Published: July 10, 2023
A series of market shocks in recent years have left treasurers facing enormous uncertainties. Adopting a strategy that mixes a back-to-basics approach with an eye on the future offers treasurers the best chance to insulate their organisation against future shocks and unwelcome surprises.
The past few years have been some of the hardest in living memory for corporate treasurers, as a collection of black swan events have given rise to tremendous uncertainty. Trade wars, COVID-19, supply chain shocks, the war in Ukraine, and soaring inflation and interest rates have come along a conveyor belt of doom, all testing the mettle of treasurers. Today, the world is holding its breath, waiting to see if there will be a significant global recession and what form that might take.
At times of market stress, liquidity is a primary focus for corporate treasurers. In the current high interest and inflation environment, looking to maximise internal sources of liquidity can be an attractive option for corporates.
Martijn Stoker, EMEA Head of Liquidity & Account Solutions at J.P. Morgan Payments, outlines the situation: “With elevated inflation, we’ve seen interest rates rise sharply and, while we’ve not hit a crunch yet, market liquidity is slowing. Therefore, funding costs are going up significantly, which clearly increases refinancing risk. Overall, this increases the importance for treasurers of recycling their internal cash and using available internal balances as much as possible.”
During major market events, such as the beginning of the pandemic or in the global financial crisis of 2008, there is a flight to quality and credit. At times like these, it remains relatively easy for high-quality multinational companies to borrow, but their customers and suppliers may not be in such a comfortable place. The start of the crisis, 2008 in particular, was a watershed moment for how corporates look at their overall liquidity picture.
Natasha Condon, Global Head of Trade Sales & EMEA Trade Head at J.P. Morgan Payments, notes: “If one tiny supplier in an emerging-market collapses, and they made a single widget that a multinational corporate needs to keep its production line moving, that’s critical to that business. Companies today are much more sophisticated in looking at those risks and thinking about themselves as an ecosystem, not as an island.”
Linked to that liquidity risk is the threat of supply chain disruption, a topic that has been in the headlines throughout the Covid pandemic. In truth, this risk is multicausal, from the shortages of cheap labour at the ports to the lack of availability of semiconductors and other vital components holding up production and manufacture of various items at different stages of the supply chain.
Condon states that while it is easy to assume that supply chain disruption risk is no longer an issue, that is not the case, as the causes behind the recent disruptions are still there.
“What has happened is consumer demand has started to slow down,” she explains. “Lots of firms built up a tonne of inventory to protect themselves from supply chain disruption during Covid. Now they’re sitting on this inventory, and nobody’s buying it, so shipping volumes start to come down and working capital is tied up. But the causes of that supply chain disruption haven’t gone away. They’re just being camouflaged by the fact that demand has momentarily dropped. We may see a reoccurrence of that issue in the near future.”
A critical element of that type of efficient liquidity management is cash flow forecasting. However, despite being core to corporate treasury responsibilities, forecasting is regularly cited in industry surveys and treasury conference polls as an area ripe for improvement. In times of uncertainty, the importance of accurate cash flow forecasting is heightened.
“Forecasting is key, especially as we’re increasingly moving towards a 24/7 economy with real-time payments and collections, which, in turn, leads to a real-time treasury function,” underlines Stoker. “That is definitely something to consider, so that the right technology, processes, and procedures are found within treasury. Something like treasury mandates, for example, could be quite outdated.”
As business models evolve, particularly with the seismic shift towards online buying and the creation of marketplaces during the pandemic, treasurers need to keep up with the demands these create on their cash management practices. But it is also a moment for treasurers to reinforce their value to the business. “There’s definitely more opportunity for corporate treasurers to get closer to the business teams within their organisations, [to help with] developing these new business models,” adds Stoker.
In this volatile environment, perceptions around working capital are also shifting. Optimising working capital is a survival measure rather than a ‘nice to have’ that merely improves the look of the balance sheet.
“Corporates are examining working capital in a slightly more sophisticated way,” remarks Condon. “They’re turning to SCF to support suppliers through the storm to keep the supply chain functioning well and as a tool to make the corporate a more attractive customer. Inventory finance is also back in fashion, because everyone is sitting on far too much inventory right now.”
On the sales side, using good old-fashioned receivables financing-type structures is coming back into fashion, and not only to quickly bring down DSO in a hurry. “Embedding receivables financing into the sales process in a much more strategic way enables corporates to go to a customer and win their business because they can offer better terms than the next competitor,” states Condon.
These reactive tactics are essential for most corporates if they want to ride out the current waves of uncertainty. But away from the front lines, identifying under-the-radar trends can be equally crucial in predicting what may be coming down the pipeline.
Take ESG as an example, which has been much talked about in the past few years in the context of the environmental aspects and various forms of carbon-transition topics. The environmental element of ESG has crossed over into the financial mainstream, but that is just one pillar of the overall concept. What about the ‘S’ and ‘G’?
Condon reveals that something “potentially quite exciting” is bubbling in the background. “One outcome, as a result of these hard times, is that companies have expressed a wish to look at ESG structures that are focused on financial inclusion.” Whether the emphasis is on consumers during the cost-of-living crisis or driving preferential support to smaller suppliers or minority-owned businesses, the quest to promote inclusion in corporate financing points to treasurers taking a more holistic view of the end-to-end supply chain.
