Cash is King!
'Cash is king' goes the adage, and a king left unprotected can spell danger for the entire kingdom!
In the corporate kingdom, organizations take great care of this "king" and watch over him at all times. Guarded well, the kingdom remains strong and prospers. Poorly managed, the kingdom is bound to come crashing down or be taken over by the nearest rival.
Cash-flow management and projection is the key to making strategic and profitable business decisions. Corporates have been more focused over the last decade in terms of tracking and managing cash flows, and commercial banks have been offering a series of products for the same, ranging from controlled disbursement, account reconciliation, balance reporting, lockbox, and cash concentration services. All these, of course, aim at forecasting cash flows and providing investment opportunities. While the concept sounds simple, there are several emerging trends and challenges that banks need to closely look at. This write-up presents a point of view about the challenges that corporate banks are faced with today in the areas of cash management and how smart analytics and business intelligence can help organizations drive decision making.
First - cash flow is not just impacted by payables and receivables but also by other factors such as inventories, capital expenses, debt expenses, exchange rates and, most importantly, the variability of 'timing' in these cash movements. The timing factor is what is driving banks to provide companies with services that reduce operational risk via real-time reconciliations and same day exception detection and resolution. Statistical analysis and configurable models enable stakeholders to view historical trends and leverage actual transaction history to predict future cash flows and discern patterns.
Banks are topping their conventional services like account reconciliation, balance reporting, control disbursement, cash concentration, etc. with other value added services like real-time tracking of surplus positions, more visibility into global cash positions, and automated sweeps, which remove reliance on intra-day borrowings.
J.P. Morgan, saw the importance of serving its multi-national customer base and introduced a real-time enabled platform called iDDA for managing treasury activities globally. Such forecasting and tracking options help institutions better compete in international markets.
Another great example of banks going beyond the conventional services is that of Standard Chartered Bank. Their global liquidity management clientele grew by 15% as a result of implementing a complex cross-border multi-currency notional pooling system that enables customers to consolidate their balances across regions to attain higher interest rates.
Second - what corporates are constantly grappling with is to know how much is too much for cash reserves. The credibility that a company acquires with banks, creditors and other vendors is built over years but can be blown away in days if it falls behind on payments. Hence, investing liquid funds BUT maintaining the ability to satisfy all payment obligations when due requires a very careful balancing act.
From a simplistic view, the cash balance needed to be maintained by a bank should factor in:
- Minimum depository balance: Deposits maintained by corporates
- Operational balance: Cash needed to manage day-to-day operations, wages, inventory, etc.
- Precautionary balance: Emergency liquid funds
- Transaction balance: Money needed to fund outstanding checks, wire payments, etc.
Companies need to arrive at the magic number, one that will leave enough in the pocket to cater to even extreme conditions. Analytics plays an important role, with banks employing stress testing and other scenario analysis tools to gauge the impact of seasonal trends, sudden crisis or emergency events (terrorist attacks, stock market crashes, credit crisis, etc.) on the company's liquidity position. Companies that take a more risk-averse approach prefer using sweep accounts to move excess funds into the money market or other short-term investment opportunity. Sure, it will not earn you a fortune, but then the idea is to earn some interest while keeping the funds accessible.
J.P. Morgan's Access Liquidity solution for example, helps organizations better manage their liquid cash globally. Not only do they help companies track some of their trapped cash but also form a bridge to invest this cash by leveraging their asset management capabilities.
Third - there is overwhelming evidence that banks are focusing a lot on offering a consistent multi-channel experience for their customers. This aspect is so crucial that it is now a key factor that corporates examine when they decide to start a new relationship with a bank. The eruption of business usage on tablets and smartphones is changing the landscape of transaction banking. Treasury professionals are demanding that their banks offer a standardized multi-channel experience and banks have no option but to cater to this new generation of on-the-go customers.
A leading research firm's findings amongst a large section of treasury professionals surveyed showed that 43% of associates are presently using more than one channel, 80% of them consider multi-channel important and over 50% say it's a key factor in deciding a new bank relationship. This is clearly an area where banks need to act swiftly to gain an early mover's advantage.
The bottom-line is that a volatile economic situation forces an organization to refocus on the basics. In the wake of a crisis, cash management solutions are more relevant to corporations who are looking to unlock confined capital to achieve better rates of return across a global cash pool. Some banks that were hit hard by various financial crises have continued to augment their cash management business.
Citi is a great example - not only did they continue a high level of investment in their treasury and trade solutions technology, but also managed to build a new award-winning online cash management portal - CitiDirect Evolution.
Banks who are able to give their customers tangible and measurable value additions, provide flexible options for modeling and improve decision making will stand out in this economy. The customer wants every buck managed and utilized but also demands maximum bang for every buck spent! And why not? After all, cash is king!