The quest for liquidity
Companies are still lacking full fund visibility and true centralization
Trapped cash and underutilized funds are two terms that treasurers and CFOs often dread hearing while running their treasury operations. Faced with the pressure of making sure capital can be seamlessly sent around to different entities within their organizations, treasurers and CFOs are making liquidity management a priority.
That’s according to Asset Benchmark Research’s (ABR) 2019 Treasury Review of close to 800 participants which found that ensuring liquidity was the top treasury goal cited by the participants followed by improving cashflow forecasting and lowering cash flow variability via hedging market risks. Cashflow forecasting in particular has become more important in today’s economic climate considering geopolitical issues such as the trade war between China and the US.
Greater China-based participants differed from the rest of the region as they placed greater importance on managing counterparty risk. This focus on companies working more closely with their service providers comes at a time when treasurers and CFOs are not planning to change their service providers anytime soon. Based on the 2019 Treasury Review findings, 64% of respondents said that they had not changed their primary cash management bank over the past 12 months.
In terms of internal cash management setup, 47% of respondents mentioned that they already had a domestic cash pool setup with another 8% planning to have one in the next six months. Taiwanese companies were the most advanced group when it came to having a domestic cash pool with close to 60% of respondents from the island mentioning that they had already aggregated their bank accounts in order to optimize interest paid and cash visibility.
Despite the treasury goal need for additional liquidity, many respondents were still in the process of centralizing their treasury operations into a regional treasury centre with just over half (52%) of large corporation respondents sharing that they already had or were planning to have a regional treasury centre in the next six months. The likelihood of a regional treasury centre was less likely for mid-cap or small and medium enterprises (SMEs) due to the smaller scale of their operations.
Respondents with established regional treasury centers told the ABR that the centralized setup was primary used for handling bank relations, financial risk management and for coordinating funding requirements. In terms of an Asia-Pacific location for setting up a regional treasury centre, Hong Kong and Singapore were both popular locations with 34% of non-China headquartered organizations opting for Hong Kong as a viable location for a regional treasury centre. Factors such as an advanced market infrastructure, ease of doing business and market liquidity were key considerations for respondents on why they picked a particular location for their regional treasury operations.
Although currently self-identifying as a cost centre, the majority (77%) of respondents expressed hopes of being either a profit centre or cost centre in the next three years. They plan for their treasury center to generate alpha on surplus funds in the future or work with upper management on where efficiencies could be realized.
“Around a fifth of the organization’s profitability is contributed by our treasury department. Low yields present a challenge for our investments across the world. We look at benchmarks for investments and our duration of investment tends to be close to 1-1.5 years,” shares a technology company based in India.
Nevertheless, companies surveyed by ABR need more information about short-term corporate investment solutions to generate alpha with only 23% of participants sharing that they had already used such instruments.
About Asset Benchmark Research’s annual Treasury Review
Conducted since 2013, Asset Benchmark Research surveys corporates across Asia on an annual basis to understand the challenges faced by corporate treasurers and CFOs and the solutions they consider best suited to navigate financial markets. In 2019, almost 800 corporate finance representatives participated in the survey, led by decision-makers in Greater China, India and Indonesia. Based on annual turnover, 54% of respondents are small and medium sized enterprises, 27% are mid-caps and 19% large corporations (>US$1bn turnover per annum).