Establishing Good Habits for a More Agile Treasury Function
After a chaotic 2020, corporate treasurers and cash managers should prioritize shoring up key processes that will promote greater agility and responsiveness.
Things are starting to look up. The fight against Covid-19 has made progress; rollout of vaccines has begun. But corporate leaders have learned lessons the hard way over the past 12 months—and some continue to face significant challenges.
The effects of the pandemic have been far-reaching, causing disruption to supply chains and a slowdown in consumer demand. For example, in the retail sector, 2020’s Black Friday weekend saw 4 million fewer Americans make a purchase, with average spending per shopper down 14 percent, according to the National Retail Federation. Although online giants like Amazon reported stellar performance over the 2020 holiday season, the picture was significantly less rosy for smaller retailers, independent shops, and those without the reserves to adapt quickly to a rapidly changing external environment.
Still, as vaccination brings Covid-19 under better control, the businesses that have survived will be looking to rebuild and strengthen their supply chains, liquidity reserves, and cash management processes so that they are better positioned to weather unexpected shocks in the future. With that in mind, now is the perfect time to refresh outdated legacy structures, explore new levers to balance liquidity requirements, and prioritize best-practice forecasting that will boost future resilience.
Giving Legacy Forecasting Processes a Spring Clean
When demand does restart, businesses will need access to working capital and the ability to unlock liquidity quickly. This means they will also need an increasingly short-term, agile approach to cash forecasting. A 60- or 90-day view will not be adequately responsive when the business environment is changing rapidly. Instead, many businesses are now shifting to 30-day, weekly, or even daily forecasting.
Detailed dashboards that show actual fluctuations in cash position, a visual view of sources and spending of cash, and real-time visibility are becoming increasingly essential for giving businesses the insights that they need. Such views into liquidity can ensure a company has just-in-time access to cash wherever it’s needed, while minimizing excess cash that is not earning investment income.
On top of acquiring and interpreting liquidity data, cash managers have a responsibility to be plugged into the rest of the business, so that they can help others within the company understand the implications of changing cash flows. Some multinational companies have adopted dashboards that enable them to analyze cash movement within their overseas businesses. These dashboards can help companies that do not have a globally robust forecasting capability or those that run a decentralized cash process to react quickly to any changes in the organization’s cash needs or liquidity position. Thus, the company can be more proactive when it comes to making time-sensitive decisions.
In addition to embracing more agile forecasting practices, cash managers may see the post-Covid economic recovery as an opportunity to challenge other legacy structures that are no longer sufficiently nimble. They should consider how the cash management function could align more closely with colleagues in other areas of treasury. For example, accounts receivable teams that have struggled with converting clients away from cash or checks may now find those clients are more receptive to the rollout of digital alternatives to collections; they may, therefore, offer instant collections from bank accounts or mobile wallets. Indeed, in the United States, 2020 saw record declines in commercial check usage, compared with 2019, according to the Federal Reserve, while payments via Venmo and PayPal saw record increases. These trends signify material improvements to balance sheets as well as client experience.
Groups both inside treasury and throughout the business might benefit if the cash management team can use this opportunity to establish best-practice reporting standards, commit to clearer and more timely communication, and prioritize better integration between potentially disparate software systems. Improving the organization’s treasury technology infrastructure is often a crucial first step to becoming a more agile treasury function.
Consolidating the data from payment and accounts receivable (A/R) systems, liquidity management tools, and risk analytics and risk management solutions into a centralized treasury system can support better visibility into cash flows. This visibility, in turn, facilitates more data-driven decision-making and positions the corporate treasurer to take on a more strategic role, whilst empowering the team to make faster decisions when the external environment changes. For example, the company can switch financial service providers or add technology tools more quickly, when needed.
At the same time, if centralizing treasury-related data also increases automation, it can facilitate more comprehensive risk management, such as counterparty risk exposures—an important area of focus, pandemic or not. Tightly integrating the key systems that support treasury and cash operations, then adding automation to reduce manual workflows, stacks the technology infrastructure in favor of cash managers who aspire to greater liquidity visibility and streamlined day-to-day activities.
