Here in the northern reaches of the globe, we are getting ready to enter the dark of Winter when the sun does not rise at all above the Arctic Circle. The Kaamos period (Kaamos is an untranslatable Finnish word for the dark period) lasts up to 51 days in the very north of the country. In other words, this is a perfect time to write darker, precautionary blog entries.
Europe is awaiting with trepidation a new dark period in the financial markets. The recent credit crunch hit banks hard and only rapid capital infusions into the afflicted banks in the US saved the markets from a collapse. This time around, many experts are even more pessimistic. Banks are considerably more debt-laden than three years ago and if the defaults really hit the fan, the trouble that started from Southern Europe can spread into a full-blown financial mayhem.
Should this happen, it means tough times for corporate treasuries; decreased availability or, at worst, complete drying up of capital can drive the cost of borrowing through the roof. There is precious little companies can do about rising cost of capital, but what they can do is regulate the amount of financing they need. By managing liquidity effectively, the treasury can play a major role in decreasing the amount of financing needed. But this requires not only effective liquidity management but also reliable cash forecasting.
Corporate Treasurers and CFOs have considered improving cash forecasting a high-priority development item for the past decade. Yet the majority of corporations are still stuck with unreliable forecasts. I cannot say how much work companies have really done to improve cash forecasting, but I can tell you that many a wrong thing has been done. Instead of concentrating on rapid and cost-effective solutions that repay themselves quickly, far too many corporations undertake their development initiatives as flexibly as the former Soviet Union developed their infamous five-year plans. No matter the size or the importance of the project, it is undertaken in the same style – with time-sensitivity or cost-consciousness not a part of the vocabulary.
In a fast-changing situation we are facing, the treasury should make streamlined decisions and select best-practices based SaaS (software as a service) solution that can be deployed quickly. The decisions needs to be quick so that the solution can be deployed in time should the worst case scenarios realize. Even if the solution lacks some seemingly important features, this problem is an order of magnitude smaller than the alternative – not being able to effectively manage and utilize liquidity because of insufficient forecasts.