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Cash management exists in a context; therefore optimising cash management must be contextual. The context is the business and its risk profile, as well as management’s risk appetite.

My working assumption is that the goal of treasury is cost effective risk reduction (CERR). Most of us want to reduce costs, especially since treasury is non-core to corporates. Likewise, we want to reduce treasury risks – but crucially not at any cost. No risk equals no reward. Nevertheless, we want to reduce treasury risks to maximise the risk capacity that can be deployed in the core business.

Treasury can only optimise CERR, and by extension cash management, if the risk profile is clear and agreed by management. This is not rocket science, just simple things like: how much cash should we hold? What is acceptable leverage? And so on.

Cash management

At its core, cash management comprises flows and balances. Flows are about moving money into, out of, and around the business – payments, collections, and intercompany settlements. Balances are what end up on different bank accounts around the business.

Optimising flows is primarily about cost reduction and managing operational risks. Optimising balances may require more work on the CERR balance. For example, to one business, zero-balancing subsidiaries may seem cost effective; to another it might seem too risky.

Managing flows

The key to efficient flow management is to minimise both the internal and the external costs. This requires efficient processes – for example manual processing is expensive both internally and externally at banks – so straight through processing (STP) must be the goal. And the wider the STP, the higher the efficiency. Happily, STP is a no brainer from a CERR perspective, since STP reduces costs and risks (humans are expensive and error prone).

STP is often understood simply to mean ‘avoiding manual repair of payments by banks’. My meaning is much wider. I mean STP throughout the purchase-to-pay (P2P) and order-to-cash (O2C) processes. In direct procurement, the purchase decision can be made by the material requirements planning (MRP) software directly without manual intervention. In indirect procurement, procurement workflow can capture initial request, management approval, delivery, and then automate invoice matching and payment when due. In O2C, where customers order electronically, the workflow can be fully automated through to reconciliation of collected cash.

I hope it will be clear that best practice goes far beyond the treasury department and the banks. Best practice involves optimising CERR holistically across business processes. This is not ‘pie in the sky’ either – I know plenty of corporates that operate as described above, and have neither (particularly) simple, nor purely virtual, businesses.

That said, the integration described above may not suit all businesses or may not be accessible to all treasuries. There are a wide variety of solutions between writing cheques and full electronic integration that can suit diverse corporate needs.

Optimising payments

Here are some more specific observations that flow from the above.

Approving payments is nonsense. It is too late anyway. The moment for key controls is when the legal obligation is created – for example, a purchase order (PO) for commercial transactions and entering into a deal for treasury transactions. If the purchase was legally valid and the seller has delivered as contracted, withholding payment will only lead to court.

And if the payment approval is intended to verify that the seller’s banking information is correct, then manual approval is a lousy way to check this kind of data. It’s time to get a decent ERP and TMS, and secure them correctly. The key control points here are changes to the vendor master data (especially banking details – or, for treasury, the SSIs standing settlement instructions) and initial contracting (POs for commercial transactions and deals for treasury transactions).

Depressingly, I frequently hear things like “But my FD likes to sign the telegraphic transfer form.” In any material business, the FD or CFO cannot possibly know the details of every payment, and signing payments cannot be a productive use of senior management time. Furthermore, despite all the current excitement about spying and data security, paper is – by any reasonable measure – a much more dangerous medium than electronic. In short, this predilection massively increases CERR by raising costs and pumping up risks.

Since the PO is the critical legal document of the business’ obligation, it makes sense to pin the P2P process to it. Many CFOs have the mantra of “No PO, no pay”, in other words if an invoice comes in without the PO number on it, it is returned to sender forthwith. With that number connecting PO, delivery, and invoice, it becomes easy to build efficient P2P processes that are both safe and cheap.

On the external cost side of payments, best practice includes ensuring lowest-cost routing, which generally means making payments locally. This in turn implies paying on behalf of (OBO) – ie treasury (or SSC) has accounts in each country so that it can make payments locally on behalf of subsidiaries anywhere in the world. Of course, it is also good practice to code payment instructions in your ERP and TMS so that they avoid manual repair at banks.

Best practice in OBO is when subsidiaries have no bank account at all. Many multinationals have consolidated all payments and collections to IHB (or payment factory), in other words 100% of flows are handled through IHB accounts on behalf of subsidiaries so the subsidiaries have no bank accounts at all. This results in one bank account per country owned by IHB.

Note that none of the above is about squeezing service providers and banks – it is about improving internal processes. None the less, there is no point in paying more than necessary for payments. As a guideline, local low value payments should be free or cents, and international payments should be $5-10. Percentage based fees are not acceptable, especially since they normally have minimum floors. Market practice is not a justification for abusively high fees. There should be no float or compensating balances (unless you have transparency over pricing and are able to calculate the benefit precisely).

The views and opinions expressed in this article are those of the authors

In the second part of this article in the next issue, we will continue our look at best practice, covering everything from visibility over balances to cash pooling.