The stakes are high for the corporate finance department. The deep financial crisis of the past several years has created a huge amount of sensitivity toward liquidity and visibility into cash. For many companies, reduced sales and frozen credit lines made it necessary to check balances several times a day, to ensure there was enough liquidity to maintain operations. At the other end of the spectrum, for those companies that were strong enough to ride out the storm relatively unscathed, balances swelled enormously, as, companies began hoarding cash at a record rate. In fact, corporate America held more than $1.45 trillion1 by the end of 2012.
Even though companies’ requirements for higher liquidity were not government-mandated (unlike banks), nervous CFOs have felt the need to have greater cash balances on hand to mitigate against the ever-growing list of risk exposures.
Another impact of the Great Recession is the increased amount of regulation in the market. From high-profile legislation such as Dodd-Frank and Basel III, to little-known accounting changes, there is a new financial regulation introduced every 22 days2. In addition to more stringent reporting and accounting practices, these regulations can lead to changes in the level of liquidity held by corporates (whether for compliance reasons or simply to provide a larger buffer for the organization). While large cash balances can help the finance team sleep better at night3, in reality they offer few benefits to the organization. With interest rates still near historic lows, balances held within short-term money markets, this cash is essentially idle, and offers little more benefit than stashing it in $100 bills under the treasurer’s bed.
In addition to the company’s internal liquidity and risk management pressures, investors also need to see sustained return to revenue and profit growth, in order to fulfill shareholder expectations. As most companies used the previous three-to-four years to strip out the fat within their organizations (through more efficient workforces and supply chain processes, for example), increasing profits simply by reducing costs is no longer an option.
This creates an opportunity for the treasurer to add meaningful value to the organization through achieving higher returns on cash, for example. While there are many other opportunities for Treasurers to add business value, corporate cash balances are always in focus by shareholders, analysts, and the media. As a result, showing proactive treasury management strategies to maximize returns on cash sends positive signals to stakeholders, as well as contributing to the bottom line.
Technology plays a significant role in enabling the treasurer to leverage this opportunity to shine. Treasury management systems offer visibility, control, and standardization of process. These are important benefits and are complemented by the delivery of insight and analysis into the effectiveness of treasury programs such as cash forecasting and hedging programs. Cash forecasting is the most important tool that a treasurer has because without effective foresight into cash flows, decisions around cash utilization, hedging programs, idle balances, and investment strategy cannot be effectively made. Without confidence in the cash forecast, the treasurer cannot start the path to creating business value. And without the right treasury technology, the treasurer cannot even see that path.
Next time, we will discuss the first of three key ways that a proactive, empowered treasury team can deliver the insight needed to support and sustain the enterprise’s return to growth.
1. Biggest challenge is not to stifle legitimate goals – Financial Times
2. Corporate Cash Piles Grow to Record $1.45 Trillion, Moody’s Says – Bloomberg
3. What keeps the corporate treasurer up at night? – Business Finance