The Virtuous Circle: Facing Up to 2010 Cash Management Challenges

The tough economic climate over the past two years has had a profound impact on corporates and their treasury department. It has been well reported that funding from banks is harder to negotiate and this situation could persist for several more years. Small businesses have been hard hit and some are relying on credit cards for short-term financing, but larger corporates have not escaped unscathed. Those that have survived are seeing plans for expansion or investment put on hold due to the difficulties involved in obtaining the necessary credit funding.

These conditions have shaped a new, harsher landscape for the corporate treasurer to operate in. Some of the key issues include:

Counterparty risk

A major on-going concern for treasurers is counterparty risk, which directly influences capital balances and reserves. This was sharply illustrated by several banking collapses that put severe pressure on corporate financial supply chains.

Geographic risks

Geographic risks are also a concern for companies that operate internationally, with Icelandic banks unable to repay funds held on deposit and, more recently, Greece suffering a downgrade in its sovereign credit rating. For companies that have expanded overseas, particularly into emerging markets, the challenge of managing counterparty risk can be multiplied several times.

Credit ratings

The credit ratings themselves and the agencies that supply them are also coming under greater scrutiny as treasurers take a more cautious approach over where to place cash with more emphasis on spreading balances and minimising risk.

Credit management

The availability of credit has become more difficult to obtain and retain. Corporate treasurers increasingly have to be creative about exploring other funding options.

Treasurers have to find a way to operate within this challenging environment. Speaking to a number of treasurers in recent weeks, interesting themes began to emerge. Issues such as efficient cash management, counterparty risk and treasury centralisation, while not exactly new, are receiving renewed attention given the circumstances.

Cash is king

In many respects the phrase ‘cash is king’ has never been more appropriate. It is the lifeblood of the organisation and when it is in short supply, business survival is jeopardised. Managing cash efficiently is a well-established goal for every treasurer but reduced funding opportunities means that short-term cash requirements can be difficult to manage.

It is a trend that Mark Flawn, assistant treasurer at National Grid, is familiar with. “Cash flow has become even more important to corporates,” he says. “Treasurers are giving more thought to the ways in which working capital positions can be improved, making sure spare cash is fully utilised and achieving these twin aims in an efficient manner.”

Getting visibility over where the cash is in an organisation and understanding where surpluses may be languishing in poorly paying short-term deposit accounts is not a straightforward task, particularly in the absence of automated payment processing. In a complex organisational structure, it is possible for one division of a company to be profitable while another is turning to the banks for financing that could potentially have been avoided.

Many corporates, particularly those that operate internationally, will typically use multiple bank accounts, receive statements and reports in proprietary formats, and rely on different banking platforms. Therefore it becomes increasingly difficult to form a clear view of the true cash position at any point in time. Without real-time visibility over cash, the options and strategies open to the treasurer are narrowed, hindering their ability to manage cash effectively.

Visibility Enables Better Control Over Cash

One of the biggest benefits to gaining greater visibility over cash is that more effective decisions can then be taken over what to do with positive or negative cash balances. An obvious place to start is to sweep any surpluses into deposit accounts or investing in short-term money markets. Where loans exist or accounts are overdrawn, cash can be more productively used to offset these, thus minimising interest payments.

Reducing the scale of debts will be particularly beneficial to companies with large loans that need to be refinanced or that are looking to arrange additional short term funding. Without access to this type of financing, investment opportunities for expansion become progressively more difficult to achieve.

We are now seeing a virtuous circle where banks are increasingly looking for evidence of robust business planning and efficient cash management when considering credit applications. By using best practices around cash management corporates will find it easier to access credit. This enables them to run their businesses more effectively thus generating more cash flow. Demonstrating visibility and control over cash in turn makes bank lending decisions easier.

SWIFT and Efficient Cash Management

Having outlined the nature of the challenge, the next step is to look at what action corporate treasurers can take. Arguably one of the most productive areas in which to invest time and resource is to make use of the SWIFT network. SWIFT has recently become more accessible to corporates, helped in part by the roll out of a broader range of connectivity options including an outsourced service bureau and Alliance Lite.

