Operational cash management – the management of transactions, accounts and balances has become unrecognisably complex compared with 20 years ago. Firms must respond to this and adapt their operational cash management processes as the pace of business change continues unabated.
Economic growth is providing a catalyst for increased business specialisation, cross-border expansion and outsourcing. The knock-on effect is an explosion in the volume of payment transactions that businesses now need to manage. This is placing greater pressure on working capital, as the expansion costs for businesses are often front-loaded. Coupled with this, regulation is more invasive while service level and supply agreements are increasingly tight around the control of transactions, requiring more traceability and faster action.
The dynamic nature of managing operational cash processes in this new business environment means that firms must have the ability to continuously reconcile monetary flows with the treasurer being able to understand the intraday dynamic cash position of the firm. He or she must be able to readily change the forecast cash position of the organisation as granular events that impact the business happen. They must have the ability to reconcile the wider, longer-term cash flow forecast with the nearer term events on the ground. Did what we expect actually happen at the transaction level, did it happen yesterday, or is it still outstanding; do I need to change my forecast and my management of balances? These are questions where the answer still eludes many treasury functions.
Treasury professionals are constrained by the lack of real-time visibility across their entire organisations, particularly when it comes to multi-currency and multi-jurisdictional cash flows. This is highly problematic.
Taking a 360 degree view of cash is increasingly necessary and the only way that firms can understand their operational cash management positions with pin-point accuracy. For firms to do this they must have continuously reconciled intraday visibility across four main stages of cash management:
- Actual historical cash position: including bank balance reports and recalculated opening balances
- Real time cash position: including unconfirmed payments, confirmed funds received and real balances
- Intraday cash position: including payment authorisation, transactions cleared and transactions queued
- Forecast cash position: including projected sweeps, projected balances, limit control and emerging balances
Treasury invading the banking space
In many cases corporate payment processes use separate technologies to forecast cash flows and to make payments. As a result, operational cash management is riddled with disconnects through the entire cash lifecycle, from order management, delivery and invoice processes, payment requisition and payment aggregation. In addition, firms are managing multi-bank relationships, lengthy account opening processes and the need to appropriately manage client monies and comply with regulation.
It is little wonder then that cash flow forecasts lack precision and take unnecessary time to reconcile and restate. By established practice, cash flow forecasts, including near term forecasts, are approximations based on a number of variables including expected balances, payments and receivables, changes in business levels and supply chain processes but they can, and should, be more precise. Achieving precision in cash management requires the treasurer to invade the banking space.
In assuming that payments (and therefore receipts) start with the instruction to the bank, banking processes often mirror the disconnects that are found in operational cash management processes.
The origin of any payment resides in orders and invoices, payroll and continuing contracts such as rent. These represent forward cash payments which firm-up on delivery and authorisation and can be created weeks before a payment or receipt. A cash flow forecast based upon forward cash payments provides a more granular, integrated workflow approach that is more precise.
The long term cash flow forecast remains the same in its construction but the daily, weekly and even monthly partitions in that forecast give way to the granular, forward cash translation of orders and invoices. As the forward cash items translate into payments and receipts, so the forecast automatically changes.
For this to work, there must be continuous reconciliation: external reconciliation to bank and internal reconciliation to client accounts and supplier accounts and a full suite of reconciliation tools for matching and allocation against expectations. Self-learning matching will drive higher match rates and deliver real-time visibility of payables and receivables positions across the enterprise to enable full transparency over cash processing.
Intraday data feeds from the bank are important but they are no substitute for information that can be accessed in real time. A real time cash book can supplement the cash flow forecast in its anticipation of transaction clearing and with the right cash book technology, including continuous balance re-striking, can reduce the dependence on the quality and frequency of intraday feeds from the banks. This puts power in the hands of the corporate and enables information to be accessed at a time whenever it is needed rather than when a bank can provide it.
From a bank account perspective the cash book provides a corporate record of the corporate bank account and becomes the operating view of that account. This can be extended across tens, hundreds or thousands of accounts that a firm may operate, which, when automated, increases transparency and reduces workload for the firm.
Thus, the treasurer has begun to invade the banking space. They are now able to confront daily transaction volumes and peaks, multiple bank connections, multiple bank accounts and thousands of client accounts and supplier cash accounts.
Treasury tools are available for sweeping, target balancing and pooling that enables ERP-connected cash flow forecasting based on balances, future payments and expected payments and receipts. This includes flexible interest rate management so firms can arbitrage interest by controlling rates applied to virtual accounts and withholding tax management.
By representing orders and invoices as forward payments and receipts most of the information that is needed for matching to incoming receipts is available as well as all of the information needed to generate payments. As bank data is imported these items are matched, become executed bank transactions and drop out of the forward view. The continuous matching and reconciliation processes to achieve this are real time and inside the operational workflow.
Here we see the close of the 360 degree cash management cycle. Not only has the treasurer invaded the banking space but, by combining the forward payments into the real time view of the bank accounts, has fully integrated bank accounts into the corporate workflow and cash flow projections.
These processes run consistently through the day and continuously adjust the forward view of the end of day balance. By the same process the following day – and beyond – balances are automatically updated. The treasury screen has been replaced with a real time view of the bank account which shows the transactions and balances and, with increasing accuracy, what the balance will be.
The result of this is the availability of real-time reporting and MIS through dynamic dashboards that make statements available 24×7 on both real and virtual accounts and provide industry-specific regulatory reporting as well as operational reporting and cash flow and reconciliation reporting.
A 360 degree view of cash management opens up all sorts of opportunities in non-bank financial services. For example, where firms can see and verify their real time balances they are able to assess whether the balances are sufficient to fund business; clients can pay directly into their client accounts without invoking traditional manual back office processes.
On the supplier side, if a cash management system operates supplier accounts which show the forward payments before they are aggregated into single payments and supplier access to this account includes download to ledgers then the cost of processing receipts will decrease because the content of the payment is pre-reconciled. If forward payments in their soft and firmed-up form are included in this account then suppliers can help ensure precision in the forward payments and continuous precision in cash management.
Ultimately, to better manage their operational cash, corporations need to be able to view and take actions at any point in the 360 degree cash lifecycle. The integration between their multi-bank relationships and their internal cash management systems need to be seamless and aligned to their core business operations. For banks supplying Corporate Cash Management services this represents a significant challenge and a fantastic opportunity.
In a non-disruptive way technology can facilitate this and support banks in their strategic objectives of providing customer centric, self-service cash management solutions, reducing time-to-market, reducing the cost of account management and driving greater from customer transactions.
Written by Paul Ormrod, Founder