However, increased automation does not remove the need for experienced finance professionals, who may have to make some tough calls in the coming months. One area companies may wish to consider as they emerge from the pandemic-driven crisis is the need to take a critical look at the volume of idle bank accounts.
Treasury teams may have been comfortable in the past with gaining proper visibility (including linking to global liquidity pools) and global reporting for 20 percent of global accounts that provide 80 percent of the accessible liquidity (a typical 80:20 rule). However, in the present climate, some cash managers may consider flexing the target ratio to 90:30, where 30 percent of accounts would provide access and visibility to 90 percent of the company’s inflows. Gaining that extra 10 percent might be a challenge, but for some companies, it could unlock hundreds of millions of dollars in internal capital.
An example of this could be finding creative solutions to tap into U.S. dollar-denominated funds sitting idle in an account in Africa. While accessing cross-border liquidity in most African countries is restricted, there are countries where repatriating dollars is somewhat easier, such as Kenya, Botswana, Mauritius, and Ghana. Some large U.S. companies have created regional liquidity structures to tap into previously unlinked dollars and move them upstream to cash pools in Dubai or London.
New Liquidity Strategies for Changing Times
Liquidity is the lifeblood of a business, and some may wish to rethink their approach to managing it whilst remaining mindful of the supply chain challenges that emerged as a result of the pandemic. Businesses that want to retain their existing payment terms while helping suppliers access liquidity are accelerating the implementation of vendor prepay programs, or supply chain finance. Suppliers that choose to participate in such a program can have their receivables discounted and be paid earlier, unlocking liquidity within the supply chain itself. Such measures are becoming increasingly popular.
Last year, demand for supply chain finance increased substantially from American businesses in Asia, both for new programs and existing ones. One example was PVH Corp.’s supply chain finance program. PVH has an extensive network of suppliers throughout Asia and a mature supply chain finance program integrated with a logistics and document-matching technology platform that has been successfully implemented and rolled out over several years. Through the program, PVH and its partner banks were able to provide critical aid to PVH’s suppliers, enabling them to weather the most challenging stages of the pandemic by providing them with early access to liquidity.
Turning to the future, corporate liquidity managers should consider that the potential risks in the upcoming year come from both directions: The economy may not recover as expected, or it may rebound too quickly. Either scenario could strain the liquidity management strategies a company currently has in place.
A faster-than-expected recovery would likely once again increase many companies’ liquidity needs. For businesses exposed to commodity risk in highly regulated markets in Asia, Africa, and South America, for example, an uptick in growth would likely signal increased demand and higher prices. If accompanied by rising inflation, the recovery would place already stressed supply chains under further pressure. Potential pain points that could emerge within the supply chain might include imbalances of supply and demand, coupled with a push from suppliers to be paid earlier or in advance, or a push from buyers to extend payment terms.
Whether prompted by paused infrastructure projects coming back online or manufacturing demand returning to pre-pandemic levels, businesses may consider unlocking liquidity through trade finance strategies to get access to cash whilst reducing the likelihood of disruption due to pain points elsewhere in the supply chain.
What seems clear is that for complex international businesses, regardless of sector, there is unlikely to be a one-size-fits-all approach to managing liquidity across a varied footprint in this rapidly evolving climate. A mixture of cash management solutions supported by trusted banking partners, alongside an agile deployment of trade finance and supply chain levers, may offer a possible balance.
Cautious Optimism for 2021
Although the pace and trajectory of recovery remains uncertain, corporate treasurers and cash managers have a variety of tools at their disposal to support their businesses as we move toward a post-pandemic world.
Now is the ideal time to embrace new technology and richer insights, reconsider supply chain finance tools for vendors and clients, de-clutter processes, and establish good habits that will underpin resilience and responsiveness moving forward. There will likely be tough calls to make in 2021, but with a flexible approach and a little creativity, there is cause for cautious optimism in the coming year.