The role of the CFO has evolved significantly in recent years. The finance function has traditionally centered around accurate accounting of a company’s historical financials, ensuring that cash is accounted for, vendors are paid, and client and customer accounts are up to date.
That’s changed. The place of a CFO and their team is no longer just in the back office. Now, not only do they need to continue to provide the business with accurate and timely historical financial data, but they’re also expected to provide strategic insights to help grow the company.
However, gaining the visibility needed to support growth through optimized cash flow can be challenging when struggling with liquidity management across subsidiaries.
Despite this, many CFOs are relishing their transforming role and energized by the potential of being able to have a direct impact on the strategic direction of the business. As a recent study from McKinsey found,
“(First,) CFOs have influence on more and more functions. The magnitude of the change is both impressive and broad. Secondly, the time for digitization in finance is now.”
The intersection between the traditional role of finance and the new strategic focus are the fundamentals of cash flow and liquidity management. This is particularly true for companies with multiple subsidiaries.
With efficient liquidity management and accurate cash flow planning, day-to-day operations become more straightforward, and precise forecasting becomes easier. Both are prerequisites for making informed strategic recommendations.
That’s why 75% of CFOs planned to increase technology spend in 2023.
Challenges In Managing Liquidity In A Multi-Entity Company
Managing liquidity is one of the most important aspects of the finance and treasury function. Understanding the current cash position and managing the access to it is one of the fundamental risk management strategies a business needs to have in place.
When a CFO or Treasurer is dealing with multiple subsidiaries, potentially across a number of geographic regions and dealing in multiple currencies, something as simple as a cash overview isn’t straightforward.
There are several key challenges:
Manual Cash Reporting
The traditional approach to this type of reporting is to have staff log into each banking portal individually, export the data, normalize it and then transfer it into a master spreadsheet. This has to be done for every bank account, with every individual bank.
Data from multiple subsidiaries must be further consolidated into a complete overview of the parent company. This whole process is time-consuming. Gathering all of the information needed could take days, by which point there may have been potentially hundreds of thousands of new transactions.
It creates a scenario where finance leaders are always looking at data that is out of date. If they are even looking at it at all. In a recent podcast interview, McKenzie Knudson, Senior Treasury Analyst at Trovata customer Sealaska said,
“We were only looking at (our liquidity position) for maybe the next week or month. We weren’t looking out into the future and we also were only looking at it at our top corporate level where we own about 30 subsidiaries, so we were letting them all be, they managed their own cash. So we’re trying to now be more of a consolidated view of treasury at Sealaska. And Excel wasn’t working.”
In many cases, the solution is that Treasurers and CFOs won’t have a granular view of their liquidity across their subsidiaries simply because gathering that data is too time-consuming.
Not only that, but the amount of manual input required creates the potential for human error, leading to incorrect data, which could be incorporated into the company’s financial forecasts.
Recommended: Check out our recent episode of Fintech Corner as our very own Joseph Drambarean chats with McKenzie Knudson, Senior Treasury Analyst at Sealaska, about her team’s transition from spreadsheets to API-based treasury tech.
Forecasting Limitations
Having a process that relies heavily on manual work makes forecasting difficult. Understanding the current liquidity position is obviously important, but being able to accurately forecast how the company’s liquidity profile may change over time is equally so.
Just like a golf ball being hit a fraction of an inch to the left can mean the difference of 100 yards in the distance, even seemingly minor errors or incorrect assumptions can create substantial changes in forecasts.
Even if there are no errors, creating financial models from scratch takes a long time. This resource restraint means that finance teams have a limit on how many scenarios they can model and how quickly they can adjust their forecasts to reflect new information.
Payments Inefficiencies
So far the challenges we’ve mentioned have all been focused on reporting and analysis. But managing liquidity across multiple subsidiaries is also about the daily practical operations side of cash management.
Moving cash between accounts and arranging payments are subject to the same issues as data gathering. Employees need to log in to each banking portal individually, transfer money between accounts to manage the liquidity position and send each payment individually.
Most banks have the ability to send multiple payments at once (such as payroll), however the batch payments process can incur fees, and just a single transaction error in the batch can cause every payment to fail.
