Spotlight on Cash Management: Outlook for 2010

The financial market upheaval produced shock effects throughout the global economy and squeezed credit available to companies. With the tight credit market, cash management – and the need to gain greater visibility and control over cash and liquidity – became the focus of chief financial officers (CFOs) as companies searched for alternative ways to raise capital to support business operations. Indeed, Figure 1 (below) highlights the fact that the majority of companies, when surveyed by Aberdeen Group have increased their focus on cash management over the past 12 months and, for more than half, this was a significant shift.

Figure 1: Focus on Cash Management

Source: Aberdeen Group, December 2009

Enhancing Receivables

The traditional approach in cash management optimisation is to collect faster, pay later and invest the residual for the greatest return. While Aberdeen findings confirmed that top performers collect cash faster and have a higher degree of forecast accuracy, the results disproved that the best-in-class (top 20% performing companies) delay payment as long as possible. Instead, those with low days sales outstanding (DSO) also paid invoices more promptly, minimising late payment fees and lost discounts. Correspondingly, Aberdeen revised its assumptions and used two key performance criteria to distinguish the best-in-class from industry average and ‘laggard’ organisations (Figure 2): DSO as a measure of receivables collections and cash flow forecast accuracy, a measure of variance in cash flow forecast. Days payable outstanding (DPO), the third metric listed in Figure 2, (in italicised font), is provided as a point of reference only, and was not used as a component of the best-in-class criteria.

Figure 2: Top Performers Earn Best-in-class Status

Source: Aberdeen Group, December 2009

Although the prevailing cash flow strategy has been to ‘stretch’ payables and earn interest off the float, this practice has become less common. With the financial stress on sellers and today’s low-interest bearing short-term investments, DPO is a metric that is less in the control of companies and more likely to be dictated by the demands of the supplier payment terms. In addition, increasing DPO damages trust with suppliers, discourages favourable pricing and affects suppliers’ working capital, increasing vulnerability if key suppliers were no longer in a position to play their part in a company’s supply chain.

Another factor that has played a role in driving prompter payments is a rise in counterparty risk concerns. With many customers, particularly in the retail sector, struggling or going out of business during the recent economic downturn, both domestic and international sellers have begun to revise their customer terms and demand faster payment, or even pre-payment, for their goods and services.

If cash flow cannot be optimised by extending DPOs, the focus should be on collecting cash as rapidly and efficiently as possible. Indeed, more than 50% of companies surveyed selected accounts receivable (A/R) as providing the most opportunity to have a positive effect on their cash position.

Figure 3: Most Opportunity to Positively Affect Cash*

* Respondents were asked to rank these functions over a range of three magnitudes in terms of opportunity to positively affect cash management activities. Source: Aberdeen Group, December 2009

Technology is facilitating both operational and strategic enhancements to businesses and their ability to harness internal working capital and extracting liquidity from within. However, the value of technology solutions can only be maximised if the organisation structures within which they operate, and the processes that they are designed to automate, are optimally configured.

Organisational Effectiveness: Treasury’s Role

Organisational structure can contribute to efficiencies and controlled costs. The ongoing impact of the credit crunch has forced treasury into the spotlight. This is reflected in the 59% of top-performing companies that now view treasury as an increasingly strategic function within their organisations in relation to 23% of their peers (Figure 4). The compelling shift towards centralisation and economies of scale is indicated by nearly three in four (72%) companies. Visibility and control over cash flows are even more vital when liquidity is constrained. Centralisation allows treasury to have a consolidated view of accounts and funds, while also permitting a more nimble response to evolving business changes.

Figure 4: Treasury Capabilities

Source: Aberdeen Group, December 2009

However, a successful treasury function cannot work in a vacuum. Integration and collaboration between the finance and treasury function and other business areas can help fully understand and support the effective planning, monitoring, and management of liquidity issues, while mitigating risks. Indeed, best-in-class companies are 68% more likely to have standardised inter-department communications relating to cash management than the least well-performing 30% of businesses.

The heightened significance of efficient cash management has also introduced a trend towards in-house banking used to settle inter-company transactions. The primary motivation of in-house banking is to cut transactional banking costs, while improving cash performance and offering greater organisational flexibility (Figure 5). Among corporate respondents, 26% of the leading organisations have an in-house bank in place with internal funding/investments initiated by subsidiaries, in contrast to 13% of the least well-performing businesses.

Figure 5: Added Value of an In-house Bank

Source: Aberdeen Group, December 2009

Automation at the Fore

As companies are tasked to ‘do more with less’, they are leveraging information technology in pursuit of enhanced business performance. With the weakened economy and shortage of credit, adequate cash flow is paramount in maintaining liquidity and sustaining business operations. One of the core objectives of the corporate treasury function is to quickly aggregate data and make the best use of cash.

