Treasurers Debate How to Manage Cash in Volatile Times 

The UK Association of Corporate Treasurers (ACT) annual Cash Management Conference 2024 was held on 6 March at Convene in the City of London. Treasurers from Tui, S4 Capital, PPD, Rentokil Initial, and Diploma, among others, examined how treasurers are coping with recent spikes in interest rates, FX, and economic unpredictability brought about by the pandemic and geopolitical tensions.

The Covid-19 pandemic and current conflicts in Ukraine and Gaza – not to mention tensions over Taiwan – have affected the economy, supply chains, oil and other commodity prices. This has caused inflation and interest rate (IR) rises, as governments try to control rapid price and wage rises, following a long period of loose monetary policy after the 2008 global financial crisis. It’s been, and remains, a volatile time, which impacts FX, loans, hedging programmes, liquidity, and, crucially working capital. Treasurers have been challenged as never before within living memory.

There are also imminent elections in the US, where Donald Trump could make a return to the White House altering American economic policy, and polls are due in other countries. For example, a general election must be held in the UK this year. A Labour victory is widely expected.

“I’ve a strong sense the markets have priced this in,” said the conference opening speaker Sonia Khan, Director of the lobbying firm Cicero, as she reassured attendees that a Labour win shouldn’t have a major near-term economic impact. Labour’s policies don’t diverge from accepted financial norms as did those of Liz Truss, who was briefly Prime Minister before Rishi Sunak’s arrival at No 10 Downing Street in October 2022. Her unfunded tax cuts caused a UK-centric spike in IR.  

Khan was  a special adviser to the ruling Conservative Party’s former Chancellor of the Exchequer Sajid Javid and also to former PM David Cameron. “My sense is [that] people aren’t really listening to the present government any more,” she said. They have been in power for 14 years, and there have been a number of Conservative PMs during that time.

The UK’s Spring Budget was held the same day as the conference. The present Chancellor Jeremy Hunt set out a range of tax-cutting measures to try to retain power, and outlined other measures intended to stimulate the stalled economy. Treasurers in the room in London kept one eye on the announcements being made at Westminster while listening to their peers.

The move to ISO 20022 standardisation in payment messaging and its potential to enhance liquidity data services, and deal with strengthened sanctions in a time of war, was also debated at the conference (see P3).  

Coping with crises

“These multiple events in recent times remind everyone that cash is king,” said Mark Tebbett, Head of Treasury, UK & Ireland, Tui, during the opening ACT panel, where he was joined by treasurers from Rentokil Initial and Diploma.

Tebbett was thinking particularly of when pandemic lockdowns placed the global economy in stasis, and travel firms faced the danger of going under. But rising IR and credit risk is now another factor to consider.

The latter raised its head a year ago when Silicon Valley Bank (SVB) collapsed after it was adversely affected by the change in the IR environment. Many treasurers at the time feared other bank runs or counterparty risks from institutions that were similarly locked into long-term loans or to financial products that were no longer favourable. 

“We have had Brexit, as well as Covid, wars, and rising oil [prices] and IR over the past five years, so we’ve had a time of it in regard to volatility,” Tebbett acknowledged, while emphasising how the international nature of Tui’s German-listed but global travel business is particularly susceptible to FX exposures. “We are only now back to hedging at pre-pandemic levels as the sector recovers.”  

Flexibility is key

Tebbett emphasised that a treasurer’s role is not just about liquidity or moving and recognising payments across borders efficiently without risk. “Cash forecasting is important too. Tui is a large travel business, so we carry out a lot of FX hedging. Typically, it’s 18 months in advance, and we need to use our forecast for that.”

That means having accurate cash reporting, tracking, timely analytical data access, and historical data. The latter has been disrupted by recent shifts away from the norm, with Covid being a particularly big outlier. 

