Liquidity management: changing the rules of the game

The old expression ‘cash is king’ becomes even more true each day. Maintaining the right level of cash and liquidity has always been the single most important task of corporate treasury; however it is easier said than done. Complex structures, relationships with countless banks and limitations caused by incompatible IT systems all combine to make the task difficult – but not impossible.

Streamlining and structuring processes is vital for efficient cash management and if not done properly, it can have a telling impact on profits. The problem is accentuated when there are multiple subsidiaries with different internal processes, varied cash flow cycles and – further afield – operating in different countries and across different time zones. This leads to another challenge, the difficulty in gaining timely and accurate reporting across the organisation and settling funds within the group.

Among the challenges that the treasury operations department faces are:

• Unpredictable cash flows: Some cash flows are less predictable than others. Domestic flows can be predicted more easily than those that are crossing border. Receivables are less predictable than payables.
• Cross currency transactions: Cross currency transactions that involvin position-hedging require accurate predictions.
• Seasonal fluctuations: These may lead to varying cash flow needs, creating uncertainty in liquidity requirements.
• Reconciliation issues: Reconciling bank statements with internal cash books is tremendously challenging. It may lead to sub-optimal use of available working capital, or the unnecessary use of credit lines when funds are actually available in-house.
• Timing: The prevailing business cycle may mean that outflows occur before inflows.
• Data consolidation: Corporates with global operations demand around-the-clock visibility of the cash available across the group. Consolidating data from multiple banks in numerous geographies is complex.
• Disconnected siloes: Challenges involved in connecting disparate systems, including legacy solutions, may result in the inability to deliver real-time position updates.
• Multiple time zones: Operating across several countries or regions usually brings the added complication of dealing with different time zones.
• Choice of correct bank: Choosing the best banking partner offering the right combination of products, coverage and price is tremendously complex, especially as global market dynamics change.
• Pace of technological change: Modern corporate executives and financial professionals demand that the technologies they use in their personal lives are made available by their banks; such as better portals, mobile enablement and app-driven solutions.

Managing liquidity

Clearly, meeting corporate customers’ needs is challenging; it can be done – but how? What tools can be used to ensure that corporates get what they need?

1. Cash forecasting: Future cash needs are forecast based on taking and analysing the aggregated feed from multiple host systems. Forecast periods may be weekly, monthly or quarterly, and the methods used may vary from simple moving averages to more sophisticated methods involving regression and statistical techniques. For groups with multiple subsidiaries, located in different time zones and locations, the global treasury may have to combine actuals and projections to determine the liquidity requirements of the entire group.
Improved cash flow forecasting, providing treasurers with a holistic view of the inflow and outflow of funds, enables organisations to make more informed decisions regarding the allocation of funds.
2. Making payables pay off: In most cases payment needs are pre-planned or known in advance. While the primary goal of the treasury is to ensure that the payments are executed “just-in-time” to avoid penalties being levied by suppliers, there is also a desire to manage payments to earn rebates if applicable. In more complex corporate treasuries, the move is towards the centralisation of payment operations riding on the strength of offerings around payment on behalf of (POBO) services and virtual accounts. This has given rise to corporate payment factories, with a framework as detailed in Figure 1 below.

Figure 1: Outline of a corporate payments factory:
Corporate Payments Factory (1)

3. Receivables management: Mobilising and optimising receivables with the use of a ‘receivables hub’ can help the group treasury operate more efficiently, while also reducing the manual or semi-automated processes used to manage their accounts receivables.
Receivables hubs are designed to consolidate payments and corresponding remittance information from multiple channels and sources thereby helping treasurers unlock internal trapped cash by matching outstanding invoices to payments automatically. This has multiple advantages, including:
(a) Eliminating the need to hold on to cash in order to identify who has paid for what.
(b) Reducing days sales outstanding (DSO).
(c) Delivering the speed and scalability needed to release working capital for daily operations.
With the harmonisation of account structures in Europe as a result of the single euro payments area (SEPA), many new business models like receivables/collections on behalf of (ROBO/COBO), global netting and virtual accounts are gaining increased prominence. The rise of receivables hubs is a prominent step in this direction; transforming the plain business of receivables management into a key driver for optimising working capital.

Figure 2: Outline of a corporate receivables factory:
Corporate Receivables Factory (1)

4. Fund optimisation: Idle cash earns the company nothing. Its subsidiaries may hold accounts in different banks, working in different time zones and across different locations. Knowing the aggregate position across all banking relationships helps the treasurer move funds from the constituent accounts into a concentration account, or notionally set debit and credit positions across the accounts. The treasurer can also fund the deficient accounts to avoid being hit with overdraft charges.
5. Netting: By netting off the invoices that members of a netting consortium raise on each other, a final settlement amount can be paid instead of time and resources being wasted in settling multiple invoices.
6. Portfolio management: With clear visibility of current and future needs and with the ability to optimise cash and liquidity, treasurers can earn the maximum return from the available funds. This may involve investing surplus funds in profitable ventures, making early payments to enjoy rebates and other actions

Regulation: burden or opportunity?

In Europe, the launch of SEPA nearly two years ago should have resulted in a decline in liquidity management tools such as cash concentration; however this has not happened. While corporates are centralising treasury operations in Europe, the urge to reduce and rationalise bank accounts is not the top priority for a treasurer where visibility and control over trapped cash is paramount.

Even where large corporates are reducing the number of bank accounts, challenges around reconciliation, balance sheet management and reporting are creating opportunities for innovative solutions with the combination of POBO, ROBO, virtual accounts and netting. These are being positioned as integrated working capital management solutions, as shown in Figure 3, where the overarching principles are centralisation, optimisation and standardisation.

Figure 3: Example of an integrated working capital management solution:
POBO%2c ROBO%2c Netting Centre

The capital adequacy requirements of Basel III, on the other hand, bring tighter regulation on the liability side of the banks’ business where stable deposits would attract premium services.

Historically, corporates have valued the banks for the credit services provided while under the new regime, banks will value the corporate for the liquidity that they add to the banks’ liability base. From the banks’ perspective, corporates that bring stable liquidity will be more sought after than the ones that have easily moveable deposits.

This will have far-reaching impacts on the facilities offered to corporates with availability of working capital credit likely to be impacted most. Corporates therefore need to look internally for liquidity, with increased focus on unlocking the cash trapped in supply chains within their own subsidiary structure.

As the landscape is changing, agile and innovative banks are tapping into new revenue streams, by offering the products and services that corporates are increasingly seeking in order to optimise their working capital.

However to succeed in this new environment it is critically important for banks to deliver a compelling, value-adding proposition to customers. Determining the correct position, executing the right strategy and selecting the best technology will be crucial for corporate treasurers who wish to be game changers.


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