Question

How can global firms use sophisticated cash management systems to reduce their transaction costs and exposure to FX fluctuations and the need to hedge against those via external tools? Assume firms which have multiple national divisions that receive and make payments to/from customers and suppliers in a number of major global currencies.

Answer 1

The Global Firms can use various Cash management system to reduce their transaction costs and exposure to Forex Fluctions. By having a Good Cash Management system, the need to hedge against external tool will be fulfilled.

In the context of cash management, there is an increased convergence of cash, liquidity, risk and trade management. Therefore, cash management is not only related to ensuring solvency and handling of payment transactions, but also involves risk management and working capital management alongside the entire financial supply chain (purchase-to-pay, order-to-cash, etc).

Furthermore, efficient cash management is expected to significantly improve both the profitability and growth of a company. As a result of globalisation and the competitive environment, companies are seeking more sophisticated cash management solutions and focusing on standardised processes and strengthening internal controls, which will lead to a higher degree of centralisation of cash management activities. The ongoing centralisation of corporate cash management activities is no longer restricted to larger corporates but is also on the agenda of small and mid-sized companies.

Research, conducted by the IBM Institute for Business Value, in co-operation with the Wharton School and the Economist Intelligence Unit, confirmed the trend of transition from decentralised to centralised cash management functionalities on a global – or at least regional – level among more than 1,200 CFOs and senior finance professionals.

The research also found that the most successful finance organisations have an enterprise-wide common data definition, a standard chart of accounts, standard common processes and globally mandated standards. By adopting enterprise-wide processes and data standards, finance organisations can start to simplify enabling systems and delivery models and establish governance to create an integrated finance organisation for greater efficiency. The criteria for developing an integrated finance organisation will also have an impact on organisational cash management structures (shared service centres, payment factories, in-house banks, etc), as well as on IT developments.

The introduction of the single euro payments area (SEPA) has also encouraged the trend towards centralised cash management activities on a pan-European level, e.g. through payments factories, even if the SEPA Credit Transfers (SCT) volumes remain marginal and are currently behind market expectations. This development will happen gradually as there is a long transition period where SEPA formats and domestic formats will exist in parallel. Plus, not all local payment instruments are within the scope of the SEPA initiative.

Conclusion:

The Cash Management system needs to designed in such a way that it can accomdate everyone on a centralised basis which can accomdate everyone on the same scale irrespective of the business being conducted at various countries.

SWIFT code was introduced a long time ago in order to simplify the movement of Money from one country/one currency to the other country/other currency in an organised manner.

But, that is not the need of the hour, it must further be developed as it is being done in the case of SEPA. The cash management system should be mended according to the present need.