Liquidity management challenges for modern treasuries

With the rapid increase of international trade and digitalisation, treasuries need to find new ways of working. They face common challenges, such as risks posed by instability in overseas markets, international trade regulations and language barriers. They also need to ensure robust communication between the treasury and other parts of the business—notably the supply chain, sales and procurement departments. We spoke to Nordea’s liquidity management experts to learn more.

Treasuries are doing more with less

The group treasury is responsible for its company’s liquidity management. It’s charged with ensuring that cash is readily available and developing strategies to mitigate any financial risks. But treasuries around the world are facing increasing pressure to fulfil these objectives with less human resources at their disposal.

“There’s pressure to have fewer people in the group treasury than a few years ago. Now there might only be two or three people. Meanwhile, the treasury’s responsibilities are expanding,” says Vesa Paukku, Head of Business Insight at Nordea. “There are new challenges coming from the changing world and digitalisation.”

These new challenges include managing the use of rapidly evolving technologies. As businesses enter a world of increasingly real-time technology, where payments can happen in a matter of seconds, there are greater risks of cyber fraud to contend with. Treasuries need to strategise carefully to harness the benefits of digitalisation, while working closely with IT and taking concrete steps to communicate these risks across departments.

In the past, treasuries may have looked at bespoke IT solutions that were designed to support the way they operated. But now, they’re realising the benefits of streamlining and simplifying the technology they use.

“Before it was fashionable to have tailor-made solutions for your treasury, but now we’re seeing more interest in basic setups and file formats—companies want to use common technical standards,” says Paukku. This standardisation makes it easier to upgrade technology, maintain security and meet the objectives of both the treasury and the wider business. It also means that treasuries can work more efficiently with other parties—which is important as companies deal with increasingly complex international networks of buyers and suppliers.

The need for global risk mitigation

International trade and supply is more important than ever to stay competitive. But this creates significant risk mitigation challenges for group treasuries. “When you’re trading abroad you’ll face certain risks that you don’t have in domestic trade,” says Petri Karhapää, Head of Trade Finance Sales at Nordea. “You have to consider the financial ability of your counterparties—whether they can pay on time, and also the country in which the company is located. There might be certain risks because of the area they are operating in.”

These risks come in many forms. Lengthy shipping delays, trade tariffs or legal regulations can result in unexpected costs. A single compliance mistake could mean your goods are stopped at the border. There’s also geopolitical instability, conflict risks and other international events which can impact a buyer’s ability to pay—and these are often impossible to predict.

When problems do occur, chasing payments can be much harder when there are geographic and language barriers to consider—and although technology is starting to reduce these barriers, they’ve yet to disappear completely. Karhapää says that ongoing assessment of these risks is crucial for effective liquidity management; not just for the treasury, but also for procurement and the entire supply chain.

Disconnect between departments

Another common liquidity challenge is the disconnect between the treasury and sales or procurement teams. Salespeople may be willing to offer extended payment terms to buyers to close a deal, without realising the wider impact this can have on the business. “Extending payment terms from 60 days to 90 days can cause liquidity management issues for the group treasury,” says Vesa Paukku. “That’s a typical problem.”

And it’s not just the misalignment of goals and priorities that can cause problems. Sales teams may not have the tools or expertise to perform accurate cash forecasting, and this can create significant issues for the group treasury. “The treasury is responsible for the whole company’s liquidity, but this is pretty much impossible if it doesn’t get accurate predictions about cash flow or income,” says Paukku.

“Selling is easy if you don’t have to worry about the payment,” agrees Karhapää. He suggests the implementation of shared KPIs, which can help sales teams to understand that every day a payment term is extended has some cost to the treasury. “If the person who makes the sale is not responsible for following up when payment is due, it’s a bad combination. So I think connecting some payment term KPIs to the sales process is very important.”

In practice, implementing shared KPIs involves a new level of cooperation between the treasury, sales and procurement. “The group treasurer needs to participate in strategic discussions and spread knowledge of working capital to other parts of the company, where it may have traditionally been ignored,” says Paukku.

