If you don’t know where you are today, how can you predict where you’ll be tomorrow? A reliable overview of your group’s current cash position is essential when you are creating forecasts of future cash flows, and it is also the starting point for any effective cash management activity. Do you know how much cash your organization has and where it is?
I meet treasury and finance professionals in my work every day. I can assure you that if you were struggling to answer the question above or if you feel that gaining group-wide cash visibility is painful, you are not alone. Especially in global organizations with local operations, achieving cash visibility gets complicated as the group treasury is working with multiple banks and the subsidiaries have local banking relationships.
Based on my experience, the corporate treasurers end up in one of these three situations:
- No cash balance reports at all: It is surprising, but many treasurers don’t even know how to get started with cash position reporting, due to a scattered bank landscape, a decentralized corporate structure, and weak management support.
- No up-to-date cash balance reports: Many treasurers settle for monthly or quarterly reports on their group’s cash position.
- Manual cash balance reports: Even in 2018, manual reporting is a common practice. Treasury asks subsidiaries to send information about their cash balances manually. This leads to burdensome routines and frustration on both sides, and results in outdated and unreliable information.
In all of these situations, it doesn’t matter how accurately you can predict your group’s future cash flows, as you’re starting the forecasting with inaccurate cash balance.
Steps to building the foundation for cash visibility
Cash visibility is not something that you can purchase out-of-the-box or that comes automatically with of a new cash management solution. It requires careful planning. When you set out to improve your cash visibility, take advantage of your software provider’s and banks’ expertise and use them as sparring partners.
Automatic account statements
It all starts with automatically sent account statements from your banks. You can subscribe to file-based bank statements that carry all the needed information, and there are reporting standards (such as MT940, CAMT053, etc.) that banks adhere to – at least sort of.
So, you don’t really need to wait for the real effects of the much talked about PSD2 regulation and the banks' open APIs (Application Programming Interface). There is more than enough information already on today’s files for corporate Treasurers to start a cash visibility project. You are bound to run into some differences and oddities in the file content, but a modern software solution can adapt to that.
To cut complexity and costs, it is good to centralize your account statements to one or a few key banks. Even with multiple banking partners, you can have your statements from all your banks sent to chosen core banks, and forwarded from there to you. Or if you want to achieve true bank independence, choose a software provider that can technically manage all of your global bank connections. IT is a scarce resource in many organizations, so outsourcing bank connectivity might make sense, and helps you stay cost-efficient, agile and secure.
Once the stream of bank statements is automated and up and running, it is a best practice to set up good monitoring capabilities of the statement flow. Treasury should always be able to quickly identify if a transmission has failed or if bank statements are missing from the balance report, to be certain the data is accurate and up-to-date.
Getting the most out of the increased cash visibility
Once you have the group’s accurate cash balance information from yesterday (or at best, intraday), you have a key to open new opportunities for liquidity analysis and to gain a better understanding of your group’s cash. To make the most out of the aggregated data at hand, you’ll need a flexible reporting tool to display the Group’s cash balances and turn the information into dynamic, easy-to-read reports.
Treasurers and Cash Managers need to be able to provide reports on the Group’s cash balance for a wide group of stakeholders, both internally and externally. Based on my experience, this is often a stumbling block even for those Treasurers that already have centralized their cash balance data: the lack of flexible grouping dimensions or drill-down options in the reporting solution makes it difficult to create the needed reports on the fly and visualize the data for easy analysis and decision-making.
At a base level, the cash balance reporting should include:
- cash per bank
- cash per company and bank account
- cash per region
- cash per business division
- cash per cash pool
- cash on stand-alone bank accounts
- the amount of free vs. trapped cash.
- Increased cash visibility and centralized cash balance information bring in many additional benefits.
Discover automated FX payments: If your bank provides enough information in the bank statement file, a flexible cash management solution can automatically detect FX payments that are made in a foreign currency from the subsidiaries’ bank accounts. In practice, FX payments result in costly spreads paid to the bank. Depending on the payment volume, just avoiding these payment pitfalls could fund the entire cash visibility project with a ROI (Return on Investment) already in the first year.
Take advantage of bank fee analysis and statistics: Often corporate treasuries depend on their banks to provide them with statistics on the number and volume of their transactions. With a modern cash visibility tool, this information is just a few clicks away. In addition, the data can be accessed at any point in time instead of waiting for month-end or year-end statistics. This information can prove to be very powerful for instance when changing banking partner, negotiating about transaction fees, or guiding group subsidiaries to use more efficient payment methods.
Use bank actuals in forecast deviation analysis: When the group treasury wants to give feedback to the subsidiaries on forecasting performance, plotting the historical bank actuals with the historical forecast data is useful. A modern cash management software can illustrate this data in graphs and grids to easily identify both the subsidiaries that deliver good forecasts and the ones that perform poorly. This insight helps you to improve the accuracy of the entire group’s cash forecasts.
Visibility of yesterday’s closing cash balance means you know today’s opening balance. That is the starting point for reliable cash forecasting, which is the topic of the second part of this blog on cash management excellence.
I discussed the importance of reliable cash forecasts also in our recent webinar – you can watch the recording here to learn how to build a best practice cash forecasting process.