Cash Management?

Cash management is the discipline of Treasury that is devoted to the management of planned expenditures, so it is highly focused on operational efficiency and process optimisation. It is about optimising the flow of money coming in from customers, some money going into savings, and other money going out to pay the bills. Since this is such a vital process for any organization, it is not hard to understand how cash management can make or break a company.

Note: At treasuryXL, we treat the practice of cash management from a corporate perspective. Within banking, the term “cash management” is often used differently. When bankers speak of Cash Management, they are usually referring to a particular line of business for the bank, which sells products and services to corporations to assist them in their cash management activities. They often call this line of business “transaction services”, working with slightly different definitions than the ones that we will use.

What does a Cash Manager do?

Cash Management is one of the three primary disciplines of Corporate Treasury. (Risk Management and Corporate Finance are the other two.) The first task that a cash manager has to accomplish is the proper execution and control of payments. This must be done according to the guidelines set by the company: salaries, suppliers, and tax authorities all must be paid with strict attention to company policies and procedures. An accountant might do the booking, whereas the cash manager instructs the bank after approval from the appropriate manager. In parallel, the cash manager keeps an eye on the money flowing in from customers.

In order to manage the payments, the Cash Manager has to know in advance when money will flow in and out, and how much. He or she collaborates with colleagues to complete a cash flow forecast: when will salaries have to be paid? when do we have to pay for this new machine? when will this client pay? In a large corporation that may see thousands of transactions on any given day, asking in advance about each potential payment and its timing is practically impossible. To cope with this, cash managers often rely on forecasting models, which predict cash flows based on historical data. Nowadays, software applications are used to develop and run cash forecasts for large corporations.

As cash forecasting grows in complexity, operational decisions regarding what banking services to use also become the duty of the cash manager. As long as a company has sufficient excess cash, inaccurate forecasting is not a problem, but when a bank has to provide credit, this will cost the company money in extra fees and interest expenses. This sort of error in cash management can be especially painful if the company has invested excess cash in the expectation that it has sufficient funds to pay the bills. It is also the job of the cash manager to identify excess cash and invest it for short-term gains. (It might be placed within a money market account at a bank to earn more interest than a traditional savings account, for example.) In times of very low or even negative interest rates, however, finding low-risk ways to earn interest becomes an increasingly difficult task. On top of all this, the cash manager must also deal with foreign exchange. When payments have to be made in a currency other than the standard currency of the company, the cash manager must buy foreign currencies, often in consultation with colleagues from the risk management department.

Together with colleagues from other departments throughout the company, the cash manager is responsible for building and maintaining a payment infrastructure as well. This means having bank accounts with the relevant banks, connecting them to the bookkeeping and enterprise resource planning (ERP) systems of the company and (if applicable) to the company’s treasury management system (TMS). Technology has a huge impact on cash management, and new developments come up constantly. Systems have to be robust, but also user-friendly. In consultation with the risk management department, operational controls within these systems must be implemented. Finally, the cash manager has to keep an eye on the cost of this whole machine. Banks and other suppliers do not work for free!

Examples of Cash Management activities

Different types of companies have very different needs for cash management activities. Here are several examples:

• Telecom operators, utility companies, and tax authorities deal with large numbers of relatively small payments in local markets. The full integration of the systems that send out bills, generate bank statements, and connect the two (through an accounting process known as “reconciliation”) has to be automated. The cash manager plays an essential role in the integration of these systems and in their operation. For example, banks often charge fees on a per-transaction basis. As a cash manager at a company that processes many bulk payments, negotiating low transaction fees is very important.
• International e-commerce companies with a focus on consumers will want to offer the most convenient payment infrastructure possible. They do not want to lose customers in the payment process. Each country has its own standards, such as credit card networks like Visa or Mastercard, or bank transfer schemes like iDEAL in the Netherlands or SOFORT in Germany. Cash management should be involved in choosing and implementing these standards.
• Companies with many different subsidiaries often have complex and fragmented bank account structures. As a result, available cash is often spread out over many accounts. Corporate banking services, such as cash pooling, concentrate this dispersed cash into a small number of accounts. From these centralized accounts, sometimes called “concentration accounts”, it is much easier to organise internal funding for expenditures. Thus, cash pooling sometimes allows companies to avoid tapping external sources of funding, which are typically more costly.
• Companies that aim to expand internationally wish to be able to make payments anywhere in the world, and yet there are no banks that are present in each and every country on the globe. For this reason, many companies hold accounts with multiple banks, and it is the cash manager’s job to manage these complex international payments. Simultaneously operating the electronic banking solutions offered by each bank can be an elaborate process, not to mention the security procedures that must be followed. Recent Payment Services Directive (PSD2) regulatory adjustments have made it possible to manage (or at least screen) accounts from different banks through a single bank. Alternatively, there exists specialised software that brings all accounts together into a single application that can be used for screening and transaction purposes. Cash managers are keenly following these developments.

Frequently asked Cash Management Questions

• Q: Why should a company have more than one bank account?
  Historically, large companies have used multiple bank accounts to gain insight into the activities of their local subsidiaries. In an extreme example, a retail chain might have held a different bank account for each local shop, so that a large retailer could easily hold over 500 accounts! Today, such unnecessary complexity is considered unprofessional. Insight into local activities can be achieved through proper bookkeeping, and extra bank accounts cost extra money. Modern bank accounts also tend to feature more extensive payment capabilities than in the past. A single European bank account, for example, will allow you to send payments within most European countries. Nevertheless, the operations of global businesses still often require multiple bank accounts. In addition, many companies like to hold accounts with banks that are widely recognized by customers in the local market.
• Q: Why is cash management separate from bookkeeping?
  In small companies, cash management need not be separate from bookkeeping. The two activities may be done within the same department. In larger companies, though, these activities are specialised. This is because the skill set required for bookkeeping is different from that of cash management. Furthermore, in larger companies it is important to segregate duties for purposes of operational control: the one sending the invoice should not be the one who processes the related payment. Lastly, it is important to mention that in larger companies a distinction is made between cash flows, on the one hand, and income and expenses, on the other. In the financial accounts of a large corporation, revenue is booked when a sale is made. However, it might take some time before this revenue actually reaches the company in the form of cash. Until it does, booked revenue is generally irrelevant to the cash manager. The same is true for expenses. An expense may be booked, but from a Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand.
• Q: Do cash managers also do foreign exchange (FX) management?
  In smaller companies, cash managers also manage foreign exchange, but FX management is a separate field of expertise. It might be the role of a cash manager to set up bank accounts in various currencies. By doing this, the cash manager lowers operational costs by preventing repetitive transactions between the same currency pairs, which can generate unnecessary fees; but, this is not FX Management. (The FX Manager researches market developments that have an impact on Treasury operations, and often plays a more analytical or strategic role.)
• Q: For cash managers, what was the impact of the introduction of the international bank account number (IBAN)?
  When the IBAN was introduced a few years ago, this new standard for bank account numbers made international electronic payments easier. In theory, it allows companies to work with fewer bank accounts, making cash management easier and cheaper. However, some companies argue that doing local business requires having a local bank, so they maintain multiple international bank accounts, despite the convenience of the IBAN.

Cash Management summary

The cash manager is responsible for monetary logistics. He or she manages the cash flows going in and out of the company, and knows how much is available, and where. The cash manager decides through what channels and storage units (bank accounts) the money flows, and optimises cost, visibility, control, and availability. He or she interfaces regularly with colleagues in treasury, finance, and accounting, as well as other departments, such as procurement, sales, and manufacturing. The cash manager holds a small but essential role in his company: without him or her, the company would be at a standstill within no time.