In the world of payments, cash is still king. But the value of cash held by enterprise organizations can only be determined if the treasurer knows what cash is available, where its held and how it's expected to flow in the future.
Often treasurers lack the necessary level of cash visibility required to give them a clear picture of their organization's full cash situation. Working with multiple banks across different markets, and encountering complex banking structures across diverse geographical footprints increases the difficulty in gaining full cash visibility.
"More than a quarter of global cash is not visible to corporate treasury on a daily basis"...PwC's 2019 Global Treasury Benchmarking Survey
What is cash visibility?
Cash visibility is crucial in effective treasury management, liquidity management, and providing a clear picture of an organization's working capital. Good financial decisions are based on cash visibility. Corporate treasurers are responsible for cash management, including cash flows, so it's imperative that they know what is in all corporate bank accounts at any given time. This means they are fully equipped to:
- Invest cash strategically
- Utilize cash management structures effectively
- Minimize debt and interest costs
- Make better informed hedging decisions
- Reduce bank fees
- Predict what cash the company will have in the future
The importance of cash visibility
Cash visibility is the essence of any organization. It enables a company to invest cash strategically, while minimizing debt and expenses. Accurate visibility also reduces a company's risk exposure, while unlocking the potential for organizational growth.
Lack of cash visibility
It's important to understand the negative strategic impacts of not having proper cash management processes in place. Perhaps the most obvious and most important consequence is the inability to forecast accurately. In turn, poor or out-dated forecasts can lead to less than optimal business decisions, since inaccurate or old data is being fed to the C-suite. These decisions might include anything from foreign exchange hedging to investments or even mergers and acquisitions. As such, poor cash visibility can lead directly to increased financial and strategic risk. So not having a clear picture of cash flow can result in a slew of issues, including:
- Insufficient return on cash
- Missed KPIs and a lack of confidence in corporate treasurers
- Higher than necessary borrowing costs
- Unnecessary bank fees and costs
- Poor hedging decisions due to incomplete information
- The lack of a buffer of surplus to absorb unforeseen expenses
Without visibility, treasurers can't adequately control and mobilize group cash. A lack of accurate and timely information over the company’s cash positions will impact treasury’s ability to create meaningful forecasts, manage foreign exchange risk, make prudent investment decisions, and stabilize borrowing costs.
The challenges of gaining clear cash visibility
There are many varied aspects to cash management. Whether treasurers are looking to pay down external borrowing, or optimize return on investments, the first step is to have a comprehensive knowledge of what cash is currently available. However, treasurers also need the tools to help them predict future flows and keep the right people informed. The more complex an organizational structure is, and the more geographically spread it becomes, gaining full cash visibility poses greater challenges. Many corporate finance departments maintain multiple bank relationships, to access a full range of services across all geographies. However, the common challenges this poses are:
- Non-standardised formats and transaction codes.
- Timeliness of information (real-time versus previous day balances).
- Unavailability of SWIFT reporting in some local banks
There are various solutions that treasury can use to help address these challenges. They include:
- Multi-bank reporting using electronic banking portals or host-to-host connections provided by the main cash management bank.
- SWIFTnet connectivity. SWIFT is developing standards with treasury management systems and enterprise resource planning (TMS/ERP) providers and integration with SWIFT gateway to make it easier for corporate finance using these TMS/ ERP systems.
- Use of an outsourced service bureau for managing SWIFT connectivity or multi-bank balance and transaction reporting.
How COVID-19 has affected cash management
Throughout the COVID-19 crisis, treasury teams have been doubling down on cash visibility, cash flow forecasting and working capital management. While these fundamentals have always been at the heart of treasury activity, the focus on getting them right over the course of 2020 and 2021 has almost certainly enabled organizations to navigate through the pandemic and its chaotic aftermath. CFOs are using the current crisis as an opportunity to focus on sustainable cash excellence, supported by a strong cash culture from top to bottom.
Boardrooms have shifted their focus from earnings before interest and taxes (EBIT) to cash. They have also shown support for end-to-end cash management, which involves thousands of daily decisions made by individual employees at all levels: from CFOs managing the books to warehouse managers ordering spare parts to accounts-payable specialists making payments. A cash-focused culture across three dimensions—people, structure, and processes—is an important prerequisite for cash excellence.
The pandemic has demonstrated that a clear focus on cash excellence as part of ongoing operations prepares companies to be more resilient during a crisis and stronger and more competitive when they emerge from it. Companies that managed cash prudently before the pandemic have remained resilient, while less-prepared companies faced existential threats in the face of a liquidity crunch (with some filing for bankruptcy).
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Technology's role in gaining full cash visibility
Technology plays a crucial role in the way corporates improve the visibility of their cash. Manual techniques to improve an organization’s view of its cash are outdated, siloed, complicated and time-consuming. This prevents treasury from carrying out proper cash management practices efficiently.
For smaller corporates, technology concerns frequently revolve around costs. While Treasury Management Systems (TMSs) have become more affordable thanks to cloud-based delivery models, many companies are still reliant on spreadsheets to complete manual forecasts and reporting. Using downloads from different single bank portals to manually create a picture of the company’s cash position is inevitably time-consuming, with significant margin for error. Additionally, data is often only available on an end-of-day basis.
Even large corporates that do have access to more sophisticated treasury technology still face visibility challenges. Before they can gain an accurate overview of the company’s complete cash position, there are legacy infrastructure and integration issues to overcome.
As we look to the future, corporate treasurers will need to ride with the momentum on the trends that were already emerging before the pandemic.
