Published: November 18, 2024
The volatile economic climate of the past 24 months has driven liquidity management to the top of the treasury agenda. An emphasis on centralisation of liquidity, achieving complete visibility over group cash and applying strong governance on the use and sources of cash can help treasurers drive strategic outcomes in this turbulent environment. TMI recently caught up with Shailesh Venkatesh, Group Head of Account Services, Liabilities & Liquidity Management, DBS, for a chat about the steps treasurers can take to achieve this.
The challenges faced by corporate treasurers today are well-known. Interest rates surged at an unprecedented rate during the upward cycle, and while a half-percentage point rate cut signals a shift, uncertainty still looms. Geopolitical tensions continue to fuel market volatility, intensifying the pressure on treasurers as they navigate critical decisions regarding liquidity management.
Shailesh Venkatesh, Group Head of Account Services, Liabilities & Liquidity Management, DBS, highlights: “Liquidity management is the last line of defence for a treasurer against operational disruptions caused by insufficient cash. Liquidity risk can’t be fully hedged, only managed – by design.”
Optimising cash has always been a challenge, compounded by today’s volatile economic environment. Treasurers now face heightened urgency in ensuring their companies can meet daily cash needs. With frequent rate actions on the horizon, treasurers are under pressure to maximise cash performance. However, many are now questioning whether their liquidity management, risk mitigation and governance strategies are truly effective. Corporate responses to higher rates have ranged from short-term yield hunting to more deliberate, strategic adjustments.
Centralising liquidity is essential for a more strategic approach to treasury management. Venkatesh notes: “We’re seeing growing interest in treasury centralisation as corporates look to optimise group liquidity, manage borrowings, and mitigate FX risk more effectively.” When combined with SSCs that standardise payables processing, receivables tracking and bank account management across the group, treasurers will be able to drive significant value to the company’s bottom line.
To maximise internal cash utilisation, treasurers must automate cash movements, shifting liquidity from areas of surplus to those in deficit while maintaining governance over the use of funds across the group. Centralising liquidity, combined with incentives and accountability measures, can significantly improve a subsidiary’s working capital cycle by driving more efficient management of payables and receivables, aligned with KPIs.
However, transitioning to centralisation requires careful alignment between top-down directives and bottom-up benefits. It involves overcoming concerns of reduced control among participating entities. Clear policies that communicate the mutual benefits to all stakeholders are vital. A piecemeal approach risks inefficiencies, so buy-in across the organisation is essential, especially in regions like Asia where capital controls often lead to fragmented liquidity management.
Despite the advancements of the digital era, many treasury teams continue to rely on outdated practices, such as logging into multiple banking portals and manually consolidating balances across banks.
Banks can offer significant value here, by providing real-time visibility and advanced analytics on cash positions through their platforms. This level of insight is crucial for managing currency exposure, mitigating risks, and ensuring liquidity is available when and where it’s needed. Automated solutions like just-in-time sweeps enable intra-day cash movements, reducing the need for cash buffers and lowering borrowing costs. Additionally, cross-currency sweeps automate the transfer of funds between currencies, effectively supporting the just-in-time liquidity demands of global businesses.
Enhanced visibility, automation, and digitalisation are crucial for minimising friction and achieving optimal liquidity levels. Advanced banking technologies enable the consolidation of bank accounts while maintaining clear segregation of information by entity and currency, ensuring efficiency without sacrificing control. APIs offer growing potential for corporate connectivity by integrating TMSs with banking platforms for tasks like balance reporting and payment confirmations. Even for corporates without the infrastructure to utilise APIs, traditional channels like host-to-host connections or Swift remain available.
Technology also supports stronger governance, which is critical to liquidity management. Transfer pricing at arm’s length is crucial, not only from a tax perspective but also for creating the right incentives and cost structures among business units. This ensures that well-performing units are rewarded while maintaining financial discipline across the organisation.
Venkatesh emphasises the importance of transparent and automated allocation of interest costs to borrowing units, reflecting the risks they take and fostering greater accountability. An efficient liquidity management structure allows treasurers to strategically determine the optimal level of group-wide cash reserves. As liquidity tightens, treasurers might maintain larger buffers, while in more favourable conditions, these buffers can be reduced.
Centralising liquidity with robust governance also enables treasurers to monitor how well individual units manage their cash conversion cycles. This, in turn, allows for improved governance around payables and receivables management, directly linking treasury processes to business outcomes. Advanced analytics on group cash levels can even serve as early warnings of financial distress, allowing for timely intervention.
For companies that have yet to embark on liquidity centralisation, the process can seem daunting. Concerns around technology or costs may make such projects less appealing. However, banking partners can provide valuable support in enhancing liquidity management. Banks can help businesses navigate common challenges, anticipate potential obstacles, and serve as valuable allies in implementing industry best practices.
Real-time visibility into cash and borrowing through banking platforms gives treasurers a timely, accurate view of their balance sheet, empowering them to strategically manage cash for future needs. When combined with governance tools to regulate cash usage, this ensures treasury teams can efficiently manage liquidity, even in the most demanding environments. As Venkatesh outlines: “An efficient liquidity management framework, supported by the useful insights provided through a bank’s electronic banking platform, can even be an alternative to a traditional TMS.”
By embracing centralisation, leveraging technology, and strengthening governance, treasurers can position their organisations to succeed in today’s volatile financial landscape.
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