Pressure on cash management and working capital looks set to be more intense than ever in 2024, forcing treasurers to be resourceful and innovative to protect capital and help navigate their companies through the year ahead.
Entering 2024, the impact of higher interest rates in markets worldwide has been a critical focus for corporate treasurers. Even though the Federal Open Markets Committee in the US was far more active and aggressive with rate hikes in 2022 compared to 2023, the Federal Funds rate was still a whole percentage point higher entering this year than it was 12 months previously. In January 2023, the Bank of England’s Bank Rate stood at 3.5% but entered 2024 at 5.25%. The European Central Bank’s benchmark rate on the deposit facility stood at 2% a year ago, but has doubled to 4% in the 12 months that followed.
This higher interest rate environment has brought cash management and the treasury function into sharp focus, particularly for multinational corporates.
Jim Scurlock, Senior Director, Assistant Treasurer, Expedia Group, comments: “Expedia has operating subsidiaries all around the world and, to maximise shareholder value, it’s important that we have strong cash management practices to limit idle balances and invest any excess liquidity to maximise our interest income.”
Treasury at Expedia is also responsible for forecasting interest income. “In a much higher interest rate environment, any changes to the interest rates for the Fed funds have a much more profound impact than when rates were at 0%,” adds Scurlock.
With the rate environment impacting both the borrowing and investment sides, how treasurers manage their surplus cash and construct borrowing facilities is under intense scrutiny. Treasurers who have worked to get good visibility and control over their cash are best placed to navigate the current rate environment successfully.
Kemi Bolarin, Head of Treasury – Europe, GXO, reveals: “I initiated a project in October 2022 that saw us implement a multicurrency notional pool, an in-house bank and then a netting solution. With the in-house bank and multicurrency pool, the key objective is centralisation of cash.”
Before this project, Bolarin faced around €20-30m of cash trapped in various accounts, particularly across Europe. The three-phase project has put her team in an excellent position to manage cash centrally, enabling it to be used effectively, removing any need to run unnecessary overdrafts across the group.
“Anticipating the challenges that may arise in 2024, I believe we’ve got the right building blocks to navigate these successfully,” asserts Bolarin. “It’s not that we necessarily had a crystal ball, but rather, in the aftermath of the pandemic, there was a collective consideration of potential scenarios. Having structures that enabled cash visibility and centralisation helped.”
Similar to many treasurers, Bolarin’s team now maintains a vigilant daily view on liquidity, ensuring that cash can be effectively and efficiently moved around, covering shortfalls and investing any surplus.
“Our key objective is to manage interest expense because we’re net interest expense within the company,” she adds. “That will be a priority for us until things stabilise.”
Maximising working capital
Working capital management is a critical area of risk management for treasurers as they look to ensure that their businesses remain liquid. This means having enough cash to fund the business and preventing unnecessary outflows. Having accurate insights into the company’s accounts payable and accounts receivable is essential for treasurers to keep track of performance and understand how to release value within working capital.
“A great way to keep on top of the working capital situation is by staying connected with my colleagues within the financial planning and analysis team, who have a long-term view of expectations for the business,” explains Bolarin. “Treasury then breaks down that view into daily and weekly compartments, where we’re able to analyse what our working capital looks like.”
Clearly seeing where value exists within the business and where this can be released is vital to efficient working capital management. This is particularly essential when the market is volatile, because treasurers can find themselves caught between wanting to negotiate longer payment terms with suppliers and facing a customer base looking for preferential treatment for their own payment terms.
“We have to retain our customers, and we don’t want to annoy our suppliers, so it becomes a balancing act of staying in touch with every stakeholder in our working capital,” outlines Bolarin. “Good communication is essential, and we must understand the credit stability of these counterparties, call out risks as quickly as possible, and then look for areas within our working capital structure to insulate that risk.”
Rogier van Lammeren, Head of Trade and Working Capital Products, Lloyds Bank, comments that corporates can look to their supply chain to create working capital for themselves and their suppliers, which helps support both sides of the equation.
“From a buyer’s perspective, looking at opportunities to provide quality low-cost working capital into your supply chain is vital,” van Lammeren says. “Supply chain finance programmes can achieve this, and different opportunities exist around how these programmes can be set up. For example, banks offer ESG-linked supply chain finance programmes to help with ESG adoption into the supply chain.”
Conversely, suppliers can find receivables financing an equally exciting opportunity. “Receivables financing lets suppliers take advantage of upcoming receivables to get working capital into their organisation today, rather than being paid according to the payment terms agreed with the buyers,” van Lammeren adds.
Getting to grips with the realities of AI
The topic of AI hit the headlines worldwide in 2023, including in the treasury space, as the launch of generative AI solutions to the open market added hype and momentum to an already fascinating technology. This year, treasurers will be looking for more practical applications at affordable prices if the AI hype will translate into actual enhancements to current working practices.
Scurlock is confident that traditional and generative AI will have a role to play in treasury. “As corporate treasurers, we’re all risk managers and have a lot of data to work through,” he says. “AI will just be another tool in our toolbox that we can leverage to assist with our daily and strategic operations.”
