Completing the Liquidity Management Puzzle

Have you ever tried driving a car with only the rear view mirror and no headlights? Well, neither have I – and will gladly avoid that experience. The last time you checked, the road may have been clear and dry. But the driving conditions will change in the rain and snow. I would prefer to be better informed in order to steer my corporation through the changes in the business environment.

Liquidity management means knowing where cash is, understanding where it will be needed tomorrow, and using this information for optimising funds and managing exposures in various parts of the business. Cash forecasting helps in this process. If you ignore the information that is available from your banks, purchase and sales ledgers or projections, then you are driving with only the rear view mirror. Instead of proactively managing risk, you will be repairing damage; instead of optimising working capital, you will spread it around with no utilisation plan; and instead of supplying your operating entities with sufficient funds to focus on the business, you will let them waste their scarce resources on arranging funding or speculating what to do with their transaction-based foreign exchange (FX) exposures.

Why Not Forecast Cash?

Then why would anyone choose to NOT switch on the headlights? The treasury’s working environment is full of activities that are high priority and too often cash forecasting gets pushed to the end of the queue due to some common, albeit understandable, misconceptions:

Cash forecasting is a ‘nice-to-have’ process enhancement but it will not give measurable financial results

Not true in most cases. First of all, if you consider working capital a core objective, you are forgetting an essential component if you do not turn your eyes on cash forecasting. If you have idle cash outside the pooling structure, or short-term business unit funding requirements, the more on-line you can follow the changes in their cash forecasts, the better chance you have at optimising funds globally. You can plan ahead instead of just mitigating damage.

The business units could avoid considerable costs in local funding and FX transactions if the process was centralised with a proactive approach. In fact, the mandatory hedging process is often a key driver for cash forecasting.

The accuracy of the forecast will not be reliable enough to produce results

Lack of accuracy of the forecast data may be an essential concern. If the corporate way has never required openness and direct reporting, you may face a tough motivational task in starting it up. However, that is not an excuse to not encourage open communication.

Consider your current situation and the immediate benefit:

  1. You will have on-line visibility into the daily balances throughout the corporate banking structure.
  2. You will see, at least, the projection based on latest cash flow data available in the essential systems.
  3. You will receive the latest (manual) updates directly from the business units.

Even two out of three will probably mean a huge improvement.

It will take so much effort to set up that we cannot consider it right now

You should not confuse cash forecasting with cash management. A best practice cash forecasting solution is basically just an on-line spreadsheet with flexible consolidation capabilities and interfaces for data entry. Start simple, for quick results.

A web-based service does not require IT set-up; all you need to do is convert your existing spreadsheet template onto the web tool. Integrations for data transfer are important but not a mandatory first step for every single location. Remember that often you can get 90% of the benefits with just 10% of the effort.

We have decided to start the set-up of a global enterprise resource planning (ERP) system later this year and we expect it to provide cash forecasting tools after it is in place

When do you realistically expect it to be ready? We have seen two years turn into five or six, and still somehow cash forecasting remains as one of the to-do items – a fully-integrated ERP is a moving target.

Why not apply a low-cost, low-maintenance tool for the time being? The organisation is bleeding money and losing opportunities while you wait.

Our business units already deliver cash forecasts; they send an Excel spreadsheet every second Monday, which we consolidate by Wednesday

How do you use that information? You might appreciate a daily view of latest closing balances combined with the latest accounts payable (AP)/accounts receivable (AR), ERP, sales information, in order to actually make some liquidity optimisation decisions.

And the list goes on.

Bank as Cash Forecasting Service Provider

As banking became more and more an electronic activity, handled within numerous software systems, we bankers considered it our advantage, privilege and duty to develop those systems in-house. The details and features of our proprietary systems are indeed what differentiate us from the competitor in a measurable way. However, there is a whole world of ways to add value for our customers through services that either are of value in themselves, enhance the value created through the core systems, or utilise global banking standards.

Sometimes it is not important to have unique components if you know how to combine and use them in a value-adding way. Why waste effort doing what others dedicate their full attention to? Software development is costly, slow and definitely not part of a bank’s core business. Our focus should be on finding creative ways to maximise the value of existing basic components by combining them in a smart way.

Just over two years ago, Nordea decided to shake the impression of banks as software providers and looked around for existing, outstanding solutions that were readily available and had already been proven and tested by some of our customers. A few clients mentioned a web-based treasury tool which was helping them get online visibility into their global cash situation and forecasts, as well as centralise their FX risk management. We knew we had found the missing piece of the liquidity management puzzle.

Making it affordable

Most of the large and mega corporations already have made the major investment to implement a global ERP system, and a large part of them run a treasury management system (TMS) to manage complex treasury instruments. However, the common challenge still remains – how to keep a close hand on the pulse and understand future liquidity changes globally. And most are not willing to make another major investment to solve it. This is an area where the bank can do a lot by delivering the existing data for viewing in a consolidated way, as well as providing easy-to-use tools for analysing business units’ cash forecast reports.

Keeping it simple and standard

We selected the quickest possible time-to-market: it took five months from idea to production launch of a complete treasury workflow solution that is branded and integrated to our other treasury services. Yet the solution is open for supporting data from all the customer’s other banking interfaces. The vendor handles all technical aspects of delivering the service, while we at the bank focus only on growing customer value.

You may think that we are offering a solution that the customer could just as well get directly from the vendor. Why would they buy it from the bank if it is so standard, accessible and bank-independent? Here is why:

  • Treasury departments are extremely pressed when it comes to human resources. They are overloaded just trying to cope with all the manual work they have to perform and cannot bear the thought of taking up another software evaluation, selection and implementation project.
  • As a result of the above, the project may never even reach the stage where the available solutions are reviewed; no one has time to find the vendor.
  • The bank is a known, trusted partner who has completed this evaluation on behalf of the customer, which may have no vendor or service provider qualification, consultancy projects to compare product capabilities, or IT investigations.
  • Buying a service from the bank may normally seem like a big commitment, but when the system is actually hosted by a third party and the bank has no access to the data within, the significance becomes less strategic, especially when the web-based service requires no long term commitment.

Is it Worth it for the Bank?

Yes, absolutely. We have made enormous investments in developing cash and risk management services for our most lucrative customer groups. Being able to leverage such capabilities in an integrated offering brings more customer value than the sum of its parts. Not only does it offer cross- and up-selling possibilities for the bank, but also truly increases the value of the bank as a service provider for the customer.

The discussion about the cash forecasting process has opened up a new level of communication with our customers, which allows us to deepen our understanding of the customer’s business and treasury processes. This, in turn, is extremely important in the strategic product development work in which we do our best to stay ahead of the customer requirements.


Related reading