Trading data for cash

20 December 2011

By Richard Helliar,
UK managing director for Global Business Operations,

The global credit crisis has forced change in the dynamic between credit and cash management and as a result the market now rewards companies that are liquid and less reliant on external funding. Recently Citigroup stated that companies with higher liquidity are generating 15 per cent incremental returns over and above risk adjusted market performance while those with higher organic funding generate more than 18 per cent incremental returns over their competitors (1).

Against this backdrop enterprise liquidity is becoming a growing concern for many businesses, especially those with complex customer and supplier relationships and billing processes. This is particularly acute in financial services where organisations are more focused on cash management efficiencies to drive revenue rather than the liquidity-based revenue favoured in the past.

Regulations like Solvency II have also come into play as governments around the world look to protect financial institutions and their customers from another financial crisis. This has meant that more financial services organisations are restructuring to reallocate resources towards improving risk management.

The liquidity challenge

Without an effective enterprise-wide strategy for liquidity risk management, financial services organisations may be left with pools of trapped liquidity across the enterprise and an impaired ability to move those funds to where they are needed. Putting the right practices in place is crucial to enhance an organisation’s ability to support daily liquidity needs and maintain operations during periods of heightened stress.

There are many strategies for tackling trapped liquidity. The key requirement is being able to spot trends, patterns and variance in large amounts of information from different sources in a way that is easy to consume and analyse. Having a single view of trapped cash in one business dashboard can help organisations to make better, more informed business decisions about how and when to release liquidity.

Organisations can transform dormant disparate data into useful information by adding the right processes and actions to unlock trapped liquidity. These actions can be automatic, manual or a combination of both. Automated processes can be initiated to effect payments, stop transactions, and highlight areas of concern or alert stakeholders of potential risk.

Different approaches

On the qualitative side of the equation, processes should be embedded into the corporate culture of an institution and aligned with the firm’s overall appetite for risk. Employees can resist change due to a fear that new ways of working are too complicated. So, it is crucial to help them to embrace processes through clearly communicating an end goal and charting the progress towards this on a regular basis. Introducing these processes in an incremental manner can ensure employee trust and buy-in. This ensures that these become ingrained in employee behaviours and regulations are met.

Quantitative elements should be based on specific measures, thresholds and limits according to risk factors and coordinated with other activities. But many firms lack the infrastructure required to manage liquidity at the level of sophistication and granularity required. A holistic approach is needed to understand the full interaction and correlation of activities within and between business lines. This provides an overview of all the options available to mitigate risk so firms select the optimal approach to avoid sticky situations.

Data quality and granularity are critical considerations for this as they allow all of the necessary data aggregations and provide accurate liquidity assessment. Not only does this improve the financial position of the organisation, but a better view of liquidity risk across the entire organisation also helps to meet increasing regulatory pressures.

One of the most effective ways to unlock liquidity is by assigning work and tasks according to key performance indicators (KPIs) and service level agreements (SLAs). This ensures timely action is taken to release some liquidity - an important first step towards tackling a complex area. As a result, organisations can start to see real liquidity released before rolling out a similar approach to more areas of trapped liquidity.

Digging for data

In the coming years, risk and liquidity are going to be tackled on an organisation by organisation basis. Financial services organisations will subsequently need to build a set of liquidity and stress testing capabilities which exceed those required by regulators and are appropriate to their specific business model. Each firm will need to be able to calculate the real-time impact of any number of potential events and understand how this will impact their liquidity.

The availability of good quality data will play a significant role here as this will hold the key to understanding events. But the challenge lies in how liquidity risk systems are structured. Many of these are built to take a top down approach but, in reality, this structure does not provide enough detail for a true overview of all possible risk scenarios. In fact, a bottom-up, data-centric approach is essential as it allows organisations to produce thousands of versions of future cash flow scenarios.

Hitting gold

Ensuring that data is visible in real-time and integrated both across an organisation and with other relevant data sources through processes like analytics allows business users to take valid actions based on it. But, the struggle to conduct analysis quickly enough often means that they run into overnight batch jobs. By the time reports are completed, approved and circulated, the information on liquidity is already out of date.

Integrating assets using a combination of change management and supporting business process management software can enable financial organisations to gain a single accurate view of liquidity. A real time view gives organisations the ability to make the right decisions through an automated process, which improves an organisation’s enterprise liquidity by mitigating risk.

With the current volatility of the global economy, the financial services industry is under constant scrutiny. As a result, it is more important than ever for organisations to minimise risk and reclaim trapped cash for use where it is needed. The ability to access data and process it in real-time is key to making these decisions. Only with a complete picture of an organisation’s liquidity can it adequately manage its risk exposure and ensure it remains as efficient and profitable as possible in what is set to be a turbulent 2012.

1. Transaction reporting document from Citigroup

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