Cash & Liquidity Management

SEB Guide to Liquidity Optimisation: An Integrated Approach: Foreword After many long months of tension and uncertainty, there are signs that the financial crisis is finally starting to subside. As the ‘real’ economy was slower to be affected, its recovery is also proving slower, and many industries, across both production and service sectors, remain gripped by recession, with the disappointment of lay-offs and postponement of capital projects. However, while pessimistic commentators predict that some of the worst-affected businesses may not have a realistic chance of recovery until 2011, it seems likely that others will experience a more rapid change of fortune as consumer confidence improves.

Foreword

by Erik Zingmark, Global Head of Cash Management

After many long months of tension and uncertainty, there are signs that the financial crisis is finally starting to subside. As the ‘real’ economy was slower to be affected, its recovery is also proving slower, and many industries, across both production and service sectors, remain gripped by recession, with the disappointment of lay-offs and postponement of capital projects. However, while pessimistic commentators predict that some of the worst-affected businesses may not have a realistic chance of recovery until 2011, it seems likely that others will experience a more rapid change of fortune as consumer confidence improves.

So, with the horizon in sight, although potentially further off for some, the cash imperative has evolved. Companies have put most of the necessary financial structures in place to help them to ride the storm, and they know what support they can expect from their banking partners. Today’s predicament, therefore, is not short-term liquidity management, but ensuring that target cash flow levels are generated in the medium to long term, so that companies can service their debt obligations as well as support their ongoing business activities. This is a slightly different liquidity issue than that which faced treasurers a few months ago. At that stage, liquidity forecasting was a priority to identify working capital gaps and the financing required to support the business; today, while ongoing forecasting remains essential for any business, as Robert Pehrson explains in his article in this Guide, the challenge is to deliver on these cash flow predictions.

Most companies have recognised the importance of managing working capital to support the business during difficult times, and many have begun to look across the financial supply chain for opportunities to improve processes and unlock trapped cash. It is not enough to embark on the short-term projects which are often reported in the financial media; these may have an initial impact on working capital and achieve short-term objectives, but they are unlikely to contribute to long-term cash optimisation and permit low levels of cash tied up in inventory and financial processes to be maintained. To achieve this, companies need an integrated and sustainable approach to liquidity management across the whole business, including areas traditionally outside treasurers’ domain, such as trade finance, accounts payable and receivable, with long-term, measurable objectives and consistent KPIs, preferably linked to compensation packages. This requires a systematic and consistent approach, such as the SEB Corporate Value ChainTM which explores, prioritises and addresses opportunities for improvement across the company’s financial value chain.

In this Guide, we look at some of the key issues facing treasurers today. Erik Seifert explores the emerging issues of counterparty credit risk, while some of my colleagues across the trade and cash areas of SEB explore ways of optimising liquidity in the new environment in which we find ourselves. Finally, Robert Pehrson looks in more detail at a pragmatic approach to the perennial issue of cash flow forecasting, which remains pivotal to managing liquidity. Please do not hesitate to contact me, or any of the SEB team, to discuss any of the issues explored in the Guide, and we would be delighted to help.

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