Canadian corporations held $476 billion dollars ($325 billion of Canadian currency plus $151 billion worth of foreign currency) as of the third quarter of 2011¹, an amount that has been building consistently since the financial crisis. This accumulation mirrors the record $2.05 trillion in cash that U.S. corporations held at mid-year 2011².
This build up is, in part, a response to liquidity worries during the financial crisis, which caused companies to build war chests, and in part due to a lack of prudent utilization opportunities. When opportunities return, companies will deploy their cash, although balances will probably remain higher than normal.
In the meantime, corporations cannot be sanguine about their cash: it’s an asset that needs to be rigorously tracked and risk-managed. This is particularly true as bank relationships and fee structures change, counterparty risk exposures evolve, and foreign exchange (FX) markets continue to be volatile as the result of the eurozone crisis, such as the Canadian dollar’s recent lurch from $0.95 to $1.05 against the U.S. dollar.
While a primary goal for treasury is to understand current liquidity levels, and to identify and determine the timing of future liquidity pitfalls, it will prove useful to review how some best practice organizations take liquidity risk management to the next level.
Managing Global Bank Accounts
Whether it be organically or through acquisition, many global organizations experience growth spurts, which result in rapidly changing bank account activity. Without proper maintenance and management of bank accounts, treasury departments expose themselves to high levels of liquidity risk. Best practice organizations are taking back control.
Centralizing control of bank account administration is the first, key step. Centralized tracking of bank account activity such as openings, closings, electronic documentation storage and signor adjustments can help minimize potential for liquidity risks, such as large pockets of trapped cash, unknown cash and internal and external fraud. Gaining Real-time Visibility into Global Cash Balances
Corporations typically have numerous banking partners and hundreds of bank accounts across the world. Treasury departments often spend a considerable amount of manual time trying to retrieve and consolidate prior day and current day bank data. This manual activity results in many treasury departments accepting far less than 100% cash visibility. Best practice organizations are leveraging technologies to help automate and schedule the retrieval of these bank statements across all banking partners. Bank file formats are also standardizing. For those banks that are not standardized, connectivity solutions can convert. Treasuries should be pulling down these files automatically through a scheduled routine, before they start their business day. Having a complete and global view of worldwide cash is must-have step in understanding an organization’s liquidity risk.
Making Informed Decisions from Flexible Cash Worksheets
Once the bank data is retrieved, it is critical that treasury departments consolidate this data into a flexible worksheet. These worksheets need to be dynamic and allow treasury professionals to slice and filter various views of their cash on hand. Best practice organizations are able to quickly cut their cash data by cash flow categories, banks, bank accounts, currencies and organizational units or other business or notional hierarchies. Accurate and confident short-term liquidity decisions are made off of these worksheets. Therefore, they should be able to structure and predefine cash concentration and target balancing scenarios and even make money movement recommendations. Lastly, good worksheets have the ability to help simulate ‘what-if’ liquidity risk scenarios.
Forecasting Global Cash Flows
Cash flow forecasting has always been and will continue to be one of the most important tasks associated with minimizing liquidity risk. Best practice organizations confidently execute and deliver accurate cash flow forecasts, typically through five key disciplines:
- Top down initiatives
Senior executives need to mandate forecast performance and identify for key staff the strategic value of forecasting for the organization. Otherwise, forecasting will become too burdensome and staff will just go through the motions.
- Data source identification
It’s crucial that an organization identifies the most relevant data sources that become the inputs to the forecast. Common areas include:
- Subsidiary/business unit forecasts.
- Maturities of financial instruments (FIs).
- Historical actual transactions.
- System imports such as accounts receivable (A/R), accounts payable (A/P), budget systems, payroll, etc.
- Automated data source consolidation
Organizations often spend way too much time just trying to bring this information together. This leaves no time for validation and analysis. Automation from many to one is key.
- Reconciliation and performance testing
Creating a forecast is just the first step. Forecast adjustments are critical and can only be done effectively with good intelligence into how your forecasting compares to what actually happened. Improvement can only be made when you realize what moved against you. About 80% of the time dedicated to forecasting should be spent on forecast accuracy testing and adjustments.
- Scenario testing
After forecasts have been checked against actuals and the adjustment process has been honed, it’s time to run scenarios. This enables the organization to understand and plan for liquidity risk situations that may arise in the future. Common scenarios used by world-class forecasters include: FX shifts, interest rate shifts, best case/worst case shifts, adjustment up or down by a given percent, and shocking large inflows or outflows of the forecast.
Improve Decision-making for Better Use of Credit Facilities
Credit facilities and bank lines are one of the most common sources of funds available to corporations in borrowing positions. Yet many treasury departments poorly manage the intricate activity of these facilities. Best practice organizations have proper tools and controls in place to perfect the borrowing decision-making process. They in turn will be optimizing utilization, improving notification timing and minimizing facility fees. By combining these practices along with the aforementioned areas of cash visibility, cash decision worksheets and cash flow forecasts, world-class organizations can truly minimize liquidity risk and lower their overall cost of capital.
Best practice organizations proactively manage their levels of cash and access to credit with a rigorous approach to tracking and managing liquidity risk. By establishing the structures necessary to improve visibility and make informed decisions, companies can avoid flying blind through the winds of change, taking their practice of liquidity risk management to the next level.
About the author
Jason Torgler is VP of Strategy for Reval, where he works with global teams to broaden the company’s SaaS offering across domestic and international markets. Mr. Torgler offers deep experience in treasury and a strong understanding of the power of SaaS-delivered solutions. His experience in treasury technology includes growth initiatives at Thomson Reuters and Selkirk Financial, as well as Parametric Technology Corporation (PTC) and Automatic Data Processing, both of which trade on Nasdaq.
The author can be reached at: Jason.Torgler@Reval.com
Reval® is a global provider of an all-in-one Software-as-a-Service solution for enterprise Treasury and Risk Management (TRM). Its awardwinning SaaS delivers deep and broad visibility into cash, liquidity and risk for finance, treasury and accounting groups, worldwide. With Reval’s integrated, straightthrough processing workflow of front-to-back office functions, companies can optimize operational efficiency, security, control and compliance across the enterprise.
Reval’s unique combination of deep domain expertise and comprehensive functionality provides companies with the means to compete confidently in a complex and dynamic market environment. Founded in 1999, Reval is headquartered in New York with regional centers across North America, EMEA and Asia Pacific.