Published: February 01, 2012
High yields are no longer a valid justification for cash and liquidity management inefficiencies, say BNY Mellon’s Dominic Broom and Gerry Barber. Instead, corporate cash concerns must be effectively addressed through expert solutions that stem from a mixture of local and global bank provision.
Corporate attitudes towards cash and liquidity management are undergoing a significant shift. Such a change is prompted by liquidity constraints and market turbulence caused by the financial crisis, which revealed a low-risk exercise to be – in reality – fraught with hazards.
Pre-crisis, corporate cash management was plagued with weaknesses, not least of which were the lack of end-to-end transaction visibility and the excess of (costly) operational inefficiencies. Of course, these could be justified by the ease with which corporates could access affordable liquidity, as well as the strong rates of return offered on cash deposits.
Universally, however, corporates are now finding bank-supplied credit lines both severely restricted and, where offered, prohibitively expensive: exposing these inefficiencies as an indulgence. In such a world, business sustainability depends upon enhanced working capital efficiencies and improved cash and liquidity management – not least through stronger visibility of the entire cash and supply chain cycle. And this means reassessing long-standing cash and liquidity management practices in order to remove roadblocks and maximise company cash control. Certainly cash, when adequately managed, can act as a tool to help corporates overcome the challenges of the continuing economic turmoil – driving them towards their individual current and long-term liquidity goals.
Before the economic downturn, yield was the priority for many corporates, but doubts over the stability of many banks have shifted concern towards risk. Meanwhile, organisations have grown nervous of investing – leading to an excess of liquidity as they stockpile cash. And this has upset the balance between liquidity, capital preservation and returns. Yet balancing these competing needs remains the crux of the corporate treasurer’s role: meaning that the mobilisation and maximisation of surplus cash is important, no matter what the uncertainty or how the business cycle turns.
When evaluating cash and liquidity management solutions, success is measured in terms of understanding individual client concerns – with regards to balancing cash assets and investments – as well as having access to, and a strong grip on, global financial markets. And this remains the case despite the economic turbulence of the past several years. Indeed, the current economic climate has fostered a wide range of responses for bank providers, reflecting an equally wide range of requirements and risk appetites.
Of course, in this environment, expecting standardised solutions is a mistake. Instead, corporates should insist upon bespoke cash management services that are offered hand-in-hand with broader treasury solutions – designed to support the holistic objectives of the commercial cycle. Yet such a dual approach is a difficult act for many local banks. Despite being in prime position to offer domestic clients solutions to best suit their individual needs, most are prevented from doing so by their lack of IT resources, their limited global reach and the ever-increasing regulatory pressures.
Certainly, local banks have an unrivalled grasp of their local clients’ needs. Yet many have insufficient knowledge of both the international markets and liquidity management practices at the global level, which is information that only global banks are able to provide. Given this, co-operation between local and global banking partners presents a strong potential solution to addressing corporates’ evolving liquidity management concerns.[[[PAGE]]]
Indeed, corporates that collaborate with global and local banks – especially when the banks are partnered, meaning they offer products and services in a coherent manner – enjoy the benefits of a cash management provision that is focused around client-specific investment objectives, as well as being able to adapt as business and market forces evolve globally.
As a global provider of a range of sophisticated cash and liquidity management solutions, BNY Mellon advocates a fully-collaborative approach to local-global bank partnerships – leveraging the individual strengths of both to produce effective and innovative solutions. This gives local banks the flexibility and autonomy to provide liquidity management services and products consistent with corporates’ stated guidelines, as well as in dealing with the pressures of a fluctuating investment and risk background. Through such collaboration, corporates can address their liquidity concerns at the varying stages of the transaction cycle, with no need to jettison the strength of their local bank relationships.
Notes
Material contained in this article is intended for the purposes of general information only. It is not intended to be a comprehensive study of the subject matter, nor provide any treasury services advice, or any other business or legal advice, and it should not be used or relied upon as such. The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon.
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