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Four ways to help treasurers concentrate cash on a global or regional basis

Corporate treasurers find themselves confronting formidable challenges on a regular basis – grappling with elevated inflation and high financing costs, persistent supply chain woes, rising geopolitical tensions, rapidly evolving regulatory compliance issues, and more.

During such challenging times, it’s crucial to reinforce the bedrock of corporate treasury: cash management.

The essence of cash management revolves around the collection, concentration, and disbursement of funds. Knowing exactly where your cash is at all times is paramount for prudent cash management.

Cash concentration involves the transfer of all funds or pooling of cash funds from different bank accounts across an organization into a single (master, concentration, or target) account, usually at the end of the day (and in some cases on an intra-day basis).

Concentrating cash held in bank accounts in diverse jurisdictions and regions can be daunting, especially when overseeing operations across multiple time zones during times of economic uncertainty.

Nevertheless, numerous companies are able to concentrate the major international currencies (i.e., the US dollar and Euro), both on a regional and global scale. For instance, “A large multinational with a presence in 100+ countries might have a series of cash pools: one in Singapore (for Asia-Pacific countries), another in Europe (for EMEA countries), and a third in the U.S. (for the Americas), with each one focused on pooling only U.S. dollar-denominated cash”, according to the Association for Financial Professionals® (AFP) 2024 Executive Guide “Concentrating Cash Across Borders”, sponsored by Standard Chartered.

“Yet, despite the availability of cash pooling solutions, it can be very difficult for companies to concentrate all their cash on a regional or a global basis, even if they choose a location for their header account that has few regulatory restrictions (such as the Netherlands or Singapore). There are multiple reasons for this — both regulatory and practical”, the guide adds.

So how can companies with multiple bank accounts, organizations with subsidiaries – particularly those with operations in several countries – and corporations with highly fragmented cash balances repurpose the funds to enhance visibility and availability, lower fees, and debt paydown?

Here are four ways to help corporate treasurers concentrate their cash on a global or regional basis:

Build a governance structure

Every organization faces distinct challenges when striving to implement a cross-border cash concentration structure. Designing an effective structure necessitates collaboration among internal stakeholders, such as tax, accounting, and business units, as well as external partners, including banks, auditors, and technology providers. Additionally, this entails corporations developing an increased focus on treasury centralisation, as outlined in the AFP 2024 Executive Guide.

Modern cash concentration structures support a high level of corporate treasury centralisation because they centralise cash from all their bank accounts, offering an efficient method of distributing cash or passing down funds to those parts of the organization that need them.

“The extent to which the treasury department is centralized (whether on a global or regional level) will influence the degree to which treasury can require group entities to participate in a cash concentration structure. Even where the treasurer has a mandate to insist group entities participate in a particular structure, managing internal relationships to maintain trust once cash is controlled at the center is vitally important for a successful project”, stated the AFP guide.

Furthermore, companies that have effectively shifted to a more centralised model will find themselves better positioned to extend cash concentration across borders. This will not only help mitigate risks but also aid in consolidating cash balances for deployment, loan repayment, or maximising investment potential for the organization.

Here it’s worth noting that corporations often initiate a phased-in implementation of cash concentration accounts, starting with development of local or regional hubs. Once these hubs are established, cash concentration forms a solid foundation for effective liquidity management. Subsequently, corporate treasurers can align concentration accounts with treasury organizational structures such as in-house banks and shared service centers. 

Choose the right banking partner(s)

Besides treasury centralisation, banking partners play a key role in the successful implementation of a cash concentration framework.

When choosing a bank to receive support for cash concentration, a treasurer will benefit from “First trying to understand how regulations affect the scope for cash concentration in each relevant market, and then working to find a provider that can offer the full range of permitted capabilities, with the ability to update its solution as regulations change”, as suggested by the AFP guide.

Secondly, treasurers must bear in mind that banking services frequently vary across countries due to differences in clientele needs. Just because a bank offers specific services in one country doesn’t imply it will offer the same service in other jurisdictions, even if the bank maintains a presence there, as highlighted in the guide.

Thirdly, the AFP guide recommends that treasurers scrutinize the liquidity management offerings of the potential banking partners in-depth. In this regard, the guide advises treasurers to seek answers to two questions - Can the bank adequately address your needs in every location? How does the bank plan to support you if the desired solution is unavailable?

Partnering with banks that provide liquidity positions in all the currencies the company operates in, and that effectively address varied sources of liquidity risk, is crucial. Moreover, the bank’s liquidity solutions should seamlessly integrate with the corporation's systems, such as accounts payable (AP) and accounts receivable (AR) solutions, to facilitate faster and more informed decision-making.

