Working Capital

To seek yield or to seek certainty? That is the question…

February 23, 2016
The C2FO Team

By Antoine Trépant, Director, C2FO

When is it advisable to strive for better returns on excess cash when a company is focused on mitigating risk? Finding the right risk/return balance is on every CFO and Treasurer’s mind when making impactful business decisions. New technology solutions are making it easier than ever before to discover that equilibrium.

A new risk/return paradigm

In 2015, the Federal Reserve reported a spike in corporate cash levels which exceeded the $2 trillion mark. This represents a 38% jump since Q1 2009, the post-crisis period during which corporations were being singled out and accused of hoarding cash in a socially irresponsible manner.


Today’s all-time high cash levels illustrate how companies have opted for a “do nothing” approach, as a precautionary measure to mitigate economic risk. For the average treasurer whose main task is to manage risk, whether it be liquidity, FX, interest rate, counterparty or commodities-related, the quest for economic certainty is important but not without its negative implications.

Corporates inadvertently increasing risk

One challenge that arises from focusing too much on risk aversion is that companies become locked into old ways of doing business. For example, the old-school scenario of financial institutions compensating hefty term deposits with minimal or negative (yet secure) interest returns really creates more risk for an organization, especially when there are no-risk alternatives that will create more shareholder value.

Plus, by placing and dispersing large cash amounts across only a few banking institutions (corporations typically have 4-6 core banking relationships), corporations significantly expose themselves to counterparty bankruptcy risk.

If we imagine a company dividing $3B of its excess cash evenly across six key relationship banks, for example, the potential default of only one such bank would represent a material loss of $500M. Another financial crisis like the one which sent A-rated institutions (e.g., Lehman Brothers) into a spiral without warning is far from unimaginable, particularly given the current fragile state of the global economy.

To further substantiate this risk, a recent survey of 300 global financial executives (Treasurers, CFOs and Finance departmental heads) recently conducted by The Economist’s Intelligence Unit revealed that 19% of respondents spend “most of their time” managing financial institution counterparty risk and 21% spend “a lot of time” doing so.

Financial executives also spend considerable amounts of time keeping up with regulatory changes. Basel III, Dodd-Frank and the European Market Infrastructure Regulation (EMIR) represent only a fraction of the existing regulations financial executives must keep up with from one iteration to the next.

To cope with this workload, corporations must increase headcount, which in turn increases the costs of operating the treasury function already labelled as a cost center. However, headcount has been stagnant at best with reduced budgets. This, in turn, increases the operational risk associated with a treasurer’s inability to “man the shop” and develop a thorough understanding of existing regulations to establish the proper risk controls such requirements mandate.

As you can see, avoiding risk actually creates more complexity and more operational risk to the organization.

New working capital best practices hold the key

Forward-looking CFOs and Treasurers are taking advantage of much more sophisticated working capital management practices than ever before. They are learning to develop accurate and useable cash utilization forecasts, evaluate cash allocations and alternative working capital funding, and pursue alternative approaches for trapped cash.

Some of the greatest opportunities to sidestep worries about risk versus return lie within a company’s supply chain through holistic accounts payable practices, including supply chain finance, to maximize the value to be found within the A/P process.

The good news is that it is now possible to achieve counterparty risk reduction through dispersion, maintain cash availability, and improve EBITDA all at the same time. Trapped cash can be put to work to help the corporations and their valuable supply chain partners.

How technology provides the solution

The fintech industry has a wide array of innovative solutions which have significantly improved financial executives’ ability to take full control of the risk/return balance when it comes to optimizing short-term cash.

C2FO is a market-based dynamic discounting solution that discovers the optimal price for early payment of approved supplier invoices. Buyers simply choose their ideal rate of return, suppliers offer a rate that works for them, and the C2FO marketplace technology discovers the best early payment price that works for both.

Companies will eventually pay approved invoices, so there is no risk involved in paying more invoices early at a discounted rate, especially when the rate of return is so much higher than other short-term cash investment alternatives.

By investing short-term cash in their supply chain where risk is dispersed due to the large number of suppliers, CFOs and treasurers reduce counterparty investment risk while making the supply chain significantly more robust as a whole. Plus you increase shareholder value by being more strategic with your short-term cash.


CFOs and treasurers can expect short-term cash returns (6.8% APR C2FO market average) without taking on additional risk. Both yield and economic certainty are secured in the process, and harnessing this technology can also provide significant upside through ease of use, global scale and the de-risking of the supply chain.

Indeed, supply chain risk of default and delivery disruption are considerably reduced as injected liquidity cascades downstream to strengthen suppliers’ cash positions. A market-based approach facilitates unique price discovery, which ensures that cash is available to each unique supplier at a rate that is better than their short-term borrowing alternative.

Market-based true dynamic discounting allows for superior flexibility as companies have the option to regulate the flow of funds into the marketplace as their needs dictate. All this is conducted dynamically, on a real-time basis, which makes it a true win-win for risk reduction…and yield creation.

By restoring the risk/return balance to a state of equilibrium, the treasury function can shift its status from cost to profit center, thus allowing it to dedicate more of its time to operational improvements versus risk mitigation.

Working Capital. Working for Everyone.

C2FO provides working capital solutions for you, your suppliers and your customers.

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