As treasurers, we understand that cash is king. It touches every part of a business because it is an integral part of the revenue and expense cycle.
Cash needs to be carefully managed in order to minimise the investment of operating cash in the business, not to mention the cash in the business’s working capital.
When operating units make sales and purchasing decisions, these inevitably impact the amount of cash that is needed to run the business. Including operating cash in the asset base of local operating units for performance measurement purposes is usually a good starting point in controlling cash.
Ask operational staff within sales, supply chain, procurement/purchasing and even logistics to devote effort and resources in helping to develop and maintain an efficient and controlled cash-gathering and disbursing system.
Reducing the number of points at which cash enters and leaves the company can help to minimise the number of transactions that are processed
Treasurers can also help to control cash by reviewing the entire cash-gathering and disbursing cycle, and looking for defective processes, non-value-added work streams and opportunities to speed the flow of cash through the system.
This could be part of a larger working capital management programme aimed at driving defects and non-value-added work out of all operating and administrative processes in order to make them error-free, faster and more flexible.
Moreover, inventory lead times should be examined using value stream mapping to compare current and future state lead times so that cash can be squeezed out of the stock cycle.
Lastly, part 36 of the cash-flow analysis should be to look for opportunities to simplify the cash management system.
Reducing the number of points at which cash enters and leaves the company can help to minimise the number of transactions that are processed and thus increase the control that you have over the cash management process.
So how does the treasurer translate that approach from theory into practice? Well, there are a number of steps that any company can take to improve the management and control of its cash…
These basic five steps will help you to significantly reduce the amount of cash required to operate the business and improve control.
Moreover, make sure that you have complete separation of duties in cash management. The basic controls are separation of the cash management and accounting activities.
This includes separating the functions of depositing cash and bank transfer and cash accounting. The accounts receivable team must not have access to cash or accounting. In order to prevent fraud, do not allow one person to manage the entire cash process.
All the steps listed above aim at making the cash-gathering and disbursing system simple to operate, fast, flexible and highly automated. They should minimise errors, improve control and keep unnecessary operating cash balances to a minimum.
The days of managing cash using spreadsheets are drawing to a close. Now corporates are increasingly investing in enterprise resource planning (ERP) systems that simplify workflows and connectivity to banks and supply chain partners.
ERP systems such as SAP, Microsoft Dynamics and Oracle have integrated certain cash management functionalities, together with payment initiation, into their systems. Making this ERP functionality work is where the treasury team will need to put some serious effort in, especially when it comes to bank connectivity and automation.
Both receivable and payment initiations can be imported via bank account files for large-scale usage. Increasingly, however, bigger corporates want to bypass the web front ends and achieve throughput processing to the banks’ middleware.
If your organisation is serious about achieving ERP and banking connectivity, it is important that you shop around in the market for vendors to get the most cost-effective deal. Also, make sure that you enquire about standard formats.
Frustratingly, when banks or vendors claim that they have multiple standards files that can be used, it basically means that there is a lack of a standard in place, which presents another hoop that the treasury team needs to jump through. But do not get disheartened – there are various other options open to you in terms of connectivity for data flows, including the internet, dedicated connections and SwiftNet.
Large corporates that have already invested in connectivity should now be looking for more than just transferring data. They should demand off-the-menu, bespoke modules that integrate into their in-house ERP system, such as analytical tools to support investment options that can be integrated with treasury management systems.
System vendors should be able to deliver more web-based services or a service-oriented architecture. A service-oriented architecture would not only enable you to create business ‘mash-ups’ (combinations of data from different sources), but also to aggregate data, where these pieces of data can be channelled correctly.
This would allow the workflow to be more streamlined, without users jumping from one system to another.
None of this is a quick fix, since investment and re-engineering will be necessary to enhance existing bank systems. But the pay-off will be greater benefits in terms of flexibility and agility.
Cash-flow forecasting still remains a central key issue in treasury today, with end-of-day balance checks being key.
Wouldn’t it be wonderful if both receivables and payable data points featured alongside current balances to predict future cash flows? Also, wouldn’t it be good to be able to apply analytical tools to ascertain optimal cash requirements on surplus and deficit cash positions?
Some of the investment banks are now embracing this technology, so it is worth enquiring about this with your relationship managers.
Another cumbersome and often painful task is maintaining an up-to-date signatories list. Digital signatures will help to revolutionise the current, rather paper-intensive, process of physically submitting supporting documentation for each account under know-your-customer rules.
Dee Kothari is founder and partner at KLK Consulting
