Trapped liquidity is a common problem for even the most profitable businesses, and particularly for multinational corporations (MNCs) that need to manage cash surpluses and deficits across borders. While this issue could once be addressed with easy and affordable access to bank-supplied credit lines, it now requires optimal working capital management (WCM) systems and processes that allow treasurers to make the best use of company funds.
Ensuring that cash is in the right place at the right time is largely a question of visibility over cash positions. Indeed, the three key elements to best-practice in liquidity management are:
Visibility is the most important. If treasurers can gain an accurate, real-time overview of cash positions across numerous banks and currencies, they are naturally better placed to control the funds available.
While the advent of internet banking has done a great deal to improve treasurers’ oversight of company reserves, and has become the default method of doing business, true cross-border cash visibility remains elusive for many corporates. This is because it is often blurred by inefficiencies in treasury management policies and practices, which vary between companies, as well as by the inherent complexities of managing multiple banking relationships.
In an ideal world, the majority of corporates would operate a one bank policy, thus immediately solving the ‘Where’s the cash?’ question. But, in reality, this is not feasible once credit and counterparty risk concerns are taken into consideration. Indeed, even the most stable of corporates can be brought to its knees if its banking partner withdraws credit (perhaps after a takeover or another event beyond the control of both bank and client).
Therefore, despite the convenience of a single bank relationship, it may be a risk too far. It is also unrealistic, as there is no one bank that can address all of a corporate’s cash requirements, either because of a lack of footprint in certain geographies or gaps in proprietary local currency capabilities. Working with multiple banking partners is, therefore, set to remain the reality for today’s treasurers, particular as cash diversification becomes central to strategic cash and risk management.
Diversification of Cash Deposits
The diversification of cash deposits is crucial if corporates are to limit their counterparty risk. In this sense, corporates are treating banks like debtors, assessing their stability and potential return on investment, and deciding the length of time to place cash accordingly. Many corporates, particularly the large MNCs, are becoming increasingly sophisticated in this respect, looking beyond credit ratings to undertake independent analyses of current and potential banking partners.
While such analysis and diversification is commendable – and often compulsory as treasury management policies increasingly dictate the terms and conditions on which company cash can be placed – it does little to alleviate treasurers’ visibility and cash control concerns. After all, knowing where funds are located – a box ticked by diversification – is one thing; knowing what they are doing at all times is quite another.
Cash forecasting is significantly adversely affected because of this element of uncertainty. This has led many banks, in recognition of the importance of forecasting to their corporate clients’ cash management, to respond by creating behavioural products.
These solutions and services reflect recent market developments and the resulting corporate responses. Examples offered by some providers include flexible interest-bearing accounts that allow instant access to cash if necessary but pay a bonus if deposits are held for a certain timeframe. This satisfies the corporate need for both easy access to cash in an emergency and yield, which has taken something of a back seat of late as security concerns have taken precedence over returns.
The newly strategic corporate approach to liquidity management, and the growing bank provision of flexible accounts, is undoubtedly a step in the right direction to optimising liquidity management. However, the issue of global visibility remains. Global visibility requires infrastructure that integrates transaction-related data across all of a corporate’s partner banks. This infrastructure also needs to present the information in real time and allow treasurers to manipulate the funds as necessary. And this, unlike cash and currency solutions, can be provided by a single operational bank, although the pool of providers capable of providing such systems is narrow due to the cost and complexity involved.
Operational Banking: Joining the Dots
Operational banking is a straightforward term for what is, in fact, an intricate procedure. In essence, operational banking is the provision of the ‘plumbing’ or distribution channels that keep data and liquidity flowing between corporates and their partner banks. SWIFT, of course, plays a significant role in this respect by uniting the financial community and facilitating the exchange of information by standardising messaging formats. Operational banking needs to go a step further than this, however, by not just enabling the movement of liquidity and sharing of data, but by collating and presenting data in a way that is useful to treasurers, and providing liquidity control capabilities.
The most suitable data presentation format, and subsequent control options, will largely depend on individual corporate treasury needs. These, in turn, are likely to depend on whether treasuries are decentralised or centralised.
While an overview of all cash positions to aid planning is likely enough for most decentralised treasury operations, centralised treasuries, or treasury operations that are planned globally but executed regionally, will require additional elements of control if liquidity is to be optimally managed.
Such control should allow treasurers to mentally, and indeed literally, ‘click and drag’ funds to manage intra-day positions and offset positions on an aggregated basis. For maximum control, treasurers should be able to access these capabilities, which should act as a gateway to further payment channels and investment services, via multiple channels that include the desktop, internet and mobile devices.
Corporates understand that excellence in treasury means being able to do the basics well. This includes managing cash and investing surplus funds. Yet the combination of external market challenges and compliance initiatives mean that the basics are now anything but.
Embracing technological solutions that offer the increased visibility and improved cash control that treasurers now require is, therefore, crucial to corporates’ commercial sustainability. Such sustainability can be achieved by partnering with banks that continue to invest in innovation; this focus will help to foster long-term relationships as opposed to short-term tactical arrangements. Such relationships, and the collaborative solutions they bring, can help corporates to grow and prosper in the face of challenging market conditions.
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