“In the last couple of months, we’ve also had more conversations about deep-tier SCF and pushing financing down not just to the first layer of suppliers, but deeper into tier two, tier three, and so on,” adds Condon. “That is a structurally difficult thing to do, but it adds enormous value if you can crack it.”
Another scenario that treasurers in any industry will be familiar with, particularly if they were in a similar role during the 2008 financial crisis, is an increased level of contact with senior management. If managed correctly, this can play to the treasurer’s advantage.
“During a downturn, getting close to senior management and the C-suite is extremely important from a treasury perspective,” comments Stoker. “By highlighting the overall risk management strategy and looking at areas such as FX volatility and funding, as well as ways to automate processes, treasurers can actively demonstrate the value they add to the business.”
Fortunately, treasury technology is evolving at such a pace that it can facilitate automation, despite market stresses. One particular tool that has grown in popularity in recent years is the API, enabling treasurers to integrate their systems with their banking partners more tightly. This means corporates can benefit from a wealth of real-time information.
With the move towards real-time treasury activity, corporates will increasingly rely on real-time data to operate effectively, but APIs are not the only form of technology that will be pivotal in this on-demand world.
Stoker adds: “There’s a window of opportunity for treasurers to continue to automate and make everything much more efficient. There are many machine learning [ML] tools out there that can support improved cash flow forecasting, for example. We’re at the dawn of this technology taking off and being used on a daily basis.”
ML also has interesting new applications on the trade side. Much of global trade still runs on letters of credit (LCs), bills of exchange and similar, which require arduous manual processing. Every minute spent processing is a minute off the corporate’s days sales outstanding (DSO). “We need to speed up this process, and we need to digitise,” urges Condon. “Where you can’t magically turn the transaction into digital all the way along, you have to absorb a piece of paper, consume it and turn it into digital data. That’s where exciting breakthroughs have been made this past year.”
Compliance and Anti-Money Laundering (AML) are particularly critical elements of a trade finance transaction. This requires a wide variety of checks from the bank in a meticulous and strictly controlled manner. Applying ML to this process is a way to retain the rigorous process but slash the time it takes to approve.
“We announced a partnership with Cleareye in 2022 around this, creating a piece of software that performs the compliance check and applies exactly the same rules as the human checker would,” Condon continues. “I can have a clean audit trail that I can show to any regulator that says the software made this decision, but it was exactly the same decision that the human would have made. The acceptable standard hasn’t deteriorated because a human was replaced with a computer. Frankly, we have increased the quality.”
Where you can’t magically turn the transaction into digital all the way along, you have to absorb a piece of paper, consume it and turn it into digital data.
One technology that has been discussed extensively in recent years but is still looking to make its mark in the treasury landscape, is distributed ledger technology (DLT). That could all be about to change, however, as specific use cases in both payments and trade are emerging. Programmable payments are one example, where regular transactions – not crypto – take place on DLT in a way that combines the payment and the payment data on the same channel.
“In the past, and it’s still happening today, to be honest, payment information is sent one way, and the actual settlement of the payment goes through another route,” explains Stoker. “With DLT, everything can be combined, and we can have ‘atomic’ linkages of the information and the actual value.”
One DLT use case for corporates is that they can create automated transactions linked to specific parameters using smart contracts, so a payment will be sent out if pre-agreed terms are met. Stoker explains: “DLT can be used for intercompany transactions and for supplier payments as well. Treasury doesn’t have to have a person manually sending those payments anymore. There are some huge potential efficiency benefits to be had.”
There are also use cases for DLT in trade finance, particularly in light of recent legal changes related to electronic negotiable instruments that are starting to go live in specific markets such as Singapore. These amendments essentially allow for the digitisation of the bill of lading and the bill of exchange.
“With both of those instruments, you can do all kinds of interesting things if you can digitise them,” remarks Condon. “But because the owner of that digitised piece of paper is the legal owner, you have to know every second who the owner of that instrument is – and this is where DLT can be useful. Because the one factor that a blockchain gives you is 100% certainty over who owns the instrument at any moment. As these legal changes start to roll out, there’s potential for something that will make global shipping more efficient. And, with the bill of exchange, some aspects of financing also.”
Despite these positive technological advances, risks remain high on the agenda for treasury teams. As such, re-focusing on treasury fundamentals and improving them where possible will be critical.
Summarising, Stoker says: “We’ve discussed how APIs can help with real-time data, and we are slowly moving towards a real-time treasury function, so treasurers need to be ‘on the ball’ for any changes there, whether it’s a market or regulatory change. Integrated solutions usually help. Managing, preserving, and optimising working capital is the name of the game in 2023.”
Condon agrees, noting that the way treasurers view their entire supply chain is critical. “Corporates that extend their payment terms without helping their suppliers will end up paying for that in the cost of goods sold – it’s a financing cost,” she notes. “Using working capital solutions more smartly to benefit your counterparties and thus benefit yourself is the key for 2023. That way, we all weather the storm together and collaborate to come out in a better place.”
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