Fast-growing corporates in the Middle East, Africa and Eastern Europe are beginning to develop more sophisticated cash flow strategies to ensure they have money available in the right currency, bank account and legal entity, at the right time.

The more sophisticated approach to cash management spans notional pooling and even establishing in-house banks in strategies that are seeing corporates utilising their own money to maximise short-term, operational funding.

Strategies are allowing treasury teams to reduce borrowing costs by repaying commercial debt and bank loans; help navigate FX volatility and because treasurers have better visibility of the cash coming into the business, they can roll out facilities like supply chain finance and dynamic discounting programmes to support liquidity further and improve supplier relationships.

A new level of cash predictability is even supporting share prices, Manish Joshi, Lead Software Engineer for Liquidity & Account Solutions at J.P. Morgan Payments, focused on exploring the critical role of effective cash management in improving investor confidence, tells Treasury Today.

“Cash flow strategies can sustain companies through trying times with the same numbers, and give real confidence to management,” he says. “It is the role of treasury to ensure that firms have access to liquidity wherever and whenever they need it, fast, automated and real time.”

Cash flow strategies are less imperative in developed markets without exchange controls where it is relatively easy to move funds across borders and treasury can easily centralise its cash, continues Joshi. But in more vulnerable emerging markets some of which may have exchange control regulations or moving money requires Central Bank approvals, treasury teams can quickly lose visibility of their cash position.

Notional pooling

Notional pooling is one example of structured solutions, or products, corporates in the region are beginning to use to optimise their funding requirements.

The liquidity solution that consolidates balances of multiple accounts or entities in different currencies without physically converting individual currencies enables companies to be strategic and use positive balances in one currency to support outflows in another.

“Notional pooling allows treasury to make strategic decisions and use predictable revenues in one currency to manage cash outflows. These structures not only enable companies to be nimble, but can also win business because paying a client in local currency can clinch a business deal.”

Notional pooling can also help corporates strategically protect themselves against currency devaluations, he says. Witness how the Egyptian pound fell almost 50% against the dollar when Egypt floated its currency in 2016 following weeks of turbulence. “Some businesses didn’t have the margin to face that kind of FX risk and really needed an additional strategy to strategically protect against devaluation.”

Structures like an in-house bank (IHB) can help global companies working across the region manage a basket of currencies that typically comprises dollars and euros alongside regional currencies in support of FX hedging strategies, continues Joshi.

“An IHB has one account per currency and money from a company’s global organisations flow into that account. Because operational funding is crystallised into one account, it’s easy to know your exposure. Based on treasury policy, teams can be effective and strategic in their hedging enabling real flexibility,” he explains.

Corporates can begin integrating more sophisticated cash management strategies by first defining and designating one legal entity that is the interface with all the regional subsidiaries or portfolio companies. Deciding the best location to incorporate the entity involves tax considerations, he advises.

Because of tax liabilities, typically, many companies segregate their cash accounts setting up one for their US-only cash and one for non-US cash. “Many companies have two legal entities. The non-US cash is the funding entity for the global companies that are not US-incorporated. This is common, because it allows companies to be tax efficient and look at consolidation of their funding.”

These structures also utilise virtual solutions that segregate and reconcile each cash flow with a participating legal entity. Once the entity is in place, it provides the transparency needed for an IHB, a cross-currency notional pool, FX trading and hedging.

“Once you have the entity you can do all this and because it is market facing it gives more value, and better execution because all the accounts are the same legal entity,” says Joshi who flags that integrating these kinds of strategies requires sponsorship from the CFO and internal tax teams particularly. “The liquidity rewards that come from allowing treasury to fund, hedge, and consolidate funds are infinitely worth it,” he concludes.