Cash visibility has been a primary focus of corporate treasury for many years. It is therefore surprising that multinational organizations often have an incomplete picture of their global cash resources. This can arise because of the accumulation of ‘trapped cash’, which is the surplus of cash that cannot be straightforwardly expatriated from its country of origin, usually because of local regulatory or legal restrictions. Trapped cash is often not visible centrally; therefore it is often wasted, meaning that it is not deployed most effectively in fulfilment of the organization’s overall cash management needs. It may be earning relatively small amounts of interest on local deposit, at the same time as the company is running an expensive overdraft to finance operations in another country.  

Treasurers are increasingly aware of the scale of the trapped cash issue. The location and liberation of trapped cash offers significant, quantifiable potential for Treasury performance improvement through measuring and mobilizing an invisible financial resource.  

Diagnosis 

How do you know whether your organization has a trapped cash issue? Trapped cash is often hidden, especially in operations with diverse, distributed business structures with low levels of centralization, outdated technology and poor day to day cash visibility. Many cash balances, including trapped cash, may only be revealed centrally through occasional reporting exercises. It is necessary to visualize, access and analyze enterprise-wide trapped cash resources, so that that Treasury can include these in its quantification of global cash.  

The Solution – Enhanced Connectivity

Mike Zack, pre-sales manager at GTreasury explains: “Connectivity is the key to liberating trapped cash. Today’s powerful communications and treasury management technology enables treasury to look closely into every part of the global financial infrastructure, so that all pockets of trapped cash are revealed, measured, and integrated into real time analysis. This new level of insight means that treasury can now integrate trapped cash into the mainstream and capitalize on the benefits.”  

Figure 1 - TMS Connectivity in GTreasury 
 

• Internal Data opens up all the enterprise’s commercial cash flows for visibility (including trapped cash resources), analysis and management, in detail or summary.  
• Financial Institutions connectivity provides the platform for integrated cash management, including bank account management (BAM), for domestic and international banks.  
• Third Party Data enables STP workflows to integrate treasury with dealing and trading operations.  
• SWIFT integration assures robust bank file and messaging integration and BAM.
• The API facility provides secure, open-ended integration with all critical market data, forecast and risk information in support of the enterprise’s specific risk management, hedge accounting and operational objectives and processes. 

Source & Copyright©2018 - GTreasury 

This figure illustrates the different dimensions of connectivity available today, leading to the discovery and inclusion of trapped cash through an upgrade to the functionality, range and power of the cash management technology. Trapped cash resources materialize when levels of visibility are improved systematically, in all areas where the company has financial operations. 

Higher levels of connectivity enable up to date bank balance and transaction reports to be collected and analyzed centrally, so that the current cash position is fully reported to local and central treasurers. Once the necessary level of visibility has been achieved, Treasury is in a better position to investigate the granular details of the cash position, and to locate pools of trapped cash. Solving this issue effectively requires a collaborative approach, involving Treasury, finance and perhaps other groups to work together so that the best interests of the company are reflected in the cash management results.  

The enhanced process requires central collection, warehousing and analysis of the relevant data, demanding close integration within the organization, and with the banking environment. As trapped cash is revealed, the organization is in a much stronger position to understand its true liquidity risk, its exchange exposure and its cash risks, resources and requirements – and to identify and execute the most effective cash movements.  

The Volatile Environment

The seemingly endless volatility of the global political and economic environment provides the backdrop to the drive to locate and liberate trapped cash. For example, demanding Chinese capital control regulation complicates and restricts the expatriation of currency surpluses, with investment caps and bureaucratic requirements required to facilitate transactions. At the same time, the Trump administration is talking about a single tax rate to be applied to repatriated funds, to encourage inflows to the US.  

Managing Trapped Cash

Once a solution which accurately quantifies trapped cash resources has been implemented, Treasury needs to determine the best available course of action. This is often a complex decision, needing financial expertise, and knowledge of the requirements and implications for using surpluses in different countries and jurisdictions. By having the information instantly, treasury now moves into a more strategic role, effectively reducing risk and increasing profitability at the company. Employees shift their daily task of gathering data to analyzing data, which in turn increases productivity and creates visionaries. The chosen action depends on what is permissible within the tax, legal and regulatory structure of each region where trapped cash resources have been identified. And, equally, it depends on having a broad current view of the local, regional and global cash requirements of the organization.  

