CFOs today are under more pressure than ever before from their board of directors and CEO to unlock trapped cash. Unfortunately, regional operations hold unnecessary cash buffers to protect their balance sheet. This cash-hoarding culture is detrimental to free cash flow, and could eliminate the opportunity to execute the corporate capital allocation strategy, including share repurchase targets, corporate debt repayments, shareholder dividends, and M&A initiatives.

For multinational corporations striving to reduce local operating cash balances and unlock trapped cash to accelerate strategic corporate funding initiatives, the following analyses must be performed:

1. Do I have current visibility into the global cash positions?
2. Do I have confidence in the future cash flow performance of my group companies?
3. Do I have the intercompany structure and controls in place to access and mobilize intercompany cash balances?

Why accurate cash visibility matters to CFOs

Accurate global cash visibility provides the data required by the treasurer to confirm cash positions, which then can support more confident decisions from the CFO. The treasurer’s fiduciary responsibility extends beyond merely viewing the corporate global cash balances: they also must analyze these positions from multiple perspectives:

1. Daily cash funding availability
2. Counterparty risk analysis
3. Currency or sovereign risk exposures

In the absence of an accurate global view of cash positions, a cash-hoarding culture is perpetuated in order to over-protect against the unknown.

Achieving target-balance discipline 

Communicating the broader strategic value that local finance can realize by remitting their excess cash can go a long way in reaching global alignment and attaining target balance discipline. Some examples of this are direct P&L benefits and executing on the company’s capital allocation strategy:

1. P&L improvements by paying down debt to lower interest expense, maximizing investment balance to drive higher interest income
2. Increasing EPS through share purchase program
3. Support acquisition and milestone payment strategy

When implementing a global bank connectivity technology solution, the solution should be able to add the following advantages to challenge and change a culture of local operating cash balance accumulation:

1. Integrate forecast projections
2. Serve as the foundation for treasurers to measure cash balance needs
3. Based on cash balance needs, recommend key performance indicators in the form of target balances

Ultimately, few best practices are advised to establish target balance discipline: an inclusive approach to communicate a global framework; a global finance policy to ensure that local cash balances are kept to a minimum, and excess cash can be used to accelerate corporate growth initiatives. By enforcing such a policy, local subsidiaries are contributing to executing the corporate capital allocation strategy, improving the corporate P&L and helping to ensure that corporate strategic objectives are realized.

In-house bank solves for intercompany remittance process and audit compliance

An in-house bank is perhaps the most dynamic and efficient method for mobilizing and centralizing intercompany cash, and thus reduces operational bank balances, as it provides global subsidiaries the ability to place their excess cash on deposit, and then simply request a repayment, or loan, once local cash demands are needed, such as local payroll. For other regions, where tax and central bank restrictions may prevent subsidiaries from participating in an in-house bank, and where trapped cash can be more prevalent, other solutions must be considered. Examples of intercompany strategies to free up trapped cash may include:

• Separate cross-border cash pooling arrangements with local bank
• Adjusting intercompany payment terms to delay intercompany payments into specific countries, while reducing receivable terms for others
• Timely financial statement publication in order to determine intercompany dividend amounts

With any of these strategies, the perquisite for timely cash visibility and an integrated cash flow plan are paramount in order to determine appropriate intercompany movements. 

Cash visibility is the fundamental step in optimizing intercompany liquidity. With this foundation, treasurers are equipped to collaborate with tax and local finance to formulate intercompany structures to consolidate excess and restricted cash to regional treasury centers or corporate, thus providing optimal liquidity for treasurers and CFOs to satisfy capital allocation strategies and improve overall investment returns.