Treasury Review 2020 Survey Series in association with Standard Chartered
Maintaining a resilient treasury function
Highlighting the importance of centralization and liquidity management in 2020
22 Sep 2020 | Asset Benchmark Research

Holding power and ensuring that you have enough cash on hand, that is the important mindset many businesses are having in today’s difficult economic environment amid the Covid-19 pandemic.

With profits falling and revenues uncertain, treasury management professionals such as CFOs and treasurers are being given the tough task of ensuring their respective businesses have enough resources available to keep afloat.

These were some of the sentiments picked up by the Asset Benchmark Research’s (ABR) annual Treasury Review Survey 2020 during the first half of this year, when Covid-19 cases started to pick up globally.

For many survey participants, ensuring liquidity was a key objective they wanted to achieve against the new normal of the pandemic. In fact, 72% of businesses surveyed cited ensuring liquidity as a top three-treasury goal followed by optimizing financing costs (51%) and improving cash flow forecasting (42%).

The current primary focus on effectively handling liquidity has prompted treasury professionals to self-reflect and examine areas that could be improved within their organizations. These include finding hidden pockets of liquidity through account rationalizing or leveraging on virtual accounts for payables/receivables to improve overall reconciliation.

Exploring additional areas of financing, with an aim to free up capital was another area treasury professionals could examine further. For example, 75% of respondents from the ABR’s Treasury Review 2020 cited an enhancement in liquidity due to implementing supply chain finance programmes.

While there are clear benefits of such a financing arrangement, just less than half (44%) respondents did not have one in place but expressed interest in supply chain financing solutions in the near-term future.

Better treasury management coordination in the form of increased centralization overall is also what is needed to get a better handle of a company’s finances. In Asia, a number of businesses have made attempts to setup regional treasury centres in Hong Kong or Singapore due to their advanced market infrastructure and market liquidity.

According to data from ABR’s Treasury Review 2020, respondents were more likely to centralize the coordination of banking relationships (70%) and financial risk management (65%) rather than liquidity management (41%) which ranked seventh in terms of centralization priority. Indicating that there is still headroom for businesses to strategically manage their liquidity.

“We are trying to have a centralized approach as much as we can. I think centralization actually works. Every organization has a core business and you don’t want to contaminate the core business with a supporting activity. If you were not centralized, then you wouldn’t have every single business unit focusing on their core business,” highlights a treasurer from a logistics company. “One thing I have learned from this Covid-19 situation is that cash is king and that we need to protect our assets. You don’t know what impact this Covid-19 is going to have on your business.”

This need for cash on hand has evidently put a damper on firms offering short-term corporate investment solutions such as money market funds. ABR data reveals that 79% of participants are not currently using such investment solutions, showing that businesses are quite content to keep their funds in regular deposit accounts despite the low interest rates.

About Asset Benchmark Research’s annual Treasury Review

Conducted since 2013, ABR’s Treasury Review surveys corporates across Asia on an annual basis to understand the challenges faced by corporate treasurers and CFOs and the solutions they consider best suited to navigate financial markets. In 2020, around 700 corporate finance representatives participated in the survey, led by financial decision-makers in Greater China, India and Singapore. Based on annual turnover, 47% of respondents are small and medium-sized enterprises (less than US$250 million turnover per annum), 21% are mid-caps (US$250 million to US$1 billion turnover per annum) and 32% are large corporations (more than US$1 billion turnover per annum).

 

View from Standard Chartered
 
In the time of Covid-19, our treasury clients are managing their liquidity with great care and attention, prioritising daily visibility and control over cash.
 
Some are looking to increase liquidity buffers in light of the pandemic’s detrimental impact on operating cash flow, and the continuing uncertainty of the crisis.
 
When a company faces disruptions to day-to-day operational cash flow, it becomes essential to have access to significant liquidity backstops so that cash is preserved. After gaining visibility, control, and access to cash, treasurers will increase their focus on cash forecasting and stress testing on the short and medium-term impact of a range of positive to worst-case scenarios.
 
The primary objective of the liquidity forecast will be to identify threshold levels where specific escalation would be required; for example, a decision point for drawing down on committed facilities or the halting of non-urgent discretionary payments.
 
In times of crisis, cash is without question king. In a worst-case scenario, it can be the difference between failure and survival. Treasury’s core responsibility to ensure that cash is in the right place, at the right time, in the right currency and at the right price, has never been more important.
 
As ABR’s Treasury Review 2020 reveals, some companies have been increasing their centralization efforts. One theme that has been gaining traction is the adoption of the ‘Payment Factory’ model: for businesses experiencing significant cash flow deterioration, the release of outbound payments must align with available collection inflows.
 
Despite the current business conditions, organizational transformation does not appear to be a theme as yet. Most companies remain in fire-fighting mode and perhaps wishing they had done more to centralize.
 
Data from ABR’s Treasury Review 2020 also shows that the majority of treasurers are not looking at short-term investment solutions. In Standard Chartered’s experience, yield is perhaps the last thing on most treasurer’s minds right now. It is all about cash security and accessibility.
 
Furthermore, with interest rates at historic lows, it’s challenging to identify short-term investment solutions that achieve incremental yield without taking additional risk, possibly beyond that permitted by treasury policy.
 
Under the current circumstances, buyers with healthy balance sheets who otherwise might be exploring short-term investment solutions have an opportunity - some might even argue an obligation - to provide critical financial support to their suppliers during this current crisis.
 
Participant results from ABR’s Treasury Review 2020 indicate that there are still companies that have yet to create such supply chain finance programmes. Despite its name supply chain finance programmes require different teams inside the corporate to come together and align their priorities. Treasury will drive the selection of a bank-led or third-party platform while procurement will have to work with their suppliers to set up a successful programme. A properly constructed and well executed supply chain finance programme will create benefits for both buyer and their supply base, ensuring stability, security and resiliency helping the business withstand external pressures. As importantly, they can help buyers secure a long-term competitive advantage by becoming the preferred partner to suppliers in the future and enabling them capture opportunities as demand improves.
 
During the pandemic, we have seen a significant increase in interest in supply chain and dynamic discounting programs as corporates have been looking to conserve liquidity but also are keen to ensure that their suppliers have sufficient liquidity. Some corporates have moved their self-funded programmes into bank funded Supply chain finance programmes.
 

 

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