There are various use cases for AI and machine learning across treasury, including helping with cash flow forecasting, identifying trends in global cash balances, reviewing anomalies in payments, and opportunities to forecast FX balances to minimise revaluations.
“Today, our use of AI is limited, but it is embedded in many of the data visualisation software that we’re using to monitor our cash globally,” notes Scurlock. “With much of our data, it’s been another opportunity to identify where some of our cash flows are changing around the world and what is driving that.”
One challenge for treasurers is the investment required to add AI to their tech stacks. IT budgets are already stretched thinly as firms pursue organisation-wide digital transformation and must account for rising cyber threats. Certainly, treasurers need to have a clear picture of where they would deploy AI and the goals they want to hit by using the technology, so many are choosing to thoroughly research the topic before going live.
Bolarin shares: “We are not currently utilising AI, but we are in exploratory mode. We’re gathering data and testing predictive analytics. Once we have got our building blocks right, I intend to then layer in all the additional elements that will make us more agile.”
That type of preparation is critical because treasurers must have a robust data strategy in place before starting to deploy AI, as AI is only as good as the quality and quantity of data fed into it. The data strategy should outline the end goal for deploying smart technologies in the company, what data treasury needs to make that happen, where that data is within the organisation – because not all of it will organically be on treasury systems – and who manages that data.
The next step is how to bring all that data into one place. APIs are an excellent option for this, thanks to their ability to link data flow between disparate systems. Another option is the consolidation of systems through a digital transformation project.
“Within GXO, we are going through an ERP transformation, condensing our current ERPs into one ERP,” enthuses Bolarin. “This gives us the data lake upon which we can layer these other various smart technologies. For us, 2024 is all about the building blocks.”
The drive to embrace a culture of digital transformation is flourishing in treasury functions around the world, something that is embodied at Expedia. “The team has been working on various initiatives such as upgrading our on-premises legacy technology stack to SaaS solutions, centralising, cleaning and standardising our data to be able to put it in a central data lake and leveraging data visualisation software to create real-time customisable dashboards,” Scurlock reveals. “The next step is to start with this clean data and leverage AI and machine learning to assist with some of our forecasting.”
One area of risk to address on the technology side is cybersecurity. As the threats become increasingly sophisticated, treasurers need to consider enhancing cybersecurity measures.
Bolarin concurs: “From a finance perspective, we must also be aware of the downside of consuming technology. Standardising technology is a risk, enhancing our cybersecurity measures to safeguard against evolving threats is another priority for 2024.”
Digital trade possibilities tantalise
One of the most exciting prospects in 2024 for treasurers is based on something that happened last year, namely the legal changes that have enabled the digitalisation of trade. Primary among these legal advancements is the change in English law through the Electronic Trade Documents Act (ETDA) of September 2023, which gives digital trade instruments the same legal recognition as their paper counterparts.
Lloyds Bank’s van Lammeren enthuses: “The ETDA has unleashed an unprecedented opportunity to digitalise trade at an extensive scale, enabling the transformation of the ecosystem at large internationally.”
The introduction of the ETDA in the UK, combined with the changes happening in other jurisdictions, sometimes enabled through the United Nations Commission on International Trade Law (UNCITRAL) and its Model Law on Electronic Transferable Records (MLETR) legal framework, enables a seismic change in how corporates and all other stakeholders in the trade ecosystem interact with each other.
“The neat thing about the technology behind digital trade is that it doesn’t look to introduce new ways of working or completely new documents,” van Lammeren comments. “It takes a paper-based version of a trade document and effectively creates a digital version. The benefit of the law change is it brings the same rights and obligations to the digital version of trade documents that already exist with the paper versions.”
A vital element of the ETDA is how dominant English law is in global trade. This means that corporates across the world could start benefitting from the new law today.
“While you might think the ETDA is only relevant in the UK, it’s crucial to note that 80% of trade documents globally fall under English law,” adds van Lammeren. “It stands to benefit companies large and small, in the UK and internationally.”
Underpinned by legal recognition, paperless trade can extend beyond customs or trade facilitation to include the entirety of the end-to-end trade system. It can immediately enhance profitability for corporates while improving efficiency and reducing turnaround time and the administrative burden.
“We believe that going digital can deliver up to an 80% reduction in international trade costs,” states van Lammeren. “We also believe that this will reduce the trade finance gap – the difference between financing which suppliers are looking for when it comes to international trade versus the financing made available by banks and other non-bank FIs in the international trade space.”
Having a digital version of a trade document means it can be processed far quicker, which opens up a huge opportunity to finance these instruments. Traditionally, with paper versions of trade instruments, it takes days, if not weeks, to get them to the proper party and for everyone to sign them at the right time. The trade transaction has often already run its course by the time that administration has been completed.
“We also estimate that cross-border processing time can be cut significantly, which we’ve seen ourselves in a promissory note transaction for one of our clients,” reveals van Lammeren. “We’ve been able to reduce processing time from weeks down to days. Most transactions go from taking around four weeks to process down to between one or two days.”
