Dynamic Treasury Practices for an Increasingly Agile World

As we move into the second half of 2021, the light at the end of the tunnel draws nearer. After the disruption of the past 18 months, signs of normalcy are returning to both our workplaces and the broader economy. Businesses are reopening, and global trade corridors are stirring back to life—WTO figures suggest merchandise trade volumes will grow 8 percent this year, compared with a 5.3 percent decline in 2020. Now businesses face important decisions about which of the practices and adaptations they embraced during the pandemic are here to stay, and which simply reflect transient, short-term changes.

Against this backdrop, companies need to remain agile, listen to the data and insights, and make informed decisions. Treasury and cash management teams’ key role in closely monitoring cash reserves and liquidity, adapting business operating models, and responding to international supply-chain challenges is vitally important as the recovery takes hold. It will remain so into the future. The remit of the corporate treasurer has become more strategic since early 2020: Treasury groups are expected to add value by driving business decisions that free up previously locked cash, identifying lower-cost sources of funding, and even engaging in new market operations such as sourcing and providing best-in-class local payment options for commercial benefit.

There are a variety of levers that treasury professionals can deploy to support their businesses and drive sustainable, long-term growth:

Count the Days

Let’s start with a quick win. While many changes to business practices are expensive to implement in the short term, tightening up management of days payables outstanding (DPO) and days sales outstanding (DSO) procedures is not one of them. Making improvements in this key area generates timely results, cheaply and efficiently.

Encouraging customers to transition to instant payment mechanisms is one way to seize this low-hanging fruit. For example, if a customer has been accustomed to using check, cash, or low-value payment clearing systems, transitioning to instant payments may speed up receivables by three or more days. Conversely, if a business previously paid vendors in three or four days in order to leave a “processing time” margin, switching to instant payments enables it to make better use of that float time (allocated to mitigate the risk of delay) and keep cash on hand for longer.

It is easy to underestimate the cost savings that result from gaining even a few days in the average working capital cycle. Consider, though, that a company with $20 billion of annual sales and a DSO of 50 can free up almost $55 million of free cash flow by improving DSO by just one day. Cash managers should continue to advocate for greater efficiencies in DPO and DSO processes.

Find New Ways to Unlock Idle Cash

It’s not news that the cheapest source of funding almost always comes from the business’s own balance sheet. As other sources of funding tightened last year, some companies had no choice but to find and better utilize idle cash. They began looking at ways to leverage the tools they had on hand, such as aggregating cash through bank overdraft lines and deploying complex liquidity structures.

These tools enabled many corporates to consolidate cash already on their balance sheet, in ways they hadn’t done before. Tax, regulatory, and legal complexities can make these processes difficult—or, indeed, prohibitive. However, as some treasurers discovered in the past year, parent and regional entities can sometimes provide guarantees for other entities, yielding additional cash at low cost.

We also saw developments in 2020 in automated sweeping structures that allow businesses to unlock additional cash out of traditionally restrictive markets. In China, for example, complex cross-border structures have been in place for some time for certain cities, such as Shanghai. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) recently launched a pilot of a new cash-pooling service for multinational companies. Announced in March 2021, the scheme aims to help corporates with cross-border fund transfers, as well as settlement and liquidity management services, by integrating yuan and foreign currency cash pooling.

Soon to be formally launched in Beijing and Shenzhen, the pilot will reduce manual processes and greatly improve the flow of cross-border funds by integrating renminbi (RMB) and foreign-currency cash pooling. It will also enable corporates to purchase foreign exchange (FX) in advance, within a certain quota, which will improve convenience for multinational groups in managing subsidiaries’ cash, as well as significantly reducing FX costs and helping businesses more effectively manage FX risks in China.

Treasury and cash management professionals should strive to stay ahead of emerging regulations and innovative developments in this space. By doing so, they can help their organization improve efficiency and reduce operating costs. In this way, strong partnerships with trusted advisers, including partner banks and financial institutions, are critical for treasurers looking for ways to unlock otherwise idle cash.

Release Working Capital Without Undermining Your Supply Chain

The expertise of banks is also relevant for treasurers who want to release working capital. The pandemic threw into sharp relief the unequal balance of power between buying and selling entities in a given transaction: For example, when a large U.S. multinational buys from a small seller in Asia, the larger, more powerful entity can dictate terms. From this advantageous position, the buyer might be able to move payments to suppliers out from 90 days to 120 or even 150 days. This approach brings obvious liquidity benefits for the buyer, but it places elevated pressure on the seller. Treasurers can lean on their partner banks for help improving working capital without driving their trading partners out of business.

During the past year, banks have increasingly begun participating within other banks’ facilities, working together to meet the soaring demand for supply-chain finance programs. In a typical structure, the bank prepays the supplier, then subsequently collects from the buyer on the invoice due date. Traditionally, a bank might have needed to onboard thousands of suppliers to make it worthwhile for a large corporate to join the program. However, when banks join other banks’ and platforms’ existing supply-chain finance programs, they jointly reach a far wider range of sellers. This higher level of participation is better for both buyers and sellers.

Beginning of the End for the Humble Check?

Much has been written about how the pandemic changed consumer behavior, as brick-and-mortar retail stores that previously relied on face-to-face payments found themselves catapulted into the world of e-commerce in order to survive. But while that shift in behavior was fairly well sign-posted for retailers, it was not so straightforward for others.

