Money only sleeps if you allow it to
If there was ever a time when economies could be relied on to expand and contract in regular and predictable cycles, it seems that time has been and gone.
Looking back over the past fifteen years, the world has been convulsed by a series of shocks—from the Asian financial crisis to the dot com crash and the credit crunch. As mathematician John Allen Paulos wryly put it: “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.”
Here in the second quarter of 2012, the relatively positive sentiment of the first quarter is steadily draining away. Hopes remain for an orderly solution to the eurozone’s problems. But as we also know from Professor Paulos, it would be unwise to assume that an end to market dislocation is waiting just over the horizon.
In my career, I’ve found there’s no financial discipline more important to businesses, and yet more frequently overlooked, than cash management. In some cases a small company won’t give it a second thought as long as there’s more money coming in than going out—the owners are entirely focused on products and sales. When market conditions are benign, even relatively large enterprises will sometimes let cash sit idle and fragmented in multiple accounts.
When credit becomes more expensive and income less predictable, however, it becomes top priority for companies to locate and maximize returns from the cash they have. Internal transfers, overdraft facilities and overnight sweep accounts may sound arcane, but poor cash management is often cited as the leading cause of business failure.
The larger the company is, and the more globalized its production and sales, the more complex its finances are likely to be. For this reason more companies are seeking advice from banks on how to be cash-efficient, and are adopting payment and collection platforms that speed up cash conversion and so free up working capital. The bank integrates its systems with those of its customers, and then handles everything from salary and supplier payments to currency pooling and account sweeps so that money lying dormant overnight can be used productively.
The benefit of this trend for companies is that they gain transparency over their cash flow and cost benefits from greater speed and efficiency, which in turn help them to become more competitive in their cross-border trade. The benefit for banks is that they deepen their relationships with customers. Because systems integration takes time and trust, the relationship matures in a way that reduces uncertainty for both parties and that provides a secure platform on which the company can build its business.
In the Asia-Pacific region, HSBC research indicates that trade will grow at an annualized 6.5 percent over the next five years as intraregional commerce flourishes and flows increase on the south-south transport corridors linking Asia, Latin America, Africa and the Middle East. This is clearly positive news for local companies and bodes well for cash generation. But it should also serve as a warning to those that haven’t built a scalable back office that can cope with growth efficiently. After all, no business wants to see costs rise at the same pace as sales.
Whereas the US and eurozone offer companies a degree of consistency, in Asia there are multiple currencies to reconcile and exchange rates to hedge, as well as multiple tax and regulatory regimes to comply with. Huge time differences mean treasurers may need the capability to sweep accounts in countries as far apart as New Zealand and India. The farther afield the company does business, the greater the need to optimize the supply chain and to consolidate financial information from partners and subsidiaries.
Personal experience tells me that there will probably always be some who choose to ignore Professor Paulos’ aphorism, and who view volatility as an occasional exception rather than the rule. As Asia opens up though, bringing new opportunities and new financial challenges for companies, I’m also confident there will be others who prefer not to bank on it.
(The author is president and CEO of HSBC Philippines.)
