Today’s cash management

Today’s cash management

Managing an organization’s cash flows and streamlining its financial logistics is of paramount importance to managing liquidity risk and optimizing interest charges. There are various ways to streamline daily cash management and Zanders has extensive experience in implementing the new structures in this area. Associate Director Hugh Davies explains.

Could you describe what is ‘trending’ in cash management today?

“It’s approaching six years since the financial crisis of 2008. Calamitous, in many respects, as that event was, it served as catalyst for some fundamental changes in corporate treasury and the role of the treasurer, inspiring a transformation in the approach to cash management that has resulted in much improved efficiency and control. Simplification, in terms of processes, systems and banking relationships, has been the over-arching mantra that has driven rationalization, centralization, standardization and automation around cash management.

The treasurer’s role today has significantly expanded as a strategic partner or consultant to the business. Consequently, enhanced visibility of data, that enables better informed decisions to be made faster, is paramount. Top management and the board remain focused on counterparty risk as well as liquidity, working capital needs and funding options for future expansion.

For many companies, the priority for the last few years has been ensuring compliance with the many regulatory impositions on treasury. Projects focused on delivering efficiency have been on the back burner. However, with this now mostly behind them, efficiency driven cash management projects are again underway, or planned, to address several components. One of these components is bank rationalization, focused on achieving a balanced banking wallet with core banks that can deliver required cash management capabilities.

Also, by achieving bank independent connectivity via SWIFT, the risk and costs associated with multiple, proprietary bank interfaces are reduced and visibility is improved. Another component is the establishment of an in-house bank (IHB) to streamline intercompany funding, payments and reconciliations, reduce FX costs and external transactions. Through a payment factory, payments can be centralized, which increases control, improves forecasting and reduces costs. Finally, implementing Payments or Collections ‘on behalf of’ models (PoBo/CoBo) can improve efficiency by reducing bank accounts, eliminating crossborder or bank converted payments, and optimizing payment routing.

Those companies that have already achieved these objectives, however, are able to look at further stages of centralization, that can include outsourcing of treasury processes and the establishment of a ‘Virtual Treasury’ with centralized, paperless operations and greater business integration. For these companies, if ‘simplification’ has been the mantra of the 2010 decade, ‘working smarter’ will be the mantra by 2020, in a world leveraging digitization that enables greater focus by the treasury team on value adding activities.”

What are the main challenges in achieving this state?

“Firstly, a transformational cash management project of this nature requires a thorough understanding of the regulatory environment in the markets where the company operates. Pooling structures, for example, which involve physical automated sweeping of funds to a treasury entity, have inter-company lending and withholding tax implications or maybe not be permitted at all in certain jurisdictions. With the effects of globalization and expansion into emerging markets, companies may find they have issues with ‘trapped cash’ in markets that do not permit affiliates or currencies to be included in such structures at all.

Similarly, some PoBo payment models are not universally permitted. Secondly, in a perfect world, the treasurer and his team would create their vision and roadmap for achieving excellence in cash management and embark on the execution phase. But in reality there are many other stakeholders whose views and requirements need to be considered, not to mention compliance with internal policies.

For example, concerning technology and IT, how will the ‘future state’ cash management blueprint align with the companies technology strategy and what enhancements and investments will be needed? What are the tax implications of the trading models, IHB or the liquidity management and payment structures anticipated? Are there reciprocity and commercial implications associated with rationalizing cash management activity to a handful of core banks? Regarding HR, centralization initiatives and efficiencies in operations often have significant implications for resources where those activities are currently performed.

Finally, the business and affiliates will want to understand how the new structure might affect the supply chain or customer relationships and need to be brought on board.”

How can Zanders help?

“Zanders has considerable experience and expertise in guiding companies through the process mentioned – from ‘ideas to implementation’ in other words, not just the concept stage but also making it a reality. A comprehensive review and assessment of the current situation, including gathering data from affiliates and interviews with stakeholders, will provide the basis for a cash management solution design or blueprint for the future. Then, a detailed roadmap will provide granularity of the various sub-projects involved and the timelines for achieving the objectives.

Before management or board sign-off for the project, Zanders can also provide support with a business case that will demonstrate the costs, resource requirements and P&L impact. In the execution phase, Zanders has great expertise in managing bank or system selection process (RfP’s), providing a clear, methodical, structured and objective approach to ensure impartiality in the process that will stand up to scrutiny when it comes to obtaining buy-in from stakeholders and getting the final approvals.

Beyond that, of course, choosing the right implementation partner, whether for a bank or system implementation, is key!”