2019 Cash Management Survey: How Corporate Treasuries Are Seizing the Moment

Schlecht holds up two of the sur­vey’s other findings as also notewor­thy: First, that nearly two-thirds of responding organizations (62 percent) are net investors as opposed to net borrowers (38 percent). And second, that 31 percent of global companies plan to reduce, during the next year, the portion of cash and short-term in­vestments that they hold abroad.

Overall, the survey found that companies continue to increase their cash reserves, which likely reflects a response to an increasingly uncertain global business environment, Nguyen notes. He also points out that some companies are tempering their pace of growth in response to the global slowdown. Some of these companies may have begun reducing capital ex­penditures more than a year ago, “and we’re now seeing the effect of growth slowdown,” Nguyen adds.

Michael Kolman, ION Treasury Chief Strategy Officer for ION Treasury, agrees. “Uncertainty related to geopo­litical risk is having a notable impact on cash management practices across industries this year, and we expect that to continue,” she says. “Another relat­ed external factor that is affecting cash management—and particularly cash pooling around the world—is the shift­ing tax and regulatory landscape.”

When treasury professionals proj­ect how they expect their organiza­tion’s cash reserves to change in size during the next year, 41 percent expect reserves to increase, 43 percent proj­ect no significant change, and 17 per­cent expect a decrease (with roughly three-quarters of that final group expecting a decrease of less than 10 percent). However, compared with the 2018 survey, significantly fewer respondents said they expect cash reserves to increase by more than 10 percent over the next year—13 percent in 2019, vs. 29 percent in 2018.

The factors that respondents ex­pect to influence their cash reserves in the future also changed significantly. In last year’s survey, 41 percent of re­spondents indicated that increases in operating cash flows would have the largest influence on corporate cash in the coming year. This year, however, only 24 percent of respondents expect increases in operating cash to have the most significant impact on cash reserves. Additionally, nearly twice as many respondents this year (15 percent in 2019, vs. 8 percent in 2018) expect a reduction in operating cash flows to have the largest impact on their cash reserves over the next year.

“It suggests that companies are slowing down their pace,” Nguyen re­ports, “and some effect of the global business slowdown may already be taking hold.” This year’s survey respon­dents also think that uncertainty in the global business climate (due to events such as Brexit), as well as trade policy and tariffs, will have a much greater im­pact on cash reserves during the com­ing year than last year’s respondents predicted. See Figure 3.

Other external factors also appear likely to exert significant impact on any internal decision-making con­cerning cash reserves in 2020, notes Jeffery, who points to the growing negative interest rates earned after in­flation and an “economic deceleration in Europe spreading to other markets and creating a feedback loop.”

More Cash Management Challenges

Allison Flexer Hughes, financial management senior manager with­in Grant Thornton LLP’s business consulting practice, sees companies’ ability to react effectively to tariffs, political volatility, and/or a downturn as hinging on the quality of forecast­ing processes. If there is a prolonged downturn, “treasury leaders should be ready to participate in, and pro­vide supporting data for, reviews of internal functions and business units to identify which are critical to core operations,” she says. “Organizations may consider the sale of underper­forming assets and business units, which would require treasury’s input on which businesses are the most ef­ficient users of capital and generators of profit.”

Delivering that data requires the right technology, which figures prom­inently among the secondary issues and challenges affecting cash man­agement capabilities:

• Regulatory requirements. A source of pain for years, regula­tory compliance requirements continue to increase and inten­sify. Corporate treasury groups and bankers are especially burdened by activities related to KYC (Know Your Customer), reports Jeffery. In most cases, companies are solving these challenges within their organi­zation, he reports, adding that “the pain is increasing at esca­lating rates.” Protiviti’s Thomas adds that the highly regulated nature of cross-border cash management activities also marks an ongoing challenge.
• Fraud. “Payment fraud contin­ues to grow increasingly auto­mated, sophisticated, and adap­tive,” Jeffery reports. “This has led to more attacks and a greater level of financial success” for the attackers. In response, Jeffery and his team expect more orga­nizations to invest in anomaly-detection tools, conduct more training and testing around pay­ment security, and assess and strengthen end-to-end payment processes.
• Cybersecurity. Payment fraud is often perpetrated via cybersecu­rity breaches, another challenge for increasingly digital treasury functions—and one which ION’s Sreepada says treasurers are fo­cusing on as a critical issue this year. Grant Thornton’s Hughes agrees. “As businesses engage in digital transformation and make use of open networks and other future-ready services from banking partners, they will be exposed to new and diverse risks and cybercrime,” Hughes notes. “Leaders must balance decisions about adopting advancing digi­tal technology and banking solu­tions with the risks inherent in these opportunities.”
• Treasury technology. Exter­nal volatility and uncertainty make it even more important for treasury functions to gain better visibility into their cash positions. This need, BELLIN’s Schlecht emphasizes, is driving treasury functions to evaluate new or upgraded treasury man­agement systems. Payment complexity—driven by global growth, foreign exchange vol­atility, payment advances, and the growing threat of fraud—is challenging existing treasury technologies. “Treasury, A/P, and IT groups now have to sup­port an escalating level of com­plexity with limited resources,” Jeffery says. “They know they shouldn’t have to solve the same problem in four or five dif­ferent underlying systems.”
• Talent. New cloud-based solu­tions, application program­ming interfaces (APIs), open banking, and robotic process automation (RPA) all require new skills. “Bank APIs, en­abling real-time updates of bank balances and transaction data, and machine learning applications for better forecast­ing and fraud detection are re­shaping the treasury function,” Sreepada says. According to Hughes, the implementation of some of these advanced technologies creates a talent challenge for many traditional treasury functions. “New re­quired skill sets have emerged,” she says, noting that treasury functions “will need to respond by changing role definitions, performance expectations, and hiring plans.”

