January/February 2007

Best Practices for Re-Evaluating a Company's Cash Management Concentration Strategy

One of the core objectives of the corporate treasury function is to quickly aggregate and make best use of incoming cash.  Whether it's funding daily operations or capital improvements, erasing debts or investing for the future, the monetary needs of today's evolving companies continue to grow.  This article looks at overcoming obstacles, analyzing payments and collections, and concentration tools.

To meet these challenges head on, companies must leverage well-executed concentration strategies.  This entails transferring cash among operating units and bank accounts, and funneling funds into master accounts for good use.

The benefits of concentration are numerous.  Companies that get it right:

• Improve the return on liquid funds
  
• Reduce excess bank balances
  
• Improve controls
  
• Decrease administrative costs
  
• Enhance bank relationship strategies

Even with so much to gain, however, too many businesses fail to leverage concentration's true value.

"To be successful in concentration—the mobilization and direction of funds—companies must consider aggregation plus use," explains Nancy Arms, senior vice president of liquidity product management, Bank of America.  "For example, your accounts receivable group could implement workflow changes to streamline collections, but that could inadvertently delay cash or move it to a place that's counterproductive to your overall concentration strategy.  Avoid this possibility by taking a holistic approach to your business's concentration strategy."

What follows is some best-practice advice for companies ready to re-evaluate how well they concentrate funds.  No one plan applies to every company, but the main objective remains the same.  Here are some issues to consider as a company's financial management embarks on its internal evaluation.

Overcoming Obstacles
First, several obstacles often preclude businesses from achieving their concentration goals.  Some of these challenges are unbending, but with effort, others can be overcome:

• Legal and tax structures.  Inability to commingle funds.
  
• Country regulations.  Controlled money movements.
  
• Timing.  Difficulties working with people in distant locations.
  
• Bank structures.  Having too many banking relationships, each with their own deadlines and processing scenarios.
  
• Internal infrastructure.  Lack of Information Technology resources.
  
• Opposing performance measurements.  Retail managers on one end of the business, for example, may be evaluated by metrics other than when or how they deposit receivables.
  
• Internal business conflicts/silos.  Imperfect worker partnerships or 'siloed' departments where employees function without knowing what other areas of the business are doing or how they operate.

Unfortunately, silos play out in everyday business.  Assume you're a multi-location retailer.  When deciding where to bank, Operations and Loss Prevention run a ZIP code survey to identify safely located bank branches near your storefronts.  This leads to the initiation of numerous relationships, thereby spreading your cash among various banks.

A better scenario would be for Treasury to help determine which relationships, which types of accounts and how many are best for the company.  Where practical, it's a best practice to reduce both the number of financial institutions with whom you bank and the number of accounts you maintain.

The lesson here is to gather all the critical players at the onset and map out a comprehensive strategy that addresses everyone's needs and concerns.  "If one side of your business is only concerned about collections or payments, concentration isn't getting its due focus - and vice versa," Arms warns.

Analyzing Payments and Collections
Once you've identified and engaged all the necessary players, it's time to deconstruct your existing strategy.  Question whether better tools or better structures could improve your cash flow.

For example, maybe you're paying vendors on the first of the month when payment isn't due until mid-month.  Pushing back payments could buy two weeks of added interest.  Alternatively, you may discover a better, short-term use for that cash.  Helping other departments better manage their payments is critical.

Furthermore, your business might benefit from volume rebates by utilizing purchasing cards.  "Where possible, try to control and delay actually paying for goods obtained," Arms recommends.

Similarly, pay attention to collection practices.  Questions to ask include:

• How much same-day credit am I getting?
  
• What are my idle balances?
  
• How long does cash sit at my locations?
  
• Am I losing cash?
  
• What is the timing between information and availability?
  
• What is our progression of electronic/card receipts?

Armed with these answers, you might be able to improve the aggregation/collection side of the concentration equation by implementing shadow depository accounts, zero-balance account (ZBA) structures, notional pooling, lockbox or remote bank Automated Clearing House (ACH) transactions.

"If you're not involved in the intricacies of payables and receivables, you're not optimizing the use of your cash," says Tom DeLany, senior vice president with Bank of America's global treasury services.  "Use your cash forecast as a real-time information outline for what you're going to do with excess cash.  If you have a loan payment due in seven days, for example, you should know how to best apply that cash to your advantage for the preceding six days."

Concentration Tools
Now that you've identified where cash is and where it's tied up by performing a cash flow analysis, the next step is to prioritize and determine what to concentrate.  What's happening in your environment?  What's your biggest problem?  What's your analysis?  Where can you make changes?

This is a good time to involve your financial services provider, DeLany says. "Your concentration bank should analyze your full treasury management requirements, including account structure, deposits and a broad range of investment instruments."

Additionally, seek advice about which bank-provided tools could better enable concentration.  DeLany outlines four to consider, along with their Bank of America product names and benefits, to help clients determine which options best fulfill their needs:

• Features current- and previous-day account information in Excel or BAI format, with customized reports showing accounts or transaction types subtotaled.
• Ideal for treasuries that concentrate from local bank deposits using ACH and wire transfers.

ACH Concentration (Cash Concentration)

• Beneficial to clients with a multi-bank presence in the United States, and with average daily deposits (available funds) less than $50,000 per account.
• Provides detailed information about each location's activities.
• Offers a simple phone or Web access point through which local offices can report deposits.

Treasury Webstations (Global Treasury Director)

• Provides current-day information from other banks that cannot exchange data.
• Replaces Excel spreadsheets with flexible concentration and funding transaction tools.
• Improves cash forecasting and management for companies leaving too much residual cash in their bank account structures.
• Reallocates earned interest on ZBAs back to the business unit.
• Helps meet Audit compliance

Outsourcing Centers (Dublin Services Center)

• For companies expanding into new markets yet lacking on-staff expertise to manage day-to-day treasury.
• Frees companies to focus on strategic working capital initiatives.
• Helps manage netting structures.
• Hedges foreign exchange exposures.

This article was written by Tom Delany, senior vice president, Global Treasury Services, Bank of America.