4 tips to achieve optimal liquidity position in AsiaBY RAJINI BALA
With an increasing degree of uncertainty prevailing in the global economy, it becomes imperative that corporates make efficient use of their available cash positions. While the need to be cash rich cannot be under stated, the need to be liquid is the need of the hour. A well-structured Liquidity Management policy can help treasurers achieve the best possible outcome with the available cash resources.
This brief article explains the various options that are available to treasurers to make their surplus cash work more effectively in times of volatile market conditions and economic uncertainty. An effective Liquidity Management policy can increase the efficiency of surplus and idle cash in the shortest time possible.
The Liquidity Management process starts by assessing the company's ability to know the cash position at any given point of time or its availability and its need in the near future. While it would be simpler to determine the cash position available locally, with the increasing globalization of businesses managing cash that is spread across various regions is a challenging task.
With globalization, corporate treasurers are faced with challenges of multiple currencies, regulations, geographies to name a few.
To overcome these challenges, corporate treasurers would largely have to depend on robust technological solutions to present them with an up to date information of available cash and their liquidity position at any given point of time.
Treasurers need powerful analytical tools that provide visibility into the available cash at various levels, viz., Geographies, Legal Entities, Currencies, Time Periods, etc. These analytical tools should help the treasurers in maintaining a centralized control over the available cash and to determine the cash flow projections in short-term and long-term periods.
The analytical tools should help the corporate treasurers to optimize the operational efficiency by balancing the surplus and the deficit cash across the organization and to make effective investment decisions on the surplus cash available.
Some of the steps that a Treasury Manager should consider to achieve an optimal liquidity position in the organization are stated below:
Cash Forecasting Techniques
Corporate treasury departments are faced with enormous volumes of diversified data, gathered from many systems and sources. To tackle this huge set of data, a powerful reporting system becomes inevitable which can give a detailed assessment of future contractual obligations or cash flow in the future.
Accurate cash forecasts are critical to determine how much cash the company has to keep as buffer and to avoid a situation in which the liquidity can get trapped in certain sections of the enterprise.
A good cash forecasting technique involves assessing the various sources and application of cash across countries, legal entities and currencies. A reporting system that provides data in various forms like a diagrammatic representation, availability of funds in varying time periods, a comprehensive list of all financial obligations enables the treasury managers to focus on analysis.
Companies are increasingly depending on simulation techniques to do a 'what-if' analysis to find out the impact on the company's cash position in the best and worst of times. A technological solution that provides the customers to be able to perform multiple mock movements of cash to determine the possible outcomes of the cash at hand would be a very useful resource available to any treasury manager.
This not only helps the treasury managers to determine the possible outcomes of various permutations and combinations, it also helps them in comparing the estimated outcomes with the actual outcomes of the company's Liquidity Management policies and can be used to revisit and revise the Liquidity Management policies of the organization.
Treasurers need to have visibility of information and should be able to control liquidity across various geographies and multiple banks. This is needed for treasurers to be able to take informed decisions at the right time.
It would be an overhead for the companies to continuously depend on the banks operations to provide them with the information required for assessing the cash position and to take actions on the available cash. An Internet portal from where the treasurers can have access to their cash information and their liquidity positions is of paramount importance in these days of technological advancements.
A mobile banking solution that can provide efficient dashboards can enable a treasury manager to operate from his tablet computers in times of rapidly changing economic situations.
Knowing where the cash is available or when it would be available is one aspect of Liquidity Management. The other aspect of it would be to decide how effectively the available cash can be managed. Two such techniques for Liquidity Management are Cash Concentration and Notional Pooling.
In Cash Concentration, funds in separate sub-accounts are automatically transferred to or from a header account based on pre-defined sweep instructions. Sweep instructions can be of various sweep types – Zero Balancing, Target Balancing, Range based Target Balancing, Debit Sweep Trigger, Credit Sweep Trigger, etc. This technique is useful to make effective use of idle cash and to avoid huge outflow of cash due to interest expense when funds are borrowed from external sources.
For example, in a Zero Balancing sweep type, the participating accounts may either be in surplus or deficit and sweep rules may be defined to be triggered at defined intervals of time. The sweep instructions would trigger debit or credit of funds from each of the participating accounts to make themselves zero balanced.
The accounts with surplus funds would be moved to a header account and the funds from the header account would be moved to the participating accounts that are in deficit. Cash Concentrations can be set across multiple geographies and legal entities. Some countries may require the fund movements to happen between participating accounts accounted for through inter company loans.
Notional Pooling achieves the same result of Cash Concentration, but it is done by virtual movement of funds rather than actual movement of funds between accounts. This technique results in no change in the account balances of the organization but the net balance of all the accounts in the pool would be determined to identify the surplus or shortage of funds with the company.
Banks providing Notional Pooling function to the companies would generate interest statements that would reflect the net offset of balances in the various accounts. As there is no movement of funds, the need to create inter company loans is removed.
Cash Concentration and Notional Pooling are well established methods of Liquidity Management and the decision to choose one over the other should be based on various considerations like regulatory requirements, transparency, tax considerations, etc.
Liquidity management is integral to the way in which a corporate manages its business. Many companies have their operations established globally. By working with a bank that can provide the companies with the needed innovative technological solutions to provide visibility to the cash positions and to manage their liquidity positions both in-country and across borders and in multiple currencies and time zones, treasurers can facilitate the company’s Liquidity Management policies and enhance its competitive advantage in the global landscape.