“Everyone knows forecasting is intrinsic to the treasury role,” said Gail Erskine, Head of Cash Management, International Corporates, Funds and Insurance, Barclays, as she moderated the opening panel of the conference. For example, it can lock in present high IR or a good FX rate, depending on how accurately the future can be foreseen. Forecasting places cash where it needs to be in the most optimal manner.   

“During my career, I’ve seen the good, the bad, and the ugly in regard to cash management and forecasting,” said fellow panellist Bente Salt, Group Treasurer, Rentokil Initial. “Including what happens when a company goes to the wall.” 

Salt knows the importance of good cash management after a long treasury career. She stressed that at her present pest control company they adopt a two-fold approach:

• An accounting focus: gives a corporate liquidity headroom in the event of a crisis
• Flexibility: via MMFs, cash pooling, and so on, gives a company options, as well as maximising value from cash vis-à-vis interest. Avoiding reliance on a single tool, structure or policy is a sensible approach in order to keep a strategy flexible  

“During Covid, for example, we had to be flexible and fell back on 13-week cash forecasting for the 19 countries in which we operate,” recalled Salt. “We looked at revenue, payroll, tax, and then ‘everything else’ that might impact crucial working capital during that time. Flexibility was key. We’ve since returned to our normal fortnightly cycle, cash pools, MMFs, and way of operating.”  

Rising IR

The next crisis, flowing on from recent wars and the hangover from loose monetary policy during the pandemic, is the rise in IR as economic policy tightens. “We have debt after a lot of recent acquisitions,” said Andrew Hutchinson, Head of Treasury, Diploma, highlighting during the same ACT panel how the increased IR causes loan costs to rise. Conversely, it can help firms with savings. 

Diploma is a UK FTSE 100 company that distributes specialised technical products and services for the controls, seals, and life sciences industries. “But we’ve a strong culture of cash generation in the businesses we’ve bought.” This negates undue debt concerns even though the cost of money has risen.   

However, he admitted: “Cash management is now a boardroom-level discussion point for us. They want to see cash and understand where it is going.” 

Fellow panellist Salt joked that: “I’ve a free flow [available] cash target to meet. There is no bonus if I don’t hit it.”     

Liquidity and MMFs

Ian Cooper, Group Treasurer, 3i Group, discussed the challenges of managing liquidity in the current market environment in the next conference session. “We are a FTSE-listed investment company, with a £24bn market cap, and have more than 50 companies in our portfolio spanning the retail sector, digital and infrastructure. There is a standalone investment vehicle as well that targets the green transition and ESG.” 

“IR rises haven’t impacted us much centrally, as we’ve a decent cash balance,” said Cooper. “Our treasury focuses on securities and liquidity, especially via MMFs . We’re not trying to play the IR curve.

“However, it’s a different story at our portfolio companies where we’ve had to engage with local finance teams around the world to ensure they are not caught out by the changing environment and are getting a good return. Surprisingly, some of them didn’t know what rate they were getting from their local bank versus the government’s baseline, or they weren’t negotiating hard enough, or looking at MMF alternatives. That is why we stepped in to assist.” 

While ensuring that 3i Group doesn’t ever run out of funds available  for acquisitions is the primary concern for the core treasury team of four, Cooper is aware there is “more value on offer when [the] IR is higher”. Consequently, he reviewed how the 3i portfolio firms were managing their cash and checked they were doing everything possible to maximise value.   

“For 10 years no-one cared about IR. But now it is worth looking at it,” said Cooper. 

A presentation from James Silverston and James Ridgewell from the UK’s Financial Conduct Authority (FCA), then followed.

The regulators invited the audience to participate in the upcoming reform of UK-domiciled MMFs, which is designed to increase the resiliency of these short-term liquid instruments. The CP23/28 MMF Update deadline for industry feedback is likely to be extended. It’s a regulatory reform that treasurers should be aware of, even if they don’t want to contribute to its amendment.  

Mitigating FX risks

Another volatile area for treasurers that impacts their cash management activities is FX. For example, Lebanon, Argentina, and some African countries have experienced significant swings in recent times, exacerbated in part by money from MNCs going back to ‘home’ countries now that better interest rates are available in Western markets. IR rises globally are impacting  the comparative values of currencies. 

