Cash visibility is the first step to gaining a good
understanding of corporates’ cash flow. This understanding puts a treasurer in a
better position to access and control cash and manage risks, before finally
deciding to deploy any surplus or excess cash for improved returns.
By returns on cash, most people would probably think about yield on
investment. They might have to think again. Are there alternative avenues for
using the cash that can generate a better return? For instance, by looking
beyond the asset side of the balance sheet, can the cash be deployed to lower
the cost of funding? Can the cash be deployed to improve the cash conversion
cycle? How about currencies? Is the cash all in the right currency? In a low
interest rate environment, coupled with a much more exacting review and
introduction of stringent capital and liquidity requirements by banking
regulators under the Basel III regime, corporates have to look beyond yield on
investment if they want to make their cash work harder.
deeper, to discuss the common practices and practical challenges in achieving
optimal cash visibility. The following will also explore various possibilities
that could help a corporate better deploy cash for enhanced overall returns.
Accuracy and Timeliness of Information
The first step towards
gaining cash visibility is to ensure that the treasury function has access to
accurate information on the account balances in a timely and consistent manner.
This is easier said than done, as many global treasuries would attest to the
challenges they face with achieving the level of cash visibility they expect.
The more complex organisational structures, geographical spread and
multi-banking relationships are, the more complicated it gets.
Among the reasons for this is that many corporates maintain multiple bank
relationships, due to the inability of a single bank to provide a full range of
services across all geographies – for example tax payments in China and
up-country cheque collection – or purely to diversify bank counterparty risks.
The common challenges this poses are:
- Non-standardised formats and
- Timeliness of information (real-time versus previous
- Unavailability of SWIFT reporting in some local banks.
Although there is no silver bullet that can achieve perfect visibility,
there are various solutions available to help address these challenges. They
- Multi-bank reporting through electronic banking
(e-banking) portals or host-to-host connections provided by the main cash
- SWIFTnet connectivity. SWIFT is developing standards
with treasury management system and enterprise resource planning (TMS/ERP)
providers and integration with SWIFT gateway to make it easier for corporates
using these TMS/ ERP systems.
- Use of an outsourced service bureau for
managing SWIFT connectivity or multi-bank balance and transaction reporting.
That said, corporates must first address some of the more fundamental
aspects related to their internal processes. These may include, although not
necessarily be limited to:
- Lack of treasury mandate (policy or implied)
to centralise treasury and cash management functions.
- Incomplete views of
currency holdings and global foreign exchange (FX) exposures at a country
- Inaccurate sales projections and reporting.
- Limited systems
investment and integration resources.
WYSIWYG (What you see is
what you get)? Think Again
While the consolidation of account and
transaction information is one key enabler of cash visibility, what you see may
not necessarily be what you get. There are many reasons why a corporate might
not be able to readily deploy all the cash it has visibility on. These include:
- Regulations: Not all jurisdictions permit the free flow of cash
cross-border, leading to trapped liquidity which cannot be accessed readily by a
centralised treasury function.
- Tax cost: Corporates need to understand
the after-tax cash position. Interest withholding tax, transfer pricing and thin
capitalisation rules are usually applicable to cross-border transactions, and
could result in high tax cost which negates any cost benefit of deploying cash
for certain usage.
- Cash Conversion Inefficiencies: A key area of
inefficiency, which impacts the optimisation of cash is cash application/
accounts receivable (AR) reconciliation. In many instances where payments
received cannot be reconciled against AR, the cash gets ‘trapped’ in the cash
application process, awaiting investigation, unnecessary collection calls,
costly exception handling, and most inadvertently, dissatisfied customers and
inability to free up credit terms for more order fulfilment by the customer. The
loss of cash flow during this period is the real cost of unapplied cash.
However, these inefficiencies and opportunity cost will not be apparent merely
by looking at a consolidated cash balance. The true visibility of the value of
the cash lies many layers beneath, and can only really be appreciated and
realised by gaining true visibility of the account receivables process.
- FX opportunity costs: Corporates need to understand their total FX costs,
either at a transactional level or costs of maintaining various pockets of cash
in different currencies. They have a tendency to focus on larger FX transactions
that are often managed at a global treasury level. However, opportunities may
exist at a transactional level for lower value transactions. FX costs for the
smaller value, higher volume transactions for incoming or outgoing transactions
can be quite costly. Two ways to overcome this is firstly by request for more
transparency for either incoming or outgoing cross-currency transactions or,
secondly, by analysing the invoice currencies in various markets to ensure that
FX costs are minimised.
Looking Beyond the Current Cash Position
Knowing the current cash position does not provide a treasurer with the
forward-looking perspective to make decisions around best deployment of cash.
Cash should be deployed not only for investments, but also considered for
optimising working capital. To do so requires a more holistic visibility on bank
borrowings; trade facilities; FX, cash and investments; payables due and
receivables ageing; and cash flow forecast.
Corporates that invest in
treasury management systems (TMS) are well placed to gain greater visibility on
both their long-term and short-term net cash positions. This enables the
corporate treasury functions to make informed decisions on the best use of
funds. Some banks also provide dashboards on the overall relationship with their
corporates, covering the full spectrum of working capital: cash, trade,
investment, loans and FX. Additionally, some even provide tools for cash flow
projection and forecasting. A major shortcoming of bank-provided dashboards,
however, is that visibility is limited to the extent of the relationship with
the bank and the extent of third party bank information which are consolidated
through the bank.
