Top Priorities for 2010: Maximising the value of your treasury

Published: April 01, 2010

Elyse Wiener
Global Head, Liquidity and Investments, Citi,

by Elyse Wiener, Global Head, Liquidity and Investments, Citi, and Ron Chakravarti, Global Liquidity and Investments, Global Transaction Services, Citi

Economic windstorms that have swept through the globe over the past few years show signs of subsiding, although they continue to stir in certain pockets. Swirling market volatilities, vagaries in capital markets access, bank defaults and safeguarding cash buffers have shaped a full agenda for treasurers in 2010. Recent Citi research shed light on seven top treasury management priorities among major corporations as they prepare to seize growth opportunities that are lurking around the corner.

#1 Establishing the right level of liquidity

It’s indisputable and understandable: companies have been hoarding cash. The cash-to-asset ratio for the S&P 1500 hovered around 5% for almost a decade between 1994 and 2003, while in the last five years it hit nearly 10%. By other accounts, US, European and Asian firms collectively hold almost $300bn more in cash on their balance sheets than they did in 2007. As we look forward, strong organic cash generation and liquidity positions will separate the losers from the winners, setting apart firms that are fuelled for growth driven by capital investments and acquisitions.

For treasurers, 2010 is a critical time to get their shops in order. Towards this end, they must:

  • Understand how and where their companies plan to restart their growth engines, so they can plan liquidity levels accordingly.
  • Examine the global dispersion of cash across countries and currencies, and the degree to which associated inflows and outflows are well matched.
  • Optimise internal use of liquidity to fund activities and reduce reliance on external funding.
  • Manage capital planning aggressively, given interest-rate volatility and expected rate increases over the next 12 to 18 months.

#2 Releasing cash trapped in emerging markets

Companies with extensive operations in emerging markets with capital-controls, such as China or Brazil, face continued pressure to get greater value from cash trapped in these markets. While they are more actively managing the repatriation of profits, the best defence is a good offence. Putting in place accurate and efficient forecasting systems helps avert costly missteps such as pumping liquidity into a country where it will get trapped. Active inter-company netting programmes and advanced treasury structures such as re-invoicing centres help restrain the build-up of cash where repatriating funds is a challenge.

It also pays to work with relationship banks to get conversant with local regulations and liquidity management structures that can provide opportunities to release cash. Strong controls and well- defined investment policies help ensure that trapped cash is productive while onshore.

#3 Diversifying sources of funding

Having faced issues with raising funds through the capital markets, companies continue to diversify sources of funding. They are looking externally to tap a broader range of sources that include, for example, trade supply chain financing, asset securitisations and local bank borrowing in certain markets.

But there are internal sources to be tapped, too. Here, knowledge is power. Global visibility of cash positions is critical to maximise the value of internal cash. Treasurers can reduce operating cash required to run their businesses by setting up global liquidity structures to offset cash surpluses and shortages across subsidiaries. Prior to the credit crisis, the perceived cost of working capital was low due to abundant and cheap credit. Now, improved working capital management is a top priority. Firms should dissect processes and policies across their entire order-to-cash and procure-to-pay cycles to extract funds trapped in working capital.[[[PAGE]]]

#4 Improving risk management practices

Risk management continues to be a top priority as companies deal with volatile FX and interest rates, in addition to challenges in managing counterparty risks. 

Global visibility of cash positions is critical to maximise the value of internal cash.

Capital preservation is the mandate for excess operating funds. During the credit crisis, firms focused on the safety of cash and strengthened investment policies to guide diversification and ensure scrutiny over bank counterparty exposures. In 2010, treasurers will need to focus on all counterparties to which their firms have significant exposures — including key buyers and suppliers, outsourced systems and service providers, and partnerships and joint ventures. 

In addition, owing to underlying business uncertainties, many buyers and suppliers have been forced to renegotiate contracts. In this environment, firmly committed FX exposures from contractual obligations in non-functional currency are no longer so firm. To tackle this, treasurers should consider reducing hedge ratios to counteract risks in underlying business transactions. Many companies may benefit by moving to layered hedging rather than a rolling 12-month hedging technique.

To deal with the myriad risk scenarios, many companies need to better integrate cash and risk management processes and structures for more holistic approaches to identifying risk levels and mitigating exposures.

#5 Proactively tackling changes in regulations and tax laws 

Globally many countries have stepped up legislative and regulatory activities that have an impact on cash management, weighing heavily on treasurers to assess pending changes and take action. Multinationals that operate in-house banks in tax havens or concentrate cash in tax-favourable markets, for example, face proposed tax reforms by the US and other OECD countries, in addition to increased scrutiny and changing incentives to relocate these activities. 

In Japan, for example, SOX-like legislation is forcing companies to meet new compliance requirements. But, even within Asia, other countries are dismantling capital and currency convertibility restrictions imposed after the 1997 economic meltdown to make it easier to do business and release trapped cash. 

Treasurers need to be aware of changing winds and work with relationship banks’ in-country experts to reassess current treasury structures and take proactive action to capture opportunities, minimise risks and manage funds efficiently.

#6 Integrating global treasury processes

A continuing focus in 2010 will be the further functional centralisation of treasury to gain a ‘single’ view of firm-wide liquidity and risk, which proved to be so essential in times of volatility. This requires establishing comprehensive policies, standardising global processes, setting common staff performance indicators, rationalising and centrally managing banking relationships, and a strong technological infrastructure.

By integrating global processes, a treasury also gains the scale and flexibility needed to be embedded in working capital and supply chain management activities. Citi research indicated that, in 2009, only around a fifth of treasury departments provided advice to businesses on working capital management on a systematic basis. However, a significant majority indicated initiatives for 2010 to achieve this integration.

The most common purpose was to equip treasury to provide state-of-the art support to businesses towards achieving the firms’ commercial objectives.[[[PAGE]]]

#7 Investing in technology

One of the most critical ingredients to improving processes and procedures is the technology that both drives efficiency and stitches together far-flung operating centres. 

Companies should stay current, investing in a well-designed and integrated technology topography to co-ordinate global treasury processes across the firm. By also aligning with banking partners who are employing the latest technology advances, companies can reap huge operational cost-savings and control benefits. Examples of developments that are reshaping the way companies manage treasury include: 

  • Deploying a single-instance treasury workstation or ERP treasury module across all treasury functions globally to gain a consolidated view of liquidity, trapped cash, FX risk and counterparty risk.
  • Adopting standard global payments mechanisms to increase straight-through processing. By using global industry standards and connectivity such as XML and SWIFTnet, companies can simplify information exchange and systems integration with their banks while retaining the ability to switch to alternate providers when necessary.
  • Implementing automated procure-to-pay solutions, with features such as integrated supplier databases and electronic invoicing, to eliminate paper processes and streamline receivables and payables cycles.   

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Article Last Updated: May 07, 2024

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