Mobilizing Cash to Unlock Business Value

By Bob Stark Global Head of Market Strategy

In today’s challenging economic and geopolitical environment, companies need cash. They need cash to invest in new companies, cash to innovate and cash to accelerate growth.

The problem is that while businesses often may have cash balances across the organization, they lack cash flow forecasting and liquidity structures to efficiently deploy cash where it can be invested efficiently to generate top line value. In fact, according to the Wall Street Journal, companies globally have around $1.5 trillion trapped on their balance sheets, generating little to no interest income, never mind being unavailable for strategic investment.

The challenge for treasurers and CFOs is to mobilize cash balances – so that the business can operate more effectively and seize market opportunities as they arise.

Related reading: ebook-Perfecting the Cash Forecast

There are three critical steps to enable treasury teams can effectively mobilize cash:

  1. Cash visibility is the starting point. Many organizations have daily visibility into 80% of their cash, meaning that large amounts of cash are not frequently tracked. This is a missed opportunity that can be easily solved through automated bank connectivity within a treasury management system. Lack of visibility is also a significant risk, as cash held in other countries is subject to currency volatility – and may not be worth as much as you thought if left unhedged.
  2. Cash flow forecasting is the second step in cash mobility. CFOs and treasurers require insight into today’s cash balances but just as importantly need certainty into the coming weeks and months. Poor forecasting drives two unfortunate outcomes:
    • Idle cash – because the treasury team cannot be certain as to what cash will be needed, they tend to leave larger than necessary compensating balances in accounts.
    • Inefficient deployment – a bad forecast may mislead treasury into unnecessarily moving cash to fund shortfalls that ended up being surpluses or, worse, thinking they have excess balances (when they don’t).

    A good forecast will not only identify excess cash and funding requirements, but will also confirm the timing of cash flows so the optimal cash flow forecasting and liquidity decisions can be made. This supports good decision making and reduces both liquidity and currency risk.

  3. Cash pooling and in-house banking are the final key steps to optimize cash mobility. Cash pooling and in-house banking are popular cash management structures to enable the movement of cash within country and across borders. Many organizations implement a combination of notional and physical pools to align with tax initiatives and regulatory compliance. The importance of setting up the right cash structures is to maximize the ease of moving liquidity while minimizing the costs and complexity of executing those movements.

Here are five ways CFOs can fuel strategic value when the treasury team is tasked with optimizing cash management:

  • Fund new growth in emerging markets: Treasury may also work alongside FP&A to identify opportunities to invest in the business, including deploying cash into emerging markets or other growth opportunities. Treasury becomes a business partner to the rest of the organization as they strategize on the tactics and strategy of growing the business.
  • Improve shareholder value: CFOs may also opt to return cash to shareholders, in the form of stock buybacks and dividends. Treasury must work in concert with the CFO and management to ensure that such promises are efficiently funded. Ideally, the treasurer can proactively offer analysis to make these shareholder value decisions easier.
  • Enable strategic investments: Paying down debt, reducing interest expense and freeing up borrowing capacity mobilizes cash to support strategic investments.
  • Gain interest income: Investing in longer term, potentially higher risk/reward options, yielding greater interest income. This has always been common in insurance organizations, but is starting to become the norm for any corporation with significant excess cash.
  • Net positive returns on payments programs: CFOs may ask treasury to collaborate with procurement to identify supplier payments opportunities – such as implementing a dynamic discounting program – that can yield an effective return of 8-12% APR.

Companies that want to expand in the global market find that cash mobility is the lifeline to support organizational growth and value generation, putting them a step ahead of competitors. To be truly agile, companies need to pull multiple levers to optimize cash flow forecasting and liquidity to accelerate the cash conversion cycle and unlock value. Fortunately, having a treasury management system for bank connectivity, cash forecasting, cash pooling, and FX exposure management offers a single platform to enable effective cash management and cash mobility.