Revisiting Global Liquidity Management Strategies: Now is the Time

Global market volatility and a myriad of regulatory changes have made it more important than ever for companies to review all aspects of their liquidity mangement practices, from where and how cash is concentrated to global investment policies. They are also considering new ways to enhance cash control and visibility.

Whether your company is capital intensive, flush with cash, process efficiency focused or very local in execution now is the time to consider enhancing existing or deploying new global liquidity management structures, significant risk management and efficiency gains can be gained.

Optimising Existing Structures

For companies with existing liquidity structures, there are several areas to consider in an evaluation of liquidity management practices.

Geography

Take a look at the countries where you do business and examine whether the regulatory, legal, tax or foreign exchange (FX) climate has significantly changed.  Based on the analysis, you may find that now is the time to add new countries to your existing liquidity structure. On the other hand, a review of the political and economic situation in a particular country might suggest taking other actions. For example, if you have a standalone subsidiary in a country that is under severe economic and regulatory pressure, moving excess cash out of that country and into a centralised structure may be a more efficient use of funds and can help to mitigate risk.               

Another area companies should consider reviewing is their regional pooling structures. For example, there may be an opportunity to ‘globalise’ currencies, such as dollars, euros or sterling, into their respective money centres by moving them into a central location in a major centre such as New York, London or Singapore. Your global banking partner can help automate the movement of various currencies – with or against the sun – into a central location, which facilitates the use of internal funds for needs in local time zones, increases efficiencies and reduces costs – with no loss of value. 

Foreign exchange

Currency exposures are another area that may require re-examination. Companies with individual currency pools might consider integrating them into a multi-currency structure, in which debit and credit positions in multiple currencies are notionally offset. By doing so, companies can leverage various currencies without having to execute multiple FX transactions. For example, a US company that historically has aggregated funds in dollars can maintain local currency for local expenditures, such as payroll. The company would continue to fund its local operations, limiting its FX transactions and using the excess cash to offset short positions in other currencies.

Netting is another alternative, particularly for companies that manufacture products in regional hubs, but sell into a number of markets around the globe. A company with a manufacturing operation in, say, the UK and another in Belgium can simply net out what one owes the other, reducing FX and payment transaction costs.

Companies can pursue netting solutions internally, as well as with global vendors that supply products used in multiple product lines, thereby centralising payments to that supplier. Some of your global banking partners have netting solutions that manage this process and can provide automated FX and payment execution capabilities to streamline the process.

Multiple banks

Many companies work with local banks to ensure access to local products and capabilities. But market concerns may make it necessary to move funds to stronger markets. There are now opportunities to continue local banking relationships, while automatically moving excess cash to a centralised pool. Multi-bank cash concentration solutions determine the balance in these local accounts toward the end of a business day and execute an automated payment (MT101) to concentrate those funds in, for example, London or Singapore.

Global investment policy

Clear, investment guidelines provide a common basis for understanding invesment practices within your company. In the current environment companies should consider a careful review of investment objectives, portfolio characteristics, risk tolerance, investment credit quality, limits, and performance and analytics. A policy evaluation could include a review of investment benchmarks, structure, duration and counterparty risk. As part of a review, the level of excess cash held at operating banks should be examined. With upcoming regulatory changes around Basel III, balances linked to operating business may provide a valuable alternative to other short-term investments.

Visibility through bank reporting packages

Today’s volatile global economy requires the ability to view real-time centralised data on your global accounts and perform analytics to help make quick and accurate decisions. Companies are looking for online tools that can provide a range of information, including real-time global cash position visibility in local or centralised currencies, investment details and consolidated reporting from third-party institutions.

Additionally, bank tools provide interactive and intuitive reporting on your, global and regional cash pools. Robust reporting capabilities include your intercompany lending activity and arm’s length interest calculations.  

Establishing New Structures

In the current environment, decentralised treasury models may be in particular need of review. Consider the following:

Centralised internal services

Consider looking at centralised solutions such as shared service centres (SSCs) or in-house bank structures. These internal mechanisms enable you to deploy, manage and leverage enterprise resource planning (ERP) platforms, treasury workstations, global investment policies and centralised liquidity and payment structures. There are significant risk management, efficiency and cost benefits that can be achieved by centralising one or more treasury processes.

Global funding: capital intensive companies

If a company has manufacturing and sales operations in multiple countries, there are techniques to avoid external borrowing costs to fund manufacturing facilities while leveraging excess cash in other sales-oriented countries or regions. By centralising liquidity through cross-border zero-balance accounts (ZBAs) and notional pools, for example, a company is able to bring excess cash into a single location and finance debit positions. In addition, balance reporting and intercompany loan administration can be automated and linked to treasury workstations and ERP platforms.

Cash optimisation: cash rich companies

For a company flush with cash, centralising funds will provide the opportunity to evaluate a variety of new investment options. Centralistion also helps to optimise yield through automated investment solutions or by using the cash to offset banking fees.

Summary

Now is the time for companies to begin re-assessing their liquidity management strategies to be better able to address today’s economic climate, regulatory changes and global risks. Consider talking to your banking partners about optimising existing liquidity solutions or creating new ones, taking into account considerations related to geography, FX, your banking networks and investment policies.

Enhancing or creating a liquidity strategy is a lengthy process, with a variety of tax and legal implications. For that reason, it’s important to get started as soon as possible so you’re ready to effectively deal with market uncertainites and take advantage of opportunities as they arise.

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