The International Chamber of Commerce (ICC) has looked to quantify what that means from an economic opportunity perspective. It has estimated a £25bn growth opportunity for SME trade and £224bn of efficiency savings available in the UK alone.[1]Extrapolating that across the global trade space underlines the size of opportunity available today.
Corporate supply chains are often very complex, hugely international and multi-layered. Digitalising the documentary trade space gives a fantastic opportunity to provide further supply chain resiliency, which is particularly appropriate considering the current global geopolitical situation.
“There are plenty of pinch points globally, which will directly impact the supply chains of the corporates that we’re dealing with,” notes van Lammeren. “So corporates need to continue to build the resiliency of their supply chains. Digital trade offers a way to do that today.”
Adding increasing value in 2024
Looking at the year ahead, many of the familiar themes that treasurers have faced in the past year will continue and perhaps even intensify, so prioritising agility and flexibility will be crucial.
“What we saw in the pandemic is going to continue,” predicts Bolarin. “There was a differentiator between treasurers who had their cash management on Excel and those who could tell their real-time cash position with the click of a button. Adapting quickly to changes in economic conditions, regulatory environments, and market trends will be crucial for maintaining financial stability and will enable treasurers to seize opportunities too.”
For Scurlock, treasurers must continue embracing technology to be best positioned to handle market events and unexpected shocks over the coming year.
“Treasurers want to be able to look at and do the most value-added activity,” Scurlock concludes. “To leverage technology to assist with some of these processes is better for the business, and also delivers a new skill set for the treasury team. At the end of the day, people are our greatest resource.”
European regulatory update 2024
François Masquelier, Chair, the European Association of Corporate Treasurers, highlights his top four regulations for treasurers to monitor in the year ahead.
EMIR III The current European Market Infrastructure Regulation (EMIR) issue goes back to the winter of 2022. Energy providers in Europe faced difficulties because of the hedging instruments they used on the regulated market, which left them struggling to finance their collateral. This trauma was in a specific industry for a particular instrument, but the European Securities and Markets Authority (ESMA) had to react because some commodity traders faced collateral-related issues. While this concerns other products, including OTC derivatives, one of their proposals was to review EMIR, specifically to reintroduce reporting of intercompany derivatives transactions between affiliates, which we had worked hard to remove from the initial EMIR regulation with the EMIR Refit.
This would mean that companies could not delegate reporting to banks if they have intercompany transactions. Banks have no means to know the intercompany transactions of a client. Additionally, if intercompany reporting is brought back with EMIR III, banks may not be willing to take on this extra workload as it provides no benefit to them. Corporates may need to (re)implement their own reporting processes and systems, which would be costly. This proposal seems unfair and may encourage companies to move operations outside Europe to more favourable jurisdictions. The definition of hedging is also being addressed in this proposal. From my perspective, corporates remain confident that the EU will eventually limit changes to EMIR Refit.
ESG reporting requirements ESG is a significant issue for corporates with operations in Europe, particularly in light of the Commission’s Corporate Sustainability Due Diligence and Corporate Sustainability Reporting Directives.
Demonstrating sustainability credentials is increasingly vital for treasurers who want to issue a green bond, take advantage of green borrowing, hold green assets such as ESG MMFs or even green FX transactions. This is an increasing trend, which will see more non-financial ESG information required in financial reporting and statements, creating additional work for treasurers.
PSD2 review The Payment Services Directive (PSD1) was a good innovation, but there are some significant issues to address in the review of PSD2. Firstly, clarification is needed on the wording covering payment factories. With the wording in PSD2, there is some doubt over whether POBO and COBO are allowed according to some national supervisors, such as in France and Germany. This is in the DNA of a corporate treasury centre, so we need this wording clarified, as this was not the intent of the EU Regulator.
Elsewhere in PSD2, we have been encouraging the EU to open up the payments market to non-financial institutions to increase competition. This could potentially decrease costs for corporates.
In the payment area, instant payments are another innovation to watch. They offer another method of paying and collecting, and if we are smart, this will be a genuine alternative to the huge US credit card networks. But there is a considerable risk of fraud. With instant payments today, banks check the validity of the IBAN before making a payment but do not check the alignment between the name and the IBAN. For PSD3, we want the regulator to consider making the IBAN-Name check mandatory for all payment types, using the legal entity identifier (LEI).
Capital Markets Union The Capital Markets Union, or CMU, is an opportunity rather than a danger, particularly in the current higher interest rate environment. The CMU aims to better balance corporate financing between bank borrowing and capital markets financing in Europe. This is to reduce over-reliance on bank financing.
However, there is a need to change the culture and make capital markets easier to access, especially for mid-cap companies. While large companies already have the means, mid-caps may struggle with requirements like obtaining a credit rating or producing prospectuses to access capital markets. The costs may also be prohibitive.
The regulators must simplify rules, ensure easier access, and make capital markets more appealing and cost-effective than bank financing. But changing corporate finance culture is also crucial. Corporate treasurers should monitor CMU proposals as it could open up helpful new options to diversify funding.
