head of the Global Liquidity Platform,
Global Treasury Solutions,
Bank of America Merrill Lynch
For the corporate treasurer, the abundance of information thatâs available today to make cash management decisions can be a double edged sword. While accurate data is essential to implement effective cash management strategies, filtering that information - which may arrive at different times and in different formats - can be challenging and time consuming. Fortunately, innovative liquidity cash concentration solutions can now automate day-to-day cash management operations and consolidate information reporting. This allows inter-company funding to take place on a just-in-time basis - and ultimately freeing up corporate treasurers to focus on strategic tasks.
Information: The quest for quality over quantity
In the age of information, treasurers can easily find themselves bombarded with data relating to all aspects of the job, and cash management is no exception. Before they can make decisions on how to invest their surplus cash, time-strapped treasurers often face the task of having to analyse numerous bank accounts held in a variety of currencies.
At the same time, treasuries are commonly confronted by scaled back resources as a result of the tightening following the financial crisis. However, the crisis also put a spotlight on the importance of efficient cash management and in many cases has resulted in treasurers taking a more active role in determining corporate strategy. While this has many benefits in terms of championing a treasuryâs objectives within the organisation, any additional work is a further strain on already depleted treasury teams. The net result: treasurers are facing the challenge of doing more work with fewer resources.
In this pared down climate, it is more crucial than ever that the information treasurers receive is the type of information that will make their jobs easier, not more difficult. Information has the greatest value when it comes pre-sifted, consolidated and clearly packaged. If treasurers can be freed from doing the sifting themselves, that information ceases to be a headache and becomes a strategic tool which can enhance cash management and enable more effective decision making.
Where cash management is concerned, automated, consolidated information can be particularly useful. The benefits of an end-to-end view of the companyâs working capital are clear: corporations can gain visibility over cash flows and balances, concentrate cash, and ultimately reduce their borrowing needs. While this all sounds positive, significant time and effort is needed to consolidate the available information to the point where it becomes useful. In response to this issue, banks have focused on developing solutions that automate a corporate treasuryâs day-to-day decision making - freeing the treasurer up to focus on the big picture.
The power of cash concentration
Cash concentration - the pooling and optimisation of cash across subsidiaries or regions - is an area which can be greatly improved by getting the balance of information right.
Treasurers can benefit from cash concentration in a number of ways. Funds can be transferred from cash rich accounts to cover anticipated negative balances in other accounts, thereby avoiding or reducing the need for external financing. Surplus funds can be consolidated in order to make more effective investment decisions. Companies can also use cash concentration as a risk management tool by concentrating funds away from specific institutions or countries in light of counterparty or sovereign risk concerns.
However, in order to execute cash concentration decisions effectively, treasurers have historically needed to obtain and analyse a plethora of data from various banks before they can begin to forecast their cash needs. That data might involve different currencies and time zones - and it might arrive at different times and in different formats, particularly where small local banks are involved. All of these factors can complicate the processes involved in reaching effective cash management decisions.
Automating cash concentration
In response to these hurdles, banks have now developed cash concentration solutions which can automate some of the treasurerâs day-to-day cash management decisions. Treasurers can stipulate up-front their ârulesâ for inter-company cash management. The system then takes over and cash is moved when required, based on those rules. The information the treasurer receives reflects these automatic cash movements, hence presenting a consolidated view of the companyâs cash position. From that consolidated view, the treasurer can focus on making strategic decisions relating to the investment of surplus cash or the consolidation of debt positions. These positions might be affected by factors such as market movements or the companyâs business cycle.
This type of consolidation can also lead to benefits where reporting is concerned. Transaction references on the concentration account statements mean that treasurers can clearly distinguish between sender and recipient, which facilitates inter-company lending and interest reallocation as well as aiding financial reporting. By automating the process the client can fund its entity in the most efficient and optimised way, with the minimum of management oversight.
Maximising cash flow with just-in-time funding
If automatic, rules-based cash concentration can be combined with intra-day balance information, the possibilities become even greater.
In many companies, cash poor subsidiaries may be funded directly each day â or may receive a monthly cash lump sum from head office to support their payments flows throughout the month. Neither of these scenarios is ideal: the first is costly in terms of time and effort; the second is inefficient, as a cash buffer must be included as part of the lump sum to compensate for variations in forecasting.
