Sound management of financial flows critical

On one level, having the right products at the right prices in the right markets is a vital ingredient for success – no change there – but it is only part of the recipe.

The piece that has been overlooked by many is the corporate imperative of watching like a hawk how quickly invoices are settled by customers, that bills are paid on time – and not before – and stocks don’t gather dust on the shelf after production.

As the global economy continues to search for sustainable growth, more and more businesses are being squeezed between ever slimmer margins and increasingly complex supply and sales chains.

This drives many to focus attention on tough pricing discussions to drastically reduce costs, such as of raw materials.

Yet the simple basics of collecting cash on the due date, ensuring that invoices are paid on time and managing stock tightly, will yield far bigger benefits to a company than a few cents off the unit costs of supplies.

Attention to working capital management has become a lost art. There is a fallacy that management of working capital is like a magic formula – but there are some levers that are freely available for companies to pull.

Like making sure that the teams in financial operations are carefully following basic cash management disciplines when preparing payments with the correct value date, and collecting in a timely manner.

These connect to cash management basics and recognise that process costs are not simply a matter of squeezing the right tariff.

Rather, making sure staff are attentive to clear operating procedures far outweighs a few thousand dollars of savings generated from lower fees.

Calculating how much working capital a company needs, and optimising its deployment, are related challenges.

Businesses are being trapped between suppliers, who are asking for earlier payment, and customers, who want better credit terms.

The key is to focus on the cash-flow needs of the business – cash starved will be of no benefit if the outcome is insufficient funds for payroll and local taxes.

As multinational companies seek to expand, widening their supply chains and moving into new markets, inevitably the potential for inefficiencies in the cash management system rises exponentially, which in turn impacts on efficient working capital management.

The sums involved individually may be relatively small – an overdue issued invoice, a payment remitted from accounts a couple of days early, finished goods delivered late elsewhere – all these factors add up, with huge cost to the company.

Then, there is another issue – sloppy management of balances left in operating accounts at the end of each working day.

There has been a range of powerful liquidity management tools and techniques available to treasurers for many years, so why are there still too many instances of companies borrowing – yet having sufficient cash to cover that debt?

Proper and active controls of such balances in different markets and different currencies, even in low-interest environments, will yield significant benefits directly to the bottom line.

The old barrier to this, often known as “trapped’ cash”, is coming down. Even China, which has a legacy of capital controls, is now allowing international companies to move currency in, and out of, the country as part of their global treasury management operations.

As if life wasn’t complicated enough, operating in Asia in particular is further |hampered by the incidence of multi-banking – local banks and banking infrastructure forcing the use of many non-core relationships upon an unsuspecting company as it breaks into several markets.

Even simple activities, like receiving and reading a bank statement, become near-impossible tasks due to language and local practices for charging fees, which can be a mystery to some.

Suffice it to say that using a single global bank can significantly reduce the financial friction both within multinational companies and between companies and their suppliers/customers.

To a large extent, the thread that ties all these developments together is technology, which imparts a new level of transparency and speed that has transformed cash management.

Centralised treasury and financial |process operations, which give businesses a transparent real-time view of their position and the ability to optimise cash deployment, were once the preserve of large multinationals.

However, in recent years technology |has put great global cash management |within reach of all but the smallest operators.

Borderless online corporate banking systems allow treasurers and chief financial officers to see cash movements as they |happen near real time, allowing underperforming cash and expensive liabilities to be set off against each other even if they are in different currencies on different sides of the world.

Growing commercial pressure is forcing companies to find ways to do more with less. Yes, technology has given traditional cash management tools new power and reach, enabling treasurers and CFOs to find new savings.

However, first take a good look at what is happening in the financial flows of the business – collect on time, pay on time and make good use of the range of these tools as enablers of sustainable growth for many years to come.

So focus on the right issues – putting cash collection and payments execution processes ahead of squeezing supply unit costs to optimise idle cash and investing in technology.

Rachakorn Chayapirad is head of global payments and cash management at HSBC Thailand.