The Key to Liberating Trapped Cash

Liberating cash without violating relevant regulatory restrictions requires effective cash management and cash forecasting, but also the right processing infrastructure to identify, quantify and mobilise needed funds.

Trapped cash is an issue that most companies face, especially those operating in developing regions such as Asia and Latin America. Many countries, including Malaysia, India, Indonesia, and China, operate with policies designed to keep currency balances in-country for economic reasons. Regulatory restrictions, currency convertibility, ease of transfer, capital requirements and tax complexities are all problematic for companies operating in these areas, causing trapped cash and increasing a company’s currency risk and country risk. To combat these risks, companies need a way to efficiently access their restricted cash.

There are a number of scenarios in which companies will generate trapped or restricted cash. For example, an organisation may have borrowings in the US and surplus cash elsewhere. A common reason for this occurrence is due to higher US tax rates and working capital investments in a developing market. The most effective cash management practice would be to repatriate cash in order to pay down external debt – provided it is cost effective – and only leave enough cash locally to fund the needs of the domestic operation. Another reason to move restricted cash is limiting the country risk, to adhere to the exposure levels that are acceptable to the corporate risk policy.

Dealing with Multiples

Mobilising cash becomes more complex when multiple currencies and countries are involved as they typically include added regulatory and tax requirements. For this reason, treasuries would do well to establish a process and cash structure that is enabled by treasury technology, offering advanced capabilities in foreign exchange (FX) exposure management; pooling and multi-lateral netting; and intercompany loan management. Such a structure requires that all subsidiaries have access to and are working with the same data. A cloud-based technology platform makes this easier for treasuries to achieve, and to manage their operations globally with full visibility across the enterprise.

Identification of trapped cash is more efficient with cloud-based treasury solutions due to the flexibility to connect to multiple banking partners; the ease of providing access to local business units through the web; and the ability to centralise overall cash requirements. Timing is critical, so access to real-time information is key to effective cash management and accurate forecasting. Treasury teams should be able to get answers to the common questions ‘Where is my cash?’, ‘How much cash do I have’ and ‘In what currencies is my cash?’ Once the trapped cash has been accurately located, the technology solution should provide the mechanism to move it for use where it is most needed.

Inter-company lending is frequently used to mobilise cash. This can be more or less complex, depending on the countries involved and whether the lending activity is domestic or cross-border. Countries such as China require entrusted loan structures to be in place where banks serve as intermediaries, but companies serve as the ultimate lenders and record their loan assets on their balance sheets. These activities require support facilities, including balance management, tax payments, interest accruals and payments, tracking loan terms and generating the related reporting.

Where regulation allows, cross-currency and cross-border pooling is used to put trapped cash to work. Pooling structures need full cash visibility to operate effectively, mirror banks’ operations, or to perform the pooling operations within the treasury mangement solution. Traditionally-regulated Asian countries such as Malaysia and Thailand are encouraging and facilitating cross-border cash pooling and giving additional benefits such as tax incentives for multinational corporations (MNCs) to set up regional treasury centres in those countries in order to better compete with their dominant Singapore neighbour.

The Role of Technology

In order to support complex inter-company cash management structures, companies should have an advanced treasury technology solution in place. Such a solution should include powerful decision support tools, providing granular details and offering simulations and scenario generation.

The multi-tenancy of cloud-based software-as-a-service (SaaS) solutions provide today’s best practice outcomes in cash and treasury management operations. This is a key differentiating benefit of SaaS, resulting from the entire user community sharing a single, up-to-date application. In addition, necessary updates to accommodate regulatory changes are immediately available to the entire user community.

Most companies in Asia are jumping directly from Excel-based treasury solutions to cloud-based solutions, propelled by the strong economic growth in the region over the past 10 years. This is quite different from companies in Europe or North America where treasuries have a deeper history with the evolution of technology, most recently advancing from installed systems to cloud-based platforms. Although there are disparities across territories and industries, Asia’s adoption of cloud technology is evident in the most developed territories, such as Hong Kong, Singapore, Malaysia and Japan, which have a strong appetite for new technology.

While liberating trapped cash can be technically complex, it can be more easily managed with the right kind of technology to support a process that is otherwise costly, labour intensive and time-consuming.

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