five steps to optimize cash...fx risk/hedging liquidity management 0% 10% 20% 30% 40% 50% 60% 70%...
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Treasury and Trade Solutions
Managing Liquidity During Turbulent Times: Five Steps to Optimize CashThe fast-emerging COVID-19 crisis is placing extraordinary pressure on financial markets, governments, corporations, communities and individuals, with volatility and anxiety at levels unprecedented in recent times. How treasurers can navigate this uncertainty, respond to the huge shifts in liquidity dynamics that many organizations are facing? How can they position their departments for effective business continuity during this extreme situation until we reach a new normal.
The markets are in the throes of significant change, stemming both from the actions of market participants and the response from governments and regulators to the crisis. Volatility in the stock markets has been at levels unprecedented since 1987. On March 11, 2020, Citi experts came together in a live Citi Online Academy virtual event to discuss what Treasurers need to consider when managing their corporate cash.
3Treasury and Trade Solutions2 Managing Liquidity During Turbulent Times: 5 Steps to Optimize Your Treasury
Five Steps to Optimize Cash 1. Reflect new business and cash flow dynamics in
scenario planning Every industry is experiencing changes to their cash flow profile, whether short or longer term. Incoming cash flows have become more volatile and uncertain, while financial liabilities remain. In some industries, immediate demand has increased, such as pharmaceutical, digital (e.g. to allow online education), e-commerce etc. while others are experiencing significant constraints, such as the travel industry. Analyzing the impact of short and medium-term shocks, as well as potential longer-term shifts, is essential to identify liquidity pinch points.
2. Take a wider and more extreme view of risk planning While every company routinely conducts risk planning, the crisis has emphasized that these stress tests often need to be far more rigorous and extreme than would be anticipated under normal business conditions. For example, the recent crisis has highlighted:
• Supply chain planning — if a supplier is unable to deliver a key component, it could completely immobilize a company’s manufacturing operations, with significant liquidity management implications.
• Regulatory intervention — government or regulatory actions could have a rapid impact, such as sudden interest rate shocks and fiscal actions, as well as changes in market conditions.
• Resource planning — it is important to distinguish who has management responsibility, and who has legal responsibility for implementation. Subsidiary personnel may be required to complete certain regulatory processes, which needs to be taken into account for resource planning and communications.
3. Anticipate capital and currency constraints in liquidity planning
In countries such as China where capital and currency controls apply, and completing documentation and regulatory compliance confirmation for cross-border lending or pooling can take time, treasurers need to anticipate, and potentially place funds locally in anticipation of liquidity shortages in order to fund business entities at short notice. Pre-payments to suppliers in these markets can also help to increase supply chain resilience.
4. Diversify your funding sourcesWhile treasury may rely on a limited number of funding sources during business as usual, it is important to have additional sources available to cover exceptional periods. For example, a supply chain financing program may be a lifeline for the company and its suppliers to provide access to last-mile cash, even if this is not used routinely. Automate liquidity flows as far as possible, and make sure multi-bank target balancing is in place, even if this is not used routinely.
5. Take an end-to-end approach to digitizationTreasurers need to take an end to end view of their cash flow cycle and map every decision step digitally, from sales through to procurement, payment, reporting, disaggregation, liquidity management and forecasting. Every manual step creates friction and risk, and these risks can be exacerbated significantly when business continuity or home-working plans are in place. If every step is digitized, processes become more scalable and flexible to changing operational conditions, and less vulnerable to fraud and error.
Supply chain interruptions
Economic slowdown
Interest rate volatility
FX risk/hedging
Liquidity management
0% 10% 20% 30% 40% 50% 60% 70%
Treasurers’ top 5 crisis concerns*Participants could select more than one option
* Results of Citi online poll, March 2020
What planning measures are you taking during the current crisis?Participants could select more than one option*
0%
10%
20%
30%
40%
50%
60%
70%
* Results of Citi online poll, March 2020
While business continuity planning is a key ‘business as usual’ activity, the important of robust and actionable plans has been clearly demonstrated as the crisis unfolds.
While business continuity planning is a key ‘business as usual’ activity, the important of robust and actionable plans has been clearly demonstrated as the crisis unfolds.
