Most people have heard the expression “cash is king” as it relates to business. Financial transactions, which reflect a business’ operations for exchanging goods and services, are nearly always settled in cash at the end of the day. Cash is required for the business to operate –– collecting on billings from customers after generating sales; or paying wages to employees or paying suppliers for raw materials to manufacture products. Cash becomes vital, like blood is to human beings or how gas and oil are to most cars and trucks.
There are 3 basic tools that Controllers, Treasurers, and CFOs all use to effectively manage cash despite the many challenges to doing so: cash positioning, cash forecasting, and cash flow analysis.
Cash positioning is the process of aggregating all cash and liquid financial asset balances to provide a complete picture of a company’s current state of liquidity. This involves consolidating cash balances across all banks and all bank accounts. Depending on operational complexity, this may involve using foreign exchange rates to translate cash positions denominated in non-USD currencies into USD equivalents as a common denominator for consolidation.
A consolidated cash position provides insights into a company's ability to meet short-term obligations (liquidity) while informing how much cash, if any, should be invested to generate interest income (yield).
Cash moves in and out of a company’s bank accounts daily. These daily cash flows can be for a variety of things – purchasing inventory, payroll, paying travel reimbursements to employees, collecting on billings from customers for the sale of products and services, or selling stock to finance the business. The underlying movements of daily cash are always reflected in the ever- changing balances.
Cash positioning helps to identify whether or not there is enough cash in each account to cover upcoming expenses while ensuring no account has excess cash. Excess cash could be swept to a control account and invested in money market (overnight) funds to generate interest income or to pay down debt to reduce interest expense. Cash positioning helps to identify efficiencies that may reduce bank fees.
Maintaining a healthy cash balance is often a financial covenant required by lenders. Monitoring the cash position is essential to ensure compliance with debt agreements to avoid penalties imposed by lending banks.
Currently, analysts login to each bank portal online and download .CSV files for cash balances and transactions from all bank accounts. Each file is uploaded into Excel and formatted, often by converting text into columns. This manual process may take an hour or more each day. However, since banks in some jurisdictions are difficult to access due to regulatory or language barriers, some balances are often omitted from the process.
Daily reconciliation – reviewing cash transactions summarized into various cash flow types – is done to ensure that cash balances are correct and all transactions were properly posted and accounted for.
There are generally 3 ways to automate cash positioning, as follows:
Setup a file gateway with the bank and receive daily files via Secure File Transfer Protocol (SFTP) to receive balances and transactions in a standardized digital file format, such as BAI2.
This process requires IT resources from the company and can take a several weeks to setup requiring authorization forms to be completed with each bank. Additionally, once files are received, the data still have to be formatted in Excel.
Outcome // achieves very little automation and time savings
Implementing a treasury management system allows you to fully automate cash positioning in a single dashboard with reconciliation capabilities.
However, this process is generally reserved for large corporates as these legacy systems can take 12-18 months and cost over $1 million to implement, along with annual license fees of $250 thousand or more.
Outcome // achieves automation, but requires long and costly implementation and expensive annual license and maintenance fees. Most companies still end up exporting data into Excel for reporting and forecasting.
Trovata.io is a next-generation platform that automates cash management. It is directly integrated with banks like Wells Fargo, JP Morgan, and Silicon Valley Bank. These direct connections allow users to connect to banks in minutes and stay connected with secure access tokens via Automated Programmable Interfaces (APIs). APIs are what drives modern technology platform like Google, Facebook, and Salesforce. Cash positioning is fully automated and includes built-in business intelligence tools to visualize, analyze, report, and reconcile cash flows. There are generally no upfront fees and no implementation. Trovata.io charges a subscription fee of between $300 to $5,000 a month to use.
Cash positioning is a fantastic tool that can help any company managing cash. The world is speeding up. To overcome the many challenges of managing cash, it is becoming critically important to leverage the latest in technology to automate the many, often manual, workflows in finance and treasury. The era of Open Banking has begun, enabling companies to consume real-time insights that will introduce unprecedented value and pace to cash management and financial reporting. Upgrading to use best-in-class predictive machine learning techniques for treasury management, accounting, and financial planning & analysis is now possible. Paired with a full ecosystem of digital tools including mobile, digital assistants, and next-generation financial management UX, the future is very bright for corporate finance and treasury to overcome its many challenges.