Simple Tips: Treasury Management in a Disrupted World
The world has come to a standstill. The global coronavirus pandemic has grounded airlines, shut offices and non-essential businesses, forced people to stay home and observe social distancing, disrupted global supply chains and tipped the world economy into recession.
The gravest global health crisis since perhaps the Spanish Flu of 1918 has resulted in governments placing unprecedented and protracted peace-time restrictions on the movement of people and goods within and across national borders. As companies, businesses and people adapt to this “new normal” by working from home and using technology intensively to communicate and transact, they face fresh challenges in keeping businesses and operations running.
For corporate treasurers, this means juggling an ever longer list of priorities with scant and physically dispersed resources. They face a manifold increase in the complexities of managing liquidity, working capital and credit arrangements with suppliers, distributors and customers amid demand-supply mismatches arising from the disruption. Market volatility makes it harder to hedge positions. Economic uncertainty hinders their ability to develop meaningful scenarios of the shape an eventual recovery would take—U, V, W or some other—and its likely impact on the company’s finances.
Given the fluidity of the situation and the likelihood of lockdowns being extended in many parts of the world, corporate treasurers will need to pick their battles wisely and focus on the core priorities from this long and growing list. We regard three key considerations—liquidity, technology and supply chains—as being paramount.
Adequate working capital is crucial for maintaining day-to-day business operations. Treasurers must estimate all existing sources of liquidity—in house, bank credit and inter-company—and assess how long it can support their working capital. By establishing various scenarios for developments in markets, they will be able to estimate daily liquidity requirements in each scenario and plug cash forecasts based on data from their treasury management system and bank statements into the simulations to identify any gaps and opportunities.
A portion of the available liquidity would need to be set aside to fund any gaps arising from delays in revenue collection due to the disruption. Demand-supply gaps are also likely to arise across geographies and, given the regulated nature of regions such as Asia, considerations will need to be given to restricted markets to arrange for consolidation of their own liquidity and external bank funding.
Treasurers must maintain short-term liquidity with strong counterparties and determine the turnaround time to access this cash regionally or globally when needed. They must also arrange to access all available bank credit facilities and the need to draw them down for contingency purposes. Scenarios will vary across industries and sectors—some will have more than they can handle, some too little—hence the importance of assessment.
The current global crisis has highlighted, like never before, the importance of technology and dispelled any remaining doubts about the need to digitalise business operations and processes. There has probably never been a more opportune time to push for digitalisation projects. The current crisis may also trigger new ideas to accelerate multiyear technology projects and to explore options for automating liquidity management.
Meanwhile, it is crucial to ensure that all treasury and finance staff are equipped with the hardware (laptops and mobile devices) and software (VPN connection, security tokens, remote access to critical systems like TMS, internet banking and financial reporting systems) to enable them to work from home or other safe remote locations. With large numbers of staff either working from home or at split sites, it is of utmost importance to increase awareness of cybersecurity and prevention of cybercrime with help from internal sources and banking partners.
Treasurers should also consult their banking partners on how to operate in situations where they are unable to provide wet ink signatures on bank instructions. Increased usage of e-banking, via shared service centres or in country finance set ups, would help ensure there are no disruptions to regular payment runs, payroll, regulatory payments and reconciliation.
Supply chain considerations
The pandemic has caused severe disruptions to supply chains around the world. Lockdowns to limit contagion have shuttered factories and, in some cases, reduced consumer demand. The resulting supply-demand imbalances are a source of stress for suppliers, distributors and customers and need to be studied with a view to devising plans to support the corporate ecosystem through the crisis. The current predicament has also highlighted an increasing need for treasurers to review their cash management set up to complement the evolution of the company’s physical supply chain set up, which will likely bring demand and supply locations in closer proximity and injection more digital tools and contact less modes of settling business transactions.
Mahesh Kini, head of cash management, Asia Pacific, BNP Paribas (pictured below), concludes: “As we navigate these extraordinary times—a generational crisis that most professionals are experiencing for the first time in their careers—it is of paramount importance to stay connected with colleagues, stakeholders, clients, suppliers, banking partners and peers to devise future treasury strategies and policies.”