Liquidity Management for Treasurers Amidst Crisis

‘Stay at home. Stay safe’. These are perhaps the words that will characterise 2020, a year dominated by the global Covid-19 pandemic. Businesses are dealing with major disruption to their supply chains, and domestic and cross-border trade remains severely impacted by extraordinary skews in demands and government-imposed ‘stay home’ regulations in countries around the world.

While treasurers already had liquidity, credit and FX risk strategies in place before, risk scenarios that seemed almost inconceivable have shifted quickly from theory to reality today. Many are revisiting their models to reflect more extreme stress test scenarios than those they had anticipated during more benign periods.

While challenges remain and will continue to persist for the coming months, banks such as DBS are providing digital solutions, as well as pragmatic advice to help companies and institutions manage their liquidity safely and efficiently across entities, borders and currencies.

A treasury view of the situation
While the COVID-19 pandemic is a public health crisis, it is also having enormous economic and business model ramifications. Governments globally, including Singapore and Hong Kong, as well as United States, United Kingdom and many European countries, have embarked on enormous fiscal programmes to stabilise their economies, and maintain confidence. Markets and economies remain extremely uncertain, particularly as conditions continue to change day by day, country by country, often at pace.

Corporations in many sectors have experienced a collapse in demand, often before any reduction in costs materialise, while others have experienced a surge, both of which have liquidity implications. Seventy five percent of companies report disruption to supply chains^[1]. Failure of key suppliers, or their inability to deliver key components, severely impacts a company’s manufacturing operations, and therefore their ability to meet customer demand and generate revenues.

Taking control of cash and liquidity
While individuals and families are advised to ‘stay at home’, for many businesses, cash is frequently not all at home, but held in accounts and currencies across Asia Pacific and beyond. Consequently, with conditions changing quickly, timely information, flexible liquidity and risk solutions and reliable advice have never been more important. In addition, outside normal conditions, such as working from home, accessing this is even more challenging than usual. A number of treasurers have reported difficulties in managing treasury processes and the attendant documentation and information flows which accompany them.

In this environment, treasurers are relying on their trusted banking partners to help create certainty and deploy practical solutions. Managing liquidity is a core treasury priority that has now become even more pronounced; treasurers need to know how much cash they have, where it is, and how they can use it to meet fast-changing liquidity requirements across the business.

1. Where’s my cash?
Treasurers’ most immediate requirement is an up-to-date view of where their cash is located: in which banks, accounts and currencies. Achieving this visibility is typically easier when a company works with fewer banks, and when treasury has a robust process of accessing this data. For example, DBS recently supported an international commodity trade company to link their Asia accounts to their European headquarters, with full visibility over their holdings across multiple currencies and the ability to operate this cash beyond Asian cut-off times.

Many companies have experienced considerable challenges in trying to replicate manual processes and manage physical documentation during a period when business continuity plans are in place. Indeed, in some cases, senior managers were not fully aware where manual ‘breaks’ existed in their processes, leading to problems when working from home. Banks like DBS continue to work proactively with treasurers to replace manual treasury operations through digitisation with APIs; manage controls across liquidity with self-administration online tools; digitise documentation submissions; achieve integrated end-to-end automation. These have been in particular demand from treasurers during this crisis. By doing so, DBS has helped both corporate and institutional clients reduce friction, make processes more scalable and flexible, reduce fraud vulnerability and avoid over-reliance on hard-pressed individuals for day-to-day activities.

Automated Yield Enhancement
With visibility over cash secured, treasurers can then evaluate how best to take control of this cash. Treasurers are seeking digital solutions to manage liquidity, and ways to integrate banking data and services seamlessly into systems and business processes. To illustrate, DBS worked with a Canadian multinational to create an efficient liquidity structure which comprised over 300 accounts, to optimise the use of cash held in all of its accounts and enhance overall yield across multiple geographies- through an efficient interest optimisation structure.

2. How safe is my cash?
With better visibility over their cash, treasurers also need to know that their cash is secure.  In more difficult times there is a strong trend amongst treasurers to move available cash to ‘safe havens’ i.e. banks with high credit ratings and strong balance sheets.

Safe Havens
DBS has one of the highest credit ratings globally, and strong liquidity and capital ratios, and has been recognised by Global Finance as Asia's safest bank for 11 consecutive years. Consequently, DBS continues to be a safe haven for corporate cash. The bank has been proactive in offering a variety of liquidity management solutions to provide treasurers with access to liquidity, security and returns on cash in line with their risk appetite.

3. How can I channel cash to where I need it most?
Many companies have experienced unplanned and unexpected liquidity constraints during this unprecedented time, resulting in a change in the way treasurers think about their sources of liquidity. For example, internal sources of funding have become more important than ever, banks’ cash concentration solutions to obtain central control over cash help in this regard. Notional Pooling and Zero Balance Arrangements are also commonly used in key financial markets such as Singapore, Hong Kong, China and beyond, as an essential way of automating the flow of liquidity and maximising available working capital across the business. Treasuries can now also simulate the feasibility of these structures for their organisation, evaluate benefits and analyse risk scenarios with digital tools such as DBS Treasury Prism, with a view to implement the best-fit structure to fund net liquidity needs at a group level at a lower cost, whilst enabling local entities to access liquidity quickly and easily.

Balance Sharing
A growing number of treasurers are working with DBS to channel liquidity between entities during this period of uncertainty. DBS Balance Sharing services allow companies to share balances from entities with a cash surplus to those with a deficit without the need to set up intraday or overdraft limit agreements. The benefits accrue to both local entities and to the treasury centre (in the event a company operates with such a setup). Entities that are short of cash can draw down on a shared balance to fund working capital needs and reduce the need for external borrowing. Treasury retains visibility over the net cash position and can take a more strategic approach to analysing and addressing working capital needs at a regional or group level.  Large corporates and SMEs alike have benefitted from this balance sharing arrangement and the bank continues to see increasing demand for this useful liquidity management solution to tide them over through the current difficult environment.

Supply Chains
Some companies are also tapping into sources of funding that they would not normally rely on, such as supply chain finance programmes, particularly given the need to build resilience and support working capital across supply chains. In a recent example, DBS partnered a Chinese consumer electronics and home appliances enterprise to avail lower cost digital financing within 24 hours to its network of distributors via the client’s digital supply chain platform. The use of APIs to create a financing facility eliminates the need for distributors to make upfront payment for their purchase orders, thereby shortening their cash conversion cycles, optimising working capital to help them stay afloat.

Equipped for the present and future
Nearly every business globally is experiencing a new liquidity dimension to their outlook, whether this is created by surging demand - such as for e-commerce, pharmaceutical and telecommunications - or demand plummeting, as we have seen with the travel and F&B sectors.

This crisis will pass in time, but the impact on revenues, liquidity and risk management is far longer-term. The better equipped a company is - with end-to-end digital solutions, flexible liquidity solutions and visibility over cash and risk - the better able it will be to manage through changing times, however benign or challenging, in the months and years ahead.

“The current situation is fluid and market dynamics are changing daily. In such uncertain times, our clients rely on us even more than usual. At DBS, we strive to support our corporate and institutional clients through this difficult period. We are taking a proactive and agile approach to finding solutions to their specific challenges, whether these be holding their cash securely, helping with their growing need for funding, supporting their supply chains or even digitalising their business continuity plans.  Ultimately, our business is underpinned by long-term relationships and we are here for our clients and community for the long haul,” said Mark Troutman, Group Head of Sales, Global Transaction Services, DBS

This article was first published by Global Finance in April 2020.

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