Multinational treasury operations - Cash visibility, forecas...

Learning Outcomes

After reading this article, you should be able to explain the importance of cash visibility for multinational groups, outline methods of liquidity forecasting, and evaluate approaches for setting and managing liquidity buffers. You will understand the role of treasury in group cash control, the practical challenges and solutions in global cash management, and how these principles support efficient and secure financial operations across borders.

ACCA Advanced Financial Management (AFM) Syllabus

For ACCA Advanced Financial Management (AFM), you are required to understand how multinational treasury operations support effective financial management. In particular, revision should focus on:

• The roles and objectives of group treasury in multinational organisations
• Principles and techniques for achieving cash visibility and central cash positions
• Group-wide liquidity forecasting and its impact on financial decision-making
• Policy and considerations for establishing liquidity buffers at group and subsidiary level
• The use of technology and reporting in global cash management
• Challenges arising from regulatory, currency and operational barriers

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a primary benefit of group-wide cash visibility?
   1. Increased local autonomy for subsidiaries
   2. Improved central control over liquidity
   3. Simplifying regulatory reporting
   4. Reduced need for cash forecasting
2. In the context of treasury operations, a liquidity buffer is best described as:
   1. The minimum cash required by each business unit per day
   2. Excess cash held in operating accounts for convenience
   3. Cash reserves maintained to protect against forecast errors and unexpected outflows
   4. Surplus funds automatically invested daily

3. Briefly describe two risks that result from poor cash visibility in a multinational group.

4. List three methods a multinational group can use to achieve visibility of cash balances across all subsidiaries.

Introduction

Effective cash management is a critical function of the treasury in any multinational group. With entities and accounts scattered across various jurisdictions, currencies, and banking relationships, achieving central visibility over the group’s cash position is both challenging and essential. Reliable cash forecasting and prudent management of liquidity buffers are necessary to ensure that obligations can be met, risks are controlled, and financial resources are used efficiently. This article examines the practical priorities and core concepts relating to cash visibility, forecasting, and the role of liquidity buffers in multinational treasury operations.

CASH VISIBILITY IN MULTINATIONAL GROUPS

Multinational groups typically operate through numerous subsidiaries, each with its own bank accounts and local cash management practices. Without consolidated oversight, management may not know how much cash is available across the group, where it resides, or whether idle balances could be used more effectively elsewhere.

Key Term: cash visibility
The ability of group treasury or management to know, at any given time, the cash balances and flows held in all group bank accounts, across all entities and jurisdictions.

Why Cash Visibility Matters

Having real-time or near-real-time cash visibility allows treasury to:

• Ensure liquidity is available where and when needed.
• Minimise group borrowing costs and interest expense.
• Identify surplus funds for investment or inter-company lending.
• Manage foreign exchange exposures more proactively.
• Reduce the risk of fraud and misappropriation.

Poor cash visibility can lead to suboptimal funding strategies, excess borrowing, missed investment income, compliance breaches, and operational risks.

Achieving Cash Visibility

Common approaches include:

• Centralising bank accounts for group entities where feasible.
• Using cash pooling structures—either physical pooling (notional or zero balancing) or virtual pooling.
• Implementing treasury management systems (TMS) integrating with bank feeds for daily statement reporting.
• Leveraging in-country cash concentration arrangements to aggregate balances for reporting.
• Requiring regular reporting of balances from subsidiaries as part of treasury policy.

Key Term: cash pooling
A structure where group bank accounts are linked so that balances can be centralised, either physically or notionally, to improve group liquidity management and visibility.

CASH FORECASTING

Effective liquidity management rests on accurate forecasting. Cash forecasting is the process of estimating future inflows and outflows to predict the group’s net cash position over specified periods.

Key Term: cash forecasting
The process of estimating future cash receipts and payments to determine likely cash balances over different time horizons, enabling informed liquidity decisions.

Objectives of Cash Forecasting

• Ensure sufficient funding to meet obligations (payments, debt service).
• Identify potential liquidity surpluses for investment or dividends.
• Avoid unplanned borrowing and funding gaps.
• Respond to currency or cross-border flows in advance.
• Meet internal and external reporting requirements (e.g. for ratings or covenant purposes).

