One of the core responsibilities of any treasury team, cash management may seem a fairly stable area of the business. But in today’s evolving corporate environment, those managing cash flows have to be just as innovative as everyone else in the organization.
The regulatory environment is subject to change at any time, as evidenced by last year’s money market reforms. The constantly changing technology landscape means companies need to constantly re-evaluate whether their solutions are still right for their organization. And in a function where staffing is almost always tight, optimizing efficiency remains an ongoing goal.
Systematic Decision-Making for Short-Term Investments
Cash management is a key concern for the treasury team at Toyota Financial Services (TFS), the captive finance arm of Toyota Motor Corp. They oversee $8 billion to $10 billion in short-term investments at any given time, and they ensure that the company can always meet its funding needs by keeping these cash investments short. The weighted average maturity of the portfolio is two to three months, and all investments stay inside three years.
“Also, in true Toyota fashion, before launch we needed to work with our accounting and operations teams to make sure this was doable,” Katzen says. “We’re pretty thinly staffed on the operations side, and previously each time we would buy a corporate bond, they would have to manually set it up in our system. We needed to make sure the system had all the right fields for credit rating, type of security, etc., in order to make everything as streamlined as possible.”
Led by Alec Small, who has since left the company, the team developed a process for evaluating the creditworthiness of a company whose debt TFS hadn’t previously purchased. “First, an analyst puts together a qualitative write-up,” Katzen says. “This describes, at a high level, what the company does, what its strengths and weaknesses are, and what its financials look like.” Next, analysts pull together a quantitative report on the company. “The quantitative piece looks at some of the ratios that our research has indicated to be a good indicator of future corporate performance, such as sales to assets and cash flow to assets,” Katzen explains. TFS’s national manager of funding and liquidity, Nicholas Ro, reviews the qualitative and quantitative reports, then decides whether to grant approval to buy debt from the company.
Modeling Short-Term Funding Best Practices
Hyundai Capital America (HCA) is the financial services captive of Hyundai in the United States. It’s the organization that finances consumers’ purchase or lease of a new Hyundai or Kia vehicle. The organization also provides financing to its dealerships. Depending on the needs of borrowers and whether any large debt issues are maturing in the near future, HCA’s daily cash requirements may range anywhere from $50 million to $1.5 billion.
Funding these cash needs is a crucial responsibility of the treasury team, but HCA’s process for selecting among multiple liquidity sources used to be extremely time-consuming. “We utilize a lot of different debt instruments simultaneously, including commercial paper, various revolvers, conduit financing, you name it,” explains Hardy Gumnor, who manages the cash management group within HCA’s treasury department. “With our legacy process, deciding how and when to utilize a myriad of debt instruments for our short-term cash needs took quite a bit of time. We didn’t have all the relevant information consolidated, so a lot of disparate steps were involved in making every short-term funding decision. We needed a model that could go through all our funding options and help us make the optimal call.”
The team created a complex and macro-dependent spreadsheet that pulls in data about the company’s cash needs from reports coming out of the company’s strategic planning and financial planning and analysis (FP&A) groups. It combines that information with interest rate data for various debt instruments HCA might use, which it acquires from Bloomberg. On top of these factors, the model takes into account the maturities and terms of the debt instruments, such as limitations on how much HCA can borrow.
“Now we hit a button, and all the right information is extracted from the source reports to populate our model,” Gumnor says. “From there, it runs calculations and makes funding recommendations. We have the ability to override the model’s decision, but getting that recommendation based on the current rate environment is a huge time-saver.” Productivity is further enhanced because the spreadsheet-based model automatically produces weekly and monthly variance reports for HCA’s global parent company, Hyundai Motor.