Continuity of business plans
Home working
Assessing liquidity
needs and options
Assessing counter
party and supplier risk
Reviewing or implementing supply chain programmes
All of the above
3Treasury and Trade Solutions2 Managing Liquidity During Turbulent Times: 5 Steps to Optimize Your Treasury
Five Steps to Optimize Cash 1. Reflect new business and cash flow dynamics in
scenario planning Every industry is experiencing changes to their cash flow profile, whether short or longer term. Incoming cash flows have become more volatile and uncertain, while financial liabilities remain. In some industries, immediate demand has increased, such as pharmaceutical, digital (e.g. to allow online education), e-commerce etc. while others are experiencing significant constraints, such as the travel industry. Analyzing the impact of short and medium-term shocks, as well as potential longer-term shifts, is essential to identify liquidity pinch points.
2. Take a wider and more extreme view of risk planning While every company routinely conducts risk planning, the crisis has emphasized that these stress tests often need to be far more rigorous and extreme than would be anticipated under normal business conditions. For example, the recent crisis has highlighted:
• Supply chain planning — if a supplier is unable to deliver a key component, it could completely immobilize a company’s manufacturing operations, with significant liquidity management implications.
• Regulatory intervention — government or regulatory actions could have a rapid impact, such as sudden interest rate shocks and fiscal actions, as well as changes in market conditions.
• Resource planning — it is important to distinguish who has management responsibility, and who has legal responsibility for implementation. Subsidiary personnel may be required to complete certain regulatory processes, which needs to be taken into account for resource planning and communications.
3. Anticipate capital and currency constraints in liquidity planning
In countries such as China where capital and currency controls apply, and completing documentation and regulatory compliance confirmation for cross-border lending or pooling can take time, treasurers need to anticipate, and potentially place funds locally in anticipation of liquidity shortages in order to fund business entities at short notice. Pre-payments to suppliers in these markets can also help to increase supply chain resilience.
4. Diversify your funding sourcesWhile treasury may rely on a limited number of funding sources during business as usual, it is important to have additional sources available to cover exceptional periods. For example, a supply chain financing program may be a lifeline for the company and its suppliers to provide access to last-mile cash, even if this is not used routinely. Automate liquidity flows as far as possible, and make sure multi-bank target balancing is in place, even if this is not used routinely.
5. Take an end-to-end approach to digitizationTreasurers need to take an end to end view of their cash flow cycle and map every decision step digitally, from sales through to procurement, payment, reporting, disaggregation, liquidity management and forecasting. Every manual step creates friction and risk, and these risks can be exacerbated significantly when business continuity or home-working plans are in place. If every step is digitized, processes become more scalable and flexible to changing operational conditions, and less vulnerable to fraud and error.
Supply chain interruptions
Economic slowdown
Interest rate volatility
FX risk/hedging
Liquidity management
0% 10% 20% 30% 40% 50% 60% 70%
Treasurers’ top 5 crisis concerns*Participants could select more than one option
* Results of Citi online poll, March 2020
What planning measures are you taking during the current crisis?Participants could select more than one option*
0%
10%
20%
30%
40%
50%
60%
70%
* Results of Citi online poll, March 2020
While business continuity planning is a key ‘business as usual’ activity, the important of robust and actionable plans has been clearly demonstrated as the crisis unfolds.
While business continuity planning is a key ‘business as usual’ activity, the important of robust and actionable plans has been clearly demonstrated as the crisis unfolds.
Continuity of business plans
Home working
Assessing liquidity
needs and options
Assessing counter
party and supplier risk
Reviewing or implementing supply chain programmes
All of the above
Checklist: Test your business continuity plansIn countries such as China where capital and currency controls apply, and completing documentation and regulatory compliance confirmation for cross-border lending or pooling can take time, treasurers need to anticipate, and potentially place funds locally in anticipation of liquidity shortages in order to fund business entities at short notice. Pre-payments to suppliers in these markets can also help to increase supply chain resilience.
Managing a crisis needs fast decisions from key decision makers. Make sure these stakeholders know what input is required from them to allow treasury to make and implement decisions. Who are the back-ups to these stakeholders? And who are the back-ups to the back-ups, particularly if people are home-working?
Who can nominate new users, both centrally and at subsidiary level, who are the security administrators and their back-ups, and are there different administrators for accounts payable and receivable?
Have you stress-tested your networks, and are there enough VPN licenses if large number of staff are home-working? Does treasury have dedicated connectivity for bank communications?
Do employees displaced or stranded outside their home markets have access to cash. For example, you may need to have mechanisms in place to increase T&E card limits temporarily.
It is impossible to anticipate and plan for every eventuality. Make sure your decision-making model is flexible and pragmatic enough to deal with unplanned and fast-moving events.
Lean on banking partners and get their input, help and solutioning for challenges you’re facing.
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To hear more from Citi experts on Managing Liquidity During Turbulent Times, please access the replay here.