Ensuring Liquidity and Working Capital Resilience

Counterparty risk, possible funding disruptions and capital preservation are still the issues keeping treasurers awake at night and governing their day-time decisions. Recent research by RBS and Greenwich Associates with companies in Asia, Europe and North America1 has revealed an extremely conservative approach to managing working capital still prevails. Treasurers continue to prioritise financial resilience over returns in the face of unprecedented levels of market volatility and uncertainty as to the availability of funding.

Preserving Liquidity and Managing Risk are Still Key Concerns

A majority of the treasury respondents (61% across all three regions) say liquidity is their number one working capital priority. This sentiment is reflected in the cash piles companies are keeping: 70% of the companies report they are holding excess liquidity and approximately 60% require immediate access to their cash. Only 19% of assets are invested for periods of more than three months.

A majority of the European treasury officers interviewed rate risk management, including counterparty, supplier and other risks, as the highest concern for them. This sensitivity could be the result of sovereign debt issues and the changing regulatory environment in Europe. Across all regions, a majority have increased risk governance and controls at their company since the credit crisis.

Figure 1: Biggest Priority When Managing Working Capital – regional split

Source: RBS and Greenwich Associates


Capital Preservation is Investment Focus

The research tells a plain story: company finance departments are preparing for a protracted period of uncertainty and volatility, and have adjusted their investment policies accordingly, reducing use of money market funds (MMFs), taking investments back in-house and prioritising capital preservation over growth. “Our cash investment strategy has focused first and foremost on safety, then on liquidity, then on return,” reports a senior treasury analyst with a North American energy company.

This outlook is not set to change any time soon. Some 85% of companies participating in the study expect little or no change to their cash investment strategies in the coming three years. “I don’t know if we’ll ever go back to the way things were pre-2008,” comments one survey respondent.

Responding to a Changed Environment

This new conservatism is a natural response to the changed environment. But risk-averse counterparty, liquidity and investment management strategies must not be at the expense of treasury efficiency through centralisation and automation. The study cites increased control and better informed decision-making as key benefits of centralisation, alongside benefits such as economies of scale savings and consistency. Sixty-six percent of respondents to the research have plans for further automation of working capital management, including liquidity.

These trends are reflected in an increased corporate demand for multi-banking and overlay structures and industry-level connectivity. In fact, we think there are three key areas where banks can respond to their customers’ needs to manage their liquidity, reduce liquidity risk and improve treasury efficiency in the current environment:

  1. By delivering open networks.
  2. Applying well-established liquidity management techniques.
  3. Providing transparent investment products and services designed with the needs of the customer firmly in mind.
Open networks

It is no longer enough for banks to offer only proprietary electronic banking channels. In today’s climate, companies demand the flexibility to connect to banking partners easily and amend counterparties when and where necessary. Standard connectivity across all banks via the SWIFT network is an increasingly popular option with corporations. Thirty-eight percent of respondents said they were prioritising enrolling in SWIFT, and 29% are looking at moving to XML and other open standards. For all but the largest corporations, using a SWIFT service bureau may be the most cost-effective way to connect to the SWIFT network.

Making the most of liquidity management techniques

Industry level connectivity is also making it possible for companies to extend treasury centralisation and centralised management of working capital and liquidity – again without compromising counterparty management. Accounts with third-party banks can be easily ‘plugged into’ regional and global overlay structures, facilitating sweeping and cash concentration to bring funds to the treasury centre.

When it comes to efficiency though, setting up cash concentration may not always be the best solution for all currencies. Our advice is to use sweeping and pooling for major currency flows and automated multi-currency conversion embedded in the transfer for lower volume currencies. This way, the cost and effort of the solution will be proportionate to the benefit gained.

Getting the right investment options

The treasury officers interviewed in the survey are emphatically risk averse in their attitude to short-term investments, with a majority wanting to keep their cash immediately available. There is als a marked emphasis on keeping control and transparency over investments: three quarters of respondents would not consider involving an investment manager. So treasurers need convenient and deep information, and they want to be able to view their current accounts, investment accounts, term deposits and money market investments all in one place. They also want to have details of products from different providers easily available to them.

But, of course, treasurers are also fully aware of the costs of keeping cash on call. It goes without saying that where possible, they look for investments that satisfy their liquidity and capital preservation requirements, but also provide a little more yield.

Figure 2: How Accessible Do You Keep Your Assets?

Source: RBS and Greenwich Associates

The research shows companies holding excess cash as a defensive measure. Since this cash is not necessarily for immediate use, but is being held in case of an unexpected shortage of liquidity, it may be viewed as ‘flexible term cash’. So why not reward stable cash balances held consistently over an agreed period with a higher rate, while variable balances in the same account can be treated, in the usual way, as overnight cash? Such investment solutions are proving popular with corporates, since good management and cash flow forecasting can earn rewards, without any loss of liquidity.

Automation, Integration and Centralisation Drive

If the study reveals extreme caution in liquidity, risk and investment management, it is certainly encouraging that treasurers are continuing to push for the benefits of automation, integration and centralisation. Since internal funding is by far the most important source of working capital, this fact is perhaps not surprising: 84% of respondents see working capital management as an integral part of their funding strategies. Forty-one percent see the convergence of cash and trade operations as a priority (Asia showed the least appetite for this with 33% of respondents choosing this as a priority) and using electronic invoicing (e-invoicing) to decrease days sales outstanding (DSO) was the highest automation priority after liquidity management.

All in all, the study shows companies have accepted and adapted to a new, more constrained liquidity environment. It seems likely that these constraints will continue as the markets adjust to increasing regulatory requirements. The challenge for banks is to continue to innovate and respond with working capital and liquidity solutions that meet the realities of their customers’ operational environments.

1In November-December 2011, RBS and Greenwich Associates conducted interviews with treasury officials from 50 large international companies based in Europe, North America and Asia (excluding Japan). The report, ‘Working Capital Management: Efficiency, Liquidity and Risk Avoidance’, may be downloaded at http://mib.rbs.com/insight/raising-capital-and-the-search-for-liquidity/working-capital-management.



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