Making the Most out of Corporate Cash

Overcoming some of the biggest challenges to moving, tracking and investing corporate profits around the globe.

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It's a historic pileup: U.S. companies now hold nearly $2 trillion in cash -about 30 percent higher than their 2008 balance -while businesses in Europe and Asia are building up large cash positions as well.1 With memories of the 2008 credit crunch still fresh on the mind and economic uncertainty looming in nearly every corner of the globe, corporate treasurers are determined to avoid falling into the cash-shortage trap again. They face increasing pressure to finance operations and new investments with available cash rather than relying on debt.

But while cash on hand has once again become king, many global companies face serious technological, organizational and regulatory obstacles with regards to moving, investing or even tracking cash. Here are three typical cash management challenges faced by global companies and possible solutions to begin optimizing their cash holdings.

Challenge #1: A Fractured View

"Many people might think it's easy for the treasurer sitting in a global headquarters to get an instantaneous view of their company's cash position," says Drew Douglas, Head of Payments and Cash Management for HSBC in North America. "It can actually be quite challenging for some."

As companies grow through global expansion, merger or acquisition, many have established hundreds of accounts in a variety of currencies with multiple local banks, Douglas explains. This hinders a treasurer's ability to gain a full view of their cash positions, resulting in expensive inefficiencies. In one country, a treasurer might be running account deficits and borrowing at high local rates just to fund daily expenses, while a treasurer in another country may allow excess cash to sit in an account with a zero rate.

A technique known as "cash pooling" can help companies optimize and deploy cash to ensure effective utilization. Cash balances are collected in a central location and then dispersed throughout the organization as needed. (See infographic for a detailed explanation of how cash pooling works.) Pooling allows surpluses in one part of the business to finance deficits in another, thereby reducing fees and the need to access credit lines. Currency risks can be offset across borders, reducing hedging costs. Excess cash is pooled into one master account, increasing the number of investment options and potentially generating a higher return.

In some cases, account rationalization --the function of reducing the number of accounts or banks that report to the global treasury --can lower account maintenance costs, improve governance and facilitate cash visibility across the organization.

When it comes to defining nirvana from a treasury perspective, there's no one-size-fits-all solution.

Drew Douglas, Head of Payments and Cash Management for HSBC in North America

Challenge #2: Cross-Border Cash

Just because a company can track its cash doesn't mean it can move it. Some governments impose limits on moving funds in or out of their country, even when it remains within the organization. Other countries impose significant taxes on cash movement and possess a strong regulatory framework. As a result, the high cost of repatriating profits often leads to a business decision to leave cash in local markets.

"U.S. treasurers can still take advantage of growth opportunities using cash that would otherwise lose value if moved across borders, as the current strength of the dollar increases incentives for companies to re-invest their profits locally,"Douglas says. "Depending on their business, some companies may also be advised to retain excess cash in their local currency for current or future opportunities."

In China, for example, authorities have been relaxing currency restrictions, enabling cross-border pooling and establishing offshore centers that offer new opportunities for hedging or investing excess cash. Yet treasurers must still cope with volatility, capital controls and other challenges.

"The long-term goal for China is financial market liberalization," says Vina Cheung, Global Head of Renminbi Internationalization for HSBC in Hong Kong. "Treasurers of global firms who want to take full advantage of that process will require not only global banking capabilities but also a detailed knowledge of the local regulatory landscape."

Challenge #3: Missing Out on Yield

Treasurers typically set operational cash aside for daily needs (paying suppliers, meeting payroll, etc.) while the rest of their cash can be used to generate a yield or be put to strategic uses such as acquisitions or share repurchases. Treasurers have strong reasons to "segment" their cash into operational and non-operational buckets. These include low and even negative interest rates that have heightened the search for yield and a new global banking regulatory regime --known as Basel III --that is encouraging banks to put a higher value on their customers' operational deposits.

But segmenting is easier said than done, as it requires businesses to accurately forecast their cash needs over both the short and long term. Forecasting can be a complex undertaking for a global company that may be receiving cash from, and paying cash to, dozens of partners in its value chain. Having a presence in multiple countries introduces additional complications, such as currency restrictions, varying credit costs, differing expectations with regards to payment terms and the internal organizational silos that can occur within different parts of the company that handle cash.

Of course, cash-flow forecasting and cash pooling are also key components to working capital optimization, which carries its own benefits, such as improved free cash flow, reduced cost of capital and minimized supply chain risk. Fortunately, new technology is allowing global firms to better integrate the tasks of cash management and working capital optimization.

"If your accounts payable, accounts receivable and treasury teams are integrated --and your technology platform allows it --the treasurer should be able to get projections on when your cash is due and when it will be available," says Mali Bartlett, Regional Head of Liquidity Product Management for HSBC in New York. "That will drive the ability to segment your cash effectively."

The long-term goal for China is financial market liberalization.

Vina Cheung, Global Head of Renminbi Internationalization for HSBC

Turning to New Solutions

Treasury centralization, cash pooling and cash forecasting are some of the most useful tools for helping treasurers achieve the fine balance between security, liquidity and yield. Simply put, treasurers want to understand how much cash a company has, where it can be found and what the best options are for its use.

Cutting-edge liquidity solutions take advantage of the latest standards and technologies to give treasurers a single view of their current global cash position across multiple banks, countries and currencies. They can automate cash pooling, cash segmentation and investments according to preselected rules, while managing regulatory compliance.

While some treasurers may seek global centralization, others may be satisfied with regional hubs. Some companies will maximize central control while others will prefer greater local flexibility. In addition, technology may only be utilized to automate select functions within an organization. Ultimately, the right solution for any given company will depend on factors such as its business structure, industry growth stage and investment priorities. "When it comes to defining nirvana from a treasury perspective, there's no one-size-fits-all solution," Douglas says.

  1. Treasury Strategies, “Quarterly Corporate Cash Briefing,” June 14, 2016.

©HSBC Bank USA, N.A. 2016. ALL RIGHTS RESERVED. In the United States, deposit products are offered by HSBC Bank USA, N.A., Member FDIC.

This article is intended solely for informational purposes. HSBC Bank USA, N.A. assumes no obligation to update or otherwise revise this article. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. Nothing contained herein should be construed as tax, investment, accounting or legal advice. In all cases, you should conduct your own investigation and analysis of each potential transaction, and you should consider the advice of your legal, accounting, tax and other business advisors and such other factors that you consider appropriate. This is not a recommendation, offer, endorsement or solicitation to purchase or sell product or service.

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