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Developments in Liquidity Management: Seeking New Working Capital Solutions

The pace of change in liquidity management is picking up, and corporations are clamoring for unified solutions. Corporate treasurers can expect further advances in integration of general ledger systems, ERP systems, specialty workstations, and solutions offered by specialty integration providers through 2010, according to a new report, Developments in Liquidity Management: Seeking New Working Capital Solutions from Celent, a Boston-based financial research and consulting firm.

Key findings of the report include:

• The Holy Grail of liquidity management is one consolidated view of all funds available and the ability to act on the data in a timely manner. Within the next five years, Celent predicts that the technology will be developed for that goal to be achieved. The goal will be achieved by different constituents in different ways and end up benefiting a wide array of corporate clients from those over $1 billion in revenue to those with as little as $10 or $20 million in revenues.

• The focus will be on improving processes and systems to achieve a truly global view. Relationships with banks will focus on two key areas: (i) data management issues, where corporations will look to work with banks to have faster access to standardized data; and (ii) liquidity management issues, where corporations will look to maximize pooling and best practices for cash balancing.

• Given the perceived challenges in today's market, treasurers of large global corporations are exploring three key areas as they seek to improve liquidity management: 1) Investigating the benefits of a direct feed from the Society for the Worldwide Interbank Financial Telecommunication (SWIFT) through their bank, as opposed to getting the data via a feed from their bank. 2) Reevaluating how best to accomplish balancing of global cash positions (Zero Balance Accounting and Pooling). 3) Exploring better connectivity of financial data with their back-end ERP systems, notably Oracle and SAP.

• Looking toward the remainder of 2008 and taking into account the trends over the past three years, it appears that more corporate treasurers are expecting investments in both US cash and non-US cash to be larger. This may be driven, in part, by the fact that treasurers have already reduced cash holdings to such a degree that an increase in cash is more likely going forward.

• Celent believes that pooling will remain in favor with many corporations. First, those corporations that do not require pooling arrangements, namely those that are generating steady positive cash flow every day and whose cost of goods or labor remain fairly predictable, are few in the current economic condition. Second, many corporations do not have a complete global picture of all of their funds so as to confidently turn their back on pooling. Additionally, cross-currency notional pooling is now coming more in demand as corporations find themselves with accounts in hundreds of countries and numerous currencies.

• Celent expects to see continued improvement in the tools available for cash forecasting and a reduction in the time required to generate accurate cash forecasts. Overall liquidity management is about gathering data, making it centrally available and spending less time collecting and normalizing data. The goal is that have more time analyzing data, while being able to arrive at executable investment decisions in a shorter period of time.

• For smaller and mid-size corporations, a treasury workstation (TWS) may not be a required solution to effectively manage liquidity. Larger corporations are more likely to have a workstation. Celent anticipates heightened competition among ERP providers and TWS providers, although it may well be that they can work harmoniously. Larger companies will continue to use specialized TWS, but more and more will be open to functionality offered by ERP providers, so competition will intensify among vendors.