Six Good Treasury Strategies

Amid Economic Volatility

_{Written By}

Andrew Parker

EVP, Head of Global Treasury Management

As businesses grapple with global economic uncertainty, the need for an effective treasury management strategy has never been greater.

Although the U.S. economy will show modest growth this year, concerns about inflation rates, policy uncertainty and geopolitical tensions persist.

As a result, businesses might struggle with cash-flow-related issues, including:

Decreased consumer demand, leading to pressures to liquidate expanded inventories.
Challenges when collecting outstanding payments, leading to liquidity and working capital problems.
Cyberattacks that may impact deposits and cash flow.

A sound corporate treasury strategy can help minimize such risks. Below, we will explore six strategic steps corporate treasury teams can take to navigate economic volatility and uncertainty by working closely with their bankers and strategic treasury relationship managers to generate liquidity.

1. Help Your Teams Understand the Fundamentals of Cash Flow

Empower your teams by ensuring that they understand the fundamentals of cash flow. Understanding factors that impact cash flow, such as sales volume and pricing, inventory management and operating expenses, equips them to make informed decisions to maintain a steady cash flow and seize growth opportunities.

A team that comprehends how its role impacts the business’s financial health is likelier to engage in cost-saving initiatives with the timing of expenses and revenues in mind.

Here are a few key strategies for effective treasury management:

Collaborate with your banking partner and their strategic treasury specialists. Their advice could illuminate effective ways for your teams to generate liquidity and systems for improving financial performance.
Instill a cash-focused mindset across the business. This helps ensure that working capital priorities align with current business needs and prepares the company for potential liquidity issues, such as the need to quickly liquidate inventory.
Utilize companywide metrics to assess business performance and drive improvement. This could include analyzing key performance indicators (KPIs) such as accounts receivable to manage customer credit more effectively.

2. Optimize Inventory Management

Optimizing inventory management can improve working capital in a few ways.

Assess Inventory Levels

Although assessing inventory levels can improve supply chain management (particularly for avoiding stockouts resulting in lost sales), it’s crucial to balance maintaining sufficient stock and managing your working capital during times of economic uncertainty.

Holding excess inventory during periods of reduced demand can drain resources. Being able to quickly convert unwanted stock into cash is essential. If this process is slow, it complicates financial forecasting and may lead to increased dependence on expensive external funding.

Manage Supply Chain Risk

Run simulations or “what-if” scenarios alongside relevant KPIs to help your corporate team anticipate how economic volatility or global disruptions could affect your supply chain and customers. Such risks could include delayed payments, increased costs or cash flow shortfalls.

Your corporate treasury team can proactively mitigate these risks by, for example, collaborating with sales to unlock supply chain funding. By leveraging the company’s credit profile, the team can adapt its financial modeling to secure financing to support the supply chain during times of uncertainty, ensuring continued operations.

Optimize the Enterprise Value of Sales

Collaborate with your sales team to negotiate favorable sales terms. This can significantly boost each transaction’s enterprise value and positively affect key metrics such as Days Sales Outstanding (DSO), which tracks how quickly your business receives payments.

Simultaneously, building solid relationships with your procurement team can help secure better purchase terms and improve metrics such as Days Payable Outstanding (DPO).

By optimizing both DSO and DPO, you can significantly improve your company’s overall financial performance.

3. Provide an Organizational Liquidity Overview

Once the first two steps have been taken, businesses can seek the counsel of their banking partners to leverage products and services to improve liquidity and financial performance. It’s necessary to have access to real-time visibility of the organization’s bank accounts, cash flows, cash balances and funding requirements to better manage corporate liquidity. Otherwise, businesses may struggle to meet strategic and immediate goals and ensure that the company maintains adequate cash.

With these insights, corporate treasury teams can:

Suggest corporate liquidity options to improve cash flow, such as BAM (bank account management), selling unused inventory and more.
Promote the importance of organization wide cash visibility so all departments understand its significance.
Introduce technology that enhances connectivity and allows for better data collection and analysis.
Provide management with well-structured and easy-to-understand cash forecasts, complete with actionable insights.

By integrating these practices, your CFO can more effectively support the company’s financial health and decision-making.

4. Risk Management and Visibility

In volatile markets, it is crucial to be on top of your account structure, FX risk management and investment strategies.

Account Rationalization and Cash Concentration

Consolidate the number of accounts the business has to simplify your structure, reduce costs and improve liquidity.
Identify areas of the business where cash may be trapped and investigate how to use available funding sources to their full advantage, such as utilizing intercompany loans or corporate cards to access cash.

Cross-Border Considerations

In partnership with your bank, evaluate how to repatriate overseas funds via foreign exchange markets. Ensure close coordination with your tax and legal teams to avoid unique pitfalls in a local jurisdiction.
Leverage FX hedging strategies, including forwards or swaps to preserve capital or profits, and deliver a clear forecast, reducing uncertainty and risk.

Reassess External Funding and Investments

Examine external funding sources: Review external funding sources/lines of credit to ensure that they offer sufficient funds. If they don’t, corporate treasury teams can reduce unused lines of credit to mitigate fees or upsize where appropriate.
Reevaluate your funding needs: Assess which banks best align with your business’s current and future goals, considering loan terms, foreign exchange and interest rates.
Extend the duration of your investments: If returns in the short term are low, longer-term investments could offer a higher yield. It is important to remain mindful of the corporate cash management tenets: capital preservation, liquidity and lastly, yield. Ensure that your corporate investment policy captures these principles.

Regularly reviewing your banking solutions helps you stay proactive, reducing the risk of funding gaps and enabling your business to seize new growth opportunities when they arise.

5. Use Data to Protect Your Treasury Strategy Against Fraud and Other

Leverage data to optimize and protect internal financial processes, driving improvements in:

Safeguards against cyberattacks, business identity theft and account takeover fraud. This can be achieved, for example, via cost-effective ACH (automated clearing house) positive pay to detect and prevent fraud in incoming and outgoing debits.
In-house banking and netting strategies to minimize financial risks and efficiently manage loans, corporate cards, deposits and FX transactions.
Cash flow analytics and forecasting to conduct scenario analysis that identifies inefficiencies.
Shift from paper-based payments to electronic payments such as corporate card, ACH and real-time payments. The vast majority of corporate payments fraud is tied to check payments.!

6. Gain Access to Strategic Treasury Management Techniques

In today’s challenging economic climate, businesses face various financial pressures, from cash flow disruptions to rising interest rates and supply chain vulnerabilities. The discussed methods are a good starting point that can be expanded with the professionals in your banking relationship. Your banking relationship manager and treasury advisor should be a knowledge center for your business, with best practices and the strongest product solutions available.

For tailored solutions and expert guidance on optimizing your treasury strategy, visit the Banc of California Treasury Management page. Discover how our team can support your business leaders with customized treasury management solutions.

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