In the end, establishing an infrastructure that facilitates having liquidity when and where it is needed requires laying the groundwork and gaining support for mobilising liquidity via a pooling structure.
Cash that is centralised in a pool can obviously be used to offset long and short positions in participating accounts, as permitted by local regulations. Pooling will eliminate costly bank borrowing and makes it possible to strategically direct excess balances to service debt or to make short-term investments.
Pooling also can help reduce certain risks. Counterparty risks can be reduced, for example, by linking a cross-border pooling structure with centralised, automated investments in money market funds. Likewise, cross-border pooling structures that enable balances to be moved from one market to another can help reduce sovereign risks.
Cash pooling is prevalent in markets where regulations permit but the scope and automation of pooling structures varies, leaving plenty of opportunity for improvement for most organisations.
More than 70% of companies, which participated in the Citi Treasury Diagnostics benchmarking research, pool cash on a daily basis, but only 33% use fully automated processes.
Increase Automation, Reduce Fragmentation
The scope and automation of pooling structures vary based on a company’s business profile, enterprise systems and their banking providers. Bank-offered pooling provides the latest possible cut-off times, ensuring the maximum value, i.e. the end-of-day value, is mobilised cross-border with no liquidity left behind. Depending on the size of the bank’s network, more of a company’s cash can be harnessed with the same day value regardless of countries, currencies, and time zones. When evaluating solutions some of the top considerations are:
- Accessibility to more cash with the same day’s value. If considering alternatives to automated bank pooling, like opting for workstations to mobilise cash, first weigh the costs and operating risks of generating cross-border wires as well as potential cash leakage.
- Solution integration into existing treasury processes and infrastructure. Determine if your banking providers can automate accounting and reconciliation with integration tools and features.
Fundamentals of an Effective Liquidity Management Programme
Citi offers modular cash mobilisation and concentration solutions on a global scale, allowing companies to capture more of their liquidity in-network without loss of value. Realising that sometimes companies cannot, for relationship or operation reasons, consolidate their banking with one provider, Citi includes automated multi-banking services as part of it portfolio of liquidity management solutions. It also offers a host of customisable processing rules that can control and limit cash movements. With keen focus on reconciliation and straight-through processing (STP), these tools are designed to facilitate integration with treasury and accounting systems. These services are complemented by our depth of in-country experience and the ability to apply these tools within regulatory and tax considerations as well as unique operational considerations.
Whether a company operates on a domestic, regional or global scale, its successful journey to liquidity optimisation will be defined by its ability to:
- Lay the groundwork for efficient liquidity management and to reduce fragmented liquidity across its bank account network.
- Establish a corporate cash discipline that helps subsidiaries and business units make the best use of liquidity and improve their cash forecasting.
- Take advantage of liquidity solutions to harness cash in respect of regulatory and tax considerations.
- Leverage banking providers’ STP capabilities to integrate and optimise deployment of cash within defined risk tolerance.
- Extract the full value of its cash.
1 Where regulations permit.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
The cash application process is an area where companies can achieve major cost and time savings, but achieving these benefits rests on securing complete information and using it effectively.
A US study, based on the quick service restaurant chain Chick-fil-A, offers conflicting evidence on whether a TMS is the best option when upgrading from Excel-based forecasting.
The EU's updated Payment Services Directive (PSD2) is expected to heighten competition among the banks, open markets to non-banking challengers and foster vigorous innovation across the financial sector.