Keeping the cash flowing

Accessing finance has become one of the most challenging aspects of a corporate treasurer’s role as they are forced to adapt to a rapidly changing market.

This shifting landscape goes back to the 2008 financial crisis, but it has not taken its final form. New regulations, constraints on banks and shrinking liquidity continue to reroute the avenues treasurers once relied on to fund their businesses.

Navigating through this constant period of change has upped the pressure on corporate treasurers, chief financial officers (CFOs) and finance directors, as they look to secure the short and long-term futures of their businesses.

This wholesale change in this space begins with the banks. For both corporates and small and medium-sized enterprises (SMEs), they used to draw their lifeblood from banks in the form of loans to fuel growth engines, mergers and acquisitions or prop-up cash flows.

This was before the financial crisis and ensuing regulations effectively shut off this option to a large number of organisations as cash supplies dried up.

Loans, credit-card limits and overdrafts were scaled back as the banks became less willing and less able to lend to businesses. This was especially prevalent with SMEs deemed as being high-risk investments.

Regulations, such as Basel III, added additional barriers, essentially mandating that the riskier banks are, the more capital they need to hold in reserve.

Corporate treasurers have had to evolve and become nimble in accessing finance – no easy feat in a market drained of liquidity

“From a bank perspective as a lender, they have to think about how they allocate their capital and the risks associated with that,” says Angela Clist, co-head of the financial institutions group at Allen & Overy.

“If you are an investment-grade company, I think it is fair to say that banks are falling over themselves to lend to you. If you are not an investment-grade company then I think it is perhaps more challenging.”

Corporate treasurers and CFOs have, therefore, had to evolve and become nimble in accessing finance. In a new environment, they have had to understand their full range of options in order to unearth the most appropriate sources of finance to fit their needs. This has been no easy feat in a market drained of liquidity.

While leaning on cash reserves during times of stress is often unavoidable, these supplies are not endless, especially after seven years of banks curbing their lending. The ability to access cash in a timely fashion is now an essential consideration when investing.

Corporate treasurers and CFOs have been forced to become savvy in their market dealings to react to a liquidity crisis and keep the business funded in both the short and long-term.

“You have to think about long-term liquidity and what happens if the markets are not open,” says Mark Kirkland, group treasurer at aluminium producer Constellium.

“The decision comes down to what products are available, when you need the money and whether the markets are open. That is how you decide how and where to borrow.”

The corporate-treasurer role has become increasingly demanding because of these new obstacles. Another aspect of their jobs that needed refining related to improvements around cash control and visibility as supply chains diminished. Firms needed a clear picture of where all their money was and the levels of their cash reserves.

“What was shocking for corporates, following the onset of the financial crisis in 2008, was that they lacked visibility of their own cash reserves,” says Terry Beadle, global corporate treasury business manager at Bloomberg.

“They had cash deposits with multiple banks all over the world, but they couldn’t actually see where those balances were held. Corporate treasurers and CFOs were relying on accounting systems to provide them with that information, but the cash was still sitting dispersed in remote locations.”

Corporate treasurers have set about correcting this lack of visibility as one of their many tasks since the financial crisis. Most corporates reduced the number of banks they were dealing with, giving themselves much closer control over their accounts.

Pooling together and having oversight of all internal cash has also become a priority. Only then could treasurers fully comprehend their reserves and how to create a competitive advantage through investing on a short-term basis, allowing them to benefit from surplus cash.

“There are all kinds of reasons why corporates were trying to get access, control and mobility of cash. It was an issue for them then and it is still an issue for a lot of these firms today,” says Mr Beadle.

Professional services consultants PwC argue that many UK firms actually have extensive cash reserves tied up in their own balance sheets, which they are unaware of.

While working capital provides a measure of a company’s short-term health, if cash gets trapped within it, this can restrict a firm’s ability to grow.

PwC estimate that between £125 billion and £167 billion could be released from working capital pools by corporate treasurers at UK businesses and redeployed in order to drive growth.

Martin Scott, finance director at brewers Hall & Woodhouse, described his firm as having “a balance sheet to die for” and very little debt, yet he had to completely revise his approach to raising finance after the banks made it difficult for his business to borrow.

