Three strategies to centralize cash management and liquidity

Cloud systems, real-time connectivity, and automated ledgers make it faster and easier to share information and centralize funds

Whether your company is small or large, with a national presence or a global footprint, there’s a definite competitive advantage when you can manage your cash efficiently and effectively. 

That benefit becomes even greater in economic cycles with rising interest rates and higher cost of funds. Optimizing your liquidity creates more options for investing, borrowing, and managing day-to-day operating activity. 

Leveraging technology supports treasury centralization

Centralized visibility and control of cash is key. However, as treasury management professionals know, the more bank accounts your company operates, the more challenging it becomes to take a proactive approach to cash management. 

The good news is that moving from decentralized to centralized cash management is far less arduous than in the past. New technologies from banks, fintechs, ERPs, and treasury management system (TMS) providers allow companies to connect accounts, obtain daily cash position, and make smart cash management decisions. These new solutions can significantly minimize the time, effort, and IT expense of a central approach. 

APIs are one of the most popular and useful tools. These “plug and play” connections can link your ERP, TMS, or system of record to bank accounts around the world, making it seamless to extract and share data. APIs can enable real-time visibility to account balances, transactions, and other critical data—without requiring intraday or end-of-day statements or manual data collection. 

Cloud-based solutions are another option. Tools like Trovata, for example, capitalize on APIs to aggregate data across banks and accounts. These solutions can dramatically improve visibility to company cash, make it easier to analyze trends, and enhance forecasting capabilities. 

Automated balance and transaction reporting is another essential for streamlining cash management and liquidity. It establishes the foundation for bank and account rationalization and supports the transition to centralized cash and liquidity management. It also saves time for staff, as banks, fintechs, and other providers can track transactions in both physical or virtual accounts, subledgers and intercompany loans.  

Choose the right cash concentration solution for your organization

Beyond leveraging technology to improve visibility, it’s smart to employ a centralized liquidity structure. Any of these three options can facilitate efficient cash and liquidity management: 

  1. Physical cash concentration structure. Treasurers have relied on physical cash concentration structures for decades; they’re a proven tool to centralize funds from multiple operating accounts and or legal entities to a single concentration account. Advances in technology can eliminate much of the legwork by outsourcing intercompany loan tracking and administration. 
  2. Notional pooling. Notional pooling, sometimes referred to as cross-border pooling or global overlay, facilitates centralized cash management, without comingling funds or requiring intercompany loans. Treasury gains full visibility and control of the liquidity across the organization, which facilitates central management of investments, funding, foreign exchange (FX), and other decisions. 
  3. Virtual treasury. With a virtual treasury, also known as an in-house bank, a designated legal entity uses a handful of physical accounts to manage company cash. At the same time, subledgers managed through an ERP or TMS, or virtual accounts outsourced to a bank, give local entities or lines of business access to their funds. While there’s more upfront work involved in creating a virtual treasury, it provides the most centralization and control to an organization for managing its cash and liquidity. 

Make centralized cash management a priority

As you determine which approach is best for your business, consider these factors:

  • How many operating accounts will you include?
  • Do you conduct operations in more than one currency?
  • Will you allow your locations or subsidiaries to retain local control of cash?
  • What resources and systems are in place to help automate cash positioning, ledger entries, and other activities?

Your bank can help you model various scenarios, identify needed connectivity, and share best practices from similar companies around the world. They can also offer guidance for a smooth implementation as you centralize and improve your liquidity management processes. 

Whichever solution you choose — even if you start with just a handful of your total accounts — making strong liquidity management a priority will yield tangible results for your business.