Cash Management
Cash is a critical resource for all businesses. Managing your cash well can create a competitive advantage for the business.
Managing working capital
The most common metric for cashflow is working capital rotation, which is normally measured by some variant of Days of Sales Outstanding (DSO) + Days of Inventory Outstanding (DIO) – Days of Purchases Outstanding (DPO). This is often referred to as Net Working Capital Rotation (NWCR) or Cash Conversion Cycle (CCC).
Working capital is affected by all major business functions, from sales to production and procurement. Hence, the responsibility naturally lies with top management, since their decisions have a direct impact on the business’ cashflow.
Managing cash is a primary responsibility for corporate treasurers, regardless of company size and industry. Treasury works with the rest of the business to manage cashflow risks, especially
liquidity risk (not running out of cash),
credit risk (not losing cash),
operational risk (error and fraud), and
efficiency (not wasting cash).
Balances and Transactions
Cash Management can be broken down into two key areas:
Transactions (payments and collections) and
Balances (bank balances resulting from the transactions).
For transactions (also known as flows), treasurers ensure that payments and collections are managed efficiently i.e. at low all in cost and with minimal risk i.e. with effective controls in place to limit the risks of errors and fraud. This is often achieved through centralisation of treasury operations and technology.
For balances, treasurers generally concentrate cash as far as possible to minimise the idle balances (cash that cannot be deployed) and distribute borrowing (borrowing from third parties when cash is available elsewhere), to reduce the need for borrowing.
Tools compared
Cash management tools can be divided into
flow tools which reduce the cost and risk associated with payments and collections by eliminating flows through the banking system or reducing their cost in terms of bank fees and corporate processing costs, and
balance tools which help concentrate funds and offset funding requirements with excess cash available for investment.
For example, Inhouse Bank (IHB) is both a balance management tool and a flow management tool. A Zero Balance Account (ZBA) or sweep results in an intercompany balance rather than a bank balance.
The diagram above illustrates ths the tools provided by banks, such as virtual accounts, interest optimisation and notional pooling.Tools provided by corporates or bank systems include reconciliation and ZBA. These tools are normally implemented with corporate systems, such as payment factory, netting, IHB, intercompany loans.
Of the flow management tools, reconciliation and virtual accounts help reduce the internal corporate cost of processing flows, i.e. by automating reconciliation, which can be onerous for many corporates; payment factory reduces the cost and risk of flows by standardising and centralising; netting eliminates unnecessary intercompany flows; and IHB combines most of the above benefits.
Of the balance management tools, interest optimisation and notional pooling result in bank balances, whereas intercompany loans, ZBA and IHB result in intercompany balances. This has important tax and regulatory consequences – notably withholding tax on interest.
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