Executive summary

Canadian corporations held $476 billion dollars ($325 billion ofCanadian currency plus $151 billion worth of foreign currency) asof the third quarter of 2011⊃1;, an amount that has been buildingconsistently since the financial crisis. This accumulation mirrorsthe record $2.05 trillion in cash that U.S. corporations held atmid-year 2011⊃2;.

This build up is, in part, a response to liquidity worriesduring the financial crisis, which caused companies to build warchests, and in part due to a lack of prudent utilizationopportunities. When opportunities return, companies will deploytheir cash, although balances will probably remain higher thannormal.

In the meantime, corporations cannot be sanguine about theircash: it's an asset that needs to be rigorously tracked andrisk-managed. This is particularly true as bank relationships andfee structures change, counterparty risk exposures evolve, andforeign exchange (FX) markets continue to be volatile as the resultof the eurozone crisis, such as the Canadian dollar's recent lurchfrom $0.95 to $1.05 against the U.S. dollar.

While a primary goal for treasury is to understand currentliquidity levels, and to identify and determine the timing offuture liquidity pitfalls, it will prove useful to review how somebest practice organizations take liquidity risk management to thenext level.

Managing Global Bank Accounts

Whether it be organically or through acquisition, many globalorganizations experience growth spurts, which result in rapidlychanging bank account activity. Without proper maintenance andmanagement of bank accounts, treasury departments expose themselvesto high levels of liquidity risk. Best practice organizations aretaking back control.

Centralizing control of bank account administration is thefirst, key step. Centralized tracking of bank account activity suchas openings, closings, electronic documentation storage and signoradjustments can help minimize potential for liquidity risks, suchas large pockets of trapped cash, unknown cash and internal andexternal fraud. Gaining Real-time Visibility into Global CashBalances

Corporations typically have numerous banking partners andhundreds of bank accounts across the world. Treasury departmentsoften spend a considerable amount of manual time trying to retrieveand consolidate prior day and current day bank data. This manualactivity results in many treasury departments accepting far lessthan 100% cash visibility. Best practice organizations areleveraging technologies to help automate and schedule the retrievalof these bank statements across all banking partners. Bank fileformats are also standardizing. For those banks that are notstandardized, connectivity solutions can convert. Treasuriesshould be pulling down these files automatically through ascheduled routine, before they start their business day. Having acomplete and global view of worldwide cash is must-have step inunderstanding an organization's liquidity risk.

Making Informed Decisions from Flexible CashWorksheets

Once the bank data is retrieved, it is critical that treasurydepartments consolidate this data into a flexible worksheet. Theseworksheets need to be dynamic and allow treasury professionals toslice and filter various views of their cash on hand. Best practiceorganizations are able to quickly cut their cash data by cash flowcategories, banks, bank accounts, currencies and organizationalunits or other business or notional hierarchies. Accurate andconfident short-term liquidity decisions are made off of theseworksheets. Therefore, they should be able to structure andpredefine cash concentration and target balancing scenarios andeven make money movement recommendations. Lastly, good worksheetshave the ability to help simulate 'what-if' liquidity riskscenarios.

Forecasting Global Cash Flows

Cash flow forecasting has always been and will continue to beone of the most important tasks associated with minimizingliquidity risk. Best practice organizations confidently execute anddeliver accurate cash flow forecasts, typically through five keydisciplines:

1. Top down initiatives
   Senior executives need to mandate forecast performance and identifyfor key staff the strategic value of forecasting for theorganization. Otherwise, forecasting will become too burdensome andstaff will just go through the motions.
2. Data source identification
   It's crucial that an organization identifies the most relevant datasources that become the inputs to the forecast. Common areasinclude:
   • Subsidiary/business unit forecasts.
   • Maturities of financial instruments (FIs).
   • Historical actual transactions.
   • System imports such as accounts receivable (A/R), accountspayable (A/P), budget systems, payroll, etc.
3. Automated data source consolidation
   Organizations often spend way too much time just trying to bringthis information together. This leaves no time for validation andanalysis. Automation from many to one is key.
4. Reconciliation and performance testing
   Creating a forecast is just the first step. Forecast adjustmentsare critical and can only be done effectively with goodintelligence into how your forecasting compares to what actuallyhappened. Improvement can only be made when you realize what movedagainst you. About 80% of the time dedicated to forecasting shouldbe spent on forecast accuracy testing and adjustments.
5. Scenario testing
   After forecasts have been checked against actuals and theadjustment process has been honed, it's time to run scenarios. Thisenables the organization to understand and plan for liquidity risksituations that may arise in the future. Common scenarios used byworld-class forecasters include: FX shifts, interest rate shifts,best case/worst case shifts, adjustment up or down by a givenpercent, and shocking large inflows or outflows of theforecast.

Improve Decision-making for Better Use of CreditFacilities

Credit facilities and bank lines are one of the most commonsources of funds available to corporations in borrowing positions.Yet many treasury departments poorly manage the intricate activityof these facilities. Best practice organizations have proper toolsand controls in place to perfect the borrowing decision-makingprocess. They in turn will be optimizing utilization, improvingnotification timing and minimizing facility fees. By combiningthese practices along with the aforementioned areas of cashvisibility, cash decision worksheets and cash flow forecasts,world-class organizations can truly minimize liquidity risk andlower their overall cost of capital.

Conclusion

Best practice organizations proactively manage their levels ofcash and access to credit with a rigorous approach to tracking andmanaging liquidity risk. By establishing the structures necessaryto improve visibility and make informed decisions, companies canavoid flying blind through the winds of change, taking theirpractice of liquidity risk management to the next level.

About the author

Jason Torgler is VP of Strategy for Reval, where he works withglobal teams to broaden the company's SaaS offering across domesticand international markets. Mr. Torgler offers deep experience intreasury and a strong understanding of the power of SaaS-deliveredsolutions. His experience in treasury technology includes growthinitiatives at Thomson Reuters and Selkirk Financial, as well asParametric Technology Corporation (PTC) and Automatic DataProcessing, both of which trade on Nasdaq.

The author can be reached at: [email protected]

About Reval

Reval® is a global provider of an all-in-oneSoftware-as-a-Service solution for enterprise Treasury and RiskManagement (TRM). Its awardwinning SaaS delivers deep and broadvisibility into cash, liquidity and risk for finance, treasury andaccounting groups, worldwide. With Reval's integrated,straightthrough processing workflow of front-to-back officefunctions, companies can optimize operational efficiency, security,control and compliance across the enterprise.

Reval's unique combination of deep domain expertise andcomprehensive functionality provides companies with the means tocompete confidently in a complex and dynamic market environment.Founded in 1999, Reval is headquartered in New York with regionalcenters across North America, EMEA and Asia Pacific.

For more information, visit www.reval.com or email [email protected].

⊃1;StatisticsCanada
⊃2;U.S.Federal Reserve