Stock image: Businesspeople filling up buckets with liquidity

Crises tend to either bring partners closer together or tear them apart. It seems that most corporate treasury functions and their banking partners have found themselves in the former camp over the past two years, as a result of mutually beneficial collaborations during Covid-19's initial wave of damage.

"Many corporates held more liquidity on their balance sheet from drawing down their corporate revolvers to provide certainty regarding liquidity, especially for their boards of directors, during the pandemic," recalls Joel L. Campbell, CFO of global B2B payments and invoicing network TreviPay. "Fortunately, following the 2008 credit crisis, banks were very supportive of this temporary move and had ample liquidity themselves to ensure corporates could make the draws."

From a liquidity management perspective, the trust and processes forged during the extreme uncertainty of the pandemic may continue to support close relationships moving forward. Now companies and banks are pivoting to address a new set of economic and geopolitical disruptions. Finance and treasury executives—and the external treasury consultants they work with—expect to leverage and expand on pandemic-driven liquidity lessons to address challenges in the months ahead.

In addition to drawing down corporate revolvers, treasury functions looking to stockpile cash rolled longer-duration investments into government money-market funds (MMFs) and Treasuries during the pandemic's early months, according to Strategic Treasury senior adviser Paul Galloway. Many organizations also moved shorter-duration investments to safer, more liquid investment vehicles. Galloway notes that some companies also employed reverse-purchase funding through their third-party banking partners and via sources such as the Federal Home Loan Bank (FHLB).

"Companies found their relationships with their banking partners to be particularly beneficial," Galloway adds. "The use of money-market fund trading portals and Bloomberg trading capabilities allowed companies to trade short-term investments to park cash and raise liquidity quickly."

How to Manage Liquidity in Choppy Waters

Rising rates, the growing likelihood of a recession, and ripple effects from trade and military wars will require treasury teams to apply, and recalibrate, several liquidity management activities that proved effective during the pandemic, including:

Enhancing forecasting.  Early in the pandemic, business closures, staffing challenges, risks concerning customers' payment timing and solvency, and other uncertainties forced treasury leaders to update liquidity forecasts more frequently. Even as markets improved in mid-2020, supply-chain challenges and labor shortages increased many companies' need for cash, notes Tim Bulman, a Protiviti managing director in the firm's business performance improvement practice.

"To do this effectively," Bulman continues, "treasurers need to simplify the forecasting process; have a clear understanding of cash flow drivers; and develop an integrated, highly automated process that incorporates information from various business stakeholder groups, such as supply chain and FP&A [financial planning and analysis]."

He also notes that the efficacy of forecasting models based primarily on historical information tends to deteriorate in periods of intense volatility. For that reason, Bulman says, "liquidity forecasts need to be based on forward-looking, driver-based information."

Expanding your levers.  To help prepare their organizations to address the unexpected, treasury leaders "should ensure they have the right levers available to pull from a liquidity standpoint," suggests Galloway, who cites repurchase agreements, commercial paper, and FHLB advances as potential short-term funding options.

Readying revolvers.  "Corporate revolvers exist for a reason—to draw down in times of market stress or liquidity stress and provide needed operating liquidity," Campbell asserts. "Every corporate that does not naturally have excess cash or capital on their balance sheet should have a revolver in place to bridge themselves in times of extreme market stress."

Elevating scenario planning.  Rising interest rates represent only one of several factors currently influencing liquidity-management strategies. "A key lesson learned from the pandemic is that business conditions can change rapidly," Bulman notes. "Treasurers need to run and plan for multiple scenarios in order to adapt quickly to changing markets. In addition, treasurers need to focus on what matters most, rather than getting hung up on details that may not have a material impact."

Sustaining that focus will be crucial for treasury professionals as external disruptions and policy responses serve up new, post-pandemic challenges.

See also:

Eric Krell's work has appeared previously in Treasury & Risk, as well as Consulting Magazine. He is based in Austin, Texas.


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