Global liquidity rationalisation: a powerful tool for leverage reduction
Reducing the cost of capital will always be a core KPI for corporate treasurers, with a future-proofed cash and liquidity management strategy increasingly seen as a key component for this.
Here at Santander CIB, we have seen approaches take different forms in developed and emerging markets, driven by the complexity of the country and currency in question.
Below is a toolkit to assist in making sure liquidity rationalisation remains firmly on your radar throughout the year for maximum cost:benefit. In both cases, internally communicating the financial cost improvements is essential for success and stakeholder buy in.
Step 1: The brilliant basics with convertible currencies
With EUR, GBP, USD and other deliverable currencies, the first step is to look at what is where, and how long you have been taking this approach. For example, when was the last time that buffer balances in cash pools were mapped to understand if liquidity can be stripped out and redeployed elsewhere? Daylight and overnight overdrafts are a useful tool to reassure business units and other stakeholders that straight-through-processing will take place despite a more robust approach to balance management.
Next is taking balance and transaction reporting data to understand what is not pooled, as well as where there is non-functional currency exposure at the subsidiary level.
For un-pooled balances, assuming that there is already good ongoing communication with tax colleagues, it is a quick win to demonstrate to subsidiary finance managers the upside of connecting to the group structure. For those entities which have flown under the radar because of changes in strategy or legal structure, partner with your Corporate Secretarial partners to agree on a closure plan which can extract idle cash.
We also suggest taking a strong approach to non-functional currencies. These are often relatively small balances where the received wisdom has been that there is not the cost:benefit to centralise liquidity. Aside from the opportunity cost of cash of these positions, they trigger a lot of accounting work without the business need being well understood. Here, it is important to demonstrate the business case for automated cross-currency payments and collections as an efficiency tool. This will reassure business units that there will be an overall cost saving, without any impact to customer or supplier relations.
By tracking and communicating the cash released through this process, you can not only better service your debt and reduce opportunity costs, but also secure buy-in from management for future treasury technology investment which will strengthen the business case further.
Partnering with our clients during this creative thinking is one of Santander Corporate & Investment Banking’s strengths. By extracting historic payment data, we have assisted clients in easily demonstrating where there is a business case to migrate payments or receipts in non-core currencies to our global suite of cross currency solutions to reduce cost and complexity in their overseas operations.
In turn, this has enabled our customers to automate management of core currencies, including those where Santander is a market leader such as EUR, GBP, USD, MXN and PLN.
Step 2: The deep dive into more complex currencies
One of the most challenging actions after the steps outlined above is to map the remaining lazy cash, including instances where it is legally possible but administratively difficult due to distribute reserves, for example.
It is important to look at the mix of cost and profit centres in emerging markets, such as Latin America, and understand the nature of flows into and out of these countries - where delivery is being undertaken for intercompany flows, for instance.
Automated cross-currency transactions should be engineered into your processes, where possible, from a regulatory perspective, and awareness of where flows cannot be fully automated, due to formatting or documentation requirements, communicated to ensure a common understanding. This will result in ease of cash movement, reassuring colleagues that funding is there, should it be required, and facilitating dialogue on how much cash is needed in-country.
Depending on the country in question and its business model, this may see changes to dividend and equity injection processes, or the adoption of offshore collections hubs (e.g. USD receipts paid into a non-resident account at your HQ location). Such changes necessitate working closely with in-house counsel and experienced banking partners to understand regulatory requirements, as well as what is practically feasible.
The business case will quickly become clear, however, that balances in ARS, BRL, CLP, COP, PEN, UYU and others are an often-forgotten source of cash which can be deployed more effectively at HQ level.
With Santander CIB’s unparalleled reachability in Latin America, we offer our clients dedicated contacts and outstanding local knowledge. This ensures that regulatory requirements do not delay access to cash by subsidiaries or HQ, reducing the opportunity cost of cash and increasing control.
Step 3: Futureproofing and treasury transformation
Greater control and access to funds is not a benefit to treasury alone. For each success in the journey above, highlighting to your business units that with every penny centralised or released, they have directly contributed to a reduction in leverage or the cost of capital.
Demonstrating the wins ensures that treasury’s mandate for continued improvement is stronger than ever before. Santander’s suite of new solutions, ranging from cross-currency sweeps to automated reconciliation mechanisms, are the ideal tools to continue your evolution and see structures which are future-proofed.
Iria Fernandez (Global Head of Cash Management, Santander CIB), says: “In this journey, Santander is your ideal partner. As a leading pan-European and pan-American cash management, liquidity and FX house, our expertise is second to none and at your complete disposal.”