30-06-2023 12:12

Staying ahead in volatile markets: Why corporates should have an FX and liquidity strategy for their cash pools

In a world of higher interest rates and currency volatility, companies have an even greater need to monitor and manage their liquidity, cash positions and FX exposure. Our Nordea Markets experts explain why a strategy for cash pool optimisation is now a must-have for treasury and finance departments.

A decade of cheap and ample corporate funding came to an abrupt end in 2022 as inflation soared and interest rates spiked. Capital is no longer free. Against this backdrop and a volatile foreign exchange (FX) market, companies are more focused than ever on managing their liquidity and FX risks. Efficient liquidity structures and smart processes are in high demand.

Having an FX and liquidity strategy for cash pooling is crucial, according to Nordea Markets’ Kristoffer Jansell (KJ) and Eduardo Avila Zumalacarregui (EAZ). In this interview, they delve into the benefits of such a strategy, how to adopt one and how automation can help implement it.

- Why is it important for companies to monitor and manage their cash positions?

EAZ: Whether you have a cash pool or not, you’ll get questions from management and subsidiaries regarding liquidity and potential FX exposure from cash positions within the group. The positions can affect a company’s P&L (profit and loss) statement, including their EBITDA, EBIT, finance net & OCI level. They can also prompt questions about the company’s funding situation, for example, “Why do we have external lending for one entity when we are cash rich in another business area?”

The main benefit of a cash pool is to have immediate visibility of the group’s liquidity. Once you have the platform to get an overview, you can easily identify the source of the headaches, which forces companies to adopt some kind of structure in which to operate.

Eduardo Avila Zumalacarregui

Position: Associate Director in Investment Banking

Years in Nordea: 2.5 years and 5 years in corporate treasury before starting at Nordea

Best part of working at Nordea: All the great, smart and dedicated colleagues! Plus, having the possibility to develop and work closely with the Markets FX & Derivatives business.

- What does it mean to have an FX and liquidity strategy for cash pools?

EAZ: It means that the company has a clear guideline or policy on how they want to manage cash, on both a strategic and operational level, within the group. The strategy typically targets different areas, such as liquidity utilisation, FX exposure, internal funding, trapped cash and treasury operations, often divided into short- and long-term goals.

The purpose is quite clear: to ensure the entire group knows and acts the way treasury wants them to when it comes to cash, short-term funding and liquidity positions. When you have many subsidiaries, it’s almost impossible to steer everything in detail from a central function

- Why is this such an important topic right now?

KJ: We’ve gone from an economic environment of disinflation to inflation. Interest rates have skyrocketed in recent years along with FX volatility. The pandemic also raised awareness of potential supply chain disruptions and the risks surrounding production and distribution.

As a result, companies have a strong focus on optimising liquidity and cleaning up unnecessary FX cash positions, which have had significant revaluation effects on their P&L statements, both positive and negative.

On top of that, the OECD in 2020 released its Transfer Pricing Guidance on Financial Transactions, which targets cash pools. The framework could affect how companies use cash pools to fund subsidiaries from an interest and tenor perspective.

Kristoffer Jansell

Position: Director in FX Sales, Nordea Markets

Years in Nordea: 12 years

Best part of working at Nordea: The unique combination of a large balance sheet and strong entrepreneurial spirit among colleagues that allows us to build top-class solutions for our customers. We have the possibility of offering our clients all the products and solutions there are. That is hard to find elsewhere.

- Which types of companies are most affected by these challenges?  

KJ: The types of companies affected by the different topics range widely, from small corporates with one to two subsidiaries all the way to OMX30 companies with over EUR 10 billion in revenue. But I would say especially small and mid-size companies face these challenges, given that their finance or treasury department is often quite slim but shouldering broad responsibility. It’s difficult to do everything at once.

It’s also one thing to have a strategy or policy. It’s another to be up to date and actually follow the policy. That’s a full-time job if everything is to be done manually. You would have to crunch the data, revisit the policy, discuss with the local subsidiary and then conduct trades. And just when you think you’re done, all the trades and transfers need to be accounted for. That’s where automation becomes a game changer.

- Say more. How does automation help companies with implementing their FX and liquidity strategy?

KJ: With automation, you can simply set parameters according to your policy and let the robot ensure that you’re compliant. We often get the question: “Will I loose control when I start to automate?” I would argue the opposite and call these robot solutions an extra liquidity controller. They allow you to spend your time on strategic questions instead of the nagging daily tasks, such as trading and reminding local subsidiaries about unnecessary positions.

Our digital automated solutions allow corporates with little to no resources to manage their operations as if they had a full-scale treasury, without adding administrative work.

- How can corporates take their first step to implement a strategy? What should they be focusing on?

EAZ: The first step is to get a full overview of the cash structure in the group, both in and outside the cash pool, from the top accounts down to each individual transaction account in the subsidiaries. Once you have the current view, you can start to pinpoint cash positions that stand out, for example, large EUR positions in a local Swedish entity or excess liquidity in a subsidiary with low working capital needs. Then address those points in your guideline.

We recommend focusing on the source of your headaches. Besides trapped cash, we often see that corporates start with restructuring or eliminating unnecessary FX positions.

- How can Nordea support corporates looking to adopt an FX and liquidity strategy – what do we offer?

EAZ: In Risk Solutions at Nordea Markets, we offer a free deep dive into our customers’ cash pool. We have developed a new advisory product, Liquidity Structure Analysis (LSA), which analyses and presents a detailed and historical view of the company’s cash balances. We then offer a roadmap approach, breaking down and working through the customer’s specific areas of interest.

KJ: On top of that, when you have a clear view of what needs to be done, we can take care of the implementation – without you having to spend a single minute on it. Through our AutoFX offering, we ensure the job gets done, from monitoring, calculation, hedging and trading all the way to accounting.

Many companies, big and small, are discovering the benefits of automation. We previously shared the stories of L&T and Thule Group, which have both used automation to revamp their approach to liquidity management with great success.

Customer view: ‘A real eye opener’

Johan Henning, Group Controller at Nordic Waterproofing Group AB:

“It was a real eye opener for us when Nordea presented the new Liquidity Structure Analysis. I could immediately see some opportunities I wasn’t previously aware of. It’s a very relevant and useful tool for us. I took action on the different imbalances we had in some companies and use weekly swaps on our top account. We have now much better control and can avoid unnecessary positions.”

“We had previously thought about this ourselves but had taken limited action. Given the limited amount of hours in a day, this tool is very helpful for us. I can recommend the Nordea LSA for anyone who needs better control over their cash pool. The initial work needed is very limited, so you can start to use it and harvest the potential benefits fast.”

Nordic Waterproofing is one of the leading providers in the waterproofing market in Northern Europe. The group develops, manufactures and distributes a full range of products and solutions for the protection of buildings and infrastructure.

Want to know more? Get in touch!

Eduardo Avila Zumalacarregui:

eduardo.avila.zumalacarregui [at] nordea.com (eduardo[dot]avila[dot]zumalacarregui[at]nordea[dot]com)

+46 79 098 20 43

Kristoffer Jansell:

kristoffer.jansell [at] nordea.com (kristoffer[dot]jansell[at]nordea[dot]com)

+46 72 145 94 96