Cash flow management is a process that involves collecting payments, controlling disbursements, covering shortfalls, forecasting cash needs, investing idle funds, and compensating the banks that support these actions. Because global cash management is highly tax and accounting oriented, close working relationships with tax and accounting staff are vital. In addition, cash flow management requires coordination between treasury and operations. And in today's volatile markets, it requires powerful electronic tools for gathering diverse financial information and formatting it into useful reports for decision making.

Best Practices
Cash flow management can be practiced to a point where every available dollar is at work either covering payment of checks or producing income. And while cash flow management continues to be a complex process -- and increasingly so on the international level -- there are a number of sound practices that high-performing companies employ. A discussion of the best practices used by leading companies to effectively manage their cash flow follows.

  • Select core cash management banking partners.
    Today, high quality of service has replaced low price as the standard when companies shop for banks to support their cash management business. And banks offer automated processes such as payroll and accounts payable along with electronic data interchange (EDI), making outsourcing affordable and secure from theft. Companies also consolidate their accounts, using fewer banks. This way they can rely on these selected few banks as partners but are not dependent on a single bank.

    When shopping for a banking partner, companies review cash management needs thoroughly by gathering input from all departments the bank may affect, examining how well current banking needs are met, and spelling out expectations for meeting future needs. Because the information systems that link banks and companies are so complex, once the choice is made, changing banks can be costly.

    The advantages of giving fewer banks more company business include enabling the company to assess its bank services line by line and compare prices that each bank charges, as well as sharing this information among the banks through the use of scorecards. In this way the banks know where they stand in relation to the other banks, and the company has more leverage to control bank fees and gain preferential services. Further, both the company and the banks know that the company has alternative suppliers that understand its business. Should one bank have difficulties, the company can continue with uninterrupted service using another banking partner.

  • Develop accurate cash forecasting models.
    Because of the uncertainty of cash flows, companies use forecasts to help offset these uncertainties and match incoming receipts with disbursements. Sources of solid information range from shipping data to orders from salespeople to buying patterns, and even include news gathered from grapevines -- all the quantitative and qualitative intelligence available.

    Forecasts are based on seasonal, monthly, daily, and cyclical patterns as well as trends. Forecasts are further divided into short term (covering one day to two weeks), medium term (covering a few weeks up to one or two years), and long term (covering one to several years). Where firms have many business units, short-term forecasts can track how well each unit does as well as how the company as a whole fares.

    Integrating information into the forecast as soon as it is obtained, using a "rolling" format so that updating is continuous, helps the company time disbursements to meet incoming receipts. Further, use of a rolling forecast improves forecasting accuracy and can see the company through cash-critical periods.

  • Improve investment yields at lowest cost.
    Companies need a clear, written investment policy that indicates objectives, guidelines, and what investments are acceptable. This document provides a common understanding for directors and investment managers in setting up a portfolio and in making investment decisions as opportunities arise. In many cases managing the portfolio in-house works best; other companies find that outsourcing portfolio management maximizes investment opportunities. An outsider may be more cost-effective, particularly with a small portfolio.

    To avoid having funds sit idle overnight in non-interest-bearing accounts, companies make use of sweep accounts. Sweep accounts allow companies to move, or "sweep," idle cash into overnight investments at the end of the business day. They also use zero-balance accounts; these accounts allow companies to write checks or drafts from an account where no balances are maintained -- without penalty. Cash is drawn from a central account whenever checks are presented for payment.

    Some countries impose high fees on demand deposit accounts (DDAs) when they are overdrawn. Because DDAs can be withdrawn without prior notice to the bank, they are less profitable than other types of accounts. Although the U.S. does not allow overdrafts for DDAs, the Federal Reserve System does impose fees when the receipts of an individual bank do not cover its payments during the course of the business day. The Fed views these daylight overdrafts as temporary loans, so charges accordingly.

  • Review the cash management system regularly.
    When the cash management system is reviewed on a regular basis, the review helps identify where existing processes can be improved, offers a recurring tracking measure, and provides some assurance that company financial data is reliable without resorting to a formal audit. Ideally the review focuses on the processes that affect the cash-to-cash cycle; for instance, collections practices and payment float.

    The review evaluates the company's cash management bank(s) -- in particular, their performance, charges, and yields on investments. Also, the review considers the risk factors that affect cash flow throughout the payment system. Risk factors include fraud, liquidity risks, and risk for erosion of day-to-day cash flow.

    It is helpful to gather data for these reviews -- as well as the audit -- by using detailed questionnaires and on-site visits to banking partners. Questionnaires, prepared in advance of site visits, offer opportunities for more in-depth analysis, and on-site visits provide a greater understanding of what cash management issues the company's local markets face.

  • Create a centralized cash management infrastructure that serves global needs.
    Cash flow management is challenging and particularly so for those companies with operations in more than one country. Global cash management occurs on two levels: the first is each country's cash management system that addresses standard treasury functions such as collections within national borders. The second is a network that connects the domestic systems and manages various currencies while integrating cash management with functions such as purchasing, sales, and accounting.

    Since not every country needs a highly centralized cash management function, the degree of centralization must be matched to the company's specific needs. The tools that provide varying degrees of centralization are multicurrency accounts, netting, domestic pooling, cross-border pooling, centralized funding, and finance company or international treasury centers.

    When cross-border treasury or cash management activities are centralized, it is best done gradually. Companies that integrate and centralize treasury operations complete this task within each country before centralizing cross-border activities. Physical cross-border transfers of funds are kept to a minimum to reduce funds movement. Instead, many companies use multicurrency accounts, netting, and pooling.

    Traditionally, companies purchase international cash netting services from banks. Doing so saves on transaction fees, foreign exchange activity, and potential for misdirected wire transfers. In-house cash netting can be cheaper, however, and it allows the cash manager to shop for the best exchange rates. Where a number of subsidiaries are involved -- five or six at least -- then the software and expertise of banks are more than worth the fees.

Copyright © 2000 Arthur Andersen. All rights reserved.