3 Cash Flow Management Techniques to Manage Treasury Yield Curve Recession

Chances of US recession in 2022 and how bad it will be

Recession is often defined as two consecutive quarters of economic contraction—declining real GDP. The nation’s GDP fell 1.6% annually in the first quarter of 2022, followed by a 0.9% drop in the second quarter. The US is tipping into a recession by the end of 2022 or early 2023. Global growth will be impacted if the $25 trillion US economy tips into recession.

What is the yield curve?

The yield curve is a graphical representation of interest rates on debt for various maturities. It displays the expected return on an investor’s investment for a specific time period. At various stages of the economic cycle, the curve may take on different forms, although it is typically upward-sloping.

The yield curve usually is not inverted since longer-term debt often carries higher interest rates than short-term debt. The yield curve is inverted when short-term interest rates are higher than long-term interest rates. An inversion in the yield curve is considered a reliable predictor of a recession.

How inverted yield curve impact companies?

Treasury yield curve recession can significantly affect various businesses. The typical difficulties firms of all sizes have during a recession are discussed below:

1. Late customer payments affect cash flow
   

   As the economy slows, customers and businesses become more careful about spending, which bloats a supplier’s accounts receivable as liquidity issues impact consumers and businesses across the supply chain. Customers who owe the supplier money are slower to make payments or fail to make them altogether. As a consequence, the supplier may run out of cash.

   
   
2. High FX risks
   

   During recession FX markets are highly volatile, so they are subject to strong fluctuations in the value of currencies. This is where FX risk comes into play. Treasurers observe increased risks involving several currencies and increasing operational and financial complexity. Currency swings significantly impact the profit and loss statement, and it is challenging to evaluate FX risks using spreadsheets.

   
   
3. Poor receivables management
   

   During a worldwide recession, customers and vendors find it more challenging to make payments on time. Businesses might have to spend more time looking for unpaid bills, which would cause them to delay receivables. This can reduce the assets and lead to debts.

   
   

Accurate monitoring and management of cash flows give treasurers essential insights into a company’s strength, profitability, and long-term prospects. This proves to be especially useful during market volatility by helping identify idle cash and cash shortfalls and helping in properly allocating financial resources. Below are three cash flow management techniques to deal with treasury yield curve recession.

3 cash flow management techniques to manage treasury yield curve recession

#1: Real-time cash visibility with automated data gathering

Businesses often fail to track or measure economic downturns due to the limited availability and quality of data since manual processes lead to a lack of access to real-time information. The primary goal of a cash management solution is to keep track of how much money the company has at the end of the day. This level of visibility allows for setting a specific target for each bank account, so the company will always have cash on hand. Moreover, visibility of overall company balances aids in avoiding a cash crunch situation and prevents from going bankrupt if it comes to it.

Using API integration in cash flow management, imports and exports, data gathering is automated from various sources such as banks, ERPs, TMS, FP&A tools, and Payroll, A/R, and A/P teams. This reduces the scope of manual errors and increases access to real-time information.

#2: Data efficiency through automatic reconciliation

A critical cash flow management step is monitoring bank transactions and data. SaaS and cloud-based platforms allow companies to store vast amounts of data and offer the connectivity needed to guarantee smooth operation from anywhere in the world. Cash management solution auto-reconciles transactions based on standard and user-defined rules without requiring manual intervention. It also allows managers to match or rectify any discrepancies manually. With proper cash flow management techniques, cash managers can save time, reduce errors, and focus on other higher-value tasks by automating bank statement processing and reconciliation.

#3: Faster access to cash and transparent decision-making

Proper cash flow management techniques aid in clear transparency over account balances, allowing cash managers to evaluate whether there is any surplus cash to invest in keeping idle funds employed. Similarly, if there is a requirement, cash managers will be aware of it so that arrangements can be made in advance to borrow money. Additionally, firms would know if any other entities have spare funds and borrow money from them rather than relying on external sources. Companies could avoid paying exorbitant borrowing rates this way.

How cash management solutions shield your money from recession

A cash management solution helps a company in cash flow management during the recession by:

• Connecting to all bank accounts, loans, and superannuation accounts to keep track of inflows and outflows.
• Assisting in automatically matching information on cash transactions provided in daily, weekly, and monthly bank statements with those recorded in the cost tracking.
• Categorizing the expenses which helps keep the business organized and assists in budgeting and determining which expenses can be deducted from the taxable income while paying taxes.
• Utilizing automated workflow-driven methods to maintain, open, and close bank accounts and audit these processes on an annual basis using the most recent bank structure and features which makes optimizing and tracking bank accounts easier.

Speak with our solution experts to learn more about the features of the HighRadius cash management solution.