Requirements for effective cash management

Cash management is a very dynamic area where companies are continuously reviewing their current practices and looking for improvements. Too often treasurers and cash managers do not have the opportunity to implement the changes they are dreaming of within the business, thus they can’t create more effective ways of handling the cash management operations within the business. 

Sometimes the issue with effective cash management is the poor communication between treasury and the business units, especially within a complex environment where business leaders simply want to find a “quick fix” to solve a symptom of a larger structural problem relating to one or more parts of the cash management process. 

While we often talk about a lack of treasury to business communication, defined policies, and measurable objectives, being the factors hindering effective cash management, I rarely come across a treasurer that is not actively looking for ways to improve the current way of working within a business. So on a positive note: when there is a will, there is always a way. 

The minimum requirement for effective cash management 

In my experience, there is one absolute requirement for effective cash management regardless of the industry, treasury profile (centralized vs. decentralized), etc., is the correct information systems. Effective cash management is totally dependent on complete and up-to-date information from internal and external sources. Starting from cash balances management being the daily activity of the cash manager, who will start each day with looking for and separating the balances that the company has with each bank, on the account and currency level. The actual work starts after this with comparing the actuals with the expectations and forecasts and supporting critical actions for the companies of what funds can be moved, payments that should be paid, and cash that should be cash pooled and/or invested. 

High-level advice for effective cash flow forecasting

”70% of decision-makers say it’s challenging or very challenging to have flexible cash flow and liquidity reporting.” Successful Businesses Excel At Cash Management, Nomentia Commissioned Study by Forrester 2021

Working with internal cash flow predictions both on a short and long-term basis requires great visibility into the company’s overall position as well as up-to-date data. Manual input errors in spreadsheets circulating around the company via email and “yesterday” news can be faithfully costly as many companies had to experience in 2020 when Covid-19 hit the markets and the business situation was fluctuating wildly from day to day for many companies. 

” Issues with cash flow visibility and management negatively impact business-critical activities. Business leaders report that the challenges they are having with cash flow visibility and management have several negative repercussions on the overall business, primarily adding time to review and audit processes, increasing data security issues, preventing business agility, prohibiting smart decision-making, and creating financial compliance issues.” Successful Businesses Excel At Cash Management, Nomentia Commissioned Study by Forrester 2021

The Covid-19 crisis also sent the payment process efficiency into a total tailspin. We all of course know that working remotely with shared bank tokens logging into internet banks is a humidor for disaster, also with regards to all the doors it opens for internal fraud, missing visibility, and lack of audit trail. However, the biggest shock for many companies was actually dealing with how these tokens that used to be shared in the office or service centers could be shared with all the staff at their homes in lockdown! We at Nomentia do see that many corporates that have not previously been too concerned about improving efficiency and work from home capabilities for their cash management process are now planning to increase their budget for cash management. 

”Plan to increase the budget for cash management. Business stakeholders see technology as a critical asset to enable better cash management, and indeed almost half increased their technology budgets in the last 12 months, mainly to enable working from home (79%), mitigate risk (65%), and improve adaptiveness to uncertainty (73%).” Successful Businesses Excel At Cash Management, Nomentia Commissioned Study by Forrester 2021

Information system requirements for effective cash management

The absolute best thing about the cash management solution market today is that almost all solutions are SaaS solutions and by design are easy to implement and take into use. This means that companies that do not want to undertake a massive restructuring of their legacy systems such as ERP and TMS infrastructure can easily adopt efficiency by taking into use best-of-breed SaaS solutions to bring efficiency to one or more parts of the cash management process. Choosing only one system and not being totally satisfied, perhaps even missing vital parts like overall visibility and effective cash forecasting is not a “must” situation. You can truly have it all, by picking and mixing the systems that do the parts of the process the best. If you find a system that checks all the boxes, you have found the winner! But before you buy, also consider other aspects of not only the system but who you will be working with. 

Choose a system that is future-proof, meaning that the company offering the solution has a system in place for co-creation together with key customers and partners and that is system agnostic. That way it will be totally irrelevant if your ERP system is upgraded or even replaced or if you choose to do a radical change with your TMS system in general. Also, just because you can, choose a system where you pay for what you actually need. In the time of SaaS why buy in bulk when you can easily choose the specific thing that will support exactly your company! I would also look into what kind of implementation support you get and if it is a fixed cost implementation or whether there are any hidden costs or even parts of the process that your company or IT will actually have to do internally. A good partner is someone who will tell it to you straight! 

If you ask me about effective cash management…

My absolute advice for starting the journey of improving cash management efficiency would be to start with ensuring visibility into the overall cash position of the company, pairing with easy access to up-to-date and emphasis on accurate data to ensure better business decisions. Adding on that it is natural to continue working with both short and long-term forecasting and absolutely at some stage take a critical look at both the treasury and corporate payments process to ensure that it is: automated, secured, fraud-proof, and easy to audit. 

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