Cash Management is one of the most important functions of the financial department that influences the final result of company work. What is Cash Management today? What are the treasury functions related to or associated with it? How can the corporations receive the highest added value by using such set of products and solutions? How can the use of complex settlement products influence the processes and targets of corporations? These and other questions will be answered below by Yury Klimov, senior vice-president, chief of the clearing business at Alfa-Bank OJSC

What is Cash Management?

In terms of classic treasury functions the main elements of the Cash Management product system, that are offered to corporate clients, are Liquidity Management, Cash Flow Management and partly Working Capital Management.

On the way to progressive Working Capital Management companies primarily have to think about the development of a centrilized treasury.  This aim can be achieved either by “manual” total control over all treasury processes and operations, which obviously lead to increase of operating expenses, or by automation and transfer of some functions to banks. And although real centralization can be achieved only by cutting the number of servicing banks to 1-2, i.e. by “putting all the eggs into one basket”, the corporations go for it in exchange for the added value, that can be created thanks to centralization and reduction of “manual” processes.

The treasury centralization process requires a set of special tools that are highly universal in use, on the one hand, and have a positive impact on cost behavior, on the other hand. Here we talk about the specific solutions that are able to improve the financial management efficiency through pre-eminent use of automated and uniform processes obligatory for all group of companies.  Let us note, that we are talking about the efficiency, economy, extra income, etc. from the shareholders’ position who view any group controlled by them as a single financial complex and are interested in its value growth.

Cash Management and Risk Management

Cash Management products and solutions serve as an instrument for treasury functions realization and certainly should be used together with instruments, related to other treasury functions such as Risk Management, Corporate Finance or Tax Planning. Besides, Cash Management indirectly impacts on the quality of these other functions performance. Foe example, the automated identification of incoming payments improves the credit control in the company (treasury function -  Risk Management), and cash pooling (ZBA) naturally reduces the number of serving banks (treasury function -  relations with banks).

Cash Management: company value influence and other opportunities

The reasons why the largest Russian corporations entering international capital markets and the middle corporate class members pay so much attention to the Cash Management products and complex solutions that can be realized on its basis are quite numerous. But all of them are related to corporate sector aim to receive not only borrowings from banks, but also modern instruments that help to increase the effectiveness of financial processes.

Among the main reasons why Cash Management keeps rising in its popularity are business consolidation and integration, development of structured holdings and, as a result, increase in settlement transactions and growth of corporate treasuries, that attempt to receive total control over finances, while reducing the time for financial decision-making.

Company capitalization growth creates the need in active working capital management which is one of the most important factors of business value. This sort of management, in turn, implies the capability to withdraw proprietary funds from ineffective processes and partly substitute expensive debts to banks by them, as well as make the most use of self-financing opportunities inside the group of companies.

Nowadays a company with extensive network of affiliate structures and decentralized treasury functions incurs sizable expenses during financial transactions. This is primarily because of lack of effective centralization of operating finances.  The characteristics of this situation are the following: affiliated (regional) branches independently choose local servicing banks, agree on short-term interest rates and deposits, make decisions about bank balances management, manage cash flows on the basis of payments authorization and routing, and, finally, manage their receivables and payables in relation to both external and “internal” counterparties. It means that it is regional financial managers who are responsible for the resulting financial flows.

As a result the group of companies has a great number of accounts in many different banks with absolutely different service conditions, technical formats, delivery channels, etc. The obvious outcome is that the group treasury lacks online information about the group liquidity position and thus is not able to make appropriate short-term decisions in favor of the group. That’s why some companies of the group ask banks for credits to cover cash deficiency, while other suffer from excess liquidity and place its temporarily surplus funds into short-term deposits.  For the group shareholders’ part, it is highly ineffective scenario, but in the absence of instruments of automated self-financing it is the most common one.

However it is not all optimal with financing of cash deficiencies by banks, too. Indeed, the banks see different companies of the group being at different credit risk levels, because Russian risk management, strictly speaking, willingly uses notion of “group of companies” only when it comes to compliance with regulations for one borrower. But if it comes to financing of a particular company with no sound financial indicators at all, then at best the parent company warrant may be required.

Furthermore, the liquidity planning also appears to be significantly complicated. The information about running balances comes from different banks with delays, so it may take several days from the event itself till its reflection in the consolidated report or the statement.

The next round of problems related to decentralized finances includes the processing of incoming and outcoming payments. In most cases this is a fully “manual” process even when the electronic delivery channels are used. It means that special personnel are required to identify the sender of a payment. The financiers at large corporations know that the number of accountants dealing with receivables processing may exceed 10.