Adopting a Regulatory Lens
III capital adequacy regime introduces a liquidity coverage ratio (LCR) aimed at
addressing the sufficiency of high-quality assets to meet short-term liquidity
outflows under specified 30-day stress scenarios. To more efficiently manage the
cost of holding liquidity, banks are starting to look at cash in two broad
categories – operational cash and non-operational cash. Operational cash arises
from the day-to-day flows of underlying clients working capital transactions,
and is valued for its stickiness. Non-operational cash on the other hand, is
surplus or excess cash set aside from daily transactional flows for which
corporates do not need to maintain daily liquidity.
tenored over >30-day period, non-operational cash is viewed to have greater
flight risk in the event of a market or bank stress situation. Suffice to say,
banks will factor in the regulatory cost of maintaining certain types of client
deposits on their balance sheet, which will directly influence the level of
interest that can be paid on those deposits. While a corporate can,
theoretically, delineate its cash in such a way as to fall within the narrow
definitions of operational and non-operational cash, the practicalities are far
more complex than that would suggest. In many instances corporates do not – and
cannot – clearly demarcate between operational cash and excess cash. There is
often a buffer amount set aside for contingency purposes, which needs to be
maintained in short-term liquid instruments.
Therefore a corporate
able to manage its cash positions in a manner that optimises the value of that
liquidity to the banks’ balance sheet will be well-placed to negotiate better
terms and service levels with its banks. In practical terms, this could mean
that a corporate using a bank for most of its day-to-day transactional flow (for
example vendor payments, collection from customers and trade settlement),
treasury and liquidity flows, and longer term investments, will likely be able
to utilise solutions and enablers which:
- Provides the holistic visibility
of longer and short term cash and working capital flows.
- Helps to more
efficiently manage the movement of cash between daily operation cash; short-term
buffer/stable cash and its longer term strategic cash.
- In the process,
optimise the return which banks might be willing to award on the basis of the
value of liquidity brought about by the sticky relationship between the
corporate and the bank.
While this might run counter to the notion
of diversification of bank risk, it is the direction in which banks are steering
their marketing efforts in order to adjust to the changing regulatory landscape.
Exploring Various Enablers
funding through cash pooling: There are various cash pooling techniques provided
by banks that provide both the visibility and the ability to consolidate cash
positions across different accounts, entities and/or countries.
Cash concentration and notional pooling are common solutions. By consolidating
cash positions across different entities/countries, corporates benefit from
optimising their internal liquidity. Surplus entities can ‘lend’ to the pool and
entities with shortfall can ‘borrow’ from the pool. Internal funding mechanism
is automated and inter-company lending positions are tracked daily, together
with the associated inter-company interest computation and reallocation.
Cash pooling therefore helps to reduce or eliminate external bank
borrowings. The net interest benefit will be the differential between the
interest the surplus entity would have earned from bank deposit and the interest
the shortfall entity would have paid for the bank overdraft had the pooling not
been in place. Effectively the corporate is eliminating the spread a bank would
have earned on both sides, and this spread savings is the additional yield or
return arising from the better deployment of cash. Additional benefits of cash
pooling include the following:
- Provides a consolidated view of cash
that can be deployed and also in a preferred functional/base currency.
- Reduces the number of accounts a corporate need to actively manage.
- Bridges operational and surplus cash.
- Enables the treasurer to
readily fund operational needs, while also enabling him/her to quickly deploy
surplus into various investment instruments in accordance with investment
- Gives the ability to establish the right inter-company
behaviours, by rewarding or penalising entities based on their cash
contributions to the global pool.
However, various considerations
should also be factored into the deployment of cash pooling. Besides the
regulatory and tax challenges discussed earlier, the legal documentation
requirements necessary for the corporate to optimise its balance sheet through
the use of these tools is dependent on local corporate laws, enforceability of
set-offs and incorporation articles of the entities involved – and can be quite
protracted in multi-country arrangements.
Investing in own supply
chain: Another avenue for deploying surplus cash is in a corporate’s own supply
chain. For instance, corporates can elect to pay vendors in advance of the
payment due date where there is an early payment discount to be taken.
This would make sense, where the early payment discount rate is higher than
the bank deposit interest rate. In particular, where a corporate has a vendor
financing programme in place with a bank, which offers its vendors access to
financing, there will be full visibility of the vendor financing rate, and the
corporate can then analyse and benchmark the investment yield (on deposits)
versus. the vendor financing rate vs. the early payment discount rate – as
depicted in Figure 1 below – and arrive at a decision whether to pre-pay the
vendor, or enable the vendor with options to access the vendor financing
programme. This not only benefits the corporate in optimising its return on
cash, but also builds up a sustainable relationship with strategic vendors by
enabling the latter access to cash for bridging their working capital gaps –
securing its own supply chain in the process.
Figure 1: Dynamic
Discounting versus Investment Yield Analysis.
Cash visibility will be of real
value to a corporate only if it extends beyond account balance reporting.
Corporates need to gain broader visibility around how much cash can be readily
redeployed, and where the cash can be best utilised, in order to uncover the
real hidden opportunities.
To achieve this, treasurers should:
- Factor in the cash conversion efficiency, regulatory and after-tax impacts
in determining the actual cash available for redeployment.
- Improve the
visibility on broader aspects of working capital and financial supply chain,
including debt/ bank borrowing, accounts payable/ early payment discounts as
well as opportunities to optimise FX costs.
- Utilise analytics and
solutions that improve the efficiency of deploying excess cash for inter-company
funding and investment in own supply chain.
- Understand the regulatory
requirements which banks are now subject to, and how these influence their views
on the relative value of various corporate cash deposits.
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.