Enterprise Liquidity Management: A New Ecosystem for Corporate Chief Financial Officers

Enterprise Liquidity Management (ELM) has emerged as a new practice area within the CFO’s and treasury professional’s remit to manage and execute the entire lifecycle of corporate liquidity—a specialized capability traditional Treasury Management Systems and ERPs are not able to deliver. The ELM concept a purpose-built, dedicated Enterprise Liquidity Platform has emerged as the software solution suite required to do so. Key takeaways from the study include the following: From a corporate finance perspective, liquidity is the strategic resource necessary to deliver value and growth under any circumstance, including but not limited to maintaining solvency. Enterprise Liquidity Management provides diagnostic decision support intelligence on all liquidity transactions, then enables indispensable actionability and operational interconnectivity between internal and external systems. ELM is powered by the Enterprise Liquidity Platform, a fully integrated software suite (e.g., Treasury and Risk Management, a comprehensive Payments Hub, and Working Capital Finance solution sets) all of which are connected, integrated, and networked through Open APIs that provide indispensable, secure machine-to-machine automation between software applications. The result is that all cash and liquidity-related data and process workflows within the organization and its external finance ecosystem are unified into a “Golden Source” of intelligence and, then within the same system, made actionable as a strategic decision-making support system. Managing cash and liquidity across large enterprise ecosystems demands the support of a dedicated infrastructure engineered to overcome one of the most significant burdens to corporate finance: the proliferation of disjointed software applications. An ELM platform differentiates from traditional treasury management systems, extending visibility, security, and actionability across all of finance internally and externally beyond cash positioning and forecasting: the treasurer can understand multiple liquidity management scenarios and—directly from the platform—move and optimize liquidity to or from the right location at the right time. The goal of this paper is to inform the market that ELM has become a strategic practice area for CFOs, Treasurers, and other corporate finance leaders who understand the newfound urgency to leverage new technologies and techniques to capture opportunities and eliminate risks. Introduction Liquidity is the strategic resource necessary to deliver value and growth under any circumstance, including but not limited to maintaining solvency. The speed and complexities required of corporate finance leaders to manage cash and liquidity in realtime, however, and especially during market shocks such as the 2008 and Covid-19 crises, has surpassed the ability of humans to build better and better spreadsheets. Even the largest ERP and treasury management system providers struggle to deliver value in the new world where comprehensive, cross-functional liquidity management has become a board-level mandate. Aite-Novarica Group’s view is that emerging leaders in the space are thinking differently and developing new technologies to enable liquidity to be managed holistically as a new practice area within the CFOs purview. While from a conventional liquidity management standpoint almost every global and regional bank has the technology in place in the form of a web-banking portal, enterprise users expect to consume decision support data through transaction banking cockpits and portals developed according to standard business process flows and practices. These cockpits must be interoperable and interchangeable. Finance and treasury executives and managers don’t want any longer multiple web-banking user interfaces that require system experts to cut and paste highly-valuable financial data into “software soups”. Fintech players must develop and present technology solutions and software applications that support their corporate clients’ internal, strategic liquidity management objectives and, at the same time, allow the enterprise to meet external client needs. This thought leadership paper introduces the concept of enterprise liquidity management as a formalized practice area for corporate finance; it further analyzes the technological, process architecture, and execution workflow capabilities required to make it happen. Following, this paper develops the concept that corporations of all sizes and complexity aim to have all their subsidiaries on a central repository for cash and liquidity-related operations rather than on individual web-banking portals. The concept is similar to the idea of a self-contained infrastructure to manage liquidity, as if it were an “ERP for liquidity management”. The paper introduces Enterprise Liquidity Management as a new financial technology category. Methodology This thought leadership paper is based on desktop analysis and extensive examinations of various solutions used by treasurers to manage corporate liquidity. Using the life cycle steps of liquidity management operations as a benchmark, Aite-Novarica Group’s groundwork also included analyzing the limitations of currently available solutions. To validate the conclusions of the research, Aite-Novarica Group will refer to the findings of an analysis conducted on Kyriba’s Enterprise Liquidity Platform and on its impact on the corporate organization culture, business processes, IT performance, and its alignment with management’s goals1. The Liquidity Management Lifecycle and the Need to Unify Fragmented Systems Enterprise liquidity is the lifeblood of every business of any size. Considering the numerous definitions used to describe it, liquidity confirms to be a strategic resource for corporate chief finance officers (CFOs) to deliver value and growth under any circumstances including but not limited to insolvency. Enterprise executives know that information technology permeates business operations and is the most powerful tool for change. Corporate finance business units, however, appear not to be the most technically mature in the organization, so only enlightened corporate CFOs are at the forefront of corporate finance digitization to transform the way they leverage cash and liquidity to build resiliency, earn growth, and generate strategic value to customers, shareholders, and boards. If resiliency, growth, and value are the targets for corporate finance, the task is now for the CFO and his teams to practically meet such targets. To his/her rescue comes liquidity management: in times of crisis a proper management of the company sources and destinations of liquidity contributes to make the organization more resilient. At the same time the ability to manage corporate liquidity not only helps the company to survive but also sustains the value of the company through growth: value is generated when the company has proper funding to distribute dividends, buy back shares, and grow by investing in other avenues and controlling capital expenditures. Liquidity is the organization’s lifeblood, irrigating all internal functions and lines of business; as blood needs to be enriched with oxygen, liquidity needs to be enhanced by a complex external ecosystem, including banks, financial data suppliers and market places, and fintech players. Liquidity is also typically