Treasury departments are grappling with dynamic interest rates, tight labor markets and supply chain shocks.
Josh Comer, head of global liquidity solutions for commercial banking at J.P. Morgan, told PYMNTS’ Karen Webster that while the pandemic and geopolitical risks ushered in a season of unpredictability for corporate treasurers and CFOs, wrestling with working capital and liquidity is always a permanent priority.
“It’s been a merry-go-round and a roller coaster the last few years,” Comer said. “I don’t know how anyone could have been fully prepared for the myriad of scenarios that played out.”
But with the right mindset, ongoing review of strategic objectives, answering key questions, trusted partners and digital tools, treasurers can find new ways to protect their firms, gaining the insight to help shape strategy in the meantime.
Some Seismic Shocks
The seismic shocks that have confronted treasurers, he said, presents both challenge and opportunity. Over the past 15 years, we’ve all gotten used to low interest rates, and supply chains were firmly entrenched and set for perfection. Entering new markets — and spending a lot to do so — seemed to make a lot of strategic sense, in an age when capital was cheap and plentiful.
“Now we’re going to see massive shifts in how business gets done,” he said. “We’re back to ‘normal,’ and it’s going to change the math” of how companies grow and go to market.
From J.P. Morgan’s vantage point, he said, and in working with everything from companies with early-stage funding to the largest multinationals, the bank has come to see that there’s a continuum of treasury needs that are industry-agnostic.
Small- and medium-sized businesses (SMBs) may be focused on getting up and running while planning for a trajectory of growth. Comparatively, Comer said, mature multinationals likely have operations across many legal entities, in different jurisdictions, dealing with dozens of banks supporting hundreds of accounts in many different currencies.
“Some of the biggest issues treasurers have in their growth journey,” Comer noted, “is understanding the exposures in their business such as FX risk … and how they can take things to the next level, automating processes and building an ‘in-house bank’ that funds subsidiaries across the globe.”
Buckets, Basics and Beyond
No matter the size or the function of the business, their treasury needs can be placed into four major buckets or “levels of the pyramid,” according to Comer: 1) managing liquidity; 2) consolidating and optimizing operations; 3) transforming the treasury functions to support corporate complexity; and 4) driving growth of the business.
First things first: The basics of managing liquidity boil down to setting up the infrastructure so that companies can facilitate fund flows, pay suppliers and receive funds from customers. In short, it involves setting up the counterparty relationships that keep commerce and goods and services humming across various supply chains.
But in the current environment, remarked Comer, with the macro pressures in place, basic liquidity management has become more complicated. Just knowing whether there is enough cash on hand to fund operations has become more challenging. Supply chain disruptions can upend fund flows.
“And if you’re a highly leveraged organization,” Comer said, “you’ve got to think about the impact [of rising rates] on cash flows. There’s less room for error.”
Optimizing and Transforming Treasury
In this environment, astute treasurers can also seek out and free up the “trapped” liquidity that can boost balance sheets and operating cash flow.
As treasurers optimize operations and diversify supply chains, he said, no matter whether they are examining internal or external sources of liquidity, data remains critical. Data, ideally, he said, needs to be consolidated, so there is full visibility across the global operations to aid both reconciliation and control to support decision making and deployment of cash.
Treasury management systems and forecasting tools offered by companies such as J.P. Morgan can help treasurers keep track of disparate cash accounts, currency exposures and risks, Comer said. Working with the right partner, he added, can make all the difference in optimizing operations and cash flow management.
“I would also encourage treasury organizations to think about off-the-shelf tools that have already addressed these challenges — and to find the solutions that work for your organization,” he said, adding that digital solutions and providers can spur treasurers to think about their overseas operations and how to repatriate cash, for example, without taking a tax hit.
Having a holistic view of accounts and fund flows in real time, combined with automated cross-border funding capabilities delivered by a global bank, can help treasury departments transform into “in-house banks” that can underpin a company’s global expansion. In that way, the treasury operations move “closer” to customers, sales offices, supply chains and new markets.
The Impact of Digital Transformation
Underscoring it all is a shift to a consumer-like experience that has been a staple of eCommerce and is now bleeding into the corporate world, said Comer. That’s especially true of the rise in embedded finance and third-party money (“3PM”), as firms hold and move cash for other entities.
“We’ve seen treasury organizations being faced with all sorts of new issues,” said Comer. “Sometimes it’s licensing requirements that come into play that could be industry-based, it could be geography-based … sometimes there’s specific safeguarding requirements or segregation requirements, for example, with tenant funds. In other cases there are contractual or agency relationships in place.”
It’s becoming especially critical, he said, to make sure that funds are segmented between corporate cash and 3PM cash, to ensure appropriate funding is available for transactional activities, while contemplating relevant legal or regulatory considerations.
As the digital transformation forces a reassessment of various business models such as forging relationships with third parties and creating marketplaces, Comer told Webster that “treasury processes can become a revenue center, not just a cost center.”