Five Keys to Optimize Cash Management
During the 2008 recession, companies were desperate for cash. They renegotiated finance terms, required faster payments from customers, managed their inventory and human resources, paid owners less and used techniques such as factoring to control cash flow.
The global pandemic has had a similar effect, with many companies trying to stay as liquid as possible to ride out uncertainty. Not surprisingly, starting in the spring of 2020, corporate cash reserves soared in what industry observers called a “dash for cash.”
Half of respondents to Treasury & Risk’s 2020 Cash Management Survey increased their cash reserves in the last year, with 38% doing so by more than 10%.
Looking ahead, nearly half of all treasury professionals expect their organizations’ cash reserves to increase this coming year, with 21% expecting a greater than 10% increase in reserves.
Effective cash management involves strategically overseeing cash flows to maximize flexibility, liquidity or return. Improving forecasting, cash flow analysis, visibility and fraud mitigation are essential to achieving optimal results.
1. Enhance visibility. Improved visibility and tracking enables corporate treasurers to quickly and strategically move cash and invest in assets that will generate cash flow. This is critical in times of economic uncertainty.
For companies with global footprints, visibility can be stymied by time zones and market cut-off times. In addition, faster payments make it more complicated to manage cash on a daily basis.
For example, Automated Clearing House (ACH) payments surged to a record high of 6.8 billion payments in the third quarter of 2020. Digital and instant payments are poised for enormous growth as well.1 While fast payments, both inbound and outbound, are generally appreciated, their lack of clearing cycle provides reduced visibility relative to payments.
Treasurers need an integrated view of payment [and receivables] activities across the organization, says Naresh Aggarwal of the Association of Corporate Treasurers. “This requires investment in technology and finding the right payment partners, whether they’re banks or third-party software providers.”2
2. Return to forecasting fundamentals. Accurate cash forecasting is a must. A PWC survey shows that “forecasting difficulties mark the greatest impediment to working capital management efforts.”
Reliable forecasting requires input from many sources, from finance to individual business units. But unlike past years, forecasts for 2021 and beyond probably can’t use 2020 as a baseline. Times of economic and financial volatility require a higher and potentially more frequent level of forecasting, and demand for forecasting is expected to remain high in 2021.3
When gathering input, treasurers need to go back to forecasting fundamentals. Some questions to ask:
- What’s going on in my industry, and with key prospects and customers?
- Who are our future customers? How and how much will they spend with us?
- How fast and reliable are our collections?
3. Streamline data analysis. Speed is essential when processing information. Stale forecasts limit their effectiveness. To be most meaningful, forecasting must move beyond spreadsheets and manual processes. Technology is not only valuable for gathering data, but also for more accurate, timely cash flow analysis. “Increased demand for financial planning and analysis requires efficient process execution,” says Jim Kaitz, president and CEO of the Association for Financial Professionals. “Otherwise, forecasting will absorb all the team’s time and resources.”4
4. Evolve fraud prevention. Cybersecurity threats keep corporate treasurers up at night. In fact, 60% of treasurers responding to a recent industry survey suggested they are more concerned about payment security now than in previous years. They identify accounts payable and accounts receivable as the areas most susceptible to fraud, with treasury and procurement also toward the top of the list.
In addition, treasurers see a “stark disparity” between the speed with which cybercriminals act and the slowness of their own companies’ security protocols. According to the Association of Corporate Treasurers, hackers can typically extract what they want from a company’s IT systems within about 90 minutes, while the average period for a company to detect a network threat is 269 days.
Ninety percent of attacks come from email, and even in companies with “good” security, 10% of employees would click on a dangerous message.
Treasurers are seeking better education and outreach to help their colleagues understand the threats their firms face. Among the takeaways from the 2020 Association of Corporate Treasurers Cash Management Conference: “Putting a set of controls in place and considering the job done is unlikely to yield long-term benefits for any organization. The battle against cyberthreats is constantly evolving — so corporate systems must do so, too.”
5. Strengthen collaboration. Not too long ago, treasury departments were somewhat removed from corporate operations. But times have changed. Today, treasury teams are expected to solve business problems and share knowledge. In 2018, 87% of respondents to a treasury business survey considered treasury as a strategic business partner in the organization. Similarly, a 2019 benchmarking survey identified “business partnering capabilities” as one of the top three characteristics “most sought in treasurers and their teams, beyond functional treasury expertise.”
Good communication and collaboration with internal and external resources is indispensable for quantifying risks, improving cash flow forecasting, accurate cash flow analysis and fraud mitigation.
But “if treasury sees the relationship with business only as a mere principal-agent relationship, no real value is unlocked and there is not integration,” says Sander von Tol of Zanders. “The relationship should be seen as equal business partners in which both partners (treasury and business) can benefit from the integration.”5
Treasurers can control cash flow – even in uncertain times.
In the current environment, ambiguity reigns and will likely continue to impact cash management practices, at least for the short term. Treasury departments that are able to pivot, while remaining focused on establishing better controls when new challenges arise, will thrive.
Read "Working Capital is Priority One" for more information on this topic.
Contact Synovus Treasury and Payment Solutions, your Treasury Consultant, or Relationship Manager to learn how we can help your business manage cash flow and liquidity.
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