by Niclas Osmund, Head of Cash Management Advisory, Patrick Zekkar, Head of Trade Finance Sales, Sweden, and Niklas Callerstrom, Global Head of Supply Chain Services
In the previous article in this Guide, Erik Seifert outlined the importance of efficient, centralised liquidity management structures to ensure control over cash flow and mitigate counterparty risk. In addition, treasurers have increasingly recognised the need for both process and capital efficiency to create and preserve working capital and reduce liquidity risk. In this article, we look at some of the challenges that treasurers face in the way that they approach liquidity management, and ways of optimising this by taking a holistic approach to the financial supply chain.
Treasurers best equipped to unlock liquidity are those who seek visibility and control over the cash held in bank accounts globally, and the processes that contribute to working capital.
Liquidity is an integral element of the treasury function: this in itself is neither new nor surprising. However, as a consequence of recent events, it is now many treasurers’ top priority. According to the Cash Management Survey 2008, published by gtnews in association with SEB (‘SEB/gtnews Cash Management Survey 2008’), treasurers believe that liquidity management represents the aspect of treasury with the greatest potential for improvement (34%), a shift from the previous year in which cash flow forecasting was identified as the most important priority. Clearly the two are inextricably linked, as illustrated by Robert Pehrson in the article that follows, but there are a variety of opportunities for enhancing liquidity management. Liquidity management is also different today in that it is now viewed from a new perspective, and by people within the business who were not previously involved. For example, liquidity management is not only about fine-tuning forecasts, but also securing funds from customers and ensuring that key suppliers continue to perform. This requires that treasurers become more involved in the company’s core activities and take a more prominent role. Often, the difficulty for treasurers is firstly to identify areas for improvement, and then to take control over the processes that contribute to liquidity optimisation, and prioritise the initiatives that will deliver the greatest value. This is the essence of SEB’s Corporate Value Chain™ approach, which explores the financial supply chain as a whole, both cash and trade, to identify, prioritise, develop and deliver concrete solutions to the challenges facing corporate treasurers today.
Theory and reality
Liquidity management is nothing new, and the solutions for enhancing liquidity, reducing liquidity risk and pushing down working capital requirements are often familiar tools in the treasurer’s toolbox. However, there are invariably challenges which conspire to thwart initiatives to optimise liquidity and reduce the company’s working capital requirement.