Treasurers across all types of companies are reviewing their approach to liquidity management with a view to using internal cash more efficiently.

These reviews are being driven by four factors:

1. Perhaps most significantly, rising interest rates increase the value of cash. They make raising external funds more expensive, incentivizing treasurers to make better use of internal cash.
2. Foreign currency markets have been volatile of late. Using internal cash more efficiently, particularly to manage intercompany positions, can help to reduce exposure to foreign exchange risk and, therefore, balance sheet volatility.
3. Treasurers have wider access to more sophisticated treasury than ever before. Functionality that supports complex cash concentration and virtual accounts is available at a relatively low cost via SaaS solutions, easing the process of implementation.
4. The external environment is changing. A number of governments provide incentives to multinationals to establish regional treasury centers, which can be used to manage the header accounts for cash concentration structures. Alongside regulatory change, there has been an increase in the development of cross-border payment schema, which will likely deepen over time.

While cash concentration is viewed as an established liquidity management practice on an in-country basis, given these market changes, is now the time to concentrate cash on a cross-border basis? Doing so will allow treasurers to meet wider objectives, such as:

• Improved liquidity management. By using surplus cash from cash-rich group entities to fund net borrowers, the (arm’s length) interest rate spread is retained within the group as a whole rather than being used to reward an external lender.
• Enhanced yield on surplus cash. The potential benefit of an enhanced yield comes from the centralization of small pools of cash across an organization that are likely sitting in low-yield bank accounts. The centralized cash can be actively managed to obtain a higher return; simultaneously, the portfolio can be diversified to improve security and invested to support sustainability goals.
• Reduced borrowing costs. Using the corporate headquarters to raise finance is usually cheaper than enabling each entity to fund itself. The center typically has a higher credit rating than subsidiaries and is also able to tap a wider range of sources of finance.
• Risk management. Cross-border cash concentration can help to reduce foreign currency volatility, especially if cash is translated into the company’s operating currency or if intercompany foreign currency payments are netted off.
• Control. Concentrating cash to the center may simply be part of a wider policy of treasury exerting more control over cash to improve operational efficiency. With improvements in technology providing visibility over cash and the ability to effect transactions remotely, central treasury can take control over much more of the financial supply chain than ever before.

Today, the opportunities to realize the benefits of concentrating cash across borders are expanding. However, different local regulations are just one of a number of significant hurdles for treasurers to overcome before they do so. To maximize the benefits of cross-border cash concentration, treasurers need to work closely with internal stakeholders and external partners to devise the most efficient structure.

Learn more in the AFP Executive Guide “Concentrating Cash Across Borders,” underwritten by Standard Chartered.