Forecasting Methods

• Short-term forecasts (daily to four weeks): Based on known/committed transactions, AP/AR schedules, payroll cycles, and upcoming treasury operations.
• Medium- and long-term forecasts: Based on budgets, forecast sales/receipts, major capital projects, financing plans.
• Bottom-up forecasts: Subsidiaries or business units provide estimates to group treasury.
• Top-down forecasts: Central assumptions based on consolidated financial projections.

Modern treasury systems, integrated with ERP, can automate much of the data collection and consolidation, improving the timeliness and accuracy of forecasts.

Worked Example 1.1

A multinational group requires each subsidiary to submit a weekly 8-week rolling cash forecast. Last month, one subsidiary significantly underestimated outflows, forcing an emergency intra-group loan from head office.

Question:
How could improved cash visibility and forecasting have prevented the need for urgent intervention?

Answer:
If group treasury had real-time visibility of all subsidiary cash balances, it might have detected the developing shortfall earlier, allowing for either the reallocation of surplus cash from elsewhere in the group or pre-emptive external funding. Reliable forecasting would also have highlighted the risk of a deficit and enabled a planned response, reducing both disruption and cost.

LIQUIDITY BUFFERS

Given the inherent uncertainty in forecasts, prudent treasury management requires that head office and major subsidiaries maintain liquidity buffers—cash reserves above the minimum expected need.

Key Term: liquidity buffer
A cash reserve deliberately maintained above forecast requirements, providing protection against unexpected outflows, forecast errors, or disruptions in funding access.

Liquidity buffers are an essential control to:

• Mitigate operational risks from payment failures or delays.
• Meet regulatory requirements for minimum liquidity (in some countries).
• Bridge timing differences between receipts and payments (especially across time zones).
• Protect against unforeseen events such as fraud, system outages, or macro shocks.

Determining the size of an appropriate buffer depends on:

• The reliability of cash forecasts.
• Group and subsidiary cash flow volatility.
• Access to credit facilities and head office support.
• Regulatory or contractual requirements.

Key Term: liquidity risk
The risk that an entity will not have sufficient cash resources to meet its obligations as they fall due.

Key Term: treasury management system (TMS)
Software used by treasury functions for centralising, monitoring, and controlling cash, exposures, and financial transactions across the group.

PRACTICAL ISSUES AND CHALLENGES

Regulatory and Structural Barriers

Certain jurisdictions impose exchange controls or legal restrictions, limiting central access to local funds or requiring local cash buffers. Time zone differences, fragmented banking relationships, or varying banking technology can all hinder seamless group cash visibility.

Overcoming Barriers

• Use notional pooling where physical funds transfer is restricted.
• Establish local credit facilities and integrate local reporting in the group’s TMS.
• Regularly review group policies to respond to changing regulation.
• Develop escalation and contingency plans for blocked or trapped cash.

Exam Warning

Inaccurate or unsupported cash forecasts may result in excessive liquidity buffers, leading to unnecessary idle cash and lower group returns, or in buffers that are insufficient to manage cash shortfalls—both are risks that will be penalised in exam scenarios. Always justify buffer levels with clear analysis.

Revision Tip

In ACCA exam answers, refer to both the benefits of central cash visibility (e.g., reduced idle balances, lower funding costs) and the potential complications (e.g., regulatory restrictions, operational delays). Show awareness of the need to balance efficiency with adequate local and group-level liquidity.

Summary

Multinational treasury teams must achieve high levels of cash visibility, implement accurate group-wide cash forecasting, and ensure appropriate liquidity buffers are maintained. These activities directly reduce risk, optimise financing costs, and support group strategy by enabling better decisions on working capital, investments, and distributions. Technology and effective reporting are key to overcoming the complexity of multinational operations and supporting secure, efficient use of group financial resources.

Key Point Checklist

This article has covered the following key knowledge points:

• The importance of cash visibility for multinational treasury operations
• Methods and tools used to achieve group cash visibility
• The objectives and techniques of cash forecasting in multinational groups
• The role and sizing of liquidity buffers as a treasury control
• Recognise challenges and practical barriers to global cash management
• Practical applications of treasury management systems for monitoring and control

Key Terms and Concepts

• cash visibility
• cash pooling
• cash forecasting
• liquidity buffer
• liquidity risk
• treasury management system (TMS)