Cash & Liquidity Management

How Smart Cash Management Could Save Your Balance Sheet Top cash management providers deploy their own methodology for analysing treasury and financial operations, and then deliver intelligence on root causes of various problems and prescriptions for fixing them.

How Smart Cash Management Could Save Your Balance Sheet

How Smart Cash Management Could Save Your Balance Sheet

by Ebru Pakcan, Global Head of Payments and Receivables, Treasury and Trade Solutions, Citi

Ebru PakcanMore often than not, finding ways to improve a company’s balance sheet requires looking at cash management operations through a different set of lenses. Just as an eye care professional can offer remedies that improve eyesight, cash management experts assist with cash flow and cash management processes that can lead to stronger financial health. 

Top cash management providers deploy their own methodology for analysing treasury and financial operations, and then deliver intelligence on root causes of various problems and prescriptions for fixing them. Toward this end, they conduct their examinations through a number of lenses. One of their most critical focal points is an organisation’s financial position, where a thorough assessment of financial pressures that drive current-state decisions can help shape strategies and priorities going forward. Perspectives on these pressures are found in the company’s balance sheet and income statement, which represent its wealth and its health respectively. These statements provide insights into financial drivers that cascade through product development, distribution, sales cycles and market expansion. They also house information that is critical to unlocking solutions for improving working capital management, in addition to risks and controls.

Since financial statement characteristics and drivers can vary from industry to industry, a company’s cash management partner must ask the right questions to understand business and financial priorities. If, for example, it is a new entrant to an industry or is deploying a new product line under a new subsidiary, it may be focusing on shortening receivables and avoiding sales reversals. A stronger, longer-term player in the same industry may be concentrating on its liquidity position to support acquisition activities. An enterprise with a wide geographic sales footprint may want to have an optimisation play across multiple balance sheets, and in turn, may set up a re-invoicing or shared service centre arrangement benefiting from tax efficiencies that makes its receivables ‘cross-border’. A solid global company may be under competitive pressure to drastically innovate and overhaul its product line, distribution, and sales model, a situation that could impact its legal and account structures, payment and collection channels, and its payment methods. In the end, it comes down to asking the right questions.

Overall, improvements to payments and receivables processes can yield numerous benefits. Potential benefits include a reduction in expenses, in addition to improved cash flows and working capital management. Efficient accounts payable processes can lower operating, interest and foreign exchange costs, and also increase days payables outstanding (DPO).  The later money can go out, the longer it can be used internally to support business activities, reducing both borrowing needs and the amount of debt on a company’s balance sheet.   Plus, having the ability to accurately monitor and shorten payables cycles increases the availability of working capital and enhances overall liquidity positions.     

On the accounts receivable side, reducing the risk of outstanding payments is a common priority among companies looking to improve cash flows. Efficient receivables management can reduce operational expense, collapse days sales outstanding (DSO) and increase control. The faster money comes in, the faster it can be reallocated or converted to cash, which effectively increases assets on the balance sheet. Mitigating receivables risks can drastically impact financial standing.

Another point of focus in any assessment of treasury operations is centralisation. Centralising the management of cash, generally speaking, fuels liquidity optimisation and investment performance, as well as strategic and daily working capital operations.

Many large multinationals maintain very sophisticated investment policies that stipulate ‘qualified’ instruments, investment limits for different obligors (government, bank, and other institutions) as well as the credit rating limits for instruments and certain financial ratio requirements. Depending on its treasury management philosophy, a corporation may maintain comprehensive worldwide policies that include different parameters for domestic and overseas operations, including defined levels of approval for certain overseas activities. The sophistication and risk appetite of the company will often drive the level of detail in its investment policies.  Regardless of how detailed the policies are, it is critical for a company’s cash management consultants to thoroughly understand its investment policies in the context of its treasury and working capital management processes and goals.

No matter how young or mature a treasury operation may be, or how complex or geographically dispersed its activities are, an operational and policy check-up by a trusted provider offers the potential to unlock opportunities for improvement. Citi’s treasury and cash management experts have a proven track record in refining and improving treasury setups and operations and bringing new levels of working capital optimisation that help foster ideal financial positioning.

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