Optimising Liquidity and Working Capital Management: Strategic Positions and Options

A number of customer challenges exist for corporations with ambitions to optimise liquidity and working capital management. In this article, strategic positions and options are outlined. In our earlier article, we described potential opportunities with supply chain finance (SCF) offerings and outlined the principal challenges, coupled with providing and packaging solutions rather than separate products from a bank perspective.

This article depicts current challenges to optimise liquidity and working capital management from a corporate perspective. Working capital and liquidity management optimisation will continue to be of importance for corporations as liquidity might become an expensive and scarce resource due to regulatory (Basel III implementations) and economic factors (recession/double-dip scenario).

Definitions and Dimensions of Analysis

In order to outline strategic positions and options, a framework is introduced to structure the discussion. The framework consists of two principal dimensions:

  1. Centralised or decentralised management of financial flows.
  2. Utilisation of holistic or silo-based product, system and channel approach.

Centralised or Decentralised Management of Financial Flows

For the purpose of this article, centralisation in the context of working capital management refers to:

  • Centralisation of financial flows (transaction execution and monitoring).
  • Having control of, or close co-operation with, all functions that are relevant to managing the financial value chain efficiently (e.g. procurement and shipping units, inventory owners and sales units).

Centralisation of financial flows remains on the top of many treasurers’ agendas and is a pre-condition for optimising working capital management. At a recent customer conference, treasurers discussed centralisation challenges in the context of working capital management. The overall sentiment among the participants was that treasury had group responsibility for working capital management, but faced challenges when trying to act on this responsibility.

The rationale was that centralisation provides an organisational understanding and a technical platform from which treasury might start exercising a monitoring role over the cash cycle in the corporation. Furthermore, it facilitates efficient co-operation with sourcing and sales units, as well as with inventory owners.

Simultaneously, the role of treasury gradually shifts from a support role to a strategic partner function (a more thorough discussion of this expected shift is available here). However, centralisation, at least in the Nordics, is an ongoing but slow trend and many corporations need to manage a decentralised structure.

Holistic or Silo-based Product, System and Channel Approach

The corporations’ governance structure for managing the financial value chain needs to be coupled with a holistic product, system and channel approach to enable liquidity and working capital management optimisation. As discussed in our previous article, corporations that have access to holistic SCF offerings from their bank(s) and system vendors have much greater opportunities to optimise the utilisation of financial products and services across their supply chain.

The overall trend in the transaction banking industry to move from product silo-based offerings to holistic ones matches those opportunities. This will benefit corporations who, as a result of historic circumstances, have a silo approach. Nevertheless, some banks and software vendors currently compete, and will in the near future continue to compete, with silo-based offerings.

Model: Strategic Position and Options

The presentation of strategic positions and options from the corporation’s perspective will depart from the grid below with the two dimensions set as axes. The taxonomy refers to the corporation’s strategic position in relation to succeeding with working capital and liquidity management optimisation.

Figure 1: Strategic Position Versus Approach Grid

Source: SEB


Decentralised Silo Position: Least Likely to Succeed

Corporations with a decentralised structure and a silo approach will encounter greater challenges than others to optimise liquidity and working capital management. This is due to the difficulties associated with achieving relevant group overviews of aggregated financial positions.

Communication with the bank(s) will be fragmented and complex due to the utilisation of different product-specific systems and channels. The number of potential systems and channels used increase if the corporations have a wide geographical presence.

With that being said, possibilities exist at each separate finance/treasury unit to have closer co-operation with relevant parties locally (e.g. inventory managers and sales staff that typically are operating in the business lines; procurement and shipping units that either are decentralised or centralised in the organisation). The reason for this is that there are a manageable number of stakeholders. In other words, the complexity of managing the cash cycle on unit/subsidiary level from an organisational perspective is lower in this instance, but most likely will require more manpower. However, over time close management of the cash cycle at the unit level would drive a demand for holistic product system support to enable internal process efficiency.