Banking relationships. Some treasury consultants point to declining levels of satisfaction with banking partners’ pay­ments-related services. Given the need for increased speed and treasury functions’ drive to improve end-to-end payment processes, some banking rela­tionships are “creating levels of friction not seen in recent times,” Jeffery observes.

Adjusting Investment Priorities and Policies

Given the variety of internal and external issues currently challenging cash management activities, it is not surprising that corporate treasurers continue to favor approaches and in­vestment allocations that safeguard principal and increase immediately available liquidity.

The investment priorities that this year’s survey respondents identified are notable in that they illustrate an even stronger desire to protect prin­cipal—that is the top short-term in­vestment goal in this year’s results (and the third-highest priority in the 2018 results). The proportion of respondents who selected “eliminat­ing any chance of lost value in prin­cipal” as their top priority doubled in 2019. “Understanding and mitigating the impact of geopolitical uncertain­ty” is also the top priority for a far larger proportion of 2019 respondents (16 percent) than 2018 respondents (6 percent). “I think the priority of ‘eliminating any chance of lost value in principal’ may move even higher if uncertainty in the business climate increases over the coming months,” Nguyen says. See Figure 4.

As treasury groups in global com­panies work through these priorities, they are not planning to repatriate a lot of funds. Among the respon­dents whose companies have cash or short-term investments overseas, 64 percent indicated that the proportion they hold abroad will not change sig­nificantly over the next year. Sixteen percent of respondents expect to make a small reduction in cash held abroad, 15 percent a significant reduction, and 5 percent plan a small increase.

Not surprisingly, most companies (66 percent) are storing most of their cash in bank deposits, including CDs and time deposits. When it comes to oth­er investment vehicles, the most popular options are prime money market funds (MMFs), government/Treasury money funds, and Treasury bills; they hold at least 10 percent of cash and short-term investments for 32 percent, 21 percent, and 23 percent of respondents, respec­tively. “Risk aversion features promi­nently in terms of where the companies choose to hold their deposits and invest­ments,” Nguyen notes. “Despite the low yield, companies are not deviating far from their traditional bank deposits and money market investments.”

ION’s Sreepada finds it interesting that about a third of companies are holding at least 10 percent of their short-term investments in prime MMFs. “Mon­ey flowed out of prime funds in 2016, when the floating NAV [net asset value] was introduced,” she points out. “Now it appears that companies are more open to these investments. As more and more companies explore MMFs as investment options, they should look to invest in these securities electronically. Doing so can save time, improve accura­cy, and automate maintenance of these investments, which eases complexity of managing floating-NAV funds.”

Most treasury functions are stand­ing pat when it comes to making chang­es to investment policies for cash and short-term investments. The policy ad­justments (conducted in the past three years) that 2019 survey respondents cited most frequently track closely to the policy adjustments that 2018 re­spondents identified. In fact, the most common response (cited by 41 percent of 2019 respondents) is that their com­pany has not changed its investment policy at all. The other frequent policy changes in the 2019 survey include:

• Eliminated prime money funds as cash investment option (20 percent);
• Added new asset classes (14 percent);
• Increased enforcement of investment policy (13 percent);
• Shortened allowable maximum maturities (11 percent); and
• Raised minimum credit rating for counterparties (9 percent).

Treasury teams should not lose sight of the fact that even bank deposits car­ry some risk, Sreepada emphasizes. “Corporate investment policies haven’t changed significantly, and companies appear to be keeping investment tenors short,” she notes. “They are investing primarily in short-term instruments or keeping cash in banks. But keeping cash in banks introduces the critical need to understand counterparty exposures.”

Despite the growing uncertainty complicating cash management deci­sions, corporate treasurers can count on a couple of sure things. First, signals concerning the global business environ­ment’s future trajectory will sharpen in the coming months. The International Monetary Fund recently reduced its pro­jection of world economic growth in 2019 from 3.6 percent to 3 percent, the lowest growth rate since the financial crisis. And second, the noise will get louder.

As such, Nguyen suggests that treasury functions “seize the mo­ment” by making the process im­provements and technology invest­ments they need to help “achieve greater efficiency, visibility, connec­tivity, and security”—all of which will be extremely practical when the downturn arrives.

Also from the November 2019 Special Report:

Sponsored Statement—BELLIN:  The Future of Cash Management

Sponsored Statement—ION:  The artificial intelligence and machine learning revolution

View the November 2019 Digital Edition here

Eric Krell’s work has appeared previously in Treasury & Risk, as well as Consulting Magazine. He is based in Austin, TX.