Cash & Liquidity Management

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Growth Entails Owning Your Cash Position Effective cash concentration requires automation to eliminate manual movement of funds, improve efficiency, reduce paperwork and create opportunities to aggregate cash more effectively – not least by maximising cut-off times in various country accounts.

Growth Entails Owning Your Cash Position

Treasury must reassess structures, processes and its choice of banks to optimise cash

by Fiona Deroo, Head of North America Liquidity and Investments, Bank of America Merrill Lynch

According to the Bank of America Merrill Lynch 2015 CFO Outlook survey, CFOs are confident about the US economy and anticipate growth in their sales, workforce and companies in 2015. For treasury, this return of confidence and related growth necessitates a renewed focus on visibility, control and optimisation of cash. To that end, the fluid geopolitical and macro-economic outlook, and the evolving implications of banking regulations, require treasury to reassess its structures, processes and people.

Account structures, global cash concentration and liquidity structures, including end-to-end working capital solutions, are at the heart of treasury’s functions. Before embarking on any growth initiative, it’s important to take a fresh look at all treasury operations to identify gaps, reduce risk and costs, and enhance synergies across the organisation.

Leveraging a global overlay bank

For treasurers managing liquidity globally, gaining visibility into global cash positions is key: the provision of solutions to achieve these goals is the critical function of a transaction bank. Corporates that operate internationally usually work with multiple banks, either through necessity (because their core bank does not operate in a certain geography) or by design (to reduce counterparty risk or to maintain bank relationships in order to have access to credit).

Working with multiple banks can reduce visibility and control of funds due to lack of systems synergies and multiple platforms. To overcome these challenges, a global overlay bank is often used to deliver a single, comprehensive view of liquidity while facilitating greater control.

Centralised control of liquidity gives treasury strategic flexibility in relation to investments, counterparty risk management, debt repayment and foreign exchange (FX). As a result, it can respond rapidly to changing market conditions or deploy liquidity in support of business needs.

While overlay structures are invaluable to corporates that work with multiple banks, they should not remain static. They can only fulfil their objectives if they are regularly updated to reflect changing operational requirements and market realities. Many companies amended their overlay structures during the financial crisis to address counterparty, country- or FX-specific risk. However, since bank and country ratings have continued to change, ongoing reassessment is necessary.

Treasury must also regularly review its payments and receipts structures, which play a critical role in achieving visibility of global liquidity. An efficient payables and receivables structure should reflect the company’s broader working capital strategy. Corporates should seek advice from their banks about how emerging trends such as payment-on-behalf-of (POBO) structures can be used to achieve their liquidity objectives. An overlay bank can also offer electronic payables or new mobile solutions, for example, to minimise manual and paper-based processes and maximise automation and straight-through processing to improve efficiency.

Automating liquidity structures

The effectiveness of corporates’ cash concentration improved dramatically in the past decade as the importance of cash to the organisation increased. However, many companies continue to have pockets of liquidity in entities or countries outside their cash concentration structures. This cash may be left in country accounts for legitimate reasons, such as to make a tax payment in future months. However, there is no reason why cash cannot be put to effective use in the months before it is required to pay a tax bill.

Effective cash concentration requires automation to eliminate manual movement of funds, improve efficiency, reduce paperwork and create opportunities to aggregate cash more effectively – not least by maximising cut-off times in various country accounts. The resulting benefit is the potential for a corporate to increase yield on these funds. Automation also gives treasury greater flexibility to alter its concentration or pooling structures if the market environment changes rapidly.

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