managed along different time dimensions. In long-term vision, CFOs grow and protect cash availability by operating financial transactions with multiple settlements. The most iconic of such transaction is drawing down a debt for cash. This triggers the long-term need to repay the debt at the end of maturity up until the final settlement. Another transaction with long-term financial repercussion is a hedge transaction that will take the company to enter in a swap with multiple settlements, maybe for the next two or three years. On the short-term execution, the corporate treasury office generates or consumes liquidity with cash transactions. Examples of cash transactions are one-off payments to a supplier, an employee, or an FX spot transaction. Between long-term financial transactions and short-term cash operations should stand strategic planning. Financial Planning and analysis (FP&A) that the CFO uses to understand what will be the budget for next rarely translates in terms of liquidity requirements and usually lacks critical data to ensure there is enough money: Should it be borrowed? How to hedge the risk? The budget fixed at the beginning of the year will inevitably move as time goes by. The necessary adjustments swing the pendulum from the very short-term treasury operations to the long-term forecasting of the outcoming liquidity. A bank that negotiates with a CFO will always ask the company’s liquidity plan for the next year, sometimes even several years ahead depending on the market segment the company operates in. This demands the treasury department and financial manager of each subsidiary to integrate their figures, usually on a monthly basis, into the centralized corporate FP&A view that gives the CFO the most updated and reliable liquidity profile of the company. Enterprise Liquidity Management - A New Practice Area in the CFO Suite Beyond closing accounts, the CFO’s constant focus is- hence- to know where liquidity comes from and where it can be allocated, and, with that intelligence, ensure its protection (from fraud and over-exposure) throughout. This requires more than a mindset shift towards prioritizing the strategic value of liquidity--it requires a purposebuilt layer of software to make it happen. We believe this combination constitutes the design and deployment of a new Practice Area. To start, Aite-Novarica Group suggests to measure the value of liquidity beyond the ordinary ‘cash and cash equivalents’ balance sheet item. This indicator may in fact be deceptive if not depurated from the component of the uncommitted drawn facilities. There is a possible risk that the lender may ask for the repayment anytime, and this scenario will vaporize the value of the borrower’s assets. On the other side, the value of cash and cash equivalents must be increased for the total value of the undrawn committed facilities the company can still access. These represent reliable and immediately accessible liquidity because the time to draw down such facilities in general is very fast, usually in the order of a couple of days. The example of the metric to gauge the real potential value of available liquidity is yet one of the many key capabilities a CFO should have available in the ELM Practice Area, a decision support system. At the back of these capabilities the CFO and the treasurer need a system that unifies the data scattered across a landscape of IT systems totally fragmented, the more disjointed the larger and complex the organization. Historically, the CFO suite has been an installed on-premise (almost monolithic) ERP sometimes combined with an equally monolithic treasury management system (TMS), now morphing into a composed set of a core solution (e.g., SAP, Oracle) and connected mission critical best-of-breed solutions such as payroll and benefits, budgeting and planning, order-to-cash, procure-to-pay, and risk management. The most recent trend sees companies shifting their IT infrastructure to the cloud with multiple objectives: constant innovation, business continuity for critical functions, or real-time flow of information while lowering the total cost of ownership of the underlying software and hardware infrastructure. A New Category: ELM Enterprise users expect to consume decision support data through interoperable and interchangeable cockpits and portals, developed according to standard business process flows and practices, typically provided by banks – or, through monolithic ERPs combined with an ever-increasing portfolio of specialized point solutions. Today, as we see the emergence of “composable” ERPs capable of providing value beyond simply recording transactions, there remains a major void in the marketplace. Corporations aim to have all their subsidiaries on a central repository for cash and liquidity-related operations rather than on individual and separated web-banking portals. The concept is similar to a self-contained infrastructure to manage liquidity and introduces to a new financial technology category: Enterprise Liquidity Management. Treasury has evolved from account management staff duties (e.g., reconciling cash every morning and putting cash in the right accounts) to a more strategic, cross-functional role, so corporate finance decision makers are receptive to ELM as the suite that enables companies with long-term vision to work with multiple liquidity structures and make autonomous and simultaneous decisions across use cases, particularly treasury. The next sections will provide detailed descriptions of the modules that constitute the ELM construct. At this point is important to capture the possible ELM use cases. As an example, the ELM construct allows the corporate user to drawdown from a credit line directly from their liquidity cockpit. Or, to recommend the corporate decision maker at what point does it make sense to go back to market and refinance. This makes it possible to look at external debt in a completely new way. Users don't want just to model cash, they want to make sure they can model all their cash flow deadlines. The ELM tools model and not just showcase. They are part of a set of open and scalable intelligent systems to come to decisions. From a conceptual standpoint, the ELM is a platform composed of three layers (Figure 1). FIGURE 1: THE THREE LAYERS OF THE ELM PLATFORM The first- the operations layer- groups the application modules to run treasury, payments, risk management, and working capital optimization. The connectivity layer is the second layer- and the raison d'être of ELM- that takes a standalone suite of rich software features to a system open to the world, thanks to the development and use of connectivity APIs. The composed infrastructure of two or three large ERPs that most large enterprises have today generates a portfolio of point solutions that can be best connected through an API architecture. This architecture enables not just the visibility of data, but the unification of that data, enabling the user to leverage AI for decision support. The third layer- the execution layer- makes it possible to analyze and understand the data exchanged between the connected systems, take the best decision using business intelligence capabilities, and leverage machine learning and artificial intelligence (AI) to turn information into decisions and- this is key- to execute directly from the corporate treasurer’s enterprise system.

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