Decentralised Holistic Position: Likely to Succeed

Corporations with a decentralised structure that uses product-holistic system support and bank offerings have greater possibilities to move towards optimised liquidity and working capital management at the unit level. However, challenges will arise when driving towards working capital and liquidity management optimisation at a corporate level. A demand for centralisation of financial flows might arise once these challenges become apparent for the parent company.

Some multinational corporations might opt for a version of this strategic position, as few banks offer holistic SCF solutions with a global scope. Close core bank relationships with the best-in-the-region banks with holistic solutions are preferred for these corporations.

In addition, this is also potentially a feasible position for smaller global corporations. The cost of centralisation will remain too high if substantial economies of scale cannot be achieved, as long as regional varieties and formats exist for many products and constitute established market practice.

Regulatory initiatives, such as the single euro payments area (SEPA), will reduce the cost of – and be a driver of – centralisation of certain transaction flows. Consequently, corporations in this position have great potential to further improve liquidity and working capital management on group level at a lower cost. One important trade-off such corporations confront is to either:

  • Drive a centralisation project simultaneously as becoming compliant to new regulations, thus take full leverage of new possibilities.
  • Make necessary adjustments to new regulations and wait a few years for the banking and system support offerings to develop further.

Gradual centralisation to improve efficiency of the current holistic approach to working capital management is important for these corporations. Possible solutions include to consolidate information in the group in a customised enterprise resource planning (ERP) system/treasury management system (TMS), or to find a banking solution covering a sufficient geographic scope.

Another small-scale way of beginning a centralisation journey for corporations in this position is to focus on certain key processes in the financial value chain with specific software support. For example, SEB’s solution for liquidity forecasting, Webforecast, allows data integration from other banks and can create group and unit forecast reports. In general, it is expected that both banks and software vendors will focus on data integration from their customers’ business partners to facilitate consolidation of relevant information tied to a specific financial process.

Centralised Silo Position: Struggling to Succeed

Historically, corporations that have centralised financial flows have only had access to product silo-based systems, coupled with efficient file transfer solutions. Centralisation has occurred primarily to achieve economies of scale. As a consequence of this type of centralisation, several larger corporations finance/treasury units work in product silos and have mirrored banks scattered organisations. One not uncommon side effect from this approach is high switching costs of their business partners’ solutions.

A number of corporations in this position have made great investments in their group level ERP/TMS in an effort to consolidate and create visibility in the data needed for efficient working capital management. Thus these corporations have, to a certain extent, compensated for scattered reporting in different product silo-based systems and channels. It is also in this space file solutions such as FileAct and the ISO formats prevails. Product-specific formats, such as Bolero or MT798s, serves the same purpose as long as the information is integrated into a working capital management context.

In order to gain best possible leverage of such a solution, close co-operation with sourcing, sales and inventory owners is necessary to optimise working capital management. Another expensive alternative to drive toward working capital and liquidity management optimisation in this situation could be to accept sunk costs from past investments and change to bank(s) with holistic SCF offerings.

Centralised Holistic Position: Most Likely to Succeed

A few corporations are already centralised and manage working capital holistically. The degree of appropriate system support varies, but both system vendors and banks will need to improve their offerings. From a systems perspective, the aim for these companies should be to integrate all relevant financial flows with as high data quality as possible to enable process efficiency and automation, and move towards liquidity and working capital management optimisation.

Simultaneously, trade-offs need to be made for minor flows that should be managed manually due to integration costs. From an organisational perspective, governance models for key internal stakeholders, including the sourcing unit, sales divisions and inventory owners, needs to be established to optimise liquidity and working capital management. It is expected that these are the key activities for treasuries in this strategic position to focus on for the next years.


In order for corporations to optimise liquidity and working capital management, organisational and technological system choices need to be managed in a co-ordinated manner. Regulations are expected to further drive centralisation of financial flows and system vendors and banks alike will move from product silo-based offerings to holistic ones to support corporations’ liquidity and working capital management processes. In a market context where liquidity once again might become a scarce and expensive resource, it is important for companies to take advantage of these developments and make feasible strategic choices based on their current position.


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