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The temptation to clear long-term debts with working capital has proved to be the downfall of many businesses. Without good cashflow, they can simply run out of money

This article was first published in the April 2011 International edition of Accounting and Business magazine.

Last year, financial software provider SunGard asked corporate finance chiefs around South-East Asia what key area of treasury they would most like to improve.

In all markets surveyed, liquidity issues topped the list. Though the mitigating factors may have varied among the individual markets, the common denominator was cash management. Why?

Wes Bernard, who heads up the corporate liquidity business for SunGard in Asia, says global economic forces are putting more pressure than ever on the delicate art of balancing the books. Some things may be beyond an individual’s control, but cash management is not one of them. As noted in one of the firm’s market insight papers, in a volatile economy, enhancing operational efficiency can more effectively increase liquidity than cost-cutting measures.

It seems treasurers agree. In Singapore, where corporate treasurers face complex challenges as their operations expand into uncharted geographic territories, an overwhelming 82% of respondents cited maintaining liquidity as their greatest concern. In Manila in the Philippines, the figure was 60% as many companies move from a purely domestic to an international focus in their operations. In Kuala Lumpur, Malaysia the figure was 82%.

Bernard believes this movement highlights the need for treasury modernisation, centralisation and automation. ‘Corporate treasurers are realising that manual processes and the use of spreadsheets for functions such as cash management and reporting are no longer acceptable,’ he says. ‘Many companies are now requiring more sophisticated systems and processes that can help them manage their liquidity and remain competitive globally.’

He says the global financial crisis heightened the importance of having real-time visibility into global cash positions on a daily basis. ‘It also highlighted the importance of being able to accurately forecast cash and liquidity requirements and therefore make better investment and borrowing decisions. If you look back at the crisis, it was more of a liquidity crisis that had credit implications. With the breakdown of trust between counterparties, organisations had to get a better understanding of their cash and cash equivalents.’

Derek Lai, Asia leader for reorganisation services at Deloitte China, explains that it’s not just a matter of making ends meet: you need to put your money to work for you. And simply leaving spare cash in the bank won’t cut it – with current low interest rates and inflation factored in, the real value of that money will shrink.

‘The world is getting smaller and smaller, the economic cycle is becoming shorter,’ says Lai. Companies need to know their exact cash position, so they can make investments. Without control over cashflow, companies may lose opportunities for investment, or put themselves at a very high risk that the business may run out of cash.’
Lai cites two examples of Chinese businesses that felt the repercussions of poor cash management. One was a home electronics company that used its short-term cashflow to repay a long-term liability. This left it short of working capital. It was unable to pay bank loans and suppliers – the business failed.

Another firm, a large-scale catering business, used liquid funds for investment when the stock market was high. Ultimately, it ran out of working capital. Workers complained about not being paid, and the business failed.

Close at hand

Though the scenarios were different, Lai says the lessons are the same: short-term cash should be used for short-term liabilities; and long-term surplus should be used to repay long-term liabilities in increments. ‘You need to have good cashflow projections so you can repay loans when they’re due, and still have sufficient cash on hand to meet your monthly liabilities,’ explains Lai. ‘With this clarity, you’ll know if you need to raise money in another way – such as selling a property earlier – to settle a long-term liability. Never use short-term cash to repay a long-term liability.’

In other key areas of cash management advice, Lai cautions against overexpansion. Being conservative in investment income estimations is ‘an essential strategy’ in any budget forecast, he adds.

‘Make sure you have sufficient funds on hand for daily management as well as strong internal controls on cash receipt and payment systems, with the aim of minimising bad debts.

‘Find ways to create short-term funds for yourself – for example, applying short credit terms for your customers, while obtaining longer credit terms from suppliers.

‘Do a daily, weekly or monthly cashflow forecast. Your outlook should take various scenarios into account, to ensure there are no surprises.

‘Divide your forecast into short and long term. Then divide this into in/out cashflow, recurring cashflow, and extraordinary cashflow. When doing this forecast, you need to consider three- to five-year historical records, as there will be some patterns.’

A good relationship with your bank, adds Lai, is pivotal to any cash management plan. ‘Think of your bank as a business partner – one whom you can easily get on board if funds are needed,’ advises Lai. ‘Banks can offer you good investment opportunities (such as bonds) as well, so it is important to have a good relationship.’

SunGard’s Bernard also stresses the importance of forward thinking.
‘Treasurers and CFOs spend a lot of time looking backward, trying to analyse yesterday’s information, when really [they] should look forward and focus on tomorrow’s numbers,’ he says. ‘They should know exactly how much is outstanding at any given time, and how long it will usually take to receive the funds. Receivables should be viewed as free money that is better off in the company’s bank account, saving it from having to borrow more money. The ability to generate free cashflow by optimising receivables is key in improving an organisation’s competitiveness, as it allows a more efficient use of funds and reduces borrowing costs.’

If you find cashflow management a challenge, you are not alone. Deloitte’s Lai says that even some large or listed companies need better cashflow management. In this case, it may be time to talk to the experts.

‘Businesses in this position should consult an experienced accountant,’ Lai says. ‘In addition to having the knowledge and technical expertise, they may have clients in a similar industry and be well placed to offer insights and advice on improving cashflow.’ 

Peta Tomlinson, journalist

Top tips for cash management

  1. Never overexpand. Be conservative, and avoid high-risk investment.
  2. Consider the ‘big picture’ of your cashflow requirements – good forecasts are about making sure there are no surprises.
  3. Use a good system of evaluating and collecting accounts receivable (to avoid bad debts).
  4. Establish good communications with key executives within the company. This will enable you to grasp the cashflow needs of every department.
  5. In budget forecasting, consider historical records; there will be patterns.
  6. Establish a good relationship with your bank.
  7. Understand how much and when funds will be coming back from investments. It’s not just about outflow.
  8. Seek professional advice: an accountant is there to help.

Source: Deloitte Hong Kong

Last updated: 3 Apr 2014