The COVID-19 pandemic brought a heightened focus on cash and liquidity positions. Companies with manual processes and disparate account structures faced more pressure and uncertainty, underscoring the importance of having a detailed treasury strategy.
Organizations commonly faced three types of pandemic-related liquidity challenges. After implementing temporary fixes, it’s time to find long-term solutions that avoid reverting to old ways.
1. Working with the right bank
Challenge: The volatility of financial markets and a high level of uncertainty exposed some companies’ lack of confidence in their financial providers. This prompted a flight-to-safety: a market shift toward safer assets that resulted in overflowing bank balance sheets with excess non-operating deposits that many didn’t want and couldn’t pay for.
Short-term response: Many companies scrambled to find a banking provider that not only had confidence in their longevity, but was also willing to open an account to hold non-operating cash, often without any ancillary business. Those that didn’t scramble were often stuck with uncomfortable levels of risk.
Long-term solution: Companies can deploy a strong investment policy with a defined counterparty risk strategy. At a high level, businesses can ensure all the banks they work with meet specific criteria in times of calm and crisis. Start by clearly defining the objectives for operating and non-operating cash balances. Also figure in whether a change in market conditions will warrant a recalibration of those objectives.
2. Undertaking treasury management without automation
Challenge: The quick shift to remote work disrupted treasury management in myriad ways. Organizations with inefficient account structures and manual cash positioning processes often had trouble performing at their previous in-office levels. Existing inefficiencies were further exacerbated by a lack of automation. Plus, resource constraints challenged business functions that typically require cross-functional collaboration. Employees no longer had the ability to simply walk down the hall for answers.
Short-term response: The pandemic prompted many businesses to consider—and in some cases, reconsider—automating treasury processes wherever they could. However, implementing such technology on the fly wasn’t feasible for every company. As teams shifted to remote work, many spent significantly more time physically consolidating cash balances to ensure their liquidity was sound. Some businesses that had moved cash between accounts on a monthly or weekly basis instead did so daily to maximize their primary account cash position. As with any time of crisis, there was an increased focus on cash balance reporting. Many organizations responded by circulating more frequent updates to a wider internal audience.
Long-term solution: Firstly, establish a sustainable solution to conduct an account rationalization exercise. This can ensure an optimized account structure, minimizing the number of managed accounts and automating funding and cash concentration, even across multiple financial institutions. The next step is to consider using technology that can automate cash positioning and reporting, as well as data collection. This can save you time, decrease your costs and reduce the risk that comes with limited visibility and access to cash.
3. Decision-making without treasury forecasting
Challenge: During the height of the pandemic, many companies experienced a lack of detailed, daily operating cash flow forecasting. This led to unknown liquidity requirements, delayed decision-making and increased risk of cash shortfall, which all contributed to considerable and pervasive disruption.
Short-term response: Most companies opted to hold excess cash reserves to cover their cash position in case of unexpected events, such as a delayed receipt of funds or an unexpected large outflow. Businesses often took this tactic even if it meant borrowing funds just to hold cash, resulting in higher carrying costs and increased concentration risk for many.
Long-term solution: Ideally, the way forward is to create a robust, rolling cash forecast that projects at least eight weeks into the future. You should manage this separately from the standard monthly forecast process handled by the financial planning teams, as intra-month cash fluctuations often vary significantly. The treasury team’s cash forecast should include multiple scenarios and stress tests, and accuracy should be monitored so that the forecast methodology can be adjusted as needed.
Past lessons point the way forward for improved treasury management
The pandemic has led to unprecedented challenges, but also unprecedented opportunity. Now is the time to look at the obstacles that businesses have conquered—or at least mitigated—and implement long-term strategic solutions to prepare for the future.