- Providing faster access to cash visibility. Financial management teams and boards are demanding more and faster access to data on their cash position – feeding into a renewed appreciation of the central role treasury plays and driving technology adoption.
- Increasing adoption of treasury technology. There has been a rapid uptake of banking and treasury technology, including greater adoption of online banking from corporate clients who hadn’t dealt with the banks digitally prior to the crisis. Among those already using online banking access, adoption rates of other digital financial solutions has also been growing significantly.
- Accelerating the move away from manual processes. Some treasury functions have accelerated their automation program and shifted away from manual processes. This is all good news since a well-optimized treasury infrastructure gives treasury resources to divert their time to more strategic inputs.
- Looking to facilitate treasury technology solutions. Banks, treasurers and Fintechs are increasingly working together to define challenges more precisely and to make solutions fit for purpose. There is recognition that each party has a specialism and perspective to contribute and that collaboration drives better solutions all round.
Why accurate cash forecasting is important
Many corporates fall into two distinct categories: those who are cash-rich and understand they are liquid and will need to find a return for their cash balances, and those who are debt-reliant, depending on short-term financing daily to maintain cashflow.
Both corporate scenarios need accurate cash forecasting optimization. Here are some of the reasons why:
Do you understand the differences between cash flow and fund flow? Read our blog on Fund Flow Statements to find out.
1. Accurate short-term forecasts allow access to higher yield liquidity solutions
Money market funds (MMF) usually have a trading daily deadline of 12:00/13:00. As a result, if you wish to trade with them successfully, you need to be able to forecast your end-of-day position early.
2. Accurate forecasting means reducing buffers left on account
This means treasurers can take temporarily idle non-ROI balances and re-allocate the funds into profitable instruments.
3. Accurate forecasting allows forward planning to access structured debt financing solutions
Debt financing costs can be vastly reduced if there are longer term or formalized arrangements in place with banks. Some of these options include; loan facilities, cross currency pooling and revolving credit.
4. A proactive C-Suite wants to know in advance, what cash will be available
Knowing this information could allow senior executives to make better informed operational decisions, form clear direction for the company and suggest more detailed growth strategies for the future. The bearer of this level of information can become a key advisor to the C-Suite.
5. Accurate forecasting is the only way to manage key treasury tasks such as FX risk
Knowing what currencies an organization has available and when, prevents making the wrong FX trades or swap deals.
6. Forecasting and review of forecasting identifies negligence on both payables and receivables.
It can allow you to detect whether internal departments are making payments out of cycle, or customers are paying late, or even early.
Netting and cash pooling
Using liquidity efficiently is in every company’s best interest. Ways to pool liquidity that help companies optimize liquidity planning and management include netting and cash pooling.
Cash pooling refers to the consolidation of liquidity within one group: Companies can deduct funds from entities with surplus liquidity and provide intercompany loans to entities who are short of funds. Central treasury is usually the one to offset balances.
Netting offsets payables and receivables between two parties and consolidates them in one final payment. Netting with more than two parties involves a central netting center that reconciles payables and receivables and consolidates them. The netting center is usually part of the central treasury.
Providing insights with data analytics
In today's digital age, the payments industry is increasingly driven by information and data, and as a result, digital advances are making cross-border cash visibility a reality for all corporates, regardless of their size or IT set-up.
Data analytics can provide valuable insights into areas including customer behavior, the competitive landscape and internal processes. If used correctly data analytics can help drive growth strategies and provide guidance as to where investment is most needed.
Data analytics has also allowed banks to increase security, protect their clients’ own data and defend against cyber-crime, which is an unwelcome consequence of increased digitization.
Through innovation and digitization as well as close collaboration with fintechs and clients, banks and financial institutions can evolve their platforms, significantly simplify processes and deliver a unique value proposition to clients to help protect, manage and grow their organizations. Integration of client software with a bank's digitized platforms and client usage of solutions such as host-to-host connectivity or APIs, allows banking clients to automate manual processes, increase productivity and eliminate bottlenecks.
While solutions that work for today are important, it’s critical for companies to implement digital financial solutions that prepare for expected expansion as well as new practices or technology.
The impact of real time visibility
Continual visibility into the performance of financial and operational activities is vital for decision making, but it's much more than that. Real time visibility shows the processes that support those decisions. For example, instead of studying historical data on employee turnover and the costs that go with it, financial analysts and HR departments will have the means to see exactly where the problems with employees are occurring - giving them the tools to intervene, implement measures to improve performance, and ultimately prevent costly turnover.
Real time cash visibility provides the financial analytics that can help companies determine risk factors, how to enhance and enrich business processes, and whether an organization's investments are focused in the most appropriate areas.
How payment analytics helps treasury management
Viewing payment analytics through a single pane of glass indicates whether or not the payment process is running without interruption, and how cash flows are being directed. It also shows precisely where any issues are, and reports as to why they may be happening.
Cash management executives are responsible for a huge volume of activity and the related speed at which payments are processed, so having real time analytics allows CFOs and CEOs to drill down deep into the payments ecosystem to focus on areas that need attention.
IR Transact suite of payments solutions
IR Transact, built on the powerful Prognosis platform, simplifies the complexity of managing modern payments ecosystems, bringing real-time cash visibility and access to your payments system. Transact gives organizations unparalleled insights into transactions and trends to help turn data into intelligence, and assuring the payments that keep you cash flow positive.
With real time analytics, businesses can gain unlimited access and insights into customer usage data, end-to-end transaction performance metrics. With dynamic visualization tools, businesses easily get a clear view of all this information to make proactive management decisions. Transact offers a thousand points of reference, from a single point of view.