Citi Perspectives 2024 E-commerce Edition

20 | Services Citi Perspectives Key ways to optimize liquidity management When planning liquidity management structures, companies should consider: • Regulatory frameworks of each country targeted for growth: Local restrictions can limit capital movements, currency exchange, and other financial transactions, and hinder the efficient movement of funds complicating liquidity management. • Functional currency: As companies begin to expand and collect in local currencies beyond their home currency, a more nuanced approach to liquidity structures may be required, including cross-currency structuring while adhering to additional regulatory requirements. • Optimal location to centralize cash: This is not always straightforward. For instance, non-USD accounts are not permitted in the U.S. for liquidity management purposes; companies centralizing multiple currencies often choose locations such as the UK, the Netherlands or Singapore as liquidity management hubs. • Compatibility with internal data management systems: Ease of integration with enterprise resource planning (ERP) or treasury management systems for bank balance and transaction reporting is key for automating reconciliation. • Cash flow forecasting models: Only by knowing where and when cash will be received and required can companies invest surplus cash and avoid costly overdrafts. Pragmatic tools as business enablers Once companies are clear about their geographical ambitions and understand their cash flow, they can design their liquidity structure in collaboration with their partners. These structures can include liquidity management tools such as target balancing, notional pooling and real-time liquidity. Target Balancing Target balancing is a commonly used tool to maintain a specific (or “target”) level for liquidity within each participating account. Companies set these target levels in advance, and funds are physically moved from one account to another when these triggers are reached. This ensures that accounts have sufficient funds for operational needs while minimizing excess idle cash. Target balancing automates movement of funds, frees up treasury staff time for more value-added functions and eliminates manual risk. If not done properly, this could result in inefficient, excess liquidity in the system and costly administrative overheads with a larger workforce required to manage global cash. For companies that have multiple banking providers, multibank target balancing will enable balances held with third-party banks to be fully integrated into a single liquidity management solution. However, single bank target balancing is recommended wherever possible, as multibank target balancing might require excess balances to be held in accounts to account for clearing system cutoff times and accommodate potential debits overnight. Once companies are clear about their geographical ambitions and understand their cash flow, they can design their liquidity structure in collaboration with their partners.