With banks teetering on the verge of collapse, corporations should be turning their attention to liquidity and risk management if they are not to be caught out by lack of funding and fragile banking relationships. After a period of easy money, companies are facing an empty well and the hitherto unthinkable possibility of their banking provider going under. Corporations need to get back to the basics of cash management, discovers Gary Simon, FSN’s managing editor.
In the last few weeks the whole world has been turned on its head and even the foundations of capitalism have been open to challenge – such is the ferociousness of events. There are no real precedents for the scale of what is happening and the notion that a major retail bank could go bust – something that was unthinkable just a few weeks ago – remains a distinct possibility.
Given this background companies need to give urgent attention to liquidity and risk in tandem. The old adage “Cash is King” is no longer sufficient to describe a world in which you cannot even trust your bank with your money – an understandable reaction when banks do not trust each other enough to loan funds.
According to Joergen Jensen, director of corporate solutions at Wall Street Systems, the current market is driving companies to do the opposite of what they have been doing in recent years. He told FSN, “Corporations have been reducing the number of banking relationships they maintain to lower transaction costs, develop deeper relationships and gain process efficiencies but with the current turmoil organisations will be looking to dilute their exposure to any one bank.”
Deloitte’s Corporate Treasury Consulting practice in London advises companies “Protection of the principal amount invested may be your most important concern.” Deloitte’s Keith Strachan told FSN, “We frequently encounter directors of companies that who do not believe that a large bank could default on money placed with them. Large banks employ a number of specialists whose job it is to analyse and quantify risks in lending to other institutions. The mere fact that banks are unwilling to lend to each other for more than a few days should give all pause for thought. Putting your eggs in a number of baskets is a sensible policy”.
Fortunately, technology advancements mean that it is easier and less costly than ever to connect to banks and Jensen expects to see businesses widen their banking relations. “In the past it has been expensive to connect to banks, but now some banks will act as hubs to other banks and advances in SWIFT connectivity mean that the marginal cost of introducing a new relationship is reducing, making it easier to spread relationships”.
However, with the credit markets seizing up it is not risk management that is necessarily the highest priority but cash/liquidity management. Traditional sources of finance are in severe jeopardy which means that organisations need to look more closely than ever at preserving and optimising cash management.
Deloitte’s Strachan told FSN, “Cash optimisation is making better use of cash already in the business by reducing working capital balances, better forecasting of cash requirements, recycling cash balances better between different entities – especially across borders; and reviewing and resolving cash around the group.”
For companies that run their treasury function on the back of spreadsheets the timely management of cash is almost impossible. “Many companies have worked hard over recent years to centralise cash management using a Treasury Management System but there are still very large numbers using spreadsheets,” concedes Jensen.
Although it is difficult to generalise, Treasury Management Systems can be as little as £100,000 and can quickly pay for themselves. Added to which Wall Street Systems can cater for smaller enterprises as well by offering hosted solutions (Software as a Service, SaaS) for a fixed rental giving mid-sized businesses access to modern Treasury Management Systems at potentially a much lower cost and without having to invest in an IT infrastructure.
“The first step to cash management is having full visibility of cash resources in the group. The ability to see cash balances and understand cash requirements going forward will allow the treasurer to challenge cash levels and remit funds back to the centre for use elsewhere in the group,” comments Deloitte’s Strachan.
Jensen agrees. “Good reporting and the ability to process ‘what if’ scenarios is very useful. For example, some organisations are finding that assets that they previously thought were liquid are either worth less or are no longer as liquid as they once were. Being able to model the effect of liquidity on overall cash position is important.”
SAP the ERP vendor says it is also seeing an upturn in businesses taking its Treasury Management Systems. “A rising number of global businesses are turning to comprehensive treasury management software from SAP to ensure healthy cash flow and adequate liquidity, and protect profit margins from fluctuations in interest rates, commodity prices and currency exchange rates,” said the company this month.
The Haniel Group an SAP user is an international corporation with more than 50,000 employees and 29.2 billion euros sales in 2007 recently embarked on an effort to streamline its treasury operations and strengthen its IFRS 7 compliance.
“Our prior IT applications made it very difficult to capture exposure data from across the company, perform the required stress testing and perform regulatory reporting,” said Andreas Laroche, executive for Corporate IT, the Haniel Group. The Group deployed the SAP Treasury and Risk Management, the SAP In-House Cash and the SAP General Ledger applications to provide an integrated solution that links treasury and core finance operations.
“Our financial reporting and compliance procedures run much more smoothly and we are in the position by using treasury applications from SAP to do proper hedge accounting. In addition, the SAP In-House Cash application has strengthened our liquidity management,” added Laroche.
F. Hoffmann–La Roche AG the therapeutic products company also chose SAP treasury management because of its integration with standardised financial supply chain processes, as well as the ability to centralise cash and treasury processes across the entire company.
“We operate a highly efficient and automated in-house bank that would not be possible without the SAP In-House Cash application,” said Martin Schlageter, head of Treasury Operations, F. Hoffmann–La Roche AG.
“Today’s global enterprises demand a more comprehensive approach to managing their treasury operations,” said Rebecca Polley, vice president of Financial Solutions Management, SAP AG. “Unlike other technologies used to address these challenges, SAP applications enable our customers to effectively manage the full spectrum of cash, liquidity and financial risk, which is becoming more critical in light of the ongoing turmoil in the financial markets. Utilising a single, easy-to-use dashboard, SAP enables treasury professionals to analyse and manage the full range of market risks, including commodity, interest rate and foreign exchange risks.”
But the integrated ERP approach is not the only way to go. “It is important that a Treasury Management System can also integrate with all of the market feeds, rate providers and banking institutions,” commented Wall Street System’s Jensen.
Whether a best of breed or ERP based approach remains a matter of debate. What is not in dispute is that for the current and foreseeable future companies need to manage liquidity and risk much more closely!
