CFOs need the right information systems and risk framework

Nedbank CIB’s Belinda Munger and Gary Marais unpack how CFOs can successfully manage liquidity.

CFO South Africa recently hosted an interactive webinar in which Nedbank CIB’s working capital and liquidity specialists Belinda Munger (pictured) and Gary Marais looked at liquidity management and how a sharp focus on managing cashflow is making companies successful despite the current crisis.

“In response to the Covid crisis, corporates were managing their liquidity carefully and investing their funds to try and gain yield out of it,” Gary said. “What this demonstrates is that in times of crisis, cash really is king.”

To provide sufficient liquidity needs for their businesses, CFOs are seeking to raise their debt funding. In order to manage their liquidity successfully, they need the right information systems and a risk framework.

Working capital

Focusing on the working capital and investment aspects of managing liquidity, Belinda said that working capital is made up of four instruments:

  1. Structured products that assist the system;
  2. Finance, both the debtor and creditor side of the balance sheet, like supply chain finance or debtor discounting;
  3. The trade element made up of instruments like trade finance, letters of credit (LCs) or guarantees; and
  4. Traditional instruments, like overdrafts and short-term loans.

“Depending on the nature of your business, you may use certain products, or a combination of them, to enhance your cashflow,” she explained.

Investing

Many large corporations have a risk management framework or investment policy that determines where they place their deposits. Smaller businesses that don’t have this framework in place have to take into account the strength of the institution in which they place their money, and understand the underlying instruments being used to generate returns.

If a company is looking to invest in a money market fund, it should understand the underlying instruments to be able to determine the risk profile of the investment and whether it fits onto the company’s investment policy. “Money market fund rates are usually higher than a bank as they have the ability to invest in higher-yield and longer-rated instruments from several institutions,” Belinda explained. “The risk of these investments, however, is that in many instances, capital is not necessarily guaranteed.”

In terms of investment periods, she said if companies have a high degree of confidence in their cashflow forecasts, they can consider segregating their cash deposits into a mix of call deposits to take advantage of the higher rates offered on these longer tenders.

“However, for many CFOs, dealing with high levels of forecast uncertainty during this period, maintaining capital value and being able to access this to meet unforeseen liquidity requirements, should be your primary focus,” Belinda said. “Under more normal circumstances, however, you should really consider using a mix of short- and medium-term deposits in order to enhance returns while managing liquidity needs.”

Cash management

“In these uncertain times, we need to ask ourselves if we’re really making use of the right solutions and services to manage liquidity effectively,” Gary said.

He explained that one of the key aspects that businesses should be focusing on to manage the cash they have effectively, is the working capital cycle - which is how quickly businesses can turn their current assets into cash. “To really achieve this you need to focus on the elements of the working capital cycle, which consists of money coming in, money going out and inventory management.”

He said that there are four questions that businesses need to ask themselves:

1. Is the inflow and outflow of cash being managed effectively?

Ultimately, companies want to manage the number of days receipts are outstanding and reduce these as far as possible, as well as manage the number of days payables are outstanding and increase these as far as possible.

2. Where is my money and is it performing for me?

There are three things to pay attention to: having visibility of all of your cash, optimising returns and ensuring that your cash is where you need it most.

“Applying these things together really brings about end-to-end visibility, optimised returns and the effective management of cash-flow,” Gary said.

3. How am I planning for the future?

“In these uncertain times, it's vitally important that all businesses place attention on forecasting to understand where funds are going to be coming from and where they are going to be utilised,” Gary said.

He explained that various scenarios need to be built into these forecasts to ensure better decision-making incorporating scenarios where conditions deteriorate or improve. “Part of the challenge is the collation of information and ensuring the integrity is there to do accurate cashflow forecasting.”

He added that cashflow forecasting is essential as it allows businesses to anticipate road bumps, and ensures they put their cash to use where it is most needed.

4. Is my risk management effective?

Gary explained that there are many aspects relating to risk management to safeguard the funds businesses have that need to be taken into account, such as where funds are being placed, segregation of duties, security, access to systems and information.

In conclusion, Gary said that treasurers need to know how much money they have, where it is and how they’re going to use it to meet fast-changing requirements across the business while ensuring they safeguard their funds.

“If you’re focusing on these practical things effectively, it will lead to a reduction in your working capital requirements, because the hidden cash in your organisation is put to work where it is needed most and that feeds directly into the company’s operations, helping it to navigate the uncertain future with greater confidence.”