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Opportunities for maximizing treasury management.

Without question, the last few years have brought upheaval to the global economy and uncertainty to businesses in the United States. Between lagging consumer demand and the diminished value of some assets, many companies have gone beyond the typical belt-tightening to help their companies survive.

Absent new loans or a sudden uptick in revenues, American businesses--from multinationals to small companies--are increasingly turning to treasury management as an efficient and effective way to help contain costs, reduce risk and conserve cash. Though the worst of the downturn has hopefully passed, evidence of lingering doubt among financial executives is clear.

In the latest edition of the annual Dank of America Merrill Lynch CFO Outlook survey, only 38 percent of financial executives said they expect the U.S. economy to grow this year. That's down from 56 percent who projected growth a year earlier. Not surprisingly, CFOs gave low marks overall to the national economy, grading it 44 on a scale of 100--the lowest number in the survey's 14-year history.

The forecast isn't entirely glum. Financial executives indicated that they plan to continue spending on research and development. They also don't expect the challenging economy to translate into job losses at their companies. In fact, almost half of the CFOs surveyed said they expect to add staff, while most of the rest expect their workforces to remain the same size. Roth of those responses were consistent with the previous year's survey.

Still, it's clear that financial executives don't anticipate an immediate turnaround in the economy. While they generally think credit will be available this year, survey results reveal a decline in those who expect their companies to consider financing in the months ahead. At the same time, fewer CFOs said they expect revenues and profits to grow.

So if not financing or increased revenues, where will companies find money this year? Increasingly, financial executives are focusing on freeing up liquidity within operations. That means installing more efficient and effective treasury management capabilities.

Given the ongoing volatility, many companies have evaluated whether their existing strategies and systems provide adequate insulation against revenue and cost distortions. Those embarking on such evaluations must keep in mind some key considerations:

Controlling currency risk: Currency fluctuations can erode predictability, which is the cornerstone of sound growth. To be effective, a corporate foreign exchange policy should include definitions of various exposures (e.g. transaction and translation exposure), outline hedging objectives and establish internal authorities and controls associated with the FX risk management function. The design of a company's treasury systems and processes should help control natural offsets and monitor for cross-border payment flows, intercompany payments and currency conversions.

Enhancing international liquidity management strategy: For companies with significant offshore operations, it makes sense to manage cash as a corporate asset. Enterprise-level visibility into cash--potentially sitting in multiple accounts across several countries--enables treasurers to reduce risk and identify opportunities to better leverage currency positions.

Two key components of effective centralized liquidity management--vesting control over concentration accounts in the treasury function and establishing protocols for ensuring reliable forecasting from offshore units--are policy matters that will generally require the support of senior management.

Investigating trade financing options: Often more readily available than other forms of working capital financing, trade solutions range from short-term instruments such as letters of credit, documentary collections or open accounts to more complex and tailored options that may involve export credit and multilateral development agencies.

Recently, supply chain financing--aimed at lowering the overall cost of capital--has emerged as an avenue for sellers to finance non-letter-of-credit shipments.

Optimizing the collection cycle: To shorten extenuated payment cycles, consider lowering days outstanding and requiring electronic remittance, two options that are particularly common when dealing with overseas counterparties. The benefits extend beyond the balance sheet, as greater certainty of payment enhances cash visibility and cash flow accounting currency and directly ties working capital optimization to prudent risk-taking.

By exploring the above avenues, many financial executives have been successful at helping their companies extract the most from their dollar. Considering how choppy CFOs expect the global economic waters to be in the months ahead, it's understandable that freeing up cash will remain a top focus. Fortunately, financial executives do have options. Amid the ongoing economic challenges, this year also will bring many opportunities to maximize their companies' treasury management.


Laura Whitley is head of Global Commercial Banking at Bank of America Merrill Lynch. She is based in Dallas.
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Title Annotation:TRFASURY
Author:Whitley, Laura
Publication:Financial Executive
Geographic Code:1USA
Date:Apr 1, 2012
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