In today’s stressful business environment, there are plenty of gurus proffering advice; some of which is worthwhile, some of it less so. One guru with a track record that validates his pronouncements is John Doerr of venture capital firm Kleiner Perkins Caufield & Byers (his start-up investments include such household names such as VeriSign, Google, Amazon, Compaq, Sun and Intuit). Doerr recently published a list of 10 things that chief executive officers (CEOs) should do to help their companies survive the current economic downturn. No fewer than six items on his list relate to better management of corporate cash.
Perhaps that is not much of a surprise. It is hardly a secret that corporate access to bank credit has tightened significantly during the global financial slowdown. A similar situation applies in the inter-corporate market, where a growing sense of caution has seen commercial paper investment evaporating. At the same time, as sales have started to slow, the internal generation of cash has declined, as have corporate cash reserves. This situation has also been exacerbated by increasing costs; while commodity prices may have at last started to soften, other costs in many Asian countries have been inflating, in some cases, rapidly.
This squeeze on corporate liquidity is serious; after all, the most fundamental reason that companies fail is that they run out of cash. While CEOs and senior management may need to focus on big-picture corporate strategy, losing sight of this very basic point can ultimately make such strategy terminally irrelevant.
Remedies and Opportunities
Fortunately, while the liquidity environment is difficult, it need not prove fatal – there is much that senior management can do to improve the corporation’s cash position. At first glance, this may seem counter-intuitive; surely management of cash is the corporate treasurer’s responsibility? Indeed, but the critical point is that treasurers can only perform this function within the limits of the environment defined by senior management. There are many aspects of corporate culture and mindset that have a massive influence on the corporation’s cash efficiency and which the board of directors can influence or dictate.
For example, some sales teams have a tendency to bunch sales at period ends as they scramble to meet performance targets. From a cash perspective, this is bad news on two counts: on the one hand, the ‘lumpy’ resulting cash flows can cause a severe funding gap; and on the other, smart customers become wise to this behaviour and push the sales team for extra discounts, thus reducing available cash. As a result, some large multinational corporations (MNCs) have already implemented commission structures explicitly intended to discourage sales teams from bunching sales in this manner.
Another obvious example of this sort of problem relates to cash visibility. It is not uncommon for corporations to leave local business units to manage their own cash (or to set local performance objectives that encourage personnel to retain cash locally). Apart from considerations such as inferior local rates of return achieved on any surpluses, this policy often makes such cash both invisible and inaccessible from a central treasury perspective. Situations then arise where one business unit is achieving a derisory rate of return on excess cash, while other units struggle – completely unnecessarily – to access expensive or unavailable bank funding. An associated cultural problem is that, where local business units control cash, they tend to regard it as ‘theirs’, not the corporation’s. Any request for information or cash from central treasury is consequently greeted with grudging (or no) cooperation.
Therefore, the CEO who is prepared to mandate central treasury to control all corporate cash is taking a huge stride towards greater corporate cash efficiency. Immediately, the treasurer can start to answer some of the most fundamental cash management questions:
- What cash is available?
- Where is it?
- Is there sufficient cash surplus to reduce/obviate external borrowing by funding internally?
- What liquidity management solutions are available to accomplish this?
However, other factors can still impose major constraints on the treasurer’s success in answering the preceding questions. Bank relationships are an obvious case in point. If every business unit is using a different bank, the treasury faces a huge logistical headache in aggregating cash data. At best, multiple electronic banking platforms will have to be accessed. At worst, some banks may only offer paper-based reporting.
Yet again, the CEO can control the environment here by influencing the choice of banking partners. If a single bank cannot offer account coverage in all the desired locations, it should at least be able to provide the corporation with a single, consolidated electronic cash information feed that includes those locations (even if it has to obtain the data from third-party banks to accomplish this).
Without this data, treasury is unable to undertake the crucial task of cash forecasting. Many other factors (such as business type) will influence the accuracy of the cash forecast. However, once treasury is able to calculate a simple maturity ladder for cash requirements over specific timeframes, it can start to match cash supply/demand far more effectively.
Some banks employ a strategy of smoke and mirrors, claiming the cash forecasting tools they offer are all-encompassing solutions. Not so. Many treasurers generate accurate forecasts using nothing more than a spreadsheet; the key is always the data. If the bank cannot supply your treasury with timely and accurate cash data, all the forecasting tools in the world are useless.
A bank capable of offering this represents a major piece in the cash jigsaw puzzle. But it can (and should) offer more. Cash visibility is one step, liquidity management is quite another. To add any value the bank must also be able to supply professional advice and tools that allow the treasurer to optimise corporate cash resources. Given the regulatory environment, developing and deploying liquidity management structures in Asia is a complex task. The bank that can achieve this, so that unnecessary borrowing is eliminated and there are better returns on aggregated credit balances, is genuinely adding value.
Yet this is still only part of the picture: the ideal banking partner for these tougher times must obviously be able to offer support for their clients various cash-related metrics – such as days sales outstanding and days payable outstanding – and their working capital cycle. On the inventory management side, banks must be able to offer a comprehensive set of solutions for trade and the securitisation of assets. But the key from the corporate perspective is how banks marshal those resources. Banks must demonstrate the right working capital mindset by proving that the well-being of a corporate’s balance sheet is the primary consideration in everything it offers, and not just a sales pretext.
Budgeting for new treasury technology in a tougher business environment may seem illogical, but in such an environment it can be one of the few investments that show a robust and immediate return on capital. (Contrast this with a new production facility that is likely to output goods for a market in which demand is depressed.) Small changes can pay large dividends here – such investments do not necessarily have to comprise a new treasury management or enterprise resource planning system. Smaller tactical investments that facilitate data consolidation and visibility will show the best returns.
Yet technology investment in isolation achieves nothing; it is just one element in a cash-focused environment that senior management needs to define to facilitate the work of treasury. For example, the benefits of a new treasury workstation will be largely negated if the corporation is using 20 banks and cannot obtain consolidated cash information.
Inevitably, risk management has moved further up many corporate agendas in recent months. At the most superficial level, there are obvious points to be aware of such as the level of government guarantees afforded for corporate cash deposits. Elsewhere, things may be less clear cut. One of the most compelling lessons of 2008 is that over-reliance on standard credit ratings is seriously ill-advised – a caveat that applies equally to customers, suppliers and banks. Additional indicators need to be considered; for example, in the case of a bank, what regional commitment is it making, and what are its plans for network expansion and recruitment?
This corporate body language may offer clues, not only to basic solvency risks but also to commitment risks. A bank that is technically solvent but lacks commitment to supporting clients through robust cash management services and/or lending is of negligible use. Reliance upon such a bank is a risk in its own right.
Setting the Tone
As mentioned, treasurers may control the cash, but senior management can and should dictate the overall cash management milieu. After years of easy credit, instilling the mantra that cash is a hugely precious resource may not be easy, but it is both essential and possible – for instance, individual performance targets can be adjusted to reward ‘cash-friendly’ behaviour.
At a structural level, senior management has to take a holistic view. Giving treasury control of all corporate cash is futile if it is not also given the appropriate banking partners and technology. Creating this cash-efficient framework may not only ensure immediate survival, it also offers a substantial return on the effort invested for years to come.
About the Author
Hiten Joshi is Director, Transaction Banking, at Standard Chartered Bank. Before joining the bank in 2005, he spent five years working as a financial business consultant and regional sales head with global financial institutions in London and Singapore. This article was first published in Asia, Africa and the Middle East: The Guide to Working Capital Management 2009/2010.