Managing Uncertainty through 2014 and Beyond

“The more things change, the more they stay the same” is an expression that certainly applies to corporate treasury. In an era of continued market uncertainty, the treasurer’s remit remains much as it has always been: to mitigate risk and ensure the timely availability of company funds across multiple markets and currencies. As we turn our attention to 2014 and beyond this is unlikely to change, although the methods that treasurers use to perform their traditional duties may require updating.

This is not to undermine some of the significant, and beneficial, developments that have already taken place in treasury management. Take for example the evolution of risk mitigation since the onset of the 2008 financial crisis. A heightened awareness of risk means the majority of treasurers now take a more holistic approach to managing both the physical and financial supply chain risks threatening commercial sustainability. They have also strived to develop multi-lateral supply and distribution networks – as opposed to linear chains – in order to minimise the adverse effects of key supplier failure.

Such efforts are to be commended and when combined with technology to allow visibility over cash flows and access to transaction-related data and information, they have gone some way towards improving the stability of commercial business cycles. Yet they are not necessarily enough to safeguard the provision of working capital and availability of liquidity as the business and investment landscape continues to shift: a key concern given the increasing importance of corporate cash balances for funding business development.

All Change

On the face of it, navigating the shift in global trading patterns should not present too great a challenge. Risk has always been inherent to commercial growth and expansion, so it stands to reason that treasurers should be prepared for the rise to prominence of new and less familiar markets that might present a challenge from a risk management perspective. However, difficulties associated with assessing the risk of unfamiliar markets and counterparties, and dealing with new currencies, are playing out against a backdrop of unprecedented regulatory development.

Herein lies the real challenge. Regulation is causing significant shifts to both the traditional suppliers of capital and how risk is managed, and is therefore sounding the death knell for many historical cash and risk management practices. Of course, change is never easy, and can be equally hampered by internal inefficiencies and outdated attitudes as by tough external market conditions, but current and future uncertainty makes new cash and risk management strategies essential.

Devising these strategies requires two things. Firstly, it depends on a detailed understanding of the evolving commercial landscape, and the effect the changes have on individual businesses. Secondly, it relies on the ability to translate this understanding into risk mitigation and cash optimisation strategies that minimise danger, without letting opportunity pass. Banks should be able to help on both counts, although many are finding managing market uncertainty equally challenging as a result of regulation.

The Basel III capital adequacy regime is a case in point. Much has been made of some of the accord’s unintended consequences, such as its potential to increase borrowing costs (making working capital optimisation all the more important), but other features have garnered less attention despite their gravity. One such example is the pressure that Basel III puts on banks to shrink balance sheets and hold longer-term deposits, which will fundamentally change corporate cash management.

Strategic Thinking

In order to meet these requirements, some banks may opt to turn down short-term corporate deposits, in favour of those that can be locked-up for longer periods. If treasurers are to ensure that available cash resources are optimised, this heralds an end to the days of simply depositing funds with relationship banks, and the beginning of an age of more strategic investment.

Of course, the need for a more calculated approach to cash management hasn’t gone unnoticed in the corporate world. Some companies have already sought to recruit members of staff with investment management backgrounds – much in the same way that some companies have employed working capital specialists. But as the global economy returns to a growth footing there is still, by and large, too great an emphasis on caution, which has manifested in the tightening of risk controls.

This trend has admittedly led to some positive developments, such as a growing demand for holding reports and a rise in the development of electronic platforms designed to collate and present this information. Yet security of cash can no longer be companies’ only consideration; cash also needs to be working hard if it is to fund future business development. In other words, cash needs to be both safe and active.

Specialist Support

From a practical perspective, striking the optimal balance between risk and reward requires transparency with regard to how cash is managed throughout the end-to-end value chain, as well as access to a diverse range of investment options so that short and long-term business objectives can be met. Efforts to minimise risk with respect to cash optimisation must then be supported by options to mitigate risk and optimise working capital throughout the business cycle (cash and trade processes being inextricably interwoven) ensuring that risk is managed and proprietary funds optimised at all levels.

Tackling these challenges can seem daunting, but it needn’t be impossible, given access to the right tools and support. This is where banks can add real value as both strategic advisors and solution providers, especially when combining the strengths of specialist global providers of cash management services and trade processing solutions, with the local expertise and service of house banks.

There are myriad uncertainties that corporates must now manage, ranging from the ramifications of the debt overhang in the US and Europe, to the longer-term outcomes of the rise of emerging economies and technological advances with regards to the speed and transparency of financial data. These are all significant challenges, but they can be addressed with a willingness to embrace change, and the necessary support.

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