Next, the guide advises treasurers to consider how they will communicate with each prospective banking partner. A smooth integration between the company and the bank can bring substantial benefits, provided the bank can align with the treasury department’s overarching goals.

Lastly, as suggested in the guide, treasurers should note that banks strive to generate income by introducing new products. Bank innovation, spurred by regulatory changes and client demands, can present new opportunities for corporate treasury to enhance operational efficiency. Thus, it is recommended to take the time to meet with potential banking partners to understand their approach to client relationships and assess whether it aligns with your interests.

Leverage technology to enable real-time reporting and record-keeping

Technology is a vital component in adeptly managing a cash concentration structure, enabling efficient access to accurate information, and ensuring real-time reporting and consistent record-keeping of transactions for tax and regulatory compliance.

The evolution of technology has enabled corporate treasurers to gather real-time information on balances, transaction visibility, and payments.

“With real-time information and reporting, treasurers can have greater confidence that, when concentrating cash, the data they rely on is as accurate as possible. The result is that the balances that remain ‘idle’ are minimized, ensuring internal cash is utilized effectively”, the AFP guide mentioned.

To establish a real-time reporting environment, treasurers must prioritize three key aspects, as per the guide. Firstly, the choice of technology platform is pivotal, whether it's a treasury management system (TMS), an enterprise resource planning (ERP) system, or a standalone solution. The chosen platform must demonstrate robust capabilities in processing real-time data effectively.

Secondly, the quality of reporting hinges on the timeliness and reliability of the received data. Employing application programming interfaces (APIs) can simplify the process of aggregating transaction data from banks, particularly beneficial for organizations with multiple banking partners.

Moreover, in line with the guide’s advice, treasurers should be aware of how often their banking partners can provide transaction data. While an increasing number of banks offer real-time data, some may only provide specific data on an end-of-day basis.

Although selecting banking partners capable of providing real-time data is preferable, it may not always be feasible in some markets where other factors take precedence. Therefore, as outlined in the AFP guide, it's essential to identify which data isn't available in real-time and adapt the decision-making process accordingly, such as relying more on forecasts for cash concentration and maintaining higher precautionary balances to counteract the risk of inaccuracies.

In addition, the guide recommends that an efficient reconciliation process is essential for corporate treasury, particularly if it functions as an in-house bank. This ensures that any incoming payments are appropriately assigned to the relevant account. In instances, “Where regulators require documentary evidence before permitting cross-border transactions, an accurate matching process between invoices and payments can ease what can be a complex compliance process”, the AFP guide further added.

Measure the efficiency of the cash concentration structure

With corporate treasurers facing myriad challenges over the past four years, the guide reckons that it is imperative for treasurers to measure the efficiency of the cash concentration structure, as well as optimise investment to achieve additional efficiencies, considering their objectives for the structure.

According to the AFP guide, one of the key performance indicators to measure the efficiency in cash concentration is to evaluate the level of concentrated cash, which reflects the proportion of cash balances from participating accounts pooled, collected, or aggregated into the central treasury.

Additionally, the guide recommends that treasurers analyse whether cash concentration has optimised internal cash usage, leading to reduced borrowing costs or improved yields on short-term surplus cash. Understanding its impact on working capital is also crucial in this assessment.

Another aspect of efficiency measurement involves evaluating how well cash concentration facilitates effective foreign currency risk management. In this regard, the AFP guide advocates that treasurers examine whether the consolidation of cash balances enables internal netting of foreign currency exposures, thereby minimising the need for external foreign exchange (FX) transactions.

Furthermore, the guide has proposed that treasurers scrutinize the cost implications of cash concentration to determine its overall efficiency. To do so, the AFP guide has advised that treasurers optimise costs by reducing various banking expenses, such as transaction fees, FX transaction costs, and account fees. Additionally, they should aim to comprehend the impact of cash concentration on operational costs, including treasury headcount and the efficiency of bank relationship management.

To conclude, amid the rise in global economic uncertainty in recent years, concerns over stalling inflation progress, and a potentially volatile currency market in 2024, treasurers have the opportunity to enhance the value they bring to their corporations by making the most efficient use of internal cash resources.

Establishing a governance structure, selecting the appropriate banking partner(s), capitalising on technology, and efficiency measurement will help concentrate cash globally or regionally.  

The AFP guide believes that corporate treasurers who strive to do so “Need to work with internal stakeholders and external partners to design a solution that is efficient today and flexible enough to remain efficient into the future.”

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