Christof Nelischer, is the Group Treasurer at S4 Capital Group, a  digital media marketing and advertising company headquartered in the UK. He explained that FX volatility across its estate of around 30 businesses across the world, such as the Media.Monks brand that was formed in the Netherlands, wasn’t a concern. “We have launched an inter-company netting structure,” he explained. “This converts funds back to our home currency. We’re a fast-paced sector and company, so the quicker we get rid of FX exposures, the better.”  

S4 Capital Group doesn’t  use currency correlation hedging techniques, explained Nelischer under questioning, because there are only nine currencies and consequently eight trades to get ‘home’. All are major currencies. It’s only really the US dollar versus local oil-rich currencies in the Middle East that tend to participate in correlation practices. “However, our scope of operation is wide with 1,000 individual entries covering 300 relationships in the mix. Sixty formal entities participate in our netting,” he said. 

Fellow FX panel member, David Everett, Head of Treasury, Future, a publishing firm with brands and a digital focus around the world, said:  “[We have] used our economies of scale to get good FX rates. 

“We get local invoices, but we’ve got natural hedges across our operations, such as in dollars to pounds, as we do a lot of work with Google and Facebook in America,” he explained, adding that a former treasurer is his CEO, “which can help with greenlighting projects”. 

Transactional FX

Transactional FX, which is the process whereby a company taps into a digital banking partner’s FX execution tools to get a favourable price, was also discussed in a panel session.

By also granting data access to its invoicing, payroll, and other corporate systems, a bank can see the value of flows and offer a company dynamic, advantageous services and pricing against the assessed positions. Such embedding of services in a two-way process has received a boost in recent years alongside the increased usage of open APIs because they empower easier data exchange and connectivity.

“The buying power of some customers is evident in the marketplace,” said Simon Jones, fellow panellist, and an independent treasury consultant who formerly worked at ClearBank and a number of other corporates. 

Closing panel: The value of humans

“Winny Li, Group Treasurer, PPD, a clinical research services firm within the large Thermo Fisher Scientific pharma group, predicted: “2024 is going to be a chaotic year, just like the last one.”

During the concluding conference panel, she said: “We have  many elections on the horizon, ongoing currency volatility, and I don’t think the UK will cut its rates  as fast as some are expecting.”

The moderator, Mike Rigby, a managing director at Barclays, agreed when stating “stability is unlikely in the year head”. Principally, in his opinion, this is down to the following key factors: 

•   IRs will enter a downward trajectory. But ‘when’ is the key question. Getting this prediction right will positively or adversely impact cash positions
• Meanwhile, present high rates create a potentially fatal credit risk, as they did with SVB last year. Treasurers need to be aware of this when looking at partners and counterparties
• The Chinese economy holds a number of risks, especially in regard to Evergrande. The indebted property developer was ordered into liquidation on 29 January by a Hong Kong court. But the fallout out from its demise will cause reverberations
• Commercial real estate globally, but especially in the US, is also a concern, perhaps linked to the post-pandemic downturn in office attendance and debt levels in the sector 

Fellow panellist, Austin Matthews, Assistant Treasurer, Sky, was more worried about the macroeconomic and specifically UK-centric position set out at the beginning of the conference by the opening speaker. “Consumer demand in the UK is important to us [for TV subscriptions],” he said. “How the UK economy does post-Budget, and the possibility of a new government, matters.”

Regardless of any external factors, do the job of a treasurer, he advised, by staying on top of the figures. “Look at the numbers daily and examine what is behind them.” 

“It’s a very uncertain world,” admitted PPD’s Li, advocating that her treasury peers “just keep calm and deal with the challenges logically”.   

She concluded: “Make sure your treasury structure and risk framework work for you. Ensure you have good partnerships with banks in different regions, and remember humans can add value on top of automated systems and data tools.”