Overcoming Barriers to Cash Optimisation

By Daniel Verbruggen

The commercial world is evolving. New regulations – crafted in the wake of the 2008 global financial crisis – are forcing companies to re-assess the way their businesses are funded and risks managed, while broader market forces are re-shaping where and how they invest.

Dealing with such changes is a tall order, particularly for small-medium enterprises (SMEs). As this sector of commerce – particularly in the developing markets – becomes increasingly important to world trade, this is a good time to assess how the cash management challenges particular to companies of this size may be overcome.

Cash management challenges for SMEs

Optimising cash today means not only gaining a return on investment – once the almost exclusive aim – but finding new means of employing surplus funds, improving cash conversion efficiencies, extracting maximum value from bank relationships, and improving overall cash visibility and control.

These are all worthwhile objectives – and challenging for SMES in particular for three reasons. First, their limited size and operational scope, which means they are unlikely to be able to capitalise on any potential opportunities for regulatory arbitrage.

To give an example, CRD IV – the European Union’s regional interpretation of Basel III requirements – enables banks within the EU to hold less capital reserves for low or medium-risk off-balance sheet products. As this would include trade finance products, banks and corporates operating in the EU can, to an extent, circumvent the punitive effects of the original Basel III accord on the cost of funding.

Although this is a positive outcome for banks and corporates in the EU – and illustrates how effective a detailed regulatory review and subsequent industry lobbying can be – it also serves to demonstrate how regional interpretations of global reforms might lead to certain markets and regions becoming more cost-effective from a cash management and operational perspective. And while multinational corporations are – at least in theory – well-positioned to take advantage of such beneficial loopholes by geographically relocating certain functions and/or restructuring transactions, SMEs do not have this option. As a result, they are more susceptible to unfavourable regulatory change.

The second challenge SMEs face is difficulty in accessing the latest innovations in technology. Overcoming emerging cash management challenges increasingly calls for hybrid solutions that not only transcend traditional product silos, but are flexible enough to cater to market and company-specific requirements. Such advanced tools are typically unavailable at local level as the cost and complexity of their development can be beyond the resources of the majority of local and regional banks.

Limited access to sophisticated cash management solutions does little to ease the third principle challenge for SMEs: a lesser degree of in-house cash management specialisation than their larger counterparts. At the SME level, treasurer is often not an individual but an “add-on” role, with “CFO & Treasurer” a common job title. The absence of a dedicated treasurer and treasury function has disadvantages – though it is not necessarily as detrimental as it may initially seem.

Leaner, meaner financial operations are less divided, which makes it easier to come to decisions regarding cash management and investment strategies, and implement change accordingly. Also, a lack of specialisation does not necessarily equate to being behind the curve. It is only in the past five to ten years that the cash management industry as a whole has woken up to the idea that working capital optimisation – a vital component of overall cash optimisation – cannot be left solely to treasurers, as they see only the final part of the value chain rather than the whole.

As cash management undergoes fundamental changes, triggering a process of revision and re-education across the board, SMEs can take this opportunity to put new cash strategies in place. In order to do this, they need to ask their banks the right questions, and work closely with them to find new ways to mitigate risk, and capitalise on arising opportunities.

Consultation and collaboration

At this point, it is important to note that the current onslaught of regulatory and policy changes are equally challenging for banks. Banks, therefore – particularly local and regional operators – may not have all the answers or options that companies require.

With risk a key concern, corporates need not only transparency with regards to how cash is managed throughout the end-to-end value chain, but a diverse range of investment options (so that varying risk/reward appetites can be met) and tailored advice as to how longer-term cash objectives can be achieved. Given that no single institution is likely to offer the combination of market intelligence, operational support and access to a broad range of investment options that companies of all sizes require, the type of local-global bank partnership arrangements common in the trade processing space are gaining traction in the cash management arena. And this can present new opportunities.

Indeed, local-global bank collaboration can allow corporates worldwide to access market-leading cash management solutions – based on detailed analysis and understanding of the market shifts affecting cash decisions – in a way best suited to their individual requirements.

By underpinning sophisticated, international-standard solutions with detailed knowledge of local market requirements, solutions that could make a tangible difference can be brought to corporates at all levels of commerce, and adapted as requirements change.

A banking community that is more closely-aligned might also help drive much needed changes. The capital markets, for example, should be more accessible to SMEs – particularly in Europe, where there has historically been a greater reliance on bank-lending than some other markets – and alternative sources of funding need to proliferate from a currently small base. Both developments could benefit from a bank-led approach. Certainly, if banks work together to combine and leverage their expertise, experience and capabilities, corporates will be better placed to capture new opportunities and mitigate risk as the investment landscape continues to evolve.

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