Cash & Liquidity Management

Show me the money

Published: Oct 2015

In recent years, survey after survey has shown ‘improvements to cash visibility’ to be near the top of the corporate treasurer’s wish list. Achieving that desired level of visibility, however, seems always just out of reach. Why are companies still finding it tricky to get proper visibility over their cash? Is technology always the answer or should treasurers be thinking about more fundamental changes? In this article, industry experts give us their take on this perennially thorny issue.

Treasurers have one overriding strategic priority at the moment. Put simply, it is to get a better view of their day-to-day cash balances across the business.
In the second edition of Bank of America Merrill Lynch’s Asia Pacific Treasury Barometer Survey, published in late May, improving visibility of balances and cash forecasting was the most cited (21%) priority of treasurers for the year ahead. Moreover, according to a March 2015 online poll by cloud-TMS providers Kyriba and the ACT, improving cash forecasting was cited as a priority for 39% of the 303 treasurers from global companies surveyed. This may not be so surprising to many in the industry. Cash visibility, if not number one, usually comes near the top whenever treasurers are asked about what they are focusing most on improving. And rightly so. Failure to achieve sufficient visibility over the company’s cash carries significant risk. In fact, without clear visibility, companies cannot adequately control group cash. In turn, this means they cannot use that cash at optimum efficiency, or maximise investment opportunities for it. Reducing borrowing costs and improving foreign exchange (FX) risk management will also be extremely challenging without full visibility and control.

Why the increased focus of late though? Perhaps, ponders Glen Giffen, Director of Sales at Visual Risk, it has something to do with recent corporate balance sheet trends. As we are reminded by industry study after study, corporate balance sheets have ballooned across the globe since the 2008 global financial crisis. Recent figures from Moody’s reveal that the cash holdings of companies in Europe, the Middle East and Africa have risen 69 per cent in euro terms since 2008. In US dollar terms, the total cash held by EMEA companies was $1.06trn at the end of 2014, slightly lower than $1.13trn at the end of 2013.

“There is a lot of cash on corporate balance sheets,” says Giffen. “Treasurers are naturally focusing more of their efforts on managing that excess cash than they have had to in the past. And if managing surplus liquidity is a much bigger feature of your day-to-day job, then cash visibility is obviously going to come into much greater focus than perhaps it has in the past. Moreover, credit and counterparty concentration risk becomes a huge concern so understanding and managing this effectively becomes a big part of the cash visibility story. For example, what is the impact on cash and investment holdings if the credit quality of a counterparty deteriorates?”

Cutting through the fog

What corporate treasurers want, at the base level, is to be able to get a snapshot of all the cash across the organisation, together with the details of any transactions that are forecast to be made throughout the day; and they want to be able to obtain all of this information in an efficient manner. That way, when they arrive at their desks in the morning they are able to anticipate whether the company will have, come the end of the day, a surplus of cash that will require investing or a shortfall that will necessitate some form of borrowing.

Yet the fact that improving cash visibility is still listed by so many treasurers as a top priority would suggest that, despite the apparent simplicity of what they want, initiatives designed to provide them with it have so far only seen mixed success. Why does the optimal level of visibility seem, for so many, still out of reach?

Industry commentators each have their own take on why this might be. “The treasurers that we talk to are typically under-resourced and frequently wrestle with the challenge of accessing data in a timeframe that allows them to make informed decisions,” says Alastair McGill, Managing Director, Global Business at Cashfac. The issue stems from the fact that despite the increasing sophistication one sees in the sorts of technologies implemented by multinationals at the top end, for the vast majority of companies these activities remain heavily reliant on manual input. In emerging markets, such as those found in Asia, this can be especially troublesome given the geographic regional spread, the multiple currencies, multiple time zones and the multiple banking relationships companies typically maintain.

“For the treasury function, identifying real-time balances of cash across these dispersed operations and across different bank relationships remains a considerable challenge,” says McGill. Indeed, the Cashfac Operational Cash Index, which recently surveyed corporate treasurers in Asia Pacific reveals that almost two-thirds of corporates in the region do not have access to a real time view of their transactions and cash. “This is a worrying statistic,” he adds.

Thomas Knudsen, Senior Manager in the Treasury team at PwC believes that, fundamentally, the issue comes down to the structure of corporate banking relationships. “Often it depends on which banks a company uses,” he says. “In some developing markets you find that your core relationship bank(s) might not be able to support you for the local services that you need. So while you can get reasonably good visibility with an international bank, you might still need to use other, smaller and less capable banks, some of which might not be connected to a banking network like SWIFT.”

