Managing Liquidity and Short-term Investment

BNP Paribas Cash Management University Preview

BNP Paribas will once again be hosting its renowned Cash Management University on October 8-9 2009 in Paris, France. This year’s event, following a remarkable year for the financial world, focuses on two of treasurers’ most important priorities: liquidity and risk. In this new series of articles, we preview some of the themes and industry experts who will be part of the event, and follow up on the key findings. In this opening article, we speak to participants in one of the workshops which will form part of the Cash Management University

Liquidity has become a treasury buzzword, dominating many articles and brochures; however, there is no single, universal solution to the challenge of effective liquidity management. For example, one company may focus on centralisation of cash to enable greater visibility and mobility of cash, a second may seek to refine its collections process to manage their credit risk and ensure timely collection of cash, while a third may be more concerned with rationalisation of banking relationships. As Peter Pollaert, Global Head of Sales, Cash Management at BNP Paribas-Fortis Bank explains, it is important to prioritise the issues which have the most significant impact on a company’s working capital,

“Effective liquidity management is particularly important during a period of crisis to ensure the ongoing viability of the business. Treasurers have placed greater emphasis on liquidity, and working capital more broadly, in recent months. This is more than simply establishing or refining cash management structures such as cash pooling and netting. Instead, the focus needs to be on cash balances and flows, especially collections. The CFO is not kept awake at night with worries about the relative efficiency of a payments process, even though this remains an important area; on the other hand, he will be far more concerned if insufficient cash has been received for the company to meet its financial obligations. Treasurers and CFOs need to take steps to ensure that they are getting cash in when it is due, and that they know it’s been received, so that they can make it work for the business.”

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The renewed focus on business fundamentals is a common theme across many companies. One of the corporate treasurers who will be participating in the event is Gerd Klevenz, Head of Treasury Operations and Processes at SAP, who discusses the experiences of the company since the crisis. He outlines:

“People have different views of the crisis: is it coming to an end or is the worst still to come? As a treasurer you need to anticipate and respond to a complex, ever-changing, global environment. A treasurer can only manage what he sees, therefore you have to be able to see your way clearly. This will enable you to act as business partner and helping top executives to navigate. The treasury team has to provide the financial visibility needed: this starts with efficient and effective liquidity management. Integrated solutions have to be in place in any case, during and beyond the crisis.”

Liquidity and risk management go hand in hand at SAP, with a disciplined approach to managing liquidity within the overall risk framework. At the beginning of the crisis, some of these policies were revised to even further mitigate risks which became more apparent during challenging market conditions. For example, SAP had a largely centralised cash management structure already in place, but still maintained some cash balances at subsidiary level. Once the impact of the banking crisis became clear, the pressure on concentration was increased even more. As a consequence, local liquidity levels were further reduced to mitigate counterparty default risk. As Gerd Klevenz continues,

“An important consideration was to quantify our risk to each banking group and reduce this to an adequate level. Based on daily and automated liqudity reporting we can control such exposures by Financial Institution. In addition, we implemented an in-house cash procedure based on SAP ERP (effectively a type of netting) to reduce the number of external payments between business units which reduced settlement risk. Our external supplier and Treasury settlement payments are routed through a central infrastructure. This enables us to re-route or stop payment orders if necessary.”

Having centralised cash as far as possible, established clear visibility over cash and cash flow risk, and fulfilled the company’s financial obligations, the next step was to determine how surplus cash should be invested. One of the most important trends in corporate short-term investment in Europe has been the increase in investment in AAA-rated money market funds (MMFs), as well as spreading deposits across a larger base of banks. As Daniel Salama, Money Market Fund Products Specialist, BNP Paribas emphasises,

“Security and liquidity are key to BNP Paribas’ investment philosophy. Before the crisis, yield was an important investment consideration; since then, trust has been eroded so these considerations are now paramount.”

Philippe Renaudin, Head of Money Market Funds, BNP Paribas, continues,

“MMFs have proved an increasingly important tool for corporate treasurers who are seeking both flexibility and security of capital. Another important, related development, is the growth of government funds. Many corporations are still cash rich and therefore the challenge of where to place funds has become more significant. With continued market volatility and concerns about security, MMFs including government funds can be valuable investment vehicles.

Companies have recognised that although MMFs appeared to be commoditised products, there are important differences between funds.”

SAP is amongst those firms who have revised their investment policy. As Gerd Klevenz continues,

“We have reduced the number of different investment instruments and the duration. Most treasury transactions, including investment, take place through head office in Germany, as local finance departments often lack the scale to implement segregation of duties and other necessary operational controls. The exception is in the United States, where we have largely limited our investment to 2a-7 MMFs with a ‘AAA’ rating.

In Europe, we have always used a reasonably conservative range of investment products, including MMFs, term deposits etc. but we also refined our policy in this area, including investing in government funds. We have distributed our cash across a wider range of core banks and into MMFs which invest in EURO government issuances exclusively to diversify our risk and to ensure the availability of larger amounts in case of unforeseen liquidity needs. Although this results in lower interest, it is compensated by greater security.”

Few companies have yet solved all the liquidity and risk challenges with which they are faced. For example, SAP had already established group liquidity and FX exposure reporting but treasury is now seeking to refine the FX exposure reports to enable consolidated group-wide visibility. Whether or not the crisis is yet over, the way in which companies value liquidity and recognition of liquidity-related risk, such as counterparty risk, has changed fundamentally.