Published: January 17, 2023
Treasury has become a key player in mitigating the pressures brought about by unrelenting global economic volatility. Here, Daniela Eder, Head of Payments & Cash Management Europe, and Karsten Becker, Head of Europe Product Management, Transaction Banking, Barclays Corporate Banking, dig deeper. They explore the impact of unsettled times on working capital management and reveal the role technology has in optimising outcomes for the whole business.
Record inflation, rapidly rising interest rates, decreasing revenues, and increasing bad debt are the stuff of nightmares for anyone charged with managing working capital. Without a crisp response to this tsunami of negatives, the ability of the rest of the business to make timely and appropriate decisions – around such fundamentals as price rises, supplier relationships, staffing levels or inventory control – can become extremely problematic. And thus it has.
To compound difficulties, the worst of the current wave has happened in a very short period, the recent turn of events escalating throughout 2022, and driving the onset of record levels of inflation, rapid interest rate rises, and a global fuel (and food) crisis created to large extent by Russia’s invasion of Ukraine.
With the extreme, and in many cases ongoing, challenges imposed by the Covid-19 pandemic, liquidity and working capital have demanded close and intelligent management throughout this period, says Eder. “It’s been about efficiency and cost control but also about keeping the business alive by staying digitally connected,” she notes.
With treasurers forced to adapt in an unusually short timescale, events of the past few years have shone an intense light on the tools used to mitigate some of the shocks. Close scrutiny of practices around forecasting, and receivables and payables financing, for example, should have already alerted finance teams to the presence of any gaps, with action underway to ensure the business is being run in the most efficient way.
Those that have in response shifted towards digitalisation and been able to optimise their balance sheets and make best use of their liquidity, will now be on the front foot, primed for more change and new solutions, notes Eder. Indeed, with payments underpinning every business deal, the roll-out of immediate processing in many jurisdictions around the world is enabling those buyers and suppliers to conclude their deals with ever-greater speed, and bring greater visibility, flexibility, and control to their working capital management.
With data and liquidity at the heart of a robust working capital position, the arrival of new infrastructures and tools, driven in part by the agile and creative force of the global fintech community, ensures optimisation of cash flows is an attainable goal for many more businesses. Of course, some businesses and sectors will be affected by current events more than others, and predictions for 2023 and beyond are extremely difficult. But, says Eder, “the more these intelligent tools, and the data they create, are leveraged, the better the risks can be managed”.
There is a general understanding in the corporate space that the efficient and effective running of treasury has become more critical since the pandemic. They know that this urgency has been amplified by current events, that any issues occurring here will impact the rest of the business, and that the speed with which they can access liquidity and financing, are all now daily concerns.
When under such pressure, it’s clear that handling invoices, matching receivables or processing forecasting data by hand, is seriously sub-optimal. Yet while the availability of new technologies such as APIs and AI means the manual work is not necessary, it nonetheless persists in many companies.
The key to successful working capital management in volatile times is not to be reactive, but to be proactive.
That said, with the depth and range of current issues having pushed many treasurers to focus on working capital management, Eder notes a range of measures having been adopted as businesses try to achieve the best outcomes. However, while the measures applied should enable rapid reaction to changing business demands, they must not in any way compromise operations.
Blindly extending DPO while demanding DSO reductions is no longer sensible, nor even permissible in some jurisdictions, says Becker. Adopting this approach can damage relationships between suppliers and buyers, and even harm the supply chain itself. A balance must be found. “The more that intelligent tools are used in supply chain management, the more flexibility there is,” he says. If it means being able to reduce pressure on a distressed key supplier because more appropriate working capital management measures are visible elsewhere, then digitalisation is surely a better response.
Indeed, for Eder, the roll-out of an effective digital response mechanism is no longer just a nice-to-have. “As we move towards new infrastructures and real-time processing, there is now no choice but for treasury to take the pathway towards digitalisation,” she states.
Not all may be ready to agree. The emergence of real-time payments mechanisms may be met by some treasurers with the view that they don’t need real-time payments. And indeed they may not. But with the adoption by buyers and suppliers of these tools rapidly expanding, being able to process and capture the related payments data in real-time has obvious working capital management advantages. Once that payment is booked it becomes both usable cash, and part of an increasingly accurate forecast. And, as Eder notes, balance sheet optimisation and transparency around cash flow supports a stronger credit rating when accessing external financing.
For those who already buy into the power of digitalisation, the recent general uplift in the deployment of technology in key corporate functions such as treasury, accelerated by the pandemic, is combining with further infrastructure developments in the payments space. If, as Eder hopes, “both meet at the top”, it means many more businesses will be able to enjoy the advantages.
In the largest corporates, leveraging technology has been part of their strategy for some time. Many have their own SWIFT connectivity, will be au fait with the latest tools, such as gpi, and have strong bank connectivity, with payments expedited for those that are members of the SWIFT network.
