Centralised Liquidity Management: A Critical Tool to Achieve Improvements in Financial Performance

Historically, treasuries tended to focus on centralising decision-making related to corporate finance, foreign exchange (FX) hedging and capital markets activities, while continuing to have cash managed as a local or regional function. Moreover, when credit was cheap and readily available, companies perceived the cost of their working capital inefficiencies to be relatively low.

Today, the landscape is quite different and the focus on efficiencies is razor-sharp.

With the tightening of credit, investors are paying far closer attention to financial flexibility, and rating agencies and debt holders are closely tracking liquidity positions. In return, companies with strong liquidity and the ability to fund growth internally are being rewarded with premium equity valuations.

Improvements in Financial Performance Through Optimising Working Capital Management

Managing liquidity throughout the cash conversion cycle is one of the critical tools to help improve working capital management (WCM). By centralising liquidity and applying other best practices such as gaining improved visibility, firms can reduce their working capital requirements substantially and avoid unnecessary financing costs. It is estimated that the working capital improvement potential can be as much as 30% for a typical large multinational that adopts best practices. This is equivalent to moving up one quartile in relative cash conversion cycles compared to industry peers as shown in Figure 1, which typically translates into a 2% to 3% earnings per share (EPS) improvement.

Figure 1: Range of Cash Conversion Cycles Across Select Industries

During the past year, most firms strived to improve their liquidity. Triggered by the liquidity crunch, they re-prioritised their working capital projects to both optimise their current structures and strategically ready themselves for the future.

The goal, across virtually every industry, is the same for firms that are decentralised, as well as those with some form of centralised structure: to improve the visibility, efficiency and usage of internal funds. So, no matter where a company sits on the centralisation continuum, enhancing liquidity management is a priority.

At Citi, we see trends at both ends of the spectrum: companies that are looking to put in place the first building blocks toward a centralised structure and those that are seeking to leverage advances in services and technology, as well as in regulations, to further optimise existing liquidity arrangements.

Leveraging Liquidity Management to Help Advance Centralisation

In a recent Citi survey of multinational companies, only 25% of respondents indicated that they pool cash at a global level, while 34% do so regionally. The same survey revealed that 34% of the participants had visibility into less than 75% of their operating cash. The conclusion is clear: there is plenty of opportunity for companies to advance, and benefit from, centralisation projects.

Without a doubt, the move to centralisation can be both technology and cost-driven. That’s why companies with disparate systems and procedures, and a multitude of local banking partners, typically seek quick fixes such as improving the visibility of balances and treasury positions and implementing liquidity overlay structures.

While an overlay structure may not represent the optimal solution for accessing as much dispersed cash as possible, it can tap into some of that cash, leveraging the reach of an overlay bank linked with local banks. Because it effectively sits on top of the existing network, however, it can limit the immediate impact and effort of rationalising local providers.

Nevertheless, an overlay is often only the start of a journey toward centralisation. Therefore, it is critical to define the longer-term objectives before embarking on the short-term leg of that journey. This upfront planning ensures that the right structure, systems and providers are lined up efficiently and that they do not become throwaway decisions in the near future. Successful centralisation efforts also hinge on collaborating with banking partners whose technology, cross-border capabilities and on-the-ground expertise will ease the re-tooling of treasury infrastructure and processes, and speed up data automation and aggregation.

No two companies’ operations or needs are alike. Having said that, the early stages of centralisation should generally include:

Improving visibility and cash flow forecasting: As the Citi survey revealed, firms do not always have optimal cash visibility. During the early stages of a centralisation strategy, visibility becomes critical to understanding where cash is and what is available, as well as for forecasting and risk and exposure management. At the same time, establishing processes that enable cash flow forecasting organisation-wide help advance the centralised control of funding and investments.

Companies often think that it is difficult to achieve this goal without a global enterprise resource planning (ERP) system or treasury management system (TMS) in place. However, there are ‘lite’ applications that provide multi-bank balance information that can be quickly set up to achieve global visibility of cash

Rationalising bank relationships: The fewer banking relationships, accounts and platforms that treasury needs to deal with, the easier and more cost-effective it is to view and manage account balances and funds transfers, and leverage FX solutions. This rationalisation might not occur as a big bang at the start of a centralisation initiative, but there should be a clearly defined roadmap to a more efficient banking network, one that considers the maintenance of local services along with regional and global needs for liquidity and cash management.