Neil Gray, director corporate solutions for UK and Ireland at SWIFT, says: “The continuation of the tough economic climate is driving more and more corporates to seek ways to rationalise their bank communication channels, gain greater visibility over cash balances and manage liquidity more efficiently. Worldwide around 600 corporates have now joined SWIFT, where they benefit from a single window to access balance and transaction data in a standardised format directly from multiple banks. As a result corporates are able to improve their controls, manage cash more effectively and reduce the need for external financing.”

Using a SWIFT service bureau enables corporates to make payments over the SWIFT network and also receive statements and confirmations back from counterparties. Corporates can standardise all payments onto a single platform for communicating with multiple banks. It enables real-time reporting thus creating the ability to understand a corporate’s true financial position, determine any surplus cash balances and facilitate visibility and control over cash as discussed above.

National Grid’s Flawn adds: “By connecting to our counterparties over SWIFT via the SMA service bureau, we will greatly reduce the manual effort required in payments processing and minimise our operational risk.”

There are a variety of techniques for putting surplus cash to work. Pooling and sweeping can be achieved with the latest cash and liquidity management systems that use business rules to determine when and where to automatically move cash, and banks also offer similar services. Treasurers should be putting surplus cash to work for the benefit of the corporate no matter where in the organisation it is generated. Other areas to consider include:

  • Explore centralising cash and treasury management.
  • Review market counterparties, such as banks, on a regular basis.
  • Proactively plan to reduce debt levels.
  • Ensure treasury and cash management systems are up to date.
  • Consider outsourcing services to free up time to be spent on core treasury activity.

Conclusion: The Lessons Learned

The economic climate has acted as a stimulus for corporates to thoroughly examine any inefficient business processes that may have built up over time. The challenge of improving working capital has to be tackled head on and technology and the banks have a key part to play. With the right financial back office and treasury management systems in place, corporates will be better positioned to gain that all important visibility over cash and the strategic flexibility to manage cash more effectively irrespective of the prevailing business conditions.

It could be argued that the recession has had a beneficial ‘Darwin’ effect with weaker corporates forced to rapidly improve or face the prospect of collapse. The businesses that have survived are typically more lean and agile and that can only be a positive for the industry as a whole.

Another trend that is emerging is that corporates have to work more closely and share information with their banking partners. This could lead to corporates and banks developing a more transparent relationship, which also makes sound business sense, and it may become a differentiator for business growth and future competitiveness.

As an industry it is vital that the right lessons be learned from the recent cash management challenges. Why have some corporates thrived and others struggled? It is important to share best practice around cash management strategies, treasury management infrastructure and risk management policies. Only by developing an understanding of how one’s peers have managed in the virtuous circle, will corporates ensure that any future crisis can be approached with greater optimism.

Establishing a Centralised Treasury Model at a Major International Corporate

The case study is based on an international utilities company that has expanded in recent years into numerous overseas markets and successfully faced up to the cash management challenges outlined in this article. Key to its ability to manage cash efficiently has been the introduction of a European centralised treasury model. Alongside this the company has invested in treasury management systems and the use of a service bureau to make payments and receive statements over the secure SWIFT network.

This enables the corporate to communicate with banks in a standardised format irrespective of where that bank is located. The company has also gained increased visibility and control over its cash, greater straight-through processing (STP) and reduced operational risk.

To cope with its international growth, the centralised treasury model is being expanded globally. This will allow the diligence and control processes that were established in the UK to be extended to overseas subsidiaries and branch offices. The use of SWIFT can be scaled up and rolled out, which will enable the corporate to apply its proven cash, risk and liquidity management techniques.

Once centralised global treasury management is in place, the utilities company will gain real-time visibility and control over its cash balances no matter where they are located around the world, and any surpluses can be used for the benefit of the group rather than local offices. This will be invaluable in servicing debt or maximising interest on short-term deposits.



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