Chart 1: Treasury priorities 2015

Chart 1: Treasury priorities 2015

Source: Bank of America Merrill Lynch Treasury Management Barometer Survey 2015

In fact, some banks in some countries won’t even provide you with an electronic banking platform of any sort, adds David Stebbings, Head of Treasury Advisory at PwC. “That means, in some instances, you have to be more manual,” he explains. “You have tiers of standards around how you do these things depending on what country you are in. That is why there is no one-size-fits-all solution. There are different ways of addressing the issue and what you do will depend on your cost benefit analysis and the banking infrastructure in that part of the world.”

What is clear though is that centralised treasuries with fewer bank accounts have a distinct advantage over those with more decentralised structures when it comes to the issue of cash visibility. Getting that visibility over banking infrastructures – and in an efficient manner – is never easy for those that must wrestle with a multitude of security tokens, logging into multiple banking interfaces and extracting the required data manually. In fact, as McGill explains, even having done this many times, treasurers will still not have the full picture “as the bank account data showing balances and historic transactions makes no allowance for the imminent expected receipts and payments, or those that should have been credited or debited but for whatever reason failed to materialise.”

The results of the Cashfac Operational Cash Index supported this notion showing that among those corporates with a real-time view, on average less than 60% of their total cash and ongoing transactions was visible in real time. That leaves the remaining balance being consolidated manually in order to achieve a complete view of their positions. As such, it’s rare for most firms to have complete real-time cash visibility at an operational level that allows treasurers to effectively maximise the treasury tools at their disposal; sweeping and pooling strategies, for example, could all be enhanced if the real-time view of cash was better understood.

One way in which firms can gain better visibility of operational cash is to exploit Client Managed Accounts where the bank account infrastructure remains bank-connected but resides under the corporate’s control; either deployed as an in-house system or as a bank-provided service. Client Managed Accounts are simply an evolution of the virtual account model, where corporates have the scope to determine their account structures; mapping them to their business requirements and establishing the rules that determine their behaviour. The way in which money is routed when it hits the main account can be predetermined and automated.

Expectations of payments and receipts can be pre-populated against individual accounts so when money movements occur they are automatically reconciled against the expectations and an accurate real-time view maintained.

Where companies are multi-banked the same principles can apply, connecting multiple banks to a single set of Client Managed Accounts is less of a challenge than most assume. Either via direct connectivity channels or through industry initiatives led by organisations like SWIFT, there are plenty of options that can be deployed to make life simpler and accelerate the aggregation of balance and transaction data.

Forecasting inaccuracies

Visual Risk’s Giffen believes there may be another factor preventing treasurers from attaining that desired level of visibility: the accuracy of cash flow forecasting. Corporate cash balances, it probably goes without saying, are never static. Throughout the day, money will flow in and out of a business altering each time the company’s cash positon. For treasurers then, it is simply not enough to have visibility over cash at certain intervals. They need to be able to see what is coming down the line.

This is where analytical software comes into play. Solutions like these can help the treasurer to identify the key risks that might lead an organisation to deviate from a forecast. This allows a stress test to be performed where the treasurer can analyse how a particular market risk – currency or energy price volatility, for example – might impact cash flow projections.

The degree of sensitivity to such market risks will vary between companies, for reasons that are not difficult to understand. A manufacturing company that is exporting 100% of the goods it makes will, naturally, have a much higher sensitivity to movements in the currency markets than another manufacturer that only exports, say, 5% of its goods. Similarly, a soft drinks company is going to find its cash flows to be highly sensitive to the price of sugar, especially if it is unable to alter the price of its products.

“What if there is a product issue that means not all of the investments the treasurer holds can be liquidated at current market rates?” says Giffen. “What if a particular currency or central bank interest rate moves in an adverse way? Visual Risk has always been very strong in sensitivity analysis.”

I think a move to systems-based solutions is really the first step. Because at this point in time a lot of the cash processes we see out there are incredibly inefficient. It can take an inordinate amount of time just to arrive at a simple end of day cash position.

Glen Giffen, Director of Sales, Visual Risk

Technology quite evidently has a significant role to play for treasuries determined to optimise the visibility they have over their cash. The greatest advantage systems-based solutions offer is the time saved, adds Giffen: “I think a move to systems-based solutions is really the first step. Because at this point in time a lot of the cash processes we see out there are incredibly inefficient. It can take an inordinate amount of time just to arrive at a simple end of day cash position.”

Still top priority

As we have seen, the issue of cash visibility is inextricably linked to two perennial pursuits for the treasurer, centralisation and the quest for process efficiencies through the harnessing of technology. Experts seem to agree, however, that while structural or organisational solutions are certainly helpful, there is nothing quite like the power of technology when it comes to improving cash visibility.

And now, with an ever-growing range of sophisticated and – thanks to the cloud, increasingly affordable – technologies on the market, those treasurers who say improving cash visibility is their top priority for the year ahead should have the means at their disposal to help realise that objective.

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