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Forecasting accurate cash flows can be problematic, which makes it imperative that funds can be accessed quickly. Yet this need has to be balanced against the importance of maximising returns.

Ongoing tough trading conditions and a tight credit environment are driving companies to ensure that they have visibility and availability of working capital across the businesses and countries which they operate in. Michiel Ranke, Head of Investments and Head of i-LIM for the UK outlines how treasurers can closely manage all available cash and get the best return on short-term funds without any loss of access.

2011 looks set to be another demanding year for businesses. While the Asia Pacific region led the global economy out of recession with buoyant growth rates in 2010, mature Western economies, including the UK, remain sluggish as measures to reduce sovereign and public sector debt start to bite.

In mid-2010 CFO Research surveyed finance executives across Europe, the US and Asia Pacific ¹ and found them uniformly concerned with maintaining liquidity and employing working capital as efficiently as possible. The research conducted with over 200 finance executives in Europe succinctly summed up the market mood and the current challenge for companies: “Companies are being squeezed for credit at the same time that they are facing lower returns on their own investments, dramatically slower – if not declining – sales and greater difficulties with collections. As a consequence, executives from finance and treasury are casting about for effective alternatives for ensuring adequate cash flow.” ²

While traditional bank lending is still the primary source of short-term funding, in the current environment companies are also exploring options such as public and private debt and the equity markets. Wider use of trade finance facilities such as pre-export or receivables financing can also be a valuable source of working capital financing. We have noted an increased demand from clients for such solutions.

Better access to cash already in the business
But in addition to securing external funding, company finance executives are also focusing on improving the use of cash already in the business, either by introducing new liquidity management solutions or looking to improve or extend existing structures. Such tools such as liquidity management solutions, including cash concentration and notional pooling, offer well-established and proven methods for improving working capital efficiency and reducing the reliance on external short-term funding.

Multi-bank cash concentration service
Multinational companies with regional liquidity management structures may now also be able to add in operating currencies or countries that were previously excluded from their cash pools. Liberalisation of exchange controls in some Eastern European and Asian countries, in particular, has made it possible to extend regional schemes to many more countries.

‘As a result of liquidity constraints, there is a noticeable trend for companies to engage with multiple banks to diversify their credit providers. Consequently, companies are rewarding these banks with cash management business, and this has impacted their liquidity structures,’ commented Conor Maher, Head of Liquidity Product and Pricing.

Balancing risk and reward
With economic conditions continuing to be fragile companies have also tightened their investment policies and are much more concerned about counterparty risk. Typically, we see tighter limits on the amounts allowed for each type of investment and more detailed analysis of counterparty risk used for short-term investments. Control, transparency and information are of the essence.

But, although constrained by tighter investment policies, treasurers are also looking to increase the yield on short-term funds. Many companies are holding larger excess cash positions as a result of the uncertainty of trading conditions in many sectors and geographies, as well as the difficulty of accurately forecasting short-term cash flow.

Three types of short term cash
Above all, treasurers and finance executives say they need to keep funds accessible. But their dilemma is clear: balancing flexibility against the search for yield in a low interest environment. We have analysed clients’ requirements for short-term funding and identified that short-term cash broadly falls into three main ‘buckets’:

1) Operating cash: This type of short-term cash is volatile, and amounts can fluctuate fairly unpredictably. In fact, many clients tell us they struggle to forecast their daily liquidity position for more than a month ahead.

2) Flexible Term Cash: This is cash reserved as a liquidity cushion. The cash may also be required at very short notice in a three- to twelve-month time horizon, so flexibility is important, but the amounts held may well be more predictable.

3) Fixed Term cash: This may be cash reserved for specific capital projects, or resulting from a sale or other business change. This Term cash can potentially be committed for a fixed maturity. 

Instant access whilst earning interest
Forecasting accurate cash flows can be problematic, which makes it imperative that funds can be accessed quickly. Yet this need has to be balanced against the importance of maximising returns. There are a range of instant access accounts available which range from straightforward current accounts for SMEs to Liquidity Manager accounts or Business Reserve accounts as well as Currency accounts. Any of these allow businesses to access their funds immediately and, with certain accounts, the potential to earn interest at the same time.

‘Based on the analysis of companies’ cash type requirements, at RBS we have also designed new interest-bearing accounts that are aimed at companies’ flexible-term cash, said Michiel Ranke, Head of Investments and Head of i-LIM for the UK. For example, RBS’s Yield Call Deposit Account is a deposit account that pays a bonus rate for stable balances over an agreed interest period and a basic rate for fluctuating balances over that same period.

Alternatively, the Growth Deposit Account which RBS offers combines flexibility and access to funds with the opportunity to earn term yields by rewarding the age of the deposit through the “last-in first-out” method of accounting. Clients will receive term value if funds have met the term. Up to five age tiers are offered, each attracting different market interest rates.

Online money market portals
At RBS, we recognise that corporate investment policies dictates the maximum amount of investment allowed with one counterparty, and once deposit limits are reached, money market funds may provide the next source of short-term investment options. Online money market portals, such as RBS’s Money Market Investor, can be very helpful in this context.  Using a portal provides convenient access to comparative information about a wide range of funds. Rules and limits may be centrally maintained, ensuring company investment criteria are enforced across operating companies.

In a challenging funding environment, it is worthwhile revisiting liquidity management structures to ensure day-to-day operational cash is available where it is needed, when it is needed. ‘Through regular and open discussion, flexibility and innovation, banks can help their clients to unlock and re-deploy cash trapped in the business as well as providing solutions to match their external short-term funding needs,’ says Ranke.

Our investment experience helps to gain return from working capital 
RBS offers a world of investment opportunities tailored to your needs. We have the size, strength, reach and highly specialised experts to meet your investment demands. As such, RBS can deliver investment opportunities across every type of asset - ranging from cash and money markets to the rapidly growing derivatives market.

If you are in the position of having surplus cash in your business, it may not simply be a case of investing that cash to generate a return. You may need to consider the wider economic and market environment, as well as the impact surplus cash could have on your corporate investments. This is where our Corporate Risk Solutions experts can help. They can create a bespoke surplus cash management solution that combines investment in the global money markets with a range of risk management structures. This gives your business the chance to optimise returns, while protecting investments from risks such as shifts in inflation or movement in interest rates and foreign exchange.