As the former director of treasury services at Plan International, Annemarie Moore was responsible for the charity’s global treasury. This included liquidity management of €160m on a daily basis to maximise returns while managing counterparty risk and currency risk management on €1bn turnover. Ahead of the ACT’s cash management conference, she tells The Treasurer about the tools necessary for effective cash management.
Proper cash management is a critical function for any business, regardless of its size or industry. It ensures that a company can meet its financial obligations, pay its suppliers, and invest in growth opportunities.
Effective cash management requires businesses to develop a cashflow forecast, use multibank platforms, implement a TMS, optimise cash balances, monitor cashflows, manage working capital and streamline processes. By following best practices, businesses can improve their cash management, reduce costs, and gain greater visibility and control over their cash and treasury operations.
Cashflow forecasting is a vital component. Forecasting helps businesses to plan their future cash needs and identify potential cash shortfalls. A cashflow forecast predicts the future cash inflows and outflows based on historical data and future expectations. Businesses use this forecast to plan their expenditures, investments, and financing needs.
Cashflow forecasting allows businesses to anticipate cash shortfalls and take proactive measures to address them, such as renegotiating payment terms with suppliers, adjusting inventory levels, or seeking additional financing. However, a cash forecast is only as good as the information that is input. If the business units provide the data, it is important that the business understands not to be overly optimistic and to consider new variables. This may take a round of education by treasury of the business units so they understand the use of the forecast and why it must be up to date and accurate.
If a regression model is used instead consider any variables that may need to be updated. Exchange rates, interest rates, inflation and economic outlooks are some such variables. Fluctuations in these rates can affect a company's revenue, expenses, and cashflows, making it essential to consider them when making cash management decisions.
If a business operates in multiple countries, it may have cashflows in different currencies. Changes in foreign exchange rates can impact a business’s revenue and expenses in those countries and that can feed into a change in forecast. Similarly, if a business imports goods and services from other countries, a weakening of the domestic currency can make those imports more expensive, increasing expenses. In both cases, these changes can affect the business's cashflows and its ability to manage its cash effectively.
Interest rates determine the cost of borrowing money, which can impact financing decisions. For example, if interest rates are high, it may be more expensive for a business to borrow money, reducing its ability to invest in growth opportunities. Alternatively, if interest rates are low, it may be more attractive for a business to borrow money, potentially increasing its debt levels.
Interest rates can also impact a business's investment decisions. Higher interest rates can make investments in fixed income securities more attractive, potentially increasing the return on investment. However, higher interest rates can also increase the cost of borrowing, making it more expensive for a business to finance its operations.
Consider the following:
Multibank platforms are another tool that businesses can use to manage their cash more effectively. Multibank platforms are online banking systems that allow businesses to manage multiple bank accounts from a single dashboard. Multibank platforms provide businesses with real-time visibility into their cash positions, allowing them to make informed decisions about how to allocate their resources.
These platforms also simplify the process of making payments and receiving funds, reducing the time and effort required to manage multiple bank accounts. However, to rely on them solely for forecasting may mean only one side of the cashflow equation is considered and this could be a costly error. Ensure the data from such systems are merged with business information.
Treasury management systems (TMSs) are specialised software applications that help businesses manage their cash, investments, and risk. TMSs provide businesses with a centralised platform for managing their cash and treasury operations, including cash forecasting, cash positioning, liquidity management, and risk management.
TMSs can also automate many of the manual processes involved in cash management, such as reconciling bank accounts and processing payments. By using a TMS, businesses can increase efficiency, reduce costs, and gain greater visibility and control over their cash and treasury operations.
However, as in the use of multibank platforms, ensure that business flows and decisions are incorporated into the data. It is possible with some systems to input business flows for a more rounded picture.
Annemarie Moore is the former director of treasury services at Plan International, an independent development and humanitarian organisation that advances children’s rights and equality for girls
