Cash Management: the North American Approach – Part 1

In Europe, corporate treasury evolved during the 1980s as a distinct function within the finance department, primarily focused on managing extreme volatility in the foreign exchange (FX) market. Interest rate risk management followed naturally, and initial cash management functions focused more on initiating and executing payments for transaction settlements than on cash positioning and analysis. Early European treasury management systems (TMSs) reflected these priorities; also offering integral solutions for different aspects of treasury. This made sense; most treasury departments being small and individuals often multi-disciplinary.

By contrast North American treasury generally evolved with a silo structure, with different departments focussing on FX, debt and cash management. For years, US banking regulation prohibited banks from transacting many kinds of business such as operating branches across state borders. ‘Checking’ (i.e. current) accounts were not permitted to accrue and pay interest on closing balances. Accordingly, successful domestic businesses had to maintain a large network of banking relationships and multiple accounts to manage cash effectively. Additionally, North America’s size and different time zones inevitably complicate the clearing process, providing additional stimulus for operating multiple banking relationships. Not surprisingly, US corporations developed large cash management departments to optimise and control often complex situations.

This situation persuaded technologists to develop treasury workstations to provide automation support. These evolved to support more efficient corporate cash management, through operation of a central database, managing interfacing with banks, and providing analysis and reporting. From an international perspective, the more mature treasury workstations tend to have a domestic bias, focusing on their primary US dollar (USD)-based perspective of cash management. While workstations might lack advanced FX and interest rate risk management capabilities, this doesn’t make them unfit for purpose in the vast US domestic commercial environment.

None of the TMSs now dominating the international marketplace originated in the US, although many are owned by American enterprises. These are systems originally designed and developed in Western Europe and Australasia with enough flexibility to accommodate both global and regional requirements, including the specific demands of supporting North American cash management.

In an extreme case, the group treasurer of a non-American corporation that has completed its first substantial US domestic acquisition may be confronted with a complex web of bank relationships and structures, using local technology and often talking an unfamiliar technical language. At a strategic level, the key decision rests on the level of global treasury integration to be undertaken. Direction will be set by the enterprise’s general policy on centralisation, and specifically on cash management and financial risk. The likelihood in today’s high profile treasury management environment is that a significant degree of central visibility and control of cash will be implemented as high priority. Further steps may range from complete absorption of the US operation into central treasury to redefining US treasury as a regional centre.

In any event, the treasurer needs to understand the special features of US cash management operation, its supporting technology and characteristics of that technology needed in the new corporate environment.

Features of US Cash Management

This section examines some high level elements of US cash management, its terminology and how technology supports it.

The US treasury business day starts with construction of the cash position. The term ‘polling and parsing’ describes the process of contacting all relevant cash management banks and collecting the balance and transaction reports (BTRs), which are equivalent to bank statements as understood globally – although this term has a different technical meaning in the US.

‘Polling’ is an ancient mainframe technology term referring to establishing contact between remote terminals and computers, or computer to computer. In the context of a US corporate’s BTR activity, it initially related to treasury workstations dialling up banks, and downloading the BTRs. The term remains in general usage, although technically TMS and treasury workstation to bank connections are most often made via a secure internet connection. ‘Parsing’ simply means translating the information in the native BTR into a format for updating the treasury system database.

For newcomers to US cash management, it is important to stress that there is no standardisation of BTR format. Software that accurately translates one bank’s BTR cannot be expected to work with another’s. When new cash management banks are implemented, some effort to analyse and accommodate the BTR format translation should be anticipated. Consolidation of the BTRs is followed by bank account reconciliation, which may be performed by the main treasury technology or a specialist reconciliation system.

In some North American cash management operations the treasury department is responsible for collecting and managing BTRs across the organisation, which often imposes a heavy data volume and processing load on the supporting technology. It also adds to the reconciliation workload, to the research and follow-up tasks relating to overdue BTRs and to reconciliation differences. As a beneficial side effect for cash management quality, this approach can facilitate clear visibility by the treasury team of the enterprise’s cash position.

BTRs enable US treasurers to consolidate a picture of prior and current day bank positions and gain visibility of the evolving future position, via the treasury technology’s cash position reporting functionality. Note that some older treasury workstations base the cash positions carried forward on reconciled BTRs, rather than using their internal database.

Unlocking the Lock Box

Lock box banking, a special feature of North American cash management, is basically a banking service based on cheque management that reflects North America’s historically high volumes of cheque usage. Essentially, customers pay their invoices via cheques, which are sent to a specific post office box emptied periodically by the bank. The bank deposits the cheques into the company’s account. Today’s workflow dematerialises paper cheques: ‘In 2012 nearly all commercial cheques processed by the Fed were converted to electronic images for presentment, payment, and record keeping.’ (Federal Reserve Bank of San Francisco 2012).

The supporting treasury technology accommodates the reporting and interpretation of lock box operations. The volume of cash transacted through lockboxes reflects the continued, if diminishing importance of cheque usage by US corporates and the supporting cash position technology reports on the evolving cash position projected through cheques’ clearing cycle.

Technological advances and regulation have significantly accelerated cheque clearing, so that a cheque deposited on the West coast, drawn on a bank on the East coast, normally clears within 48 hours, and often within 24 hours.

Cash Pooling – ZBA

Cash pooling using zero balancing (ZBA) is a commonly found cash management facility for interest optimisation. The North American term ‘peg balance’ describes the target or minimum balance that may be required for retention in a bank account after sweeping operations. Cash pooling will be addressed in a future article.

Cash Forecasting in North America

American cash managers often use statistical methods of cash forecasting, described earlier in this series under ‘Historical and Statistical Forecasting Methods’. These are technology-intensive, requiring strong supporting technology so that dependable updated forecasts are available on demand.

Cash Mobilisation: Funding and Investing

The responsibilities of North American cash management departments extend naturally into short term financing and investment operations.

Larger US companies enjoy the pricing and source of funds diversification benefits that flow from directly tapping into the substantial domestic commercial paper market – in addition to using bank lending facilities for financing short-term borrowing requirements. In many operations, this includes technical integration with the systems of commercial paper dealers and issuing and paying agents, to maintain accurate positions and facilitate settlements. As the US domestic commercial paper market operates on a ‘cash settlement’ (value today) basis, significant performance demands are imposed on the supporting technology to ensure funding positions are updated and timely settlements executed.

A significant element of US companies’ short-term investment operations is through money market fund (MMF) deposits. MMFs originated in the US, as a higher-yielding, liquid and low-risk alternative to bank deposits. Many treasurers shop around for the best performing funds within the authorised creditworthiness boundaries and rely on technology for monitoring and analysis where large numbers of funds are involved.

Part 2 of this article will review interest earnings and earnings credit on bank accounts, bank account management (BAM) and wallet share analysis, cash accounting, foreign bank account reporting (FBAR) regulatory compliance) and ‘wires’.



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