Establishing a liquidity overlay: Hand-in-hand with rationalising banks, an overlay liquidity structure improves central control for funding, as well as the deployment of unused balances. There are clear benefits where the overlay bank has in-country presence from where funds are being swept to allow for the local transfer of funds and to benefit from local cut-off times and charges. Furthermore, it is critical to enable seamless integration of liquidity across the globe on a follow-the-sun and against-the-sun basis, such as end-of-day sweeps from the US to Europe with same day value.

Understanding local regulations and practices: It is often difficult to translate varied regulations and local practices when designing a solution to move funds between entities, countries and currencies. This is particularly true for emerging markets and those with currency restrictions where the business and regulatory environment are rapidly evolving. The ability of a bank provider to physically move cash as part of a centralisation structure is only part of the story. Its knowledge and experience in local markets is an invaluable asset. In practical terms this means choosing a provider who has real, on-the-ground experience in the local markets and has helped companies achieve a similar goal in the past.

Establishing a shared service centre: Shared service centres (SSCs), in addition to automating and streamlining processing, can offer both economies of scale and standardised processing providing greater opportunities to adopt best practices and lead to higher predictability of funds flows.

Getting senior management and subsidiary buy-in: As processes move from subsidiaries to centralised structures, it is vital to remain responsive to the needs of the subsidiary and local market. It’s also important to engage business operations, tax, legal, and other support functions early on to avoid roadblocks and to gauge organisational readiness and buy-in. The intercompany lending process can be a critical success factor. The local businesses’ ability to both allow cash to flow to the treasury and efficiently request funds back can make the difference in getting their buy-in.

Automating and integrating processes and systems: Integrating processes and systems with the service provider’s network and liquidity offerings to run an efficient and automated structure maximises the amount of cash being centralised. In addition, it reduces the effort involved and allows the corporate treasury to focus on value-added activities.

Going the Extra Mile

At the other end of the centralisation spectrum, companies with large global footprints and established treasury structures are going the extra mile to optimise their structures, by further integrating and automating liquidity flows. Some of the steps they are taking include:

Leveraging treasury portals: User-friendly, ‘lite’ platforms that allow firms to aggregate cash, debt and liquidity data across multiple business units and currencies are increasingly being used to support cash flow forecasting and decision-making. Systems such as Citi’s TreasuryVision often complement existing ERP systems and TMS’, due to their ease of rollout and ability to generate quick results for management reporting purposes.

Tapping into more countries and structures: As more regions and markets open up across the globe and businesses expand into these markets, bank service providers need to keep up by providing consistent cash management capabilities, such as cross-border sweeps, and seamlessly integrate them into existing liquidity structures. New sweeping capabilities in central and eastern European, African and Middle Eastern (EMEA) markets, for example, provide opportunities to expand liquidity structures.

Optimising multiple currencies: Companies are using multi-currency pooling structures, either as an efficient replacement of overnight FX swaps between currency pools or simply as a safety net that captures end-of-day positions to complement their active currency management programmes.

Maximising use of internal funds: A successful liquidity structure maximises the ability of the treasurer to self-fund, with the inherent benefits in control and both financial and operating efficiencies.

Linking investments to liquidity structures: Once as much cash as possible is concentrated to the treasury and used to manage the overall group position, treasurers continue to evaluate the optimal and appropriate investment programme for short-term surplus balances. These can include traditional bank deposits, but can also be aligned with growing needs for automatically ‘draining’ cash pools into diversified investments, such as money market funds (MMFs) or managed investment programmes.

The Road Ahead

For companies with far-flung operations, there is no question: centralised treasury structures provide a host of benefits. Automation standardises processes so that treasury functions firm-wide can operate in concert. Payments can be made from a more simplified account structure. Sweeping of account balances helps maximise the value of cash flows. Plus, the ability to harness and access information in real-time, or near real-time, provides executives with a more accurate picture of their company’s financial position, so that they can make informed cash and liquidity management decisions.

Achieving these important benefits does not need to be a complicated journey. Starting with simple steps to establish visibility, such as an overlay liquidity structure, could provide significant initial benefits. However, it’s important to have a strategic vision of how to evolve the structure, along with banking partners who can provide globally consistent platforms and in-country capabilities and expertise.

Steps Toward Centralisation

  • Define the scope and drive centralisation from the top.
  • Obtain enterprise-wide buy-in and senior level support.
  • Rationalise processes and banking structures.
  • Increase automation and information integration.
  • Explore innovative solutions and leverage experience for more regulated jurisdictions.
  • Choose banking partners who can support your objectives and adapt as your business operating model evolves and expand.

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