At the onset of the pandemic, the initial response for many corporate treasurers was to ensure they had continued access to liquidity for the immediate and short term. Many corporates took the option to draw down on existing lines of credit as well as establish contingency. Indeed, across our Corporate & Institutional Banking clients, NAB saw an increase of 59% in cash holdings in operational accounts between 1 March and 31 August.

With evidence of stabilisation and eventual recovery, it’s now time for treasurers to re-assess the liquidity management strategy. The pandemic has emphasised the importance of “liquid capital”. Improving efficiencies and controls to accommodate shifting needs toward a faster, leaner and more robust treasury operation will provide a strong foundation for improving profitability and shareholder returns in the future.

Visibility of cash and liquidity

Uncertainty around future cashflows will remain for some time and the effectiveness of historical data for liquidity planning is no longer a reliable backstop for forecasting gaps or delays. Having 100% visibility of cash via a visual dashboard that provides availability, location and previous outflows is now a minimum necessary starting point for daily planning and monitoring.

Where visibility via existing Enterprise Resource Planning systems (ERPs) or Treasury Management Systems (TMS) is limited, leveraging online banking platforms is a useful tactical alternative. NAB for example has launched a Liquidity Management Solution that incorporates a visual cash dashboard covering group cash, agnostic of bank, currency or account type, improving both visibility of cash and utilisation.

Once cash visibility blind spots have been eliminated, re-assessing and monitoring liquidity reserves and contingency options will be essential. Returns on strategic capital have given way to liquidity as the priority in the short to medium term. Along with active management of cash, utilisation of liquidity buffers and headroom should be included in weekly if not daily updates.

Liquidity management structures and strategies

While structures can vary in complexity, their overall objective is to improve utilisation of cash and on-demand debt through the combination of positive and negative cash flows and debt facilities.

1. Physical Pooling (cash concentration) – Involves consolidation of cash to a central or master account, typically owned by a finance or holding company through the physical movement of credit and debit balances from operating accounts across the group. Cash and liquidity can be managed via the central account for the entire structure. Centralisation enhances control and limits free cash available in operation accounts for discretionary spend. More advanced bank providers automate intercompany loan management, including management of daily and overall loan limits utilisation and interest.

2. Notional Pooling – Operating balances are maintained in their respective accounts. However, for the purposes of calculating available liquidity and interest, the bank balances are combined to a single net (or pool) balance. Notional structures do not involve the physical movement of funds, so participating entities can maintain a level of autonomy over their cash and avoid administrative effort of managing intercompany positions. While this clearly has its advantages, it also imposes greater due diligence and documentation requirements. Cross guarantees, indemnities and right of set-off must be addressed to establish a structure that can be
provided on a net basis.

3. Overlay – Sits over existing transactional bank accounts and automates concentration of cash to the overlay bank for participation in a notional or physical pooling structure. This strategy allows companies to maintain multiple transaction banking relationships, while leveraging the benefits of a cash concentration or notional pool structure without the disruption associated with changing banking partner. The key benefit of an overlay strategy is the speed and simplicity with which it can be deployed. With little or no disruption to processes it a pragmatic option to fast track benefits.

Treasury structures and process

The COVID-19 pandemic has been a liquidity ‘black swan’ event that has tested the strength and resilience of existing treasury strategies and structures. Corporates with adaptable structures that can adjust to further possible disruptions or delays in recovery will set themselves up for delivering greater enterprise value in the future. While there is no universal right solution for liquidity management, generic principles do apply.

Centralised or Global Treasury Centres and In-house banking structures improve data aggregation and risk management, as well as optimisation and control of cash and liquidity. Cost has typically been a barrier, but banks and fin-techs now offer sophisticated liquidity management solutions that can support most client needs. Assessing the desirable and practical level of centralisation, combined with an efficient and automated liquidity optimisation structure, should be a high priority for most treasury departments.

This article was first published in our Corporate & Institutional magazine ‘Beyond 2020: Creating opportunities”.  Read more articles from the magazine, below.

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