One more point to make is that working with a lot of different banks involves certain time and costs needed for preparation of different documentation, carrying out of different procedures, established by banks for various transactions. In practice, such coordination requires companies to keep large staff in order to deal with different situations on a daily basis, and legal issues arising in work with various banks worldwide. Such diversification obviously results in costly and resource-intensive processes.

Differences in procedures established by different banks, different approaches to risk assessment, limits for one borrower, opportunities of major transaction funding – all these factors negatively affect the financial decision-making within the group of companies. Going deeper insight, it appears that labor costs increase, for example, even due to the use of different banking systems of information delivery as the need to combine various bank formats with the format of corporate ERP system arises. It means that inevitable price for diversification is rise in costs.

The situation starts to change only with the gradual centralization of treasury functions. Moreover, almost any process has a particular solution from the Cash Management family. Uniformity and a high level of automation in the management of interest rates, bank balances, cash flows, unification of formats, documentation, single channels for information delivery, special technical solutions for the exchange between banking system and ERP – this is only a small part of the factors necessary for creation of added value in corporation finances.

Uniformity, automation, regularity and full transparence are the main features of the Cash Management solutions that help to create a single centralized treasury, that would posses all operating information about the funds flows, diversify the funds inside the group given the current liquidity position, and maintain uniform financial standards in any area of the company footprint. It is also essential that a company obtains access to all this facilities for a minor commission that is incomparable with the effect from the use of this set of products. Thus with minimum investments in special developments the company receives much more opportunities and significantly reduces its expenses. All investments costs are born by the bank. The benefits for the company are far more obvious as the growing efficiency of financial management leads to the lower need in short-term loans and hence to appropriate economy on interest costs (10-30% in different cases), and improves the turnover readings.  Our experience shows that the use of all range of the Cash Management solutions allows speeding up the turnover by 2-3 days depending on the level of treasury centralization and the process of decision-making in the whole company.

The first step to treasury functions centralization is the creation of central treasury. And at the first stage the central treasury functions can be limited to centralized management of interest rates. To the great extent it may be realized through such solutions as Umbrella Overdraft Facility and Interest Compensation.

The next step in the process of centralized treasury creation is the centralization of bank balances management. In the beginning, as we have mentioned above, regional companies usually have accounts in the local banks.  The balances of such accounts virtually are not included in joint funds of the group of companies in terms of their use in group's favor. The local financial managers are responsible for management of these regional accounts including the surpluses distribution or financing of liquidity deficit in the money market. The centralization of bank balances management may be fully realized through the automatic liquidity concentration of the whole group of companies on one bank account in addition to the Zero Balancing solution (ZBA), which is a form of physical balances pooling. The accounts in local banks are replaced by the accounts in the main bank (Zero Balancing provider). It is ZBA that is the main source of improvement of interest results.

The final stage of treasury functions centralization primarily involves centralization of cash flow management as well as management of payables and receivables. In some cases documentary transactions can be centralized, too. A company may even go further and centralize the whole work with debtors and creditors. It involves the whole cycle of payments processing - from electronic order and invoice placement, creation of customer’s receivables and supplier’s payables to actual regulation – acceptance/delivery of the payment in question. In terms of the Cash Management solutions the final stage is characterized by a single electronic delivery channel with single center of limits and payment authorization as well as instruments of automatic identification of incoming (obligatory) and outcoming (optional) payments. The automatic identification of incoming payments within the Cash Management family is the most important tool for improving turnover indicators.

So, speaking about the Cash Management influence on fundamental financial figures we can sum up as follows.  The use of the above mentioned solutions affect both EVA elements at the same time.  The higher net interest (reduction of interest expenses and growth in interest income) improves net income, whereas speed-up of receivables and inventory turnover reduces business assets and, as a consequence, cost of capital.  As a result, depending on the financial state of a company before Cash Management implementation, EVE growth can stand at between 0.5% and 3-5% - a substantial (as shareholders, creditors and market analysts reckon) positive impact on the cost of business, which is known to be directly linked to EVA.

Roman Ageev, chief of the investment consulting department at BKS Consulting

Cash Management is a product provided by some financial organizations and banks that enables treasury functions centralization. The main elements of the Cash Management product system are Liquidity Management, Cash Flow Management and partly Working Capital Management.

It is clear that Cash Management favorably affects the company financial activities and hence the operating activities.