The overriding aim of corporate cash management has always
been two-fold; firstly to have efficient bank channels for transaction and
information capabilities and, secondly, to maximise available resources to
either reduce interest paid or enhance overall return. However, an unprecedented
combination of market and regulatory forces is now serving to re-define many
aspects of, and established approaches to, managing group cash positions in the
most optimal way.
Corporates need a deep understanding of the ways
in which the overall management of cash is changing. This, in turn, means
recognition that gaining a return on cash is no longer the only consideration in
managing group cash effectively.
As such, long-held cash management
practices continue to be tested by increased regulation and market uncertainty.
Security, liquidity and yield have always been the principles for investing
cash. However, a greater awareness of counterparty risk and proposed regulatory
change has reinforced these principles. Both bank and corporate attitudes to
cash have changed, with prioritising the security and availability of funds as
much a concern as optimising overall return.
Given the above, best
practice in cash management today requires a three-part focus; ensuring cash is
safe, accessible and working hard for the company’s benefit. This means
implementing strategies that focus on consolidation of cash, optimisation of
cash across the business – which goes beyond simply gaining a return for surplus
cash – and diversification from both counterparty and investment vehicles used.
The precise balance between these three elements will vary from one corporate to
another, but all must be considered when formulating a cash management strategy.
In order to achieve consolidation of cash across
the business, central visibility of global cash positions is required. Achieving
this can be a significant challenge, particularly in instances where many
accounts are maintained in numerous countries to support transactional
efficiencies. While some difficulties in this respect stem from existing
operational processes and the use of basic technology infrastructures and
processes, many others are structural and based particularly around the
This is very much the case for decentralised
treasuries, where the decision on the banks used and number of accounts required
rest with the local operations. In some cases this may result in hundreds of
accounts being held in different locations and different currencies. In turn,
this can create significant complexity and limit central cash visibility and
control. Heightened visibility, as well as the ability, where permissible, to
move cash across the business to self-fund local operations and decrease
dependence on external credit facilities, could enable more efficient use of the
group’s overall working capital position. In addition, better management of
overall cash will maximise the efficient use of cash for the benefit of the
group, as well as better risk management.
There are, however,
certain underlying complexities to consolidation that visibility alone cannot
solve. Companies need to have efficient processes in place to track
inter-company loans, interest on such loans and other internal cash movements;
for example the monitoring of inter-company loans may be hampered by intricate
company legal structures. In addition, where cash is held in multiple
jurisdictions, consolidation efforts may be constrained by limitations imposed
by the legal and regulatory frameworks of individual geographies and/or sectors,
resulting in ‘trapped’ cash.
That said, restrictions of this nature
by themselves do not justify a passive approach to cash consolidation. Should
the centralisation of funds globally or regionally not prove viable, there may
be local options available. Corporates should be proactive in researching
in-country options, as well as consulting their banks, which should be able to
provide advice on alternative investment options for locally-held cash as well
as guidance on how best to optimise the consolidated funds.
Optimisation and Diversification
In today’s environment, cash
optimisation relates more to the holistic use of cash on a group basis rather
than a sole focus on gaining a return on deposits. Indeed, with heightened risk
and counterparty concerns now encouraging treasurers to focus on both a return
of as well as on deposits, they may need to reconsider what a “return” actually
means. For example, can interest earned be viewed entirely positively if it
means that cash security is compromised – or is on condition that cash is
tied-up for long periods?
With this in mind, it is clear that solely
focusing on earning interest on deposits at the expense of all else could easily
prove counterproductive. Instead, treasurers must look to optimise funds at each
stage of the cash cycle. For many, this will chiefly be a question of enhancing
risk management and the strategic deployment of cash.
counterparty risk is a major concern, to the extent that many companies are now
looking beyond ratings and analysing credit default swaps to gauge credit risk.
Growing concerns in this respect are driving two key trends.
is the stockpiling of corporate cash, a development driven by prolonged economic
uncertainty and the concerns about the sustainability of external sources of
Second – and an extension of the stockpiling trend – is a
re-think of the way that surplus funds can be put to best use until they can be
re-invested in the business. With regulatory change potentially leading to
reduced reliance on long-established deployment methods, such as the use of
money market funds (MMFs) – often historically considered a proxy for bank
accounts – corporates are finding investment options that meet their liquidity
and counterparty risk criteria hard to find.
Yet this need comes at
a time when outlets are decreasing, and proposed regulatory change is, in some
instances, creating conflicting needs between banks and corporates with respect
to liquidity. The Basel III Liquidity Coverage Ratio (LCR) has an impact on how
banks think about funding. The intention of the regulation is quite clear – to
wean banks from dependence on short term, wholesale funding and point them
towards more stable sources of funding.
Funding that is likely to
disappear in a stress scenario lasting 30 days will require banks to hold a
stock of high quality liquid assets against it (otherwise known as a liquidity
buffer). The cost of providing this buffer will seriously undermine the value of
short term, less stable deposits as a source of funding. As a result banks will
seek longer terms and more stable deposits.
The only concession that
the Basel III regime does make is in recognising the stability of operational
relationships. Deposits arising from operational relationships are given a
preferential outflow assumption. This will no doubt further emphasise the value
of transactional banking business as a supplement to deposits and lending
business. In that respect, the regulations merely emphasise what transaction
banks and corporates have known for a while – that operational relationships are
hard to move.
The diverse nature of corporate requirements means the
emphasis must now be on strong bank relationships and banks which understand the
needs of their clients. The subsequent design and implementation of solutions to
provide innovative corporate payment and collection services, rather than the
selling of vanilla products, is important in developing the strength of
relationships that are needed today. However, as vital as operational solutions
are to cash management – technology, after all, facilitates change – it is just
one part of the equation.
Today, more than ever, it is imperative
that banks understand not only their clients’ day-to-day banking requirements
but their current and future treasury needs with regard to their cashflows.
Clearly, innovation in developing banking services to meet clients developing
needs is vital. However, in view of the regulatory changes impacting banks and
their clients, it is as important for banks to also help provide a more
strategic and sophisticated approach to liquidity management.
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