Governments enforce exchange control and capital regulations to manage the country’s economic and trading environment, through the exchange rate, and by encouraging the retention of capital on-shore. This is designed to stimulate in-country investment, by using trapped cash to finance new business operations. Trapped cash does not necessarily have to be repatriated; it simply needs to be measured so that Treasury and Finance can together make informed decisions about its best usage.  

Treasury must have a high level of confidence in the precision and dependability of its supporting technology, as it must rely on the reported data to make cash management decisions. Equally, the technology is central to the effectiveness of subsequent operations, to put the trapped cash to work. Best practice technology solutions provide the high levels of connectivity and functional richness needed.  

The transparent measurement and collaborative management of trapped cash using integrated and efficient technology provides Treasury with greater certainty, quickly and accurately. This enables the company to make better decisions with a high level of confidence, based on having the required information readily available. Subsequent actions may be executed promptly, taking full advantage of market opportunities, for example to: 

• Aggregate and offset FX exposures, to minimize the number of market interventions, and maximize their effectiveness; 
• Reduce payment costs, by aggregating payments; 
• Elect to make certain payments early, to take advantage of time dependent vendor discounts; 
• Finance stock buy-back programs cost effectively. 
• Borrow money at a reduced rate or invest at a higher rate, due to earlier requests

It is important that the technology includes the connectivity tools to work with the bank reporting and payment systems in use, which can typically range from the archaic, to contemporary message-based communications. State of the art technology provides the potential to take advantage of open APIs and blockchain advances, which are likely to provide new opportunities to improve the speed and transparency of bank balance and transaction reporting, and in secure payments management.  

Integrated cash forecasting enables treasuries to anticipate – and hence manage – the build-up of trapped cash. This requires visibility into the relevant payable and receivable flows, with the integration of this information into the projected cash position.  

Capital control regulation is at the core of the trapped cash issue. Companies need to take advantage of peer group experiences, for example at user conferences, to understand how others have addressed and resolved trapped cash issues. Learn from the mistake and benefit from the success of others. Solutions such as the use of dividend and royalty payments provide ways of legitimately circumventing some capital control regulation and liberating trapped cash.  

A strong STP cash management solution effectively understands the restrictions on specific cash movements and identifies the best available payment method. A fully automated solution collects the required information - and advises the user of the viable options.  The client then decides on the necessary action based on the presented data, and the decision should result in swift STP execution.  The solution must accommodate the necessary communications systems, file formats and protocols for statement retrieval and payment executions.  

GTreasury’s recent merger with Visual Risk has added the additional dimension of powerful risk analysis to the GTreasury global cash management solution. The derivation of CFaR (‘Cash Flow at Risk’) provides deep insight into how bad things could get as a consequence of current IR/FX exposures, so that appropriate remedial action can be initiated. The integrated solution delivers analytical results numerically and graphically to provide corporate treasurers with an effective cash management tool using ‘at risk’ methodology, and the facility to gain insight and make better decisions through scenario analysis and stress testing. No one knows where the market is going to go, but with the right technology, you could hurdle over the competition. 

Trapped cash is a business issue which can easily lead to bad investment decisions. Companies need to work collaboratively with partners that have global expertise, in a business community with understanding of all relevant local regulations, and of the tax implications of alternative actions. This will enable them to manage a range of testing requirements, such as Brazilian embargo codes, Chinese capital requirements and South African exchange controls.  

A robust connectivity implementation as shown in Figure 1 provides the base for locating, liberating and analysing trapped cash. 

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As GTreasury’s Mike Zack explains, “Connectivity across the organization reveals its true cash needs and resources, so that trapped cash is brought into the light, and can be put to work. Idle cash is far from ideal for interest income/expense optimization. The real time complete and accurate cash visibility enabled by connectivity empowers treasuries to achieve enterprise-wide best practice cash management.”