Insufficient or no access to liquidity can put businesses at significant risk.

From a pure cash flow perspective, corporates should be immediately revising their treasury plan for cash management and testing forecasts and modelling (best versus worst case scenarios).

This is also an opportunity to assess whether the technology supporting treasury is robust, with scope to look at more options for digitisation.

Cash management

Cash management is a broad term that a business can apply to tasks relating to daily cash control, decisions on bank account structures, management of receivables and payments, and decisions for short-term investments or borrowings. It’s important to every part of an organisation-  without access to liquidity, a business quickly fails.

Outside of any immediate crisis, a focus on centralisation and simplification is generally integral to the corporate treasury function. The shift towards centralisation has been encouraged by technological advances.  Solutions from banks that support physical pooling of value by sweeping arrangements are common ways to achieve centralisation.

Increasingly notional pooling groups of accounts that need to remain separately funded for operational needs are another way to achieve centralisation benefits without the physical movement of funds.

Overall, a treasurer’s cash management objectives should be to:

• Ensure full cash visibility;
• Ensure sufficient cash is available to meet day-to-day cash flow requirements;
• Maximise income from short term surpluses and minimise the cost of short term deficits;
• Minimise idle bank account balances; and
• Drive accurate cash flow forecasting.

Treasury planning

A corporate treasury team needs to be aware of where all excess liquidity is at any point in time and be able to easily report on its status and availability.   While this is integral to ordinary operations, in a stressed environment the importance of this is elevated to an even higher level, potentially becoming critical for the survival of the firm. So how can a team approach it?

Firstly, running multiple scenarios for cash forecasting, incorporating a range of events that could transpire to impact the expected available liquidity.  Stress test these with a variety of scenarios.

Then review available liquidity against the forecast and determine whether there’s a shortfall that needs funding and what funding sources are available.  Immediate short-term options for corporates to consider include:

1. Liquidation and centralisation of available cash and short-term investments. Converting term deposits where appropriate and centralising any available trapped cash from subsidiaries or foreign locations back onshore to the primary jurisdiction of operations.
2. Accelerate outstanding collections. Operational push to collect any outstanding sales, renegotiating terms and potentially consider offering discounts for early payment.
3. Extending supplier terms, reviewing approved expenditure plan. Reviewing outstanding approved invoices, negotiate for extension of existing terms.  Consider any planned capex over the coming period and review its prioritisation.

Other options such as inventory disposal and seeking external funding support from banks should be considered.

Summary

Cash management is a critical component of a business or the most important. Quotes abound of the importance of cash but it’s easy to reference the common phrase – cash is king.

A treasurer needs to ensure maximum visibility of cash in the business which can be readily deployed to address the business’ payment obligations. Whilst efforts to shape efficient bank account structuring can help, in many cases the complexity of business operations means there’s a misalignment between available funds and payment obligations, leading to debt facility coverage of funding gaps.

Account structuring solutions such as notional pooling or cash concentration are effective means of supporting maximised availability of liquidity in a business.

Finally, it’s important banking relationships are stable and the quality of banking services provided are optimised. The treasurer needs to ensure relationship banks can be relied upon for funding and can deliver an expected level of service provision for required facilities and products. Treasury is responsible for maintaining these relationships and monitoring bank accounts.

If your business has been impacted by COVID-19, find out what support may be available.

Important Information

This material has been prepared by personnel in the Corporate and Institutional Bank division of National Australia Bank. It has not been reviewed, endorsed or otherwise approved by, and is not a work product of, any research department of National Australia Bank and/or its affiliates (“NAB”). Any views or opinions expressed herein are solely those of the individuals and may differ from the views and opinions expressed by other departments or divisions of NAB.

Any advice contained in this material is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.

This material is intended merely to highlight market developments and is not intended to be comprehensive and does not constitute investment, legal, accounting, hedge accounting or tax advice, nor does it constitute an offer or solicitation for the purchase or sale of any financial instrument or a recommendation of such product or strategy.

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