Why FX & Liquidity Management are key in Treasury

Liquidity management enables finance teams to have a wholistic view over their financial resources and improve their cash flow margins. This presents a strategic opportunity for Treasury to have a system in place that helps the CFO to be more agile and have more control of the company’s liquidity risk. In this article, we will explain how FX and liquidity management are key to an improved currency management strategy.

Treasury as a strategic tool

In currency risk management, swap execution is the process of adjusting the firm’s hedging position to the cash settlement of its underlying FX exposure. At first sight, it looks like something best left to the technical expertise of the Treasury team. 

But could swap execution be the stepping stone for a more strategic view of Treasury Operations, one that raises the profile of treasurers and improves communication with the C-suite?

Let us briefly explore this possibility. 

Positive feedback

We’ve seen finance teams shying away from using more currencies in their business partly because of the complexities involved in manually executing the required swap transactions.

Faced with poor traceability and a series of operational risks, many treasurers dread this time-consuming and error-prone activity.

Yet, thanks to swap automation —a solution embedded in Currency Management Automation software—, FX management becomes a less resource-intensive undertaking than previously thought.

This makes it easier for the finance team to allow the use of more currencies in the business. And here’s the key part: using more currencies, in turn, can spark a number of liquidity management-related benefits:

• Selling in more currencies. As customers pay in their own currency, the risk in accounts receivables is lowered.
• Buying in more currencies. As more currencies are used, suppliers who get paid in their own currency may grant extended payment terms.
• Managing currency risk.

As FX hedging is undertaken, automation allows managers to delay hedge execution, leading to:

• More time for the treasury team to update cash flow forecasts
• Less cash immediately disbursed for collateral requirements
• More netting opportunities and less trading costs

All of this can incite finance teams to take currencies for what they truly are: a strategic opportunity to enhance the value of the business. As more currencies are used, the need for FX automation grows, further adding to the benefits. Now that’s the definition of a virtuous loop!

If you want to know more about FX swap automation and how it relates to liquidity management, download our free report Optimising Cash & FX Risk Management: The ‘Cash Flow’ Moment of FX Risk Management.