He says: “After going through the banking crisis, when we were talking about renegotiating our facilities over the next year, our bank said ‘We’re not sure if we can do that’, which came as a bit of a shock if you saw our balance sheet.

“We came to a conclusion that as a risk, we should actually diversify our borrowing requirements away from the banks, even if it costs us some margin.”

Hall & Woodhouse, which runs around 200 public houses, ended up securing a £20-million ten-year loan from asset manager M&G. This has become a far more common trend as insurance companies, pension funds and fund managers fill the gaps left by the banks.

“The process wasn’t that different,” Mr Scott adds. “I think there is this big fear of it being a different process, but they used the same documentation as we had used with our banks. Once we had agreed to do the deal, the legal niceties and documentation wasn’t that difficult.”

Corporate treasurers are also becoming far more strategic with their capital-markets funding. Research by Allen & Overy shows that the value of bonds issued by businesses has increased by 70 per cent since 2007 to more than $1.5 trillion.

Equity finance has also been on the rise over the past few years. Despite being one of the most expensive sources of finance, with dividends being discretionary, this does allow firms the luxury of flexibility, which they do not get with other sources of finance.

Alternative finance now accounts for 41 per cent of funding among European corporates

Bonds are not without their challenges either. The liquidity risk surrounding bonds means CFOs and corporate treasurers need to understand and closely monitor the high-yield bond market. Fortunately with interest rates low, investors are likely to chase this high yield, which is unobtainable from banks at present.

The biggest uptick for sources of finance has undoubtedly been alternative finance, which now accounts for 41 per cent of funding among European corporates, according to Allen & Overy.

For SMEs that have run a gauntlet of challenges throughout the crisis and recession, alternative finance has become a substitute for the overdrafts, credit cards and loans they once turned to.

Recognising the growth of this space, the government is set to introduce a mandatory referral system whereby banks will direct businesses towards alternative finances if they cannot provide them with their own funding.

“What the government has done is recognise they need a more diversified financial services sector and this is where alternative finance has come in,” says Louise Beaumont, head of public affairs for alternative finance provider GLI Finance.

“Banks have a monopoly on SME lending and it’s a monopoly they don’t really want anymore. We are not trying to do anything the bank wants to do. We are looking to do the business they don’t want to do.”

The corporate treasurer’s duties and methods have changed drastically in line with the new world of financing. Those who have altered their approach to meet the new requirements will be the ones keeping their business well-funded, while others will have fallen by the wayside.




Nothing is more important on the part of a corporate treasurer than ensuring there are ample amounts of day-to-day cash to keep the business running smoothly.

There can be reserves sitting on strong balance sheets and corporate treasurers are tasked with making efficient use of this excess cash by utilising short-term investments and generating some extra income. There are a number of considerations around this, however.

Risky investments for the sake of potentially lucrative returns are out of the question and there must be an option to convert back to cash at short notice. Therefore, the investments generally end up being low yield with minimal risk in highly liquid markets.

The obvious route is to deposit back into the banks, in a low-risk, simple and stable move if the agreement is through an existing banking relationship.

The rates offered by banks for such products can be low, however, forcing corporate treasurers and chief financial officers to look towards different products.

Because of this corporates are increasingly turning to money market funds, which also provide a low-risk alternative with slightly higher interest rates.

Money market funds are portfolios of short-term securities, usually liquid debt and monetary instruments, often carrying low fees and possible tax benefits. These two investments are also likely to keep the accountants happy in some businesses, which consider anything other than bank deposits and highly liquid money market funds under three months not to be “cash”.

Commercial paper also presents a short-term debt solution with better rates than a bank deposit. These are often issued by major institutions with expiry dates of around a month and not usually more than a year.

Ultimately, the credit risks associated with these funds need to be analysed by those in senior finance roles and do not carry the same simplicities as depositing with a familiar bank.

Other short-term investment options, which can trump bank deposits in terms of yields, include bonds near maturity dates, certificates of deposits or repurchase agreements.

With an eye on a lower-risk, highly liquid short-term investment to optimise cash reserves, easier alternatives include paying bills, creditors and suppliers off earlier in order to receive discounts, which will be considered as profit. The same benefits apply to paying off debt to avoid paying interest.