Cash management is often seen as the routine part of the job, the bit where process can be perfected and no-one in the company takes much interest until something goes wrong, like a supplier is not paid. That is a myth! Cash management is the glue which holds the company together and it is the start of the whole strategic process. It’s also a way for the treasurer to get their foot in the door of operations and really find out what is going on.
Funding the company is arguably the only job which the treasurer must always get right and cash management is part of that.
Let’s look at this in more detail:
| Long term liquidity management | This is the ability of the company to generate cash from its business and re-invest that cash in better products to keep that cash generation going. | This is not really down to the treasurer, but he can advise on its importance. |
| Medium term liquidity management | This is about getting the right financing in place so that liquidity is available at all times. It is about facilities, credit ratings and headroom. | This is all in the treasurer’s to do list. |
| Short term liquidity management | This role is cash management, all about making sure that suppliers, employees, the tax man and others get paid on time. | This falls fully on the treasurer. Everybody in the company knows this. |
If any of them fail, then sooner or later there will be dire consequences. However, in cash management, it catches up with you quicker than all the rest. So, despite automation and technological advances, this must work and work well. No cash management – no long-term future!
Every company, in every sector and under every ownership must do this. Cash is the highest common factor or the lowest common denominator, depending on your point of view.
So, this is what cash management is:
Every account (bank account or card etc.) That is used for payments must either have enough money (or available credit) in it when payments are made.
Of course, it also extends to other concepts of collecting revenues quickly and ensuring that interest is minimised, but that liquidity approach is the driver. Liquidity trumps efficiency in every treasury decision.
Banks have introduced some brilliant products which can automatically put money into accounts when needed. Zero balance accounts do this by giving and taking money from a concentration account, so fund that ‘top’ account and it all works. Notional pooling achieves the same, offsetting credit and debit balances as payments and collections are made. These products can be very sophisticated, achieving our goal across borders.
However, it gets more difficult as you go more international and more complex. There will not be one company where all this is automated across all subsidiaries and regions.
While efficiency has been a secondary aim of cash management, these approaches also help efficiency. Cash collected and credit balances can be made to work hardest and save interest with good cash management. However, falling interest rates (and margins) have made this less important, as has the trend to holding large cash balances. So, if you are long cash, one solution to the cash management problem is just to leave it in the accounts ready to be paid away when needed.
So why worry about cash management when all you have to do is get the right bank solution? And for banks, these great products can be sold more widely.
Well, several things are happening:
| Banks are retreating to domestic markets | As banks shrunk after the financial crisis, they preferred domestic customers, thus making global solutions more difficult. |
| Regulation threatens the products | The efficient bank products are under threat, especially notional pooling. |
| Challengers to banks are appearing | Cash management can now be done by other parties such as APIs (authorised payment institutions), suggesting competition and efficiencies. |
| Open banking is coming | Data around payments and cash management will be more easily shared across providers, creating opportunities for added value products. |
| Technology is improving | This will allow better products to be introduced. The information and payment streams can be combined. This affects both bank and customer systems. |
| Payments are getting cheaper | Initiatives such as SEPA and Faster Payments (and equivalents around the world) mean that efficiency can be achieved more easily and payments do not have to be aggregated. |
| Working capital products | The incorporation of financing and risk products into payments is increasing. A credit (or P) card is a classic example. |
So cash managers, bankers and entrepreneurs and all their advisers must understand the basics of all these issues and how business works so that they keep up to date with the trends. They will become more efficient, gain customers and give better advice.
A corporate treasurer often finds it difficult to connect with the business, or operations, of their company and can often be thought of as working in an 'Ivory Tower'. Ensuring that they can pay their bills and making it cheaper and more efficient, is a great way for a treasurer to get noticed. From there they can move on to better managers of risk and better advisers to their companies. They can also get better cash forecasts which will help them do their job better.
Cash management is good ancillary business. For a corporate treasurer worried about funding his company, this is a good piece of work which can help tip the bank’s lending decision in their favour!
[su_box title="Do you need cash management skills?" box_color="#51284F" radius="1"]Develop practical new cash management expertise that you can apply immediately in the workplace. There's something to suit every level of competence with professional qualifications, training and eLearning to choose from. [/su_box]