An alternative solution is to implement a âjust-in-timeâ funding model. Instead of the monthly lump sum or daily payments, the company sends timely and accurate injections of cash on an as-needed basis - giving subsidiaries the funds they need, when they need them. This approach has been made possible in the last year by the arrival of cutting edge solutions which can provide information on the corporationâs account balances intra-day.
From that intra-day information, multi-bank cash concentration solutions can allow just-in-time funding to happen on an automated basis, in accordance with the rules stipulated by the treasurer at the outset. For example, a funds transfer can be triggered by real-time information showing that a local entityâs balance has dipped below a set value. Or rules could be built around the concept of the net cash position, perhaps stipulating that the amount of cash sent to a subsidiary should never exceed the amount that the subsidiary has sent to the treasury centre.
Consolidating cash in real-time
Aside from funding subsidiaries, another key benefit of cash concentration is the ability to make more effective investment decisions with surplus cash within the structure. The combination of real-time balance information and automatic cash sweeps can increase efficiency here too: as they become available, funds can be concentrated from different banks to the global liquidity provider, leading to a consolidated balance that can then be invested. This can also be an effective means of managing counterparty risk if the corporation wants to minimise the cash held by particular banks.
Multi-bank solutions: Balancing diversification with consolidation
Since the financial crisis, corporates are increasingly focusing on working with multiple banks - putting all your eggs in one basket is no longer seen as best practice. On the other hand, companies are also looking to consolidate cash as effectively as possible in order to avoid the need for external funding as far as possible. In this climate, a multi-bank cash management solution can enable companies to work with a number of different banks, both local and global, and still incorporate balances held by all of those banks into a single cash concentration structure. The global liquidity bank can offer this solution without needing to be present in all of the countries in which the corporation operates.
Multi-bank cash concentration solutions have been facilitated by the standard messages provided by SWIFT. Where a multi-bank cash concentration solution is used, funds transfers between local banks and the global liquidity bank are carried out via MT101 messages, which are commonly used in Europe but are less widespread in Asia. In other cases it may be possible to leverage local clearing systems in order to design a process that works for any bank.
The role of SWIFT messages in multi-bank cash concentration extends beyond the movements of funds. In addition, MT940 and MT942 messages are the nuts and bolts which allow reporting to take place on a consolidated basis. By receiving standard messages from the corporateâs other banks, the global liquidity bank can combine that information and provide the corporate client with a consolidated view.
Automated advantage: not just multi-bank
The benefits of automated information are not restricted to multi-bank solutions. Similar benefits can be experienced within a single banking provider. For example, a multinational will likely have accounts in multiple countries and currencies. Receiving, analysing and acting on balances held across the world in different time zones can be complex - but automated cash concentration can connect accounts around the globe, increasing the speed and reducing the effort of concentrating cash.
As an example, a global company has a multi-currency notional pool and cash concentration hub in London. The companyâs activities require local collection accounts to be held throughout the Americas, but the difference in time zones makes it difficult to concentrate cash manually between the two locations. An automated cash concentration solution can allow excess cash to be concentrated automatically to the liquidity structure in London.
The example shows how the mobility of cash can be transformed by the proactive use of information. Consequently, even companies with a centralised and automated treasury structure can benefit, deploying cash where it is needed quickly and efficiently and avoiding the issue of excess cash languishing in operating accounts. Automatically consolidated information - in other words, one automatically generated statement showing net positions - can also improve the accuracy of liquidity forecasts and in turn increase the efficiency of treasury in the medium to long term.
Taking pressure off the treasurer
For the typical overloaded treasurer, receiving relevant, consolidated and automated information is extremely powerful. A surplus of unanalysed information will only complicate treasurersâ lives and potentially compromise operational decision making. True to the clichÃ©, it is quality, rather than quantity, that matters when it comes to information. The new breed of liquidity cash concentration solutions relieve treasurers of the burdens associated with manual data collection and day-to-day cash management. This allows treasurers to focus on making better decisions based on the quality data delivered to them, ultimately enabling them a more strategic role in their organisations.