Tools to Optimize Cash Management

By Daniel Shaffer February 8, 2017

Through analysis of cash positions, foreign exchange risk and counterparty risk, powerful tools now help CFOs effectively perform their duties.

A company’s performance is often summed up by its capacity to produce, sell and innovate, and its ability to attract and motivate talent. The effectiveness of its finance policy is highlighted less frequently, as if it played only a minor role in the company’s success. In fact, the situation is quite different. Financial departments are constantly seeking tools and solutions to help them optimize their cash management, allowing them to become more efficient in an increasingly competitive environment.

Take a look at some measures to improve financial performance that can be advanced using dedicated software solutions with Edi Poloniato, Vice President of Kyriba, in charge of sales and marketing for Southern Europe.

MANAGING LIQUIDITY

One of the CFO’s main tasks is to ensure the financial security of the company. To achieve this, a 360° overview of the cash available to the company is critical. “At all times, a CFO must have a clear grasp of the situation in terms of liquidity, whether to ensure payment of employees, supplier invoices or social security contributions without getting into trouble,” insists Edi Poloniato. This is a thorny issue in a small entity, and becomes a real conundrum for a group made up of various entities, sometimes spread around the world, which almost always hold multiple accounts with different banks. “And don’t forget,” adds Edi Poloniato, “the concept of liquidity should not be reduced to only cash. The objective here is not only to have an accurate view of the positions in the group’s various current accounts, but also of all assets that can be quickly liquidated, such as investments.” The creation of this type of dashboard allows the company’s net liquidity situation to be determined. “One problem,” continues Edi Poloniato, “lies in the ability to connect all of these data sources and to constantly and consistently handle the information that flows from them. This is a challenge for publishers of cash management solutions.” Of course, most tools on the market do not merely assess the situation. They also allow for optimization, particularly through cash pooling, i.e. by modifying, through a series of transfers (manually or automatically when a threshold is crossed), positions in the accounts held by group entities in order to avoid or reduce bank charges (surpluses offsetting overdrafts). This centralized cash management also offers the ability to secure better terms, to the extent it allows investments to be made at the group level, and further limits the risk of inadequate coverage. “Having an understanding of the liquidity position at any given moment is essential, but it is not enough. Some cash management tools also allow for forecasting, i.e. revealing cash requirements and therefore helping treasurers and financial departments ensure the company’s ongoing liquidity,” adds Edi Poloniato.

Additional reading: Making payments less risky

FOREIGN EXCHANGE AND INTEREST RATES

Acting on liquidity is not the only optimization method available through cash management tools. Companies operating in an international environment use various currencies and are therefore exposed to foreign exchange risks. “In these situations, companies will rely on software solutions which, taking into account cash receipts and currency fluctuations, apply hedging policies,” states Edi Poloniato. Companies that intend to optimize management of their debt can also rely on similar solutions to hedge against changing interest rates.

COUNTERPARTY RISKS

Companies are highly dependent on their partners. Assessing their reliability is a central concern for financial departments. First, banks, whose vulnerability was tragically illustrated in 2008, are now being monitored by companies. Software tools exist for this purpose as well which, by taking into account changes in financial institutions’ ‘health status’, can adjust and automatically apply deposit amount limits through the use of transfers. For suppliers, the situation is different. The strong interdependence that binds them to their customer, due to substantial customization of products or services and shared expertise, requires going beyond simple monitoring. Again, through the use of software platforms, certain tools enable the supplier to put the customer’s financial credibility to use, helping it clean up its cash position. These solutions, known as supply chain finance (SFC), will allow the supplier to benefit from a factoring service on more favorable terms than if it directly approached a financial institution. “Typically in this situation, the customer agrees to pay its supplier’s invoice. With a negligible risk of non-payment, the bank charges lower fees. In the end, the customer strengthens its supplier’s financial position without having to change its payment terms,” concludes Edi Poloniato.

“It’s hard to make good decisions without understanding the company’s liquidity situation,” said Edi Poloniato, VP, Southern Europe Sales for Kyriba

CLOUD SOLUTIONS

Like many other software solutions available to businesses, those which can optimize the finance function are also delivered through the cloud. This approach, when compared with internally installed software, makes it easier to deploy and update the solution. In addition, through the use of configurations, cloud-based solutions enable the tool to be customized to better meet its users’ circumstances and aspirations. Finally, in this situation, there is no need to invest in servers to host the solutions.

Additional reading: What is the true value of a treasury management system?

This article originally appeared in BDO ZOOM and is reprinted here in English with their permission.

12 ZOOM Financial function

1st quarter 2017 DR

www.bdo.fr 13 

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