Necessity of corporate cash-flow visibility questioned
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Necessity of corporate cash-flow visibility questioned

The difficulty corporates have in gaining real-time visibility of their real-time cash flows has been highlighted, but for many corporates having full oversight might not be a necessity.

Gaining a greater level of oversight on the movement of cash is often cited as a key priority for corporates operating across multiple markets and currencies. For smaller companies, though, this might not be among their top priorities.

Results from the Cashfac EMEA operational cash index study, carried out by East & Partners (E&P), found the number of corporates with a complete, real-time view of their balances was low across EMEA.

Paul Dowling-160x186

 Many of the relationships between the corporates and their banks have evolved over time, and not as part of a strategy

Paul Dowling,
East & Partners

In the study of 350 EMEA companies with an average turnover of $2.23 billion, in Western Europe 7.7% of respondents stated they had a real-time view of their cash balances, and 5.7% were able to forecast their cash flows in real time. For Africa and the Middle East the results were lower, at 4% for balances and 2.3% for cash flows.

Paul Dowling, principal analyst at E&P, states the importance of having good cash-flow visibility. He says: “It is absolutely vital to have an overview on flows. If the cash position is not in good shape and there is not the ability to forecast accurately, it can compromise working capital management.

“Cash is today the single largest element of working capital for the corporates. Cash is today the single largest element of working capital for the corporates. They can know their overdraft positions and their debtors but if they don’t know their actual cash flows it causes obvious problems for working capital management." 

When asked to rate the risk potential of not having detailed insight, with one indicating high risk and five indicating low, the overall score given by the EMEA corporates was 3.22. While corporates recognise the risk, they do not seem to place it as a high priority.

Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT), suggests it is not necessary to have such a level of specific detail on cash flows for all but the largest companies.

He says: “For most corporate treasures, there is no need for that level of monitoring during the day, as most revenue data will be processed overnight as Faster Payments or Bacs.

“Having an overview is desirable, but it is overstating the case to say that all corporates need real-time processing. Eventually there might be a move towards it, but it is no great loss by not having it.”

Alastair McGill, managing director, global business, at Cashfac, disagrees, saying that even for companies with a far smaller turnover than those surveyed, having overview is an important part of their business planning strategy. “If corporates are not aware of their current position, there is the risk they are not using cash effectively," he adds.

“The smaller corporates need the overview for different reasons to the large. The smaller companies can see their cash become squeezed.”

ACT's Baseby argues that having a continual update of of data throughout the day is not necessary, adding: “It would work for a large utility, but for a smaller retailer it would not feel the need to have a system in place where they can watch the flows go back and forth.”  

There might be more reasons for having details on the flows of cash that can go beyond knowing the company’s financial position, and might be required for regulatory reasons, depending on the company’s set up.

Cashfac's McGill says: “Some businesses hold the cash of their clients and this needs to be segregated. If they cannot get a clear view of the separation of these funds, they could be falling outside of regulation.”

Disjointed relationships

The reported low percentage of corporates with real-time overviews could be down to the way in which international banking relationships have developed for corporates in EMEA. 

E&P's Dowling says: “Many of the relationships between the corporates and their banks have evolved over time, and not as part of a strategy.”

He points to earlier research by E&P of Asia-Pacific (Apac) corporates, which found 34.9% of respondents had overview of their cash flows. Dowling suggests this is down to the comparatively recent expansion of multi-billion-dollar corporates in the region

“There are legacy issues from the age of the companies in EMEA," he says. "The average age of the corporates surveyed in EMEA was 90 years, while in Apac it is less than half of that number.”

The biggest challenge to bringing the system up to standard comes from ensuring the technology being provided by the banks matches the needs of the corporates. Dowling says: “Banks are behind the game in terms of their technology, and also in matching rising corporate expectations.”

Stephen Baseby-160x186

Stephen Baseby, ACT

Baseby explains that, at present, most of the corporates access details on banking flows through online portals, which they do not leave open for security reasons. Instead, they will periodically log in to check their positions. Before the systems are taken up to any degree by the smaller companies, he does suggest improvements could be made to how the data is accessed to increase security.

“The file transfer system could be more secure, logging into these portals and leaving them open is a risk in itself,” says Baseby. “The technology needs further development. It is similar to online banking, and the concerns that arise are no different.”

The platforms that are to be used can benefit from being tailored towards industry-specific needs to indicate greater understanding from the banks of their client’s business. 

McGill says “For big clients there could be a relationship manager who understands the business and can help bridge the gap. But the systems that are being used by a retailer are the same as for a law firm, and their needs and challenges are clearly very different.”

He argues that the knowledge assists corporates to make better business decisions, regardless of their size. It can also be a financially beneficial service for the banks to offer. 

“At the lower end they do not have the tools in place to get a full overview of their current, intraday and forecast cash positions," McGill says. 

"Smaller companies still often run on Excel-based processes and likely won’t have a sophisticated treasury management system in place. Banks can lock in loyalty and drive fees from filling this gap by providing more functionally rich cash-management systems to their corporate and business banking clients.” 

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