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By Frank-Oliver Wolf, Global Head of Cash Management & International Business at Commerzbank

Effective cash management has always been key to business survival; cash must be located where it can provide the greatest benefit, be that accruing credit interest or satisfying expected or unexpected business outgoing demands. And while many treasurers became adept at the task pre-crisis – understanding and anticipating business activity to establish where cash needs to be when – successful cash management has been complicated by the post-crisis economic landscape.

Faced with liquidity constraints, interest rates at record lows, new regulations and shifting trade corridors, corporates and their banks must now traverse a challenging financial environment that is seemingly in constant flux. Subsequently, risk management now plays a far greater role in influencing cash management decisions.

Frank Oliver Wolf

Frank Oliver Wolf

Yet while conditions have shifted, cash optimisation remains the goal of every organisation. The solution is to adapt to the changing market and implement an effective cash management strategy specific to your individual business requirements; one that can help ensure liquidity is maximised, with all cash having a purpose and working hard at all times.

In this respect, there are five key pillars upon which companies should base their cash optimisation strategies: reducing complexity, improving liquidity, overcoming borders, optimising interest and enhancing transparency.

Reducing complexity
Given the transforming nature of the financial environment, reducing complexity is an essential component of any effective global cash management strategy.
The introduction of the single euro payments area (SEPA) can be used as an incentive for businesses to make significant enhancements to their cash management, accompanied by potential cost savings and efficiency gains.

Certainly, although SEPA migration relates only to euro bulk payments, it constitutes a strategic opportunity to enhance processes and structures for global cash management in order to optimise all kinds of payment flows, e.g. wire payments, payments denominated in foreign currencies and third-party bank payments in addition to bulk payments in euro.
Companies can benefit from using a payment factory to centrally manage and pool international payment processing – perhaps even standardising communication channels and converting incoming payment instructions into country-specific formats. Payment transactions can then be routed centrally to the respective bank, which increases speed and flexibility. The benefits of a centralised payment unit also include cost savings brought about by reduced internal per-payment processing costs, and reduced bank fees and charges, as well as enhanced transparency and security.

Fiege, a German operator of logistics centres, provides a good example of how efficient cash management can reduce complexity. Working with Commerzbank, Fiege implemented a payment factory to centralise the payments of its companies in Germany, Austria and Switzerland. The solution uses one centralised delivery and one communication channel for all of the international companies’ payments and harmonises payment formats by means of a single payment method. Firstly, this has helped Fiege eliminate the generation of incorrect payments. But, more than that, the company now has much more oversight over all of its payment flows; allowing it to benefit from economies of scale, simplify its financial risk management and seek opportunities to take on other services in addition to those relating to payment transactions.

Furthermore, corporates should carefully consider the methods with which payments are issued and received. For example, collecting receivables by direct debit, limiting cheques, optimising cheque handing, or implementing virtual accounts are all ways in which cash management complexity can be reduced.

Improving Liquidity
With new banking regulations causing a reduction in the availability of capital from lenders, finding alternative, innovative ways to manage and optimise internal liquidity as a source of working capital can be of huge benefit.

One of the keys to unlocking working capital is for companies to examine their cash conversion cycles. Many businesses have long capital lock-up periods, often caused by generous payment deadlines or delays in invoicing and dunning.

Cash concentration solutions can provide customised, comprehensive liquidity management support. For example, by assessing days inventory outstanding (DIO), days sales outstanding (DSO) and days payable outstanding (DPO), companies – working with their banks – can identify potential improvements in their cash conversion cycles (such as faster cheque processing and issuing invoices at an earlier stage so that bills are paid sooner).

Overcoming borders
With economic and corporate globalisation accelerating, many companies are expanding their geographical footprint as they seek a competitive advantage. Treasurers are therefore expected to manage cash in an increasing number of currencies, payment formats and time zones; as well as navigating local payments specifications and regulations (which can involve cash management costs).

Addressing these challenges firstly requires efficient, reliable and transparent processing of payments beyond bank and national borders. In this respect, international electronic banking solutions can overcome the hurdles of local format and connectivity issues.

In addition, through SEPA, it is also possible for companies to operate with a single account to make transactions anywhere in the eurozone (previously, companies were required to have an account in every country in which they were operational and incurred fees to make cross-border payments). Not only does this account consolidation significantly facilitate proficient cash management, it reduces payment costs and eradicates multiple account maintenance fees.

Optimising Interest
With interest rates at an all-time low, it is particularly important that businesses take advantage of every opportunity to benefit from cash returns. International cash pooling can be a particularly valuable tool, enabling balances from different accounts to be automatically offset against each other. This service can clear overdrawn balances (if funding is available elsewhere) so that unnecessary debit interest is not accrued, and also pool credit balances to ensure companies can leverage on their positive cash positions. What’s more, it is possible to centralise liquidity management in this way even if your company has relationships with a number of different banks in foreign markets.

Enhancing Transparency
The turbulent economic climate has resulted in risk concerns having a far greater influence on cash management decisions. As a result, the need for transparency has become particularly crucial. If treasurers don’t have the visibility they need to make sound cash management decisions, effective cash management becomes a near-impossible task.
Corporates must therefore be given solutions that offer access to reliable, up-to-date information on current financial positions (including account positions with third party banks), interest rates, exchange rates and the latest regional and global market data and industry trends. Such solutions should also span national borders – with essential information on national payment requirements available – to give companies the accurate, collective oversight needed to be able to make effective cash management decisions.

Furthermore, it is possible to receive credit reports from your banking partner detailing the financial status of your debtors and potential debtors, as well as country-specific risk assessments. This information can prove invaluable when choosing possible business partners, monitoring the strength of existing supply chains, and assessing risks associated with investment decisions.

Certainly, achieving true cash optimisation in the current financial landscape can prove a challenge. But by enlisting the support of the right global cash management provider, companies can receive the guidance and tools they need to implement a strategy that is effective for their individual cash management needs; helping cash to be where it needs to be to provide the most value to your business.

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