Hard to Maximize Cash Yield
Because of the friction in reporting and payments, it’s hard for treasurers to try to maximize cash yields while maintaining their desired liquidity profile. If you can’t quickly see where your cash is, and then easily move it, it becomes impractical to try to improve yields through improved cash allocation.
How Modern Treasury Tech Transforms Liquidity Management Across Subsidiaries
The use of Open Banking APIs can directly address these challenges.
The focal point of all of this friction in the liquidity management process is data transfer. Whether moving data from a banking portal to a cash overview spreadsheet, moving data from payroll to a banking portal, or moving data from the cash overview into a financial model, at the center of it all is a human normalizing and transferring the right information from one place to another.
Open Banking APIs create a direct link between all of a company’s data, eliminating the need for the manual process in the middle.
Real-Time Cash Positioning
The most simple illustration of this is how APIs are used to provide treasurers and CFOs with a global overview of their cash position. Connecting all of your banking portals with an API-first treasury tech solution like Trovata creates a single source of truth for all of your financial data.
The API provides a mirror of your banking portal in Trovata, meaning that you can see all of your cash balances, across all of your connected accounts, in real-time, with 100% accuracy.
But it’s not just cash balances. Trovata provides a fully managed data lake with a robust developer portal for bank balances and transactions at scale. That’s all your real time financial data, aggregated and normalized in one place, with the ability to integrate directly with your ERP software.
This transforms liquidity management for CFOs and Treasurers working across multiple subsidiaries. Companies like Sealaska can now drastically improve their oversight into the cash position of all of their subsidiaries, while actually reducing the workload for each entity’s finance team.
Automated Forecasting and Scenario Planning
With a foundation of current and 100% accurate financial data, the logical next step is to integrate this data into your financial forecasts.
Layering AI and machine learning technology onto your data creates the capability to complete complex scenario planning and multiple forecasts, without the need to manually build or amend financial models.
Natural language prompts can be used to speak to Trovata AI like an analyst.
“Can you forecast our total liquidity position based on a 10% increase in marketing spend in 2025?”
In seconds, you’ll have a draft scenario model that you can review and adjust to suit your needs.
Advanced Analysis Capabilities
That same technology can be leveraged to dive deep into the data without the need to manually trawl through thousands of line items. Perhaps your liquidity position in a specific subsidiary is lower than you expected it to be.
Trovata’s machine learning algorithms can quickly analyze transaction data, analyze historic trends and highlight any anomalies that may have contributed. For example, perhaps there was a large jump in payments to insurers during the period, or a specific product line saw a large fall in sales.
This output still requires a real person to verify that it’s correct, but it dramatically cuts down the time it takes to find data points to review. Essentially, it shifts time away from finding out what happened or why it happened, allowing for more time to focus on how to move forward.
All of these capabilities only improve over time, with sophisticated tagging and categorization allowing teams to automate their transaction and cash reporting.
Integrated Payments
APIs work both ways. As well as being able to see the cash position for every account in one place, users can make payments from every account in one place.
This saves time without the need to use multiple banking portals for payments, but APIs also unlock the ability to initiate bulk payments, rather than batch payments.
Bulk payments initiate group payments such as payroll in a similar way to batch payments, with the key difference being that each payment is made individually, rather than batched within a single file. That means that if one payment fails, it has no impact on the others, making reconciliation more straightforward.
How Trovata Can Level Up Treasury and Finance Operations Immediately
Trovata brings all of this technology together into a single platform. CFOs, Treasurers and their teams can level up their ability to manage their liquidity position, practically overnight.
Because of the API-first, cloud-native approach to the software architecture, Trovata can integrate into your business in a matter of days. There’s no need for a lengthy, expensive implementation process as is the norm with a legacy TMS, as Eventbrite discovered when they migrated to Trovata:
“Implementing Trovata was very straightforward. With the great support from Trovata’s client success team, we connected [Trovata] with our three major bank partners and the figures came in right as we were talking-it was instantaneous.”
If you’d like to learn more about how Trovata can improve your multi-entity liquidity management, download our data sheet today!
