Often mid-size companies are at an exciting stage of growth, which creates particular challenges and opportunities for their treasury and cash management teams.
The Mid-market Goes Global
Many of the mid-market firms that BofA Merrill deals with already have an international footprint. Typically they established operations overseas four or five years ago, and instigated relationships with suppliers and distributors to introduce their products and services into new markets. These businesses already have banking accounts set up in numerous jurisdictions and are cognisant of the tax systems in the locations where they operate.
For 2015, the chief executives and finance directors of these companies believe there are more international opportunities that can be pursued. They are drawing a distinction between the speed bumps the global macro economy saw in 2014, such as the slowdown in China and Europe, and the more positive prospects they see at a micro level. What is noticeable is that they are looking at expanding beyond the major European and Asian centres one might expect. Having a relatively mature footprint already, the goal is to enter more emerging nations and the smaller second- and third-tier cities within larger countries such as China.
With this strategic direction set, corporate treasurers have the task of making sure their cash management and payments procedures, processes and technology can facilitate such growth. Sometimes the most valuable service that providers can offer is advice on the countries their corporate clients are looking to enter and insight into the operational and economic factors they need to plan for.
When looking at products, mid-market firms need a similar level of sophistication as global corporations. Effective foreign exchange (FX) and trading solutions are their principal requirements. Typically each new country entered will have its own currency and regulations around the movement of cash. This creates increased complexity when payments have to be managed and converted across borders. Additionally, where any company has currency exposure risk protection is crucial, particularly as we proceed through 2015. Hedging strategies can help sustain business when there is market volatility, and more of this may be expected when the US Federal Reserve starts the process of raising interest rates even at a gradual pace.
Corporate cards are another popular cash management tool for expanding companies. Those with staff and operations abroad often reach a tipping point where it makes sense to roll-out cards in local currencies and not just in the US dollar. This typically leads to conversations about improving payment automation and ensuring that card technology is arranged in a way that provides consistent and consolidated data which can be managed across borders.
Challenges at Home as well as Abroad
Breaking into new markets can also be an opportune time for corporate treasurers to analyse their overall liquidity position, and see if additional efficiencies can be made. In the mid-market, there is often a relatively low uptake of cash pooling solutions. Huge gains can come from implementing global pooling solutions, and from identifying and then freeing cash trapped in accounts around the world. The first step is to get visibility over payments and cash flows, in something approaching real time.
At home and abroad, how companies of all sizes manage their cash and operating flows could look very different once US interest rates start to rise. A consistently low interest rate has given treasurers simplicity and predictability since the Fed cut the rate to 0.5% six years ago. It has also changed the type of products used; when rates are so low, the attractions of sweeping are limited. This is undoubtedly set to change. We are likely to see a return to off-balance sheet vehicles and the way corporates manage their payments and operating flows could look very different in a year’s time.
Improving the efficiency of cash and payments is not just reserved for companies with global ambitions. The many US corporates that are more domestically focused have an exciting year ahead despite the likely monetary and economic changes, and nowhere is this truer than in the healthcare sector.
The Affordable Care Act has been one of the most significant changes to the US healthcare system in the past 50 years. Gradually more Americans are coming under its auspices and entering the health insurance market. For corporate treasurers in this sector, it creates major challenges as well as opportunities. The payment and revenue cycle is a complex one, with payment flows passing from patient, doctor, provider of services, insurance company and federal agencies, and electronic mandates requiring management at every stage of the process. In addition, the volume of those payments is anticipated to increase as enrolment into the programme is expanded. It is not just 2015 but the next three to five years that spell change for domestic mid-market players.
Technology Knows no Bounds – but neither does Fraud
Technology is constantly developing, and the one of the few things that can be said for sure about 2015 is that there will be new advances. For internationally-focused firms, their technology has to work across borders. Companies are increasingly looking at their supply chain finance and seeking to automate the payments process end-to-end, in an effort to improve efficiency and lower cost.
At all levels of the market, the trend is more and more towards the consumerisation of technology and this will only continue through the year. People are accustomed to simple, intuitive interfaces and certain capabilities from their personal technology use, and expect to see these high levels of innovation carried through into their business lives.
For mid-market firms that are directly consumer facing, this is even more of an ask, and they are thinking through how they can give their clients an advanced experience. For those doing this, it is worth remembering that not all technology providers are the same. Some firms are more accustomed to dealing with the demands of retail customers than others, and have experience with the online systems and portals that are becoming increasingly mainstream.
At the same time that technology is creating new opportunities, the pernicious influence of fraud has risen up the corporate agenda. Fraud and the protection of data is a major talking point between corporates and their advisers and providers for 2015. Companies want to ensure their data is protected when it is passed through all systems, but they also want to know how they can minimise their own exposure to fraud within the business and in front of their customers. It is a question often posed as ‘what am I not doing?’ In times of rapid hiring and geographic expansion, there are always potential threats to information and assets to assess and it will be no different this year.
US-wide Optimism Apparent
Looking around the US, it is clear that many mid-market firms are getting stronger financially and economically although some challenges do still exist. The country’s business community is more upbeat as a collective whole, and throughout the nation rather than just in regional pockets. Mid-market attitudes toward 2015 are constructive, the question being asked is typically not ‘will I grow?’, but “how can I grow and manage the obstacles that will undoubtedly come?’ Each company has their own path and is looking for different elements of advice and product, technology and trade, but it is safe to say that few will be content with hogging the middle of the road this year.
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