Cash & Liquidity Management

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SEB: Addressing the Liquidity Challenge Liquidity is an integral element of the treasury function: this in itself is neither new nor surprising. However, as a consequence of recent events, it is now many treasurers’ top priority.

Addressing the Liquidity Challenge

by Niclas Osmund, Head of Cash Management Advisory, Patrick Zekkar, Head of Trade Finance Sales, Sweden, and Niklas Callerstrom, Global Head of Supply Chain Services

In the previous article in this Guide, Erik Seifert outlined the importance of efficient, centralised liquidity management structures to ensure control over cash flow and mitigate counterparty risk. In addition, treasurers have increasingly recognised the need for both process and capital efficiency to create and preserve working capital and reduce liquidity risk. In this article, we look at some of the challenges that treasurers face in the way that they approach liquidity management, and ways of optimising this by taking a holistic approach to the financial supply chain.

Treasurers best equipped to unlock liquidity are those who seek visibility and control over the cash held in bank accounts globally, and the processes that contribute to working capital.

Liquidity is an integral element of the treasury function: this in itself is neither new nor surprising. However, as a consequence of recent events, it is now many treasurers’ top priority. According to the Cash Management Survey 2008, published by gtnews in association with SEB (‘SEB/gtnews Cash Management Survey 2008’), treasurers believe that liquidity management represents the aspect of treasury with the greatest potential for improvement (34%), a shift from the previous year in which cash flow forecasting was identified as the most important priority. Clearly the two are inextricably linked, as illustrated by Robert Pehrson in the article that follows, but there are a variety of opportunities for enhancing liquidity management. Liquidity management is also different today in that it is now viewed from a new perspective, and by people within the business who were not previously involved. For example, liquidity management is not only about fine-tuning forecasts, but also securing funds from customers and ensuring that key suppliers continue to perform. This requires that treasurers become more involved in the company’s core activities and take a more prominent role. Often, the difficulty for treasurers is firstly to identify areas for improvement, and then to take control over the processes that contribute to liquidity optimisation, and prioritise the initiatives that will deliver the greatest value. This is the essence of SEB’s Corporate Value Chain™ approach, which explores the financial supply chain as a whole, both cash and trade, to identify, prioritise, develop and deliver concrete solutions to the challenges facing corporate treasurers today.

Theory and reality

Liquidity management is nothing new, and the solutions for enhancing liquidity, reducing liquidity risk and pushing down working capital requirements are often familiar tools in the treasurer’s toolbox. However, there are invariably challenges which conspire to thwart initiatives to optimise liquidity and reduce the company’s working capital requirement.

Lack of centralisation

Centralisation of cash has been a priority for many treasurers for a number of years, often with significant success. However, there is frequently further progress that can be made. Centralisation takes a variety of forms, and treasurers best equipped to unlock liquidity are those who seek visibility and control over the cash held in bank accounts globally, and the processes that contribute to working capital.

Looking first at cash management structures, while many companies have adopted cash pooling or concentration solutions that centralise a portion of cash flow, there are often some countries or regions that remain outside of these structures. In addition, treasury and cash management may be centralised in some parts of the world, but other countries and regions retain local cash management autonomy, making it more difficult to achieve global visibility and control. According to the SEB/gtnews Cash Management Survey 2008 (figure 1) a surprising 28% of companies currently have a decentralised cash management structure, although the majority plan to centralise cash management in the future, ideally on a global scale.

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