CASH IS KING: Time to build a strong cash management culture


The COVID–19 pandemic has had a significant effect on governments and businesses, with many trying to stay as liquid as possible. Then came supply chain disruptions, inflation (now at an 18-year high of 27.6 percent), rising interest rates, and the war in Ukraine and its impact on energy and other commodity prices. In response to control inflation, central banks, especially in the developed economies, began to reverse many of the measures implemented to keep their respective economies running during the pandemic.

For instance, the Bank of Canada, the US Fed and the Bank of England have all rolled back some of their measures to support the economy during the peak of the pandemic to fight inflation, particularly raising interest rates. Also, the European Central Bank is expected to raise rates later this year for the same purpose – inflation. However, the inflation and responses from central banks in developed economies are feared to have currency and debt sustainability implications for developing and emerging economies, such as Ghana.

This concern and rising domestic inflation elicited some notable policy measures from the Bank of Ghana in its last two Monetary Policy Committee meetings. The significant one was increase in the policy rate by 450 basis points to 19 percent. In addition, it increased the Cash Reserve Ratio to 12 percent; the Capital Conservation Buffer was reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category was reset to the pre-pandemic level of 10 percent.

The main aim of these measures is to reduce liquidity – cash in the system. The central bank’s outlook for inflation is negative, and could mean further increase in the future, especially given the latest statistics. Undoubtedly, cash is the lifeblood of every business – it is king, and therefore, a regulatory constrain on its availability requires proper management and utilisation of what is available. Basically, cash management is necessary because there are mismatches between the timing of payments and the availability of cash. For investment purpose, the concern has usually been how not to keep so much cash because it does not earn interest.

Banks, the main channel of distributing/allocating financial resources, need to manage their own liquidity at this time to maintain the stability of the sector, and provide stability for customers and the economy in general. This is crucial because the liquidity measures by the central bank could cause many businesses, especially the small and medium scale types, to be worried about having more available cash to meet operational needs relative to investments needs. These businesses are the backbone of the Ghanaian economy, making more than 70 percent of the country’s Gross Domestic Product (GDP). Therefore, the banking sector should manage its cash (liquidity) to remain stable and to support the sustenance of these businesses.

Some have questioned the capacity of the inflation targeting regime to control the kind of inflation we have today which is largely driven by supply side factors, and the end game of the central bank for increasing the policy rate and purchasing local gold at the same time. There is also the capital flow reverse and the exchange rate debate regarding the policy rate hikes. The policy debates notwithstanding, treasurers need to ensure their banks can meet their liquidity needs and also serve their customers to the best of their abilities.

This first and foremost requires making cash management a top priority. It should be at this time a constant item in every top management meeting with clear action owners for the purposes of responsibility and accountability. Importantly, there is need to build a stronger bond between business units to have a common understanding of issues and share knowledge, especially related to cash management. Every team needs to understand their role in cash and its management equation. Today, the relationship between treasury and corporate or corporate operations have become very important in meeting the liquidity needs of banks, and very integral to building cash management culture.

In this regard, the thinking around cash management culture should go along some core fundamental objectives which include but not limited to: timely visibility into all transactions, removing/reducing time-consuming and vulnerable manual payment-generation workflows, compliance issues causing significant delays or confusion around transactions and cash flows; and there should be a strong collaboration between risk and treasury management.

Real-time, end-to-end visibility across the entire liquidity landscape, taking into account cash flows, fund requirements, risk scenarios and constant monitoring of the market activities, gives treasurers a better control of the liquidity situation of their banks. This control is enabled by daily cash forecasts based on a data-driven view of the bank’s entire liquidity landscape. This is particularly crucial for short-term liquidity managing. Reliable daily forecasting requires input from many sources, including individual business units. The level of details included in the information for forecasting makes it possible for the treasury team particularly to understand very clearly what is happening.

Also, daily cash forecast ensures that the bank’s position, for instance, can be seen at almost every level of the business. Each business units or department can have their respective cash positions forecasted as part of the overall daily cash forecasting process, allowing for greater cash visibility. This can also afford treasurers vastly improved financial control.

Achieving real-time end-to-end cash visibility on the back of faster payment and collections will bring efficiencies to the treasury teams of banks. This means removing/reducing time-consuming and vulnerable manual payment-generation workflows. In this regard, treasurers need assistance in terms of the right technological preforms. The deployment of the appropriate technology will ensure,  for instance, that treasury teams will not have to wait until the start of the next business day to check on whether transactions (especially cross-border transactions) have been successfully processed or received. In addition, automation of processes identified as crucial for cash management should consider audit and compliance processes that cause significant delays or confusion around transactions and cash flows.

Finally, for bank treasurers who want to get ahead in terms of decision-making in times like this, a good starting point will be to strengthen collaboration with the risk team. With their assistance, the treasury team can run financial scenarios/models with a clear sense of the bank’s exposure to interest rate risk, exchange rate risk and inflationary risk, and the extent to which they can be hedged.  Although many are hedging by staying at the short end of the yield curve, this scenario analysis – taking into account the entire risk landscape – provides useful insights.

As the country and the world in general suffer the impact and consequences of COVID-19, high inflation, increasing interest rates, high energy prices, and geopolitical tensions, treasurers must cope with the uncertainties and prepare for changes in the way they operate – if required. Remember that the main reason of business bankruptcy is in the area of cash management. Therefore, treasurers need to keep their companies surviving by meeting operational needs by ensuring the availability of the necessary ‘blood’ – cash.

Grace is the Treasurer, FBNBank Ghana


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