Liquidity management is not just about gaining visibility over a company's cash positions. This article examines what lies beyond visibility and how to get there.
The challenging economic environment has driven businesses to enhance efficiency and control over their liquidity. While many corporates have rightly been focusing on gaining end-to-end visibility over the company's cash, this is just the first step. As new technologies emerge, regulations change and banks introduce new services, corporates are presented with greater opportunities to access quality information and leverage new techniques to manage global liquidity.
Achieving full visibility to a company's cash positions – across entities and geographies – is a fundamental challenge to address in optimising liquidity. Given the diverse local market infrastructure and regulatory limitations in Asia, it is not uncommon for companies to maintain banking relationships with multiple local and international banks. As a result of decentralised structures, many regional treasuries have to bear the daunting task of manually inquiring and monitoring the positions of their local offices or business units. This can be time consuming and prone to error.
A more practical solution to enhance visibility over local entities' positions is multi-bank reporting, a service especially useful in markets where it is necessary to retain local bank accounts. The regional treasury aggregates account information based on the SWIFT statements provided by various banks. Once the information has been gathered, corporates can 'slice and dice' the data to analyse exposures. While a corporate with good IT resources can run this analysis themselves, some banks do provide solutions that enable a treasurer to assemble all of its bank information in a way that relates to its own corporate structure.
Timely cash visibility cannot be easily achieved even with a multi-bank reporting solution in place. The key is the reporting performance of third-party banks, including the turnaround time of a request for statement. When bank statements are being pulled into a common multi-bank reporting platform, translation is often required as the SWIFT formats from different banks vary, particularly with the rarer message types. The lead bank should have the ability to generate a consolidated report that is meaningful and relevant to the business.
It is important to partner with a bank that has the experience working closely with third-party banks and the expertise to advise the corporate on any nuances and requirements to implement a robust multi-bank reporting process. In recent years, more large corporates have started using SWIFTNet to enhance multi-bank visibility.
To ensure that the company meets its future financial obligations, not only does the treasurer need the visibility over current cash positions, an accurate view of the future cash flow and funding requirements is also essential. While it is easy to keep track of its payables, the real challenge lies with how fast the company converts incoming receipts into cash in the bank, that is, the ability to apply receivables accurately and quickly to specific customer invoices.
Traditionally, large corporates have had staff in their receivables department sorting through batches of payment instructions and remittance advices and combing through bank statements to reconcile their inflows. Today, some banks and vendors offer systems that support automated reconciliation. They all work on the same basic principle of mapping the payment information the bank captures against expected receipts. Many factors, however, such as payor behaviour and market infrastructure can affect the quality of information and lead to a lower matching rate. Here are some of the key considerations:
Forecasting is all about building up a cash flow profile to support various business needs.
Corporates therefore should consider prioritising cash by liquidity needs. Typically, the tranches of cash include highly liquid operating cash and reserve cash (daily/monthly), as well as strategic cash and restricted cash that is held with a much longer horizon.
Improving cash forecasting – a case in point
A multinational corporation recently rationalised its banking relationships and simplified its account structure from over 500 banks to two banks across the entire organisation. With the rationalisation, however, each account had to handle a large volume of transactions for global subsidiaries and counterparties. The treasurer was faced with the challenge of reconciling incoming receipts to the accounts quickly for accurate cash flow forecasting.
To improve reconciliation, virtual reference numbers were assigned to individual counterparties, assigning each a unique reference. These virtual reference numbers are tied to a single set of physical bank accounts maintained by the company. Payments processed on behalf of a business unit pass through the physical bank accounts and can be quickly reconciled using these unique virtual reference numbers.
At the beginning of this project, the company could only see an accurate view of their 10-day cash flow forecast. Having a limited view of liquidity prevents a company from being able to invest further for the future. Today, the company has increased its forecasting horizon to 30 days. Having visibility over all payment and deposit flows enables the company to forecast its net funding or investment position more accurately, thereby improving funding and investment operations.
3. Accessing cash
Having end-to-end visibility over current and future cash positions is critical to liquidity management, but it is important not to lose sight of the ultimate goal: leveraging the information to effectively put the cash to use.
Trapped cash in regulated markets
Trapped cash can be particularly challenging, especially if a company operates in multiple regulated countries. The challenges can essentially be broken down into two components: the difficulties with managing liquidity onshore, and difficulties moving money across borders. In the first instance, treasurers should look at potential liquidity management options locally and minimise the need for external funding. One funding option for corporates with multiple entities in a country is intercompany lending through a cash concentration structure. In some countries, opportunities to do this will be limited by strict regulations, so it is important to understand what can be done where.
There are also ways to reap the benefit of trapped cash, taking into account the balances across multiple countries, including regulated markets. The total portfolio of balances is considered to achieve interest optimisation or fee discounts from the banks in return for these balances.
Repatriation of cash from restricted markets can be more challenging, due to the possible paperwork and fees. Corporates need to be aware of the regulations in both the country where the cash is currently held and also where it will be repatriated. For example, if the treasury is based in the US, the corporate can enjoy potential tax breaks under the Homeland Investment Act (HIA).
Unrestricted markets tend to be more straightforward. Many corporates set up local cash concentration structures where cash can be eventually pooled to a nominated regional or global pooling centre – for example, in Asia, this can be in Hong Kong or Singapore. Any surplus funds can be swept to overnight money market funds or other investment vehicles for enhanced yield. In addition to traditional single entity and currency pools, corporates are now leveraging multi-entity and multi-currency cash concentration to maximise use of liquidity.
The above techniques are common practice for treasuries in centralised companies, as the regional or global treasuries usually take on the responsibility of overall liquidity management for the organisation. More decentralised companies tend to keep cash in-country through notional pooling arrangements. The emergence of multi-currency notional pooling in recent years completes the treasurer's toolkit, offering greater flexibility to multinational corporations.
Investing time and effort in liquidity management can have a broad range of benefits: streamlining internal processes, minimising financial costs for external borrowing and overdrafts, not to mention optimising returns on surplus cash. Whether the goal is to gain visibility, improve forecasting or ensure immediate liquidity, understanding in-country requirements and implementing the right technology is key. Banks that have established local expertise and strong global infrastructure can help corporates tailor liquidity management programme that protect their organisation through turbulent times and position them for growth.