Financing
- Ensure sufficient cash-flow

Optimising your liquidity in a changing rate environment

24 October 2022

Article

Article

Today’s business environment is changing rapidly, with interest rates on the rise and inflation a serious concern. CFOs and treasurers are rightfully following these developments closely, as they are responsible for ensuring their organisations are in the right financial situation to weather this uncertainty.

We have brought together ideas for treasury teams to consider as they undertake this work. Whether they are managing a deficit, a surplus, or experiencing irregular cash flows, there is a robust set of cash management solutions to manage their liquidity effectively.

Managing the growing costs of borrowing

As central bank interest rates rise – in September 2022 the US Federal Reserve raised its federal funds rate by 75 basis points for the third month in a row - corporate treasury teams managing a cash deficit portfolio or a mix of credit and debit balances need to be able to deploy liquidity quickly and efficiently. Borrowing in this context is costlier and overdrafts are expensive, which can lead to financial risks if not addressed.

“In the current rate environment, efficiency can come from stronger centralisation. Treasurers, especially those with cash deficits, should look to optimise the allocation of liquidity within their organisation and adopt tools to automate the transfer of funds between accounts or to offset balances.
Ray Suvrodeep | Managing Director, Global Head of Deposit and Investments Product Management, Global Payments Solutions

A key benefit of these tools is the ability to facilitate self-funding, enabling liquidity to be easily mobilised internally rather than turning to external borrowing. For example, in the following scenarios:

Automated cash concentration, which transfers funds from diverse accounts to a single master account, can eliminate idle balances and ensure cash is managed effectively.
A company generating a cash surplus in one market, could use this to offset deficits in other markets, thereby maximising the value of internal funds and reducing reliance on borrowing.
Similarly, notional pooling, whereby a banking partner offsets a corporate’s balances to reduce the interest spread, enables treasurers to lower the costs associated with holding debit balances across multiple currencies and entities.

Investment risks are on the rise

In a low interest rate environment, the difference in yield between various financial instruments, such as money market funds (MMF) and short term bank deposits, is usually insignificant. Treasurers with cash surplus portfolios can worry less about which instruments they are using.

However, in rising rate environments, these differentials can grow substantially, meaning that having too much cash in the wrong instrument can produce comparatively poor outcomes.

When this happens, treasurers should consider reviewing existing investment arrangements, with two priorities in mind:

Optimising yields while also maintaining security and liquidity levels.
Identifying attractive instruments across a range of jurisdictions and currencies using relationship-based pricing.

These priorities can further be addressed through tools such as integrated MMF sweep platforms, which support treasury teams with investment execution and the management of counterparty risks.

Considering the global trends around ESG, green deposits are also an increasingly viable option for treasurers looking to link their cash management activities with their firm’s overarching sustainability objectives.

Lastly, some bank providers offer relationship-based pricing solutions, enabling centralised deposit pricing based on the balances held with them.

Accommodating irregular cash flows

Given the increased cost of borrowing and risk of inefficiently allocated surpluses as mentioned above, the current rate environment is also putting pressure on companies with less predictable cash flows. This pressure is further compounded by the challenges around forecasting and making treasury decisions on that basis.

Having real-time visibility on current balances, paired with robust cash flow forecasts, has become a significant value-add, especially for organisations with irregular cash flow situations. Digital tools have made these capabilities available, giving organisations the ability to project fund movements and better understand the impact on day-to-day cash positions.
Kilian Brunschwig | Senior Product Manager, Liquidity Management, Asia Pacific, Global Payments Solutions

Some bank providers offer self-service tools for their Liquidity Management services, which provide needed flexibility and further support real-time liquidity management.

Lastly, to efficiently manage surplus funds, providers are now offering online investment platforms, enabling treasurers to invest and divest cash surpluses from a single account to a range of MMFs in just a few clicks.

In today’s interest rate environment, corporate treasurers have a critical role in helping their companies optimise their cash positions and maintain healthy financials. For these reasons, having a banking partner with the tools needed to successfully navigate these conditions is key. HSBC’s Liquidity & Investment Products team provides an array of solutions to help treasury teams work more efficiently and drive their businesses forward.

Source

1. https://www.bloomberg.com/news/articles/2022-09-21/fed-delivers-third-straight-big-hike-sees-more-increases-ahead

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Financing
- Ensure sufficient cash-flow