Perfecting Cash Repatriation in 2019

By Bob Stark December 12, 2019

As mentioned in our blog on ‘The Forgotten Key to Fully Benefitting from the Tax Cuts and Jobs Act (TCJA),’  the expectation by some that trillions of dollars’ worth of overseas cash would be repatriated, which would be invested in American businesses, driving increased economic output across the country didn’t quite have the promised impact.

We covered why this may be the case – CFOs and treasurers did not require pre-2018 profits and cash to be brought home to meet free cash flow guidance and meet growth targets, most repatriated cash in 2018 and 2019 has been used for share buybacks, and many corporates lack the precise visibility into cash balances and have insufficient cash structures to make effective cash repatriation decisions

However, the most disturbing explanation is that CFOs and treasury teams lack the tools necessary to maximize the repatriation opportunity. Fortunately, there are four easy steps that companies can take to resolve this problem.

Step 1 – Cash Visibility

Before 2018, many treasurers would not worry about overseas cash as the prior tax legislation made it prohibitively expensive to bring profits and cash balances home. Instead, many organizations found it cheaper to borrow domestically, leveraging the strength of their global balance sheet to return cash to shareholders. As a result, global cash visibility was not a priority, so treasury teams were not instructed to implement technology to achieve 100 percent cash visibility, nor were they incentivized to optimize banking structures to simplify access to cash. 

Today, treasury teams emphasize receiving daily bank balance and transaction reporting into both their treasury systems and ERP(s), typically using their TMS as a connectivity hub to simplify the number of finance platforms that need to connect to their banks. In some cases, SWIFT is used; in other scenarios, new APIs are implemented. Regardless of the method: security, automation and cost-effective global cash visibility are successfully achieved.

Step 2 – Cash Forecasting

Daily visibility into bank balances is an important step to understand how much cash is available for repatriation. However, visibility into future cash is paramount to confidently know how much cash is available to extract from overseas accounts. Many treasury teams lack centralized visibility and control to be able to rely upon their forecast to make these decisions. Therefore, a bargaining process with different regions essentially occurs wherein regional finance chiefs lobby for padded bank accounts to ensure they have enough cash for all possible scenarios. 

An accurate cash forecast puts this discussion to rest. The forecast, if done properly, becomes the answer to the “how much cash is needed” question. There are many techniques to perfecting cash forecasting, but the most important requirement is to perform a detailed forecast variance analysis. 

Cash forecast variance analysis is accomplished by measuring forecast-to-actual and forecast-to-forecast scenarios at a line item level, using snapshots and versioning. Data visualization with drill-down capabilities is a must to easily identify both one-off and systemic exceptions that, once explained, can be prevented going forward. It is this understanding of how to improve the forecast that must be integrated back into each forecast source so that the same mistakes are not repeated. With the “new and improved” forecast now established, treasurers can point to the cash forecast as the single version of truth of how much cash is required for working capital for each business unit and across each region. 

Armed with this understanding, the treasurer can confidently report cash available for repatriation back to the CFO.

Step 3 – Cash Mobility

Cash mobility includes how cash is organized within the organization’s legal entities (often via multiple cash pools and/or in-house banks), as well as the mechanisms used to tax-effectively move cash in different accounts to new geographies. 

When it comes to cash repatriation, most treasurers will have already established a global cash pooling network with multiple regional pools. Some countries (e.g. India, China) may have separate pools for regulatory reasons as well. The key to cash pooling is to both maximize return on cash through notional or physical cash pooling, but also to support deployment of cash to other regions. This is where the collaboration of tax and treasury is the most critical, to ensure that cash is swept to tax-advantaged legal entities where it can retain the most value prior to being repatriated.

Many finance teams will have also implemented an in-house bank and shared services center(s), which can optimize how global payments are made, reducing excess foreign exchange transactions and minimizing cost.

Step 4 – Understand Currency Risk

While overseas cash sits in foreign currencies it is at risk. Many CFOs lack transparency as to how much at risk cash is to currency volatility, with many organizations claiming ‘currency headwinds’ as an explanation when earnings and balance sheet value unexpectedly fall. However, when holding billions in cash, it is the treasurer’s responsibility to fully understand where cash is held, what risks it is exposed to, and what organic and/or hedging actions can be implemented to mitigate translational risk. 

While currency volatility used to be a mystery, shareholders and analysts demand better governance by management and the board especially when so much cash is at stake. Those CFOs that choose to leave cash overseas – especially in the face of “friendly tax legislation” that encourages repatriation – risk tough scrutiny and uncomfortable questions if they cannot adequately protect global cash from currency volatility.

The Right Technology Enables Cash Repatriation

All four steps to drive effective cash repatriation – visibility, forecasting, mobility and understanding of currency risk – are made easier by having the right technology in place. Those who rely on spreadsheets, manually logging into bank portals, or fighting with obsolete treasury workstations suffer from a lack of productivity and treasury performance that makes achieving all four steps to successful repatriation impossible.

Treasury technology should deliver:

  • 100% cash visibility leveraging SWIFT, APIs and regional bank networks 
  • Accurate cash forecasting with data visualization and two-way integration to source systems, such as ERP, to perfect future cash projections
  • Global cash pooling and in-house banking support, as well as payment-on-behalf-of capabilities
  • Currency exposure identification and analysis, including seamless ERP integration, to perform effective FX exposure management

Fortunately, there are treasury systems in the market that deliver the needed intelligence and performance for treasurers to strategically support the CFO, management and the board to meet cash repatriation targets that drive organizational value. 

Enterprise Liquidity

Transform how you use liquidity as a dynamic vehicle for growth and value creation

Find out how