“But there are many areas along the chain where improvements can be made for many more businesses, and it all starts with visibility and understanding of your cash and cash flow, and quick access to liquidity,” says Eder. “If you’re not already using digital forecasting or engaging with the real-time treasury toolset, I encourage you to consider doing so because there is no going back.”
The pace with which new technologies are emerging can make it a challenge for treasurers to prioritise solutions. Plotting a chart through this dynamic environment requires a clear strategy, defining first what the business aims to achieve, advises Eder. Part of that strategy will be guided by liquidity planning, risk management and cost control, but elements such as supply chain stability should also be considered.
Bearing witness to plenty of client agility suggests to Becker that treasuries the world over have long since understood that centralisation is key to building a deeper understanding of their working capital. “For many it’s pretty much a precondition of progress because as a treasury is centralised, it enables a reduction in the number of bank partners and bank accounts, which in turn enables a more focused approach to working capital management,” he explains. “Having to manage working capital over many accounts and locations is so much harder without a centralised set-up.”
From the perspective of sharpening internal processes, and the application of cutting-edge working capital management technology, centralisation – and standardisation – using solutions such as virtual accounts structures and virtual IBANs, is enabling treasury to unlock a host of new opportunities, notes Becker. This includes better cash visibility through AR matching tools, especially with the increased role that AI is playing here to make smarter decisions. Real-time reporting, driven by API bank connectivity, and real-time payments infrastructures around the world are also combining to give clear visibility and control over cash globally. Treasuries can even begin automated investments of surplus.
The progress that centralisation, and the subsequent digitalisation of a range of processes, is now a notable trend as treasuries seek to apply efficiency, reliability, and security to their working capital management measures. It follows a line of thinking that is seeing businesses adopt digitalisation across a wider scope of their activities, driven by a range of key internal and external stakeholder interests, and also now ongoing macroeconomic pressures.
“It’s now up to us as banks and financial infrastructure providers to upgrade and deliver the added-value services that come with the new opportunities created by digitalisation,” says Eder. To this end she notes in particular that the publication of bank APIs is playing a “critical role in facilitating mass transfer of data in a standardised form”, especially from a payment and a forecasting point of view.
On the lengthening list of values added is quicker reconciliations of receivables. But APIs can also enable treasuries that are not able or ready to rationalise banking partners to collect data from multiple banks via third-party account information service providers, which is a form of centralisation in itself.
While the roll-out of this technology is changing the way businesses settle and pay, Becker also sees its emergence as a mutual journey for treasurers and banks. “Just as not all treasurers have the processes in place to make use of these on-demand services yet, not all banks have the whole suite of API capabilities on offer.” The joint direction of travel towards the greater adoption of APIs, he feels, is “inevitable”.
Treasurers without the visibility, flexibility and control over working capital that the right technology can bring may be feeling most pressure in the current environment. But talk of centralisation, AI and analytics, APIs, virtual accounts structures and so on may sound unrealistic, particularly in the face of budgetary constraints.
“Often the smallest element is the budget for the use of these technologies,” responds Becker. “As these tools are developed, so their use becomes more widespread, driving down costs.” However, he adds, the bulk of the cost of building a more efficient approach is often in making sure internal processes can support and extract the most from new technology. “There is no point in planning to roll out APIs for real-time account information, if real-time treasury reporting and decisioning is not also available.”
For this reason, it is vital that treasury plans are in alignment with the overarching business strategy. This ensures the key wants and needs of treasury and the business are mutually prioritised. If, for example, hugely increased online trading is the business strategy over the next three years, treasury will need a plan to leverage additional payments channels, platforms and potentially additional currencies, alongside a working capital management structure capable of capturing and processing real-time data.
“Most organisations are looking at their current business models and thinking about where they want to be in the next few years, and how they will get there,” comments Eder. “By putting in place the mechanisms that support that journey, and by optimising working capital, treasury will be supporting future growth.”
Ultimately, declares Becker, “the key to successful working capital management in volatile times is not to be reactive, but to be proactive”. This is why, for treasurers, strong internal communication, keeping up to speed with the latest technologies, and continually reviewing peer activities and best practices are essential. But connecting with a trusted banking partner that not only delivers the right solutions but also has the knowledge and experience to offer advisory and consultative services across the board, should similarly be considered a key part of that strategy.
Barclays Bank Ireland PLC is registered in Ireland. Registered Office: One Molesworth Street, Dublin 2, Ireland D02 RF29. Registered Number: 396330. A list of names and personal details of every director of the company is available for inspection to the public at the company’s registered office for a nominal fee. Barclays Bank Ireland PLC is regulated by the Central Bank of Ireland.
This article is intended only for an audience in Europe. Where readers are present in the UK it is only intended for persons who have professional experience in matters relating to investments, and any investment or investment activity to referred to within it are available only to such persons.
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