The role that the corporate treasury function plays in an organization varies widely. Depending on the company, the treasury group generally oversees liquidity, cash flow, external financing, risk, and bank relationships. As companies grow organically, through acquisitions, or by geographic expansion; liquidity management becomes increasingly complex and top-of-mind for corporate treasurers. One of the key components of liquidity management is managing cash investments.
When establishing their investment policies, historically organizations balance risk against return. The 2017 AFP Liquidity Survey reflected a focus on safety. Sixty-seven percent of survey respondents indicated that safety is still most important short-term investment objective for their organizations (the 2016 survey result was 68%).
With safety and liquidity holding their place as top priorities, the AFP Liquidity Survey also reported that treasurers are placing the bulk of corporate cash in bank deposits. One of the drivers of corporate deposit growth is the stockpiling of cash by many corporations, and many US-based firms with global operations are leading the charge.
According to the 2016 Global Finance Global Cash 25, Moody’s Analytics puts the total cash on balance sheet of the US companies it rates at somewhere around $1.7 trillion; that grows to closer to $3 trillion when including cash held overseas. Many of these companies hold cash overseas and are headquartered in countries where cash repatriation puts the company at a tax disadvantage.
With the record amounts of cash that corporates are holding, it is almost counterintuitive that liquidity management is a challenge for corporate treasurers. But liquidity management is increasing in complexity and volatility, exacerbated by the triple whammy of Basel III, low/negative interest rates and money market reforms. The proliferation of banking relationships and operating accounts, combined with manual treasury processes, is a hindrance to effective liquidity management.
On a day-to-day basis, cash inflows and outflows are uneven and uncertain
The more unpredictable a company’s daily transaction flows, the greater the challenge in managing short-term liquidity. Within the business day, mismatches between inflows and outflows can result in a daylight overdraft. Misaligned cash flows can occur for a variety of reasons. These include, but aren’t limited to, the methods selected to pay/receive; currencies chosen; where the account is domiciled; the nature of the client’s business. Whatever the reason for the misalignment, selection of the most appropriate liquidity management solutions optimizes the use of internal liquidity, minimizing the reliance on and cost of external liquidity, and accelerate reconciliation.
Treasurers prioritize safety and liquidity of their cash investments. When choosing how to manage those investments, treasurers face a number of challenges. One of the most significant cash investment challenges for corporate treasurers is the insufficient range of suitable investment options followed closely by the change in the investment landscape due to Basel III and the proposed money market fund reforms. Basel III, along with other regulations such as money market fund reform, is changing the relationship between business customers and their banking partners. A deposit is no longer a deposit. Instead of taking the traditional tack of looking mainly at balance size, banks are considering additional factors when valuing customer deposits, including, among others, its purpose; the associated activities underpinning it; currency; originating market; and others.
The Big Four
There are four key external forces creating tremendous upheaval.
The most significant regulation affecting liquidity management is Basel III, along with others such as money market fund reform. Taken together, they’re changing the way banks structure their balance sheets and the relationship between business customers and their banking partners.
On the economic front, businesses of meaningful size continue to seek opportunities abroad. Combined with an environment of negative interest rates in several countries, this makes multi-currency liquidity management increasingly challenging.
Technology evolution has facilitated a move toward centralization, which in turn is enabling enhanced technology capabilities such as ERP integration, payment and receivables hubs, and real-time information flows.
Industry initiatives such as expanded use of ISO 20022 XML and real-time payments provide both opportunities and challenges for cash and liquidity management, and as the speed of transactions accelerates, so does the need for even more timely information.
The expanded use of ISO 20022 for banking data is helping treasuries to standardize and simplify information gathering, resulting in consistent automation and visibility across banks and accounts. Rather than expend effort performing data translation from legacy bank statement formats, receiving data in native ISO 20022 message formats increases the potential for straight-through-processing from bank to corporate ERP and TMS systems.
In turn, standardizing data inputs helps to speed cash management and forecasting capabilities, high priority areas for improvement according to CFO Publishing. The CFO Publishing report further states that 80% of respondents are looking for their treasury function to prepare cash reports and liquidity forecasts much more quickly than they are currently able to.
As a result, we expect a shift toward real-time data aggregation, enabling up-to-the-minute cash position reporting. While treasury technology providers tout real-time cash visibility and reporting, a continued reliance by treasurers on batch file transmissions feeding Excel spreadsheets limits their ability to move to real-time data consumption.
Recognizing the benefits of improved accuracy, bank cash management portals, treasury management systems, and ERP systems are enhancing real time capabilities to help treasurers move closer to real-time forecasting.
With all of these external forces, what’s a treasurer to do?
These ‘Big Four’ sources of upheaval provide some very compelling reasons to obtain greater visibility. While there isn’t a one size fits all solution, here are three best practices for managing liquidity today.
1) Recognize and understand the challenges that are happening in the landscape – and more importantly, understand the consequences these have on the trajectory of business and strategic objectives.
2) Increase awareness of the options to solve these challenges and respond in a manner that enables the ability to be prepared and participate in the future.
3) Understand the value of maintaining an ongoing dialog with partners to respond to these changes proactively.
Visibility is critical to cash and liquidity management. Corporates need tailored, customized solutions, developed in close consultation and partnership with their banking partners and technology providers: people who know and speak treasury. As companies centralize treasury activities, bank relationship management is also centralizing. Savvy treasurers are aware of the changes to their overall transaction banking relationships. In response, they are proactively engaging their banking partners to help them successfully optimize liquidity.
It is especially important to find partners who understand industry sector distinctions along with an understanding of geographic nuances and local regulations understand what is or is not feasible in specific jurisdictions.
Treasury technologies are constantly improving. To take advantage of new capabilities, financial professionals need to continuously look for automation and digitization opportunities, whether provided by banks or other technology providers. No one can predict what lies around the next bend in the river, but robust strategic preparation can equip treasurers to ride out the next stretch of liquidity management turbulence.