Cash transactions, where they were not actively discouraged by governments and health agencies, were avoided by many clients and customers wary of face-to-face interactions. Checks landed on the doorsteps and in the mailrooms of empty offices and, as a result, took a long time to clear. Although they continued in recent years to hold onto a surprisingly large chunk of the transactions market, the percentage of checks used in the United States fell by a substantial margin in 2020 as demand shifted toward digital payments. By the end of last year, average check volumes had plummeted to 14.2 million checks processed daily in Q4/2020—25 percent lower than in Q4/2018 and the most dramatic reduction of check usage recorded by the Federal Reserve.

This is obviously an area in which treasurers can add considerable strategic value, helping accelerate the transition to a digital-payments economy. But companies cannot achieve this transition in a vacuum. The payment experience has rapidly become a critical part of any product offering that touches consumers and small businesses. Adopting new creative payment journeys can, in fact, drive business growth, but any such move must be planned and managed very carefully.

This is an opportunity for corporate treasurers to shine by adopting a strong leadership position. The treasurer can guide close collaboration between cash managers and the organization’s product and business teams, to find solutions and improve processes that permeate all levels of the business.

Ultimately, treasurers can play a key role in facilitating behavior change for the company’s end customers. Any new payments system needs to be straightforward, but the business will likely also need to deploy programs that encourage customers to adopt the change. For example, the company might offer discounts to incentivize clients to move to a new payment method, then reward loyalty for continued use of the method through points, discounts, or bonuses. Treasurers can provide insights on ways to foster these desired behaviors. Then, thanks in part to improved reporting and data analysis, treasury professionals can continue to steer their partners in other areas of the business as the organization adopts a more digital business model.

In addition to liquidity benefits, the transition to new payment methods can help reduce the transaction fees a company pays. In emerging markets, replacing credit card transactions with instant payments saves, on average, 2.5 percent of acquiring fees. If a restaurant is running at a 10 percent margin and can save a further 2.5 to 3 percent by leveraging instant payments, that may equate to a 30 percent increase in profitability—a huge gain. Companies that have historically relied on card acquiring for client payments can save hundreds of millions of dollars in annual costs by shifting just a portion of their clients from cards to instant payments.

Furthermore, in some markets, such as many parts of Africa, a high proportion of the prospective customer base is unbanked. Enabling digital payment methods, such as mobile wallets, enables a business to reach new customers, lift their participation in the local and global economy, and ultimately accelerate growth.

Support Sustainability

Another trend that has emerged in recent years is the increasing desire for businesses to be more sustainable and mindful of their impact on surrounding communities and on the planet. More than ever before, companies are considering sustainability when they make banking and financing decisions.

In many cases, organizations are under pressure to adopt and adhere to stronger environmental, social, and corporate governance (ESG) principles in all areas of the organization. As they undertake greener business practices, they are also increasingly adopting financing solutions such as green bonds and green deposits, and demanding sustainable trade finance. We believe this trend will mature, with trade finance being used as a conduit for funds to flow from investors with ESG goals through to supply chains and onward. Some standby letters of credit and bank guarantees will target ESG-focused projects, and will be crucial to development of more sustainable business practices. Corporate treasurers will need to partner with their colleagues in the business to make sure the bottom line keeps pace with the company’s ambitions to help build a better world.

On the deposit front, we are beginning to see banks—Standard Chartered included—that offer sustainable investment products including term deposits linked to sustainability projects. For example, Standard Chartered is currently providing sustainable deposits to Southwire, one of the world’s leading wire and cable manufacturers. These products enable the company to align its treasury practices with both the tenets of environmentally conscious action that are central to its corporate ethos, and the necessary levels of liquidity, safety, and yield required to satisfy its conservative investment policy. We also expect to see the emergence of corporate bank accounts linked to sustainable investing goals, as well as deposit accounts designed to fund ESG-targeted lending to other businesses.

Here to Stay?

Corporate treasurers—and, indeed, businesses as a whole—have had to adapt to many new challenges that emerged over the past year. The pandemic accelerated already emerging trends, such as the shift toward e-commerce, and threw into sharper relief areas requiring more pressing attention, such as the need to unlock idle cash, flex receivables, and consider more complex cross-border transactions to optimize supply-chain efficiency.

Throughout this period of evolution in treasury strategy and methods, companies have remained committed to ESG improvements and have become increasingly curious about managing their treasury operations in more sustainable ways.

The need to remain agile and responsive is clear. Treasurers and cash managers have a wide variety of levers at their disposal; they should bring to bear their considerable experience with an appreciation of changing regulations, new and emerging products, and strategies to secure the liquidity necessary to power stability and growth.

Certainly, it is an exciting time for treasury professionals to drive strategy and shape the future of their business, as they reorient toward greater optimism and post-pandemic growth with a myriad of new techniques and possibilities at their fingertips.

Tarek El-Yafi is managing director with Standard Chartered Bank, where his team is responsible for helping clients across the Americas grow their businesses, and operate efficient and market-leading cash management processes in Asia, Africa, and the Middle East. El-Yafi joined Standard Chartered in 2009; before that, he spent 13 years with Citibank in New York and Texas in senior product management, sales, and relationship management roles.

Filipe Mossmann is managing director with Standard Chartered Bank, where he heads the trade finance sales team for the Americas, based in New York. He has international experience in trade/structured trade finance, corporate finance, and foreign exchange and has worked in Brazil, Spain, and the United States over the past 20-plus years. In 2020, Mossmann was appointed as a member to the U.S. Department of Commerce Trade Finance Advisory Council (TFAC), providing advice and counsel to the U.S. Secretary of Commerce on issues and concerns that affect trade finance.