Chapter 4 Integrating cash and trade
will want to maximise their own organisation’s
access to liquidity.
For many companies, changing internal
operations can improve liquidity within the
organisation as a whole. There are many
different ways to do this, including:
Negotiate better payment terms.
For a company seeking to manage its
own position, agreeing better payment
terms, whether by paying suppliers later
or collecting payment from customers
earlier, will improve working capital
within the organisation. Whether this
is possible will depend on the relative
bargaining positions of the company
and its counterparties. For example,
supermarkets and other large retailers
are often able to impose strict payment
terms on their suppliers. Whilst this
might improve a company’s own liquidity,
it will inevitably weaken that of its
counterparties.
Offer early payment discounts.
Where better payment terms with
customers cannot be agreed, some
companies offer early payment discounts
to accelerate cash collection. Care
should be taken to ensure sales teams
only offer discounts that have been
agreed with the treasury.
Reduce exceptions and manual
interventions.
One of the most significant ways a
company can improve its liquidity is to
reduce delays in the receipt of payment
as a result of invoice or letter of credit
error. Any manual intervention in any
process will increase the time taken to
prepare the invoice and consequently
the time to collect payment. Treasurers
should consider measures aimed at
reducing errors in the preparation of
documents and payment instructions.
This may include automating or
outsourcing certain activities. Standardise processes as far as possible.
Although it can prove difficult to arrange,
standardisation of processes is one
technique to improve liquidity. Instead of
having a number of different processesand systems, standardisation usually
reduces both the headcount required to
administer an activity and, if automated,
the cost of operating different systems.
For example, accessing all bank account
information through a single platform
with common authorisation procedures is
much more effective in terms of managing
balances and protecting against fraud,
than operating a number of different
proprietary electronic banking systems.
Improve management of inventory.
Using ERP data and other information to
improve the management of inventory, so
that unnecessary items are not bought
(thus having to be stored), can allow
a company to streamline its physical
production processes, reducing the
level of working capital committed to
inventory. This is not always possible,
especially when the company has
already streamlined its processes, or
where demand levels are uncertain or
supply lead times unreliable. However,
when improvements can be made in the
management of inventory, gains quickly
feed through to working capital.
In a similar vein, taking advantage of
improved tracking of goods in transit will
both improve the use of inventory and
reduce the associated transit risk.
Restructure liquidity management
processes.
At the other end of the scale, treasurers
can be tempted to invest significant time
and effort into improving the efficiency
of domestic and/or international liquidity
management structures. The larger and
more complex the organisation, the more
scope there is for gains. However, this
will need to be set against an increase
in costs in terms of both the time and
resource that such a project will require.
A liquidity management restructuring
is most likely to provide improvements
where a group has significant numbers
of bank accounts in a number of
locations and where there is scope to
reduce reliance on external borrowing
by using cash-rich group entities to fund
cash-poor ones.