According to the latest financial data, rather than taking a chance on uncertain or longer-term investments, many risk-averse treasurers and chief financial officers (CFOs) are still stockpiling vast amounts of cash reserves instead. In 2012, US non-financial companies added an additional $130 billion to their reserves, taking their total cash to a record $1.45 trillion, according to ‘Forbes’ magazine. Even the latest Corporate Cash Indicators (CCI) survey by the Association for Financial Professionals (AFP), which questions corporate treasurers in the country, and is indicating some lessening of the vast reserves stockpiled by firms since the onset of the financial crisis in 2008, is still way ahead in comparison to historical norms. In Europe, where the worse economic situation is making treasurers more risk averse, the latest UK Office of National Statistics (ONS) data for the final quarter of 2012 showed that corporations, other than banks, are sitting on a £318 billion-plus cash pile.
With interest rates forecast to remain low for the foreseeable future, especially as Europe navigates the eurozone crisis, treasurers looking for better returns need to become more creative and consider options outside of money market funds (MMFs) or similar instruments. Three popular alternative investment options for the present low-rate environment include:
- More strategic investing.
- Debt repayment.
- Supply chain early payment discounts.
To take advantage of these opportunities, however, treasurers must first increase the accuracy of their cash forecast. Forecasting has become the most important tool to enable better cash returns simply because cash requirements must be certain, prior to committing funds to a permanent path.
It is not enough to simply forecast cash; it is in fact necessary to refine the accuracy of the forecasting process to increase confidence in the amounts and timing of future cash flows. In this way, corporate treasurers can be certain of the full amount of the funds to be invested or repaid. This focus on forecasting not only attacks the possibility of unforeseen cash shortfalls, but also maximises the funds available for achieving better returns. Too many organisations leave pockets of idle cash effectively lying around, which adversely affects the efficiency of the treasury cash management programmes.
The Need For Strategic Investing
Treasurers and cash managers armed with a more certain cash forecast should feel more confident about sacrificing liquidity for better cash returns from longer duration investments. While different organisational policies will support different risk appetites, the opportunity is there to pick up an extra 100 to 200 bps for most treasury teams.
For most businesses, repaying outstanding bank borrowings or debt placements is an obvious candidate for implied cash returns, as the savings in interest expense outstrip actual cash returns from short or medium term investments. The concept of debt pay down or repayment is not new. However, the tools to improve cash visibility and the cash forecast are more advanced allowing for more confidence that funds directed towards a permanent reduction in debt balances won’t be needed tomorrow or next week. It is certainty in the forecasting of cash balances that is crucial to future investment success.
Early Payment Discounts
The best cash returns are often realised through internal collaboration and by focusing on supplier invoices. Supplier-offered discounts are well understood to offer a high annualised rate of interest despite a seemingly small discount being offered – for example, 0.5% discount if paying 15 days early.
Taking this to the next level, treasurers can collaborate internally to design a proactive dynamic discounting programme that offers early payment on existing invoices in return for dynamically calculated payment discounts. Suppliers are offered a discounted rate by the buyer that is dynamically calculated for the term of the invoice, meaning the earlier the payment the greater the discount. Often, well-structured supplier finance programmes yield double-digit returns on excess cash and liquidity, sometimes providing the best alternative to a treasurer seeking non-bank funds.
Conclusions: Is Technology Necessary?
Enabling these types of cash return initiatives and supplier finance programmes may be difficult if a treasury is relying on Excel spreadsheets or disparate systems that are not properly integrated. Treasury management systems (TMS) can help in delivering the visibility and cash forecasting accuracy needed to confidently support strategic investment, debt repayment, or early payment discount initiatives.
Treasury technology can also manage the debt and investment transactions of treasurers, as well as calculations and reporting obligations to provide a complete picture, especially if good integration with any enterprise resource planning (ERP) system is achieved. Some treasury systems can also play a role in managing payment discount programmes by delivering a collaborative buyer-supplier platform, including straight through processing (STP) capabilities from invoice through to payment. Certainly some form of technology support to aid automation and efficiency would be beneficial.
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