However, few companies are fully automated in the consolidation of their payments data. Straight-through processing (STP) of payments that eliminates manual intervention and automates cash inflows and outflows is elusive for even top performing companies. Just 44% leading corporations have achieved STP, and all other organisations, far less (26%) (Figure 6). Best-in-class companies are therefore 69% more likely to have STP than their peers, further enhanced by automated procure-to-pay (P2P) and order-to-cash (O2C) processes. Best-in-class organisations are 48% more likely to automate P2P with enterprise applications and 105% more likely to automate O2C with enterprise applications than those that have not reached this level of performance. The majority of finance executives still rely on drawing data from multiple sources, which often entails time-consuming, manual processes that increase the potential for error.

Figure 6: Technology Capabilities

Source: Aberdeen Group, December 2009

The manual processes also exacerbate another issue: companies are dealing with hundreds of bank accounts across the globe and with multiple banks. The manual nature of the current account maintenance processes – opening and maintaining these accounts with up-to-date signatories – can be an arduous and time-consuming process. The process is further complicated by the lack of common standards, consistent interfaces, and integrated process flows between participants, resulting in process fragmentation, diminished efficiency, and obstructing enterprise-wide visibility and control. With automatic reconciliation of bank accounts, interoperability across all banks’ websites and financial systems, and automated reporting on cash held and forecasted, organisations can gain real-time visibility into their global cash position to ensure liquidity and optimise the use of cash in appropriate investments. In practice, only 24% of leading companies have fully automated reporting of cash held and forecasted, and 26% of top performing enterprises have achieved interoperability across all banks’ websites and financial systems. Although more companies have automatic reconciliation of bank accounts, the best-in-class are 88% more likely to have this capability than their peers.

Whether it is funding daily operations, deleveraging schemes or investing for the future, the monetary needs of companies continue to grow. To meet these challenges, a widely used best practice by top performing companies is to use online access to balance reporting, forecasting and account reconciliation, along with setting up controlled disbursement accounts. Leading corporations are 42% more likely to have web access to bank balance reporting, forecasting and account reconciliation than their peers. Further, controlled disbursement accounts used by companies to forecast their daily cash positions, gain better control over cash flow, and take advantage of investing or borrowing options are employed by 46% of organisations to maximise funds and manage daily cash requirements.

Idle cash reserves can be optimised by pooling into cash concentration services for short-term investments. These cash management structures transfer cash among operating units and bank accounts to funnel funds into a master account to manage liquidity across the organisation. Among corporate respondents, all companies predominantly use cash management tools like zero/target balance pooling (51%), followed by notional pooling (19%).

However, maintaining multiple banking partners, each with proprietary connections and/or systems to send, receive, and access banking information can be prohibitively costly and time consuming. Equally important is a safe, secure and reusable single point of access to all banking partners, using standardised message and file formats, for integration with a treasury management system (TMS) or enterprise resource planning (ERP) system. Twenty-nine percent of best-in-class companies have adopted SWIFT to connect to banks through one platform – in contrast to just 18% of the least well-performing 30% of companies.

Performance Management Optimisation

With liquidity and the availability of cash gaining renewed focus, finance executives are increasingly placing greater emphasis on customer risk analysis and scrutinising delinquent and overdue accounts. While 42% of top-performing companies have the ability to clearly assess the status of risk, there is a gap with even the best-in-class, which have room for improvement.

Figure 7: Performance Management Capabilities

Source: Aberdeen Group, December 2009

Companies need to know that enough cash exists to meet corporate obligations as they fall due. Clear assessment of liquidity, however, is limited to just 60% of leading companies, which are 18% more likely than worst-in-class to have this capability.

Also imperative to liquidity management is establishing a transparent framework of cash-related targets, based on specific business levers. The ability to forecast the amount of available cash at any given period helps companies to better plan and execute investments, expenditures, and other strategic initiatives. Companies that lack this information may end up with larger cash reserves on hand to act as a buffer during periods of cash shortages that adversely impact the business. The best-in-class organisations are 123% more likely to have the ability to monitor forecast accuracy on a regular basis than their worst-in-class counterparts, and accordingly able to respond to disruptions in cash flow, such as delays or shortfalls.

Looking Forward: the Path to Success

In the face of a tight credit market and a stagnant global economy, shareholders, boards and executive management committees are pressing for more focus on cash management performance. The firms that will be best-positioned to navigate evolving market conditions are those companies that consistently invest in processes and technology to differentiate themselves from the pack. Companies that will emerge ahead will be those that view cash management as a holistic process that includes all pertinent stakeholders in the cash flow forecasting and cash management process. A comprehensive approach incorporating accounts payable (A/P) and A/R with treasury and finance, contributes towards a significant strengthening of internal financing resources and capital efficiency. This approach can:

  • Enhance the understanding of cash flows within a business.
  • Improve forecasting accuracy.
  • Improve visibility, predictability and control of cash flows.
  • Drive changes to release cash tied up in working capital and other areas.
  • Increase cash reserves in periods of shortages.

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