Cash Management Journey Cash Management Journey Cash Management Journey

Cash management is key constituent and core discipline of a treasury organisation in a company. While the specific range of cash management responsibilities manifests itself differently in each organisation, the basic definition covers optimal management and structuring of all external and internal payment flows taking into account the company's corporate structure. In this context, all companies find themselves in a highly sensitive and relevant working environment within cash management, and one that consistently requires careful attention.

The cash management spectrum must be viewed as a constant that continually reinvents itself and responds to the latest developments. Thus, the working environment is currently being shaped by many relatively new factors such as standardisation, digitalisation and automation. Alongside the established institutions of banks, rapidly growing FinTechs, such as Finastra (for the purposes of automated trade confirmations), are positioning themselves as additional solution providers. These providers are directly rendering universal buzzwords (such as automation) into practicable solutions and are transforming familiar processes. In this instance, the focus is on automated confirmation of financial transactions.

By implication, companies need to continuously ask themselves: "What is state-of-the-art cash management?" "How can we use processes or individual solutions more effectively and integrate them more closely?" And thus the journey through the individual cash management issues begins: from defining a uniform banking strategy via virtual accounts through to a uniform external communication channel using a multi-banking platform.

The market offers a wide range of different technological solutions to organise cash management processes more rapidly and efficiently. This is another example of the coronavirus pandemic serving as a catalyst: in terms of demand, from companies, and supply, e.g. from software providers, this has driven the development of digital solutions forward. 

The notion of physical distance has grown in importance, and companies must be able to consistently present this in their virtual process mapping. That doesn't just mean remote workflows and digital means of communication, but also seamless functioning of technical communication between individual tools in the company's internal and external sphere of influence. Many companies already use highly efficient technical solutions and have correctly understood the signs of the times regarding digitalisation. The art is to interlink effective individual solutions to achieve the greatest potential in the overall context of cash management. Each individual measure entails potential for improvement, but it is only through coordinated interaction of the cash management components that the desired result will be generated for in-house staffing and monetary expenses.

Before rolling out individual solutions, such as a multi-banking platform, there is first the issue of obtaining relevant benchmark criteria for determining feasible potential within the particular organisation. Which areas have optimisation potential in respect of cash management processes and technology-based solutions? Which parameters can assess the current status quo of the organisation in a targeted manner? A review of the market shows four different target parameters that can be used for an adequate assessment:

• Centralisation
• Flexibility
• Data analysis
• Workflows

Through centralisation, companies can take supporting automation components such as cash pooling, an in-house bank or a multi-banking platform and optimally adjust them to their individual needs, thus generating synergies through standardised processes. The central treasury organisation enables the optimum use of advanced IT infrastructures and creates a centre of excellence interconnected with core functions such as accounting, tax and controlling.

Flexibility entails scrutinising local management parameters, such as bank dependence and the reliability of liquidity forecasts. A company should always aim for a high level of independence from individual bank partners combined with the closest possible integration of individual cash management solutions. The company selects suitable partners on the basis of its strategy – and avoids the reverse of adjusting its strategy to the service range of its partners. 

Inherent to assessing the flexibility of a process is whether the decision is made wholly on the basis of data and whether the full bandwidth of reporting options is used. The objective is full transparency of the individual liquidity ratios, for example to use data-based cash forecasts.

Finally, the overall impression is complemented with an assessment of workflows, often referred to as exception-based management. This considers the extent to which workflows are automated and basic daily activities filtered out, meaning that staff can be deployed for more complex cash management issues.

In order to introduce further processes or to implement technical solutions, an efficiency analysis of the strategic fundamentals should be initiated at the outset. In so doing, it is necessary to formulate the company's strategy in respect of banking partners. Ideally, companies link individual needs and service requirements to function aspects such as cash pooling and geographical integration (global versus local bank partners). To this end, the core geographical regions are defined and functional activities pooled for the purposes of an overall consideration. Individually designing the strategy helps to simplify processes, reduce monetary expense or staffing effort and to break down complex structures. 

A detailed analysis of bank partners goes hand in hand with the rationalisation of bank accounts. Once the core banks and local bank partners have been defined, little effort is required to remove redundancies concerning bank accounts. The level of granularity needs to be considered in questioning the nature and purpose of each individual account. This leads to bank accounts being allocated to a predefined objective and analysed for each individual currency at country and company level.

Using virtual accounts can be seen as an additional supplement to standard solutions for liquidity and cash management. Virtual accounts are non-physical accounts which serve to reduce the number of physical bank accounts and to optimise the manual administrative effort, for instance concerning KYC. The use of virtual accounts is a notable trend among global companies, who are aiming to further rationalise while reducing administrative effort, improving transparency and increasing velocity of circulation. In KPMG's experience, administrative costs can be further reduced by approx. 30% on average. In this regard, the use of VAM must be examined on a case-by-case basis, as it may not prove suitable for all organisational structures.

Increasing numbers of companies are considering whether to centralise payments and cash management such that they can offer the functionalities of an in-house bank. An in-house bank primarily focuses on five key elements: cost efficiency, interest savings, process controls, risk optimisation and tax optimisation. This is achieved by centrally aligning the IT architecture and internally filtering out services such as intercompany balances, netting and on-behalf transactions so that external banking services are taken up only after reviewing the in-house options beforehand. This saves costs and increases internal transparency over company-wide liquidity.

After having focused on in-house optimisation measures, it makes sense to review external communication. In many companies, the current situation is one of fragmented bank communication using a number of channels. This often means that there is no uniform channel of communication (e.g. host-to-host connection) and that different payment formats are used. A multi-banking/payment platform can remedy this. The platform supports the core functionalities, such as workflow management and account statement processing, via money and sanction checks and the automated conversion of payment file formats. This achieves a maximum degree of standardisation, and all payments are routed to the bank via a single gateway.

The cash management journey does not stop at the items discussed here: there are numerous other topics to be analysed and categorised. Among others, these include the analysis and monitoring of bank charges, digital signatures, APIs and eBAM developments. The various solutions are constantly changing, especially in view of the digital possibilities, and require an individual review in terms of the target state for cash management. After all, it must be considered that cash management in all companies has the core function of securing liquidity, and is thus constantly focused on the financial survival of the company. It is therefore important to continually assess in-house company functionalities and processes and to adjust them to current challenges.

Source: KPMG Corporate Treasury News, Edition 117, December 2021
Authors:
Nils Bothe, Partner, Finance and Treasury Mangement, KPMG AG
Michael Gerhards, Partner, Finance and Treasury Mangement, KPMG AG