Best Practices: Manage

Cash Flow
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es/2000/07/19865.html
Cash flow management is a process that involves collecting payments, controlling
disbursements, covering shortfalls, forecasting cash needs, investing idle funds, and
compensating the banks that support these actions. Because global cash management
is highly tax and accounting oriented, close working relationships with tax and
accounting staff are vital. In addition, cash flow management requires coordination
between treasury and operations. And in today's volatile markets, it requires powerful
electronic tools for gathering diverse financial information and formatting it into useful
reports for decision making.

Best Practices
Cash flow management can be practiced to a point where every available dollar is at
work either covering payment of checks or producing income. And while cash flow
management continues to be a complex process -- and increasingly so on the
international level -- there are a number of sound practices that high-performing
companies employ. A discussion of the best practices used by leading companies to
effectively manage their cash flow follows.

Select banking partners.

Develop cash forecasting.
Improve investment yields.
Review cash management.
Centralize infrastructure.
 Select core cash management banking partners.
Today, high quality of service has replaced low price as
the standard when companies shop for banks to
support their cash management business. And banks
offer automated processes such as payroll and
accounts payable along with electronic data
interchange (EDI), making outsourcing affordable and
secure from theft. Companies also consolidate their
accounts, using fewer banks. This way they can rely on
these selected few banks as partners but are not
dependent on a single bank.

When shopping for a banking partner, companies

review cash management needs thoroughly by
gathering input from all departments the bank may
affect, examining how well current banking needs are
met, and spelling out expectations for meeting future
needs. Because the information systems that link
banks and companies are so complex, once the choice
is made, changing banks can be costly.

The advantages of giving fewer banks more company

business include enabling the company to assess its
bank services line by line and compare prices that each
bank charges, as well as sharing this information
among the banks through the use of scorecards. In this
way the banks know where they stand in relation to the
other banks, and the company has more leverage to
control bank fees and gain preferential services.
Further, both the company and the banks know that the
company has alternative suppliers that understand its
business. Should one bank have difficulties, the
 company can continue with uninterrupted service using
another banking partner.

 Develop accurate cash forecasting models.

Because of the uncertainty of cash flows, companies
use forecasts to help offset these uncertainties and
match incoming receipts with disbursements. Sources
of solid information range from shipping data to orders
from salespeople to buying patterns, and even include
news gathered from grapevines -- all the quantitative
and qualitative intelligence available.

Forecasts are based on seasonal, monthly, daily, and

cyclical patterns as well as trends. Forecasts are
further divided into short term (covering one day to two
weeks), medium term (covering a few weeks up to one
or two years), and long term (covering one to several
years). Where firms have many business units, short-
term forecasts can track how well each unit does as
well as how the company as a whole fares.

Integrating information into the forecast as soon as it is

obtained, using a "rolling" format so that updating is
continuous, helps the company time disbursements to
meet incoming receipts. Further, use of a rolling
forecast improves forecasting accuracy and can see
the company through cash-critical periods.
 Improve investment yields at lowest cost.
Companies need a clear, written investment policy that
indicates objectives, guidelines, and what investments
are acceptable. This document provides a common
understanding for directors and investment managers
in setting up a portfolio and in making investment
decisions as opportunities arise. In many cases
managing the portfolio in-house works best; other
companies find that outsourcing portfolio management
maximizes investment opportunities. An outsider may
be more cost-effective, particularly with a small
portfolio.

To avoid having funds sit idle overnight in non-interest-

bearing accounts, companies make use of sweep
accounts. Sweep accounts allow companies to move,
or "sweep," idle cash into overnight investments at the
end of the business day. They also use zero-balance
accounts; these accounts allow companies to write
checks or drafts from an account where no balances
are maintained -- without penalty. Cash is drawn from a
central account whenever checks are presented for
payment.

Some countries impose high fees on demand deposit

accounts (DDAs) when they are overdrawn. Because
DDAs can be withdrawn without prior notice to the
bank, they are less profitable than other types of
accounts. Although the U.S. does not allow overdrafts
for DDAs, the Federal Reserve System does impose
fees when the receipts of an individual bank do not
cover its payments during the course of the business
 day. The Fed views these daylight overdrafts as
temporary loans, so charges accordingly.

 Review the cash management system regularly.

When the cash management system is reviewed on a
regular basis, the review helps identify where existing
processes can be improved, offers a recurring tracking
measure, and provides some assurance that company
financial data is reliable without resorting to a formal
audit. Ideally the review focuses on the processes that
affect the cash-to-cash cycle; for instance, collections
practices and payment float.

The review evaluates the company's cash

management bank(s) -- in particular, their performance,
charges, and yields on investments. Also, the review
considers the risk factors that affect cash flow
throughout the payment system. Risk factors include
fraud, liquidity risks, and risk for erosion of day-to-day
cash flow.

It is helpful to gather data for these reviews -- as well

as the audit -- by using detailed questionnaires and on-
site visits to banking partners. Questionnaires,
prepared in advance of site visits, offer opportunities for
more in-depth analysis, and on-site visits provide a
greater understanding of what cash management
issues the company's local markets face.
 Create a centralized cash management
infrastructure that serves global needs.
Cash flow management is challenging and particularly
so for those companies with operations in more than
one country. Global cash management occurs on two
levels: the first is each country's cash management
system that addresses standard treasury functions
such as collections within national borders. The second
is a network that connects the domestic systems and
manages various currencies while integrating cash
management with functions such as purchasing, sales,
and accounting.

Since not every country needs a highly centralized

cash management function, the degree of
centralization must be matched to the company's
specific needs. The tools that provide varying degrees
of centralization are multicurrency accounts, netting,
domestic pooling, cross-border pooling, centralized
funding, and finance company or international treasury
centers.

When cross-border treasury or cash management

activities are centralized, it is best done gradually.
Companies that integrate and centralize treasury
operations complete this task within each country
before centralizing cross-border activities. Physical
cross-border transfers of funds are kept to a minimum
to reduce funds movement. Instead, many companies
use multicurrency accounts, netting, and pooling.

Traditionally, companies purchase international cash

netting services from banks. Doing so saves on
transaction fees, foreign exchange activity, and
potential for misdirected wire transfers. In-house cash
netting can be cheaper, however, and it allows the
cash manager to shop for the best exchange rates.
Where a number of subsidiaries are involved -- five or
six at least -- then the software and expertise of banks
are more than worth the fees.