Challenges are amplified for small businesses

Many of these challenges are amplified for small to medium-sized enterprises (SMEs). “If you’re a small, growing company, you’re trying hard to win big deals. But because you don’t have a good competitive position, you might not have much freedom to negotiate on payment terms,” says Antti Laakso, Head of Bank Sales at Nordea.

While it’s already on the agenda of most corporate organisations, growth companies may not realise the importance of liquidity—at least until they encounter bad economic times. It’s easy to turn a blind eye to it while things are going smoothly, only to be caught out later warns Laakso: “Even if risks aren’t a present concern, companies will eventually need cash to pay the bills.”

While offering generous payment terms may help to secure trade deals, it also causes accounts receivable lists to grow. This can have a direct impact on a company’s liquidity position, and often cannot be balanced with their accounts payable. Cash flow planning, active working capital management and collaboration with the sales department about payment terms are crucial. “That’s something you really want to look after,” Laakso says. “Making sure you have a healthy balance sheet and the right size liquidity buffer.”

Liquidity management solutions

It’s clear that liquidity management can be a challenge for organisations of all sizes—whether it’s because of international trade risks, disconnect between departments or compromising on payment terms to stay competitive. Fortunately, there are a range of tools and solutions that can improve efficiency in working capital management, and these are becoming increasingly sophisticated.

Nordea has formed a Working Capital Management (WCM) team to help customers of all sizes find the appropriate liquidity solutions. Tools offered for corporate businesses include cash forecasting and dedicated supply chain financing. For smaller businesses, Dynamic Discounting is a programme which allows buyers to receive a discount in return for prompt payment, helping to improve liquidity for the seller.

But it’s important to note that there’s no one-size-fits-all approach to working capital management. “Every solution is different depending on the needs of the company,” says Karhapää.

Looking at the big picture

To get the best results, the WCM team strives to understand businesses from all angles. “When we start discussions with a client, our first goal is to understand their business activities, their value chain from purchasing to sales, and also the roles and responsibilities in the organisation,” says Terja Ahlgren, Relationship Manager for WCM at Nordea. The team also assesses the company’s market position, its strength in negotiations and its relationship with suppliers.

By working closely with the business to understand its logic, position and mission objectives, the WCM team is able to design customised working capital solutions that truly benefit the company. It will often start by offering customers a comprehensive peer group analysis. This involves assessing a company’s liquidity compared to other businesses of a similar size in the same industry. The team is able to draw on Nordea’s industry research and expertise in working capital to offer a clear picture of where companies stand compared to their peers in the Nordic region. Ahlgren says this is something her customers take very seriously.

While smaller businesses may be daunted by the prospect of liquidity or working capital management, it’s not as complicated as it may seem. “From our perspective, there are a lot of quick wins to be found,” says Karhapää. “We’re not necessarily talking about very complex measures. Once you have a proper look at the working capital structure within your company, there’s usually something that can immediately be improved.”

The future of liquidity management

When asked about the future of liquidity management, our experts agree that we’ll see a great deal of change in the next few years. While traditional trade finance tools like Letters of Credit are still heavily used by most customers, they expect to see new competition emerging in the form of fintechs. “New technology—whether it’s blockchain or something else—will definitely have an impact on the market,” Karhapää says. “But exactly what that impact will be remains to be seen. We can at least expect new tools and new ways of administering liquidity management.”

Rather than being disrupted by new technology, Nordea is positioning itself at the forefront of change. Later this year its WeTrade platform will be released, an initiative co-founded by a consortium of nine banks. WeTrade will be the first ever blockchain-based trade finance platform. Based on distributed ledger technology, WeTrade’s goal is to make domestic and international trade easier, safer and more efficient for companies of all sizes. Its launch will be a significant milestone in the evolution of trade finance, and will provide a whole new toolkit for treasuries seeking to improve their liquidity management.

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