Cash is the lifeblood of any company and its effective management can mean the difference between success and failure. When a company has sufficient cash to finance its business plans and growth – and also to deal with contingencies – it can successfully focus on its core business operations. Treasurers must therefore work to ensure short- and long-term funding, while at the same time ensuring that cash reserves are invested to ensure maximum return.
However, optimal management of liquidity and cash flows can prove a major challenge. Certainly, in the post- 2008 crisis era, treasurers are facing new challenges. Banking regulation has become more stringent, reducing the availability of capital from lenders, and interest rates reside at an all-time low across the board. In addition, with the acceleration of economic and corporate globalisation, geographic expansion has now become a must for most companies looking for a competitive advantage – but moving cash across borders brings with it unique country-specific challenges.
Yet to focus solely on the challenges would be to miss the opportunities. The establishment of the single euro payments area (SEPA), emerging technology and, significantly, banking product and service innovation mean that there is no better time for corporates to grasp the opportunities to improve their account and cash management. Indeed, these innovations allow them to drive efficiency in five key areas: by reducing complexity, improving liquidity, overcoming borders, optimising interest and enhancing transparency.
Treasurers undoubtedly have many challenges to handle in their day-to-day work, particularly now that many businesses operate in a number of different countries or are focusing on international expansion with the push from globalisation. Therefore, reducing complexity is key for efficient global cash management.
In this respect, one development that aids matters is the introduction of SEPA. For corporates, becoming SEPA-ready should be more than simply a compliance issue – it offers companies potential savings and efficiency gains if they make the relevant adjustments.
Pre-SEPA, businesses had to have accounts in each country of operation and incur cross-border bank charges to make their euro payments. Today, corporates can make euro payments to any beneficiary located anywhere in the eurozone using a single bank account and a single set of payment instruments, significantly reducing bank charges.
In addition to the advantage of having a unified European payment service, SEPA can also improve cash management efficiency globally. For example, for those corporates that conduct trade on a global basis, SEPA will allow them to consolidate their bank accounts, optimise liquidity management and potentially centralise payment and collection factories. The potential for optimisation also goes beyond bulk payments in euro to payments denominated in foreign currencies and third-party bank payments.
As well as becoming SEPA-ready, corporates should also seek to reduce complexity by using direct debits, optimising cheque handling or implementing virtual accounts.
While profitability was a main cash management focus for some treasurers before the 2008 crisis, this has since shifted to concerns about risk and internal liquidity. With funding currently scarce, treasurers should therefore focus on making full use of their internal financing resources in order to release trapped cash. Yet, despite this, many companies are still afflicted by long-term capital commitment, caused by generous payment deadlines or sub-standard arrangements for invoicing and reminders. As such, companies must exercise the utmost care in structuring their capital commitments, since an inordinately high amount can cause drags on liquidity.
Cash concentration solutions offered by banks such as Commerzbank can provide targeted support for managing liquidity. Furthermore, as part of a comprehensive approach to optimising the commitment of working capital, cash management experts can give advice on optimising days inventory outstanding (DIO), days sales outstanding (DSO) and days payable outstanding (DPO). In this way, treasurers can evaluate their working capital management efficiency and have a far clearer view on their ability to pay off current liabilities, as well as a better understanding of where improvements can be made in their cash conversion cycle.
Another key challenge facing treasurers in the modern day is internationalisation. With companies’ ever-expanding geographical footprints, success now relies on efficient, reliable and transparent processing of payments beyond bank and national borders. Yet crossing borders often means dealing with new currencies, new payment formats, and different laws and tax regulations; which regularly result in increased cash management costs. What is more, when moving funds between countries, it can be difficult to gain an oversight of liquidity positions across multiple jurisdictions, currencies and time zones.
One solution in this respect for companies wishing to centrally manage the payment transactions of their international units can lie in payment factories, particularly those solutions offering flexible communication channels and a powerful engine to convert incoming payment instructions into country-specific formats. The transactions are then routed to the respective bank and processed either domestically or internationally in the destination countries. Payment data files are electronically signed and transferred centrally to the bank, thus ensuring faster availability and greater flexibility for international bulk payments.
In addition, it is helpful to have local knowledge for overcoming cash management borders through a bank with the ability to provide both global support by means of a cross-border client relationship team as well as local support at its branches in the respective countries.
Given many companies’ problems with long-term capital commitment, it is even more important that the cash they do have is making a solid return. Given the current global low interest rate environment – which is not expected to change in the near future – this is, of course, far from simple.
Indeed, for treasurers it can be tricky to juggle several corporate accounts and, at the same time, ensure that cash is not sitting idle or earning as much interest as possible. Any treasurer who manages several accounts will be familiar with this situation; overdraft charges are payable on one account, while another is in credit yet earns little in the way of interest.
Here, the solution can lie in centralising cash; making it far easier to ensure that funds are put to the best possible use, whether that be to pay suppliers, reduce debt or make acquisitions. Where the cash cannot be centralised, businesses want to be able to pool it locally so that it is also available. A bank’s cash concentration service can offset debit and credit balances which attract interest and use all the options for short-term liquidity investments and borrowing by means of focused volumes. In this respect, experts also examine whether – and when – it makes sense to take a cash discount.
Post-crisis, risk has certainly risen up the treasury agenda. Today, corporate treasurers are not only responsible for funding, cash and liquidity management, but they also increasingly find themselves responsible for decisions related to risk and compliance and management strategy, for example. Therefore, building a transparent view of cash and risk has become essential for treasurers to allow them to mitigate risks easily and stay on top of cash management.
A web-based treasury management system (TMS), such as that issued by Commerzbank and several of its peers, helps corporates to optimise their finance management. The TMS provides information about the preparation and management of cash planning and cash pooling, as well as liquidity planning, thereby supporting company treasurers in all major financial decisions.
Indeed, banks can certainly lend a helping hand to enhance transparency by providing reliable, timely information about current financial positions as well as details of interest and exchange rates. Credit ratings for potential business partners and country-specific risk assessments can also be invaluable when operating both at home and internationally. Added to this, up-to-date information about national requirements is also essential in the context of international cash management.
Certainly, in today’s more demanding financial landscape, businesses have understood that they need to readjust their focuses and find more innovative ways of managing their cash. While cash management can seem complex in the constantly changing financial environment, enlisting the help of a global cash management services provider can certainly help manage cash flow with greater convenience and efficiency.
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