This post involves Treasury. The CFO is responsible for the Treasury function in most firms. Among the key duties of the treasury effort is cash management. Effective cash management is critical for a company , because effective deployment of cash is the lifeblood of the firm, its profitability, its growth, and hence its value.
The primary goals of treasury are accelerating collections and slowing disbursements. Each can be accomplished in a variety of ways. Speeding up collections can entail utilization of remote deposit service; converting checks to ACH; requiring customers use electronic disbursements and purchase orders; and automatic re-presentation of NSF checks. The final method must be carefully weighed against the value of the customer relationship.
Slowing disbursements can be achieved by using credit cards to pay bills; making sure the cards have rewards programs; electronic payments; outsourcing payroll while using direct deposit; negotiating extended terms with suppliers where your firm has leverage; or outsourcing accounts payable functions where scale makes it practical.
There are two key tools that can be used to achieve these goals. They are cash management practices and bank relationships. A key element of cash management practices is forecasting inflows and outflows of cash as well as the timing of these cash flows. For a small business, an Excel spreadsheet can be utilized, but it must have appropriate controls, protection and documentation. A feasible alternative is to utilize third party software or services.
In our view, the key objectives for a banking relationship are threefold. The first is to manage the costs of bank services which largely entails persistence regarding the quality of service. The second is to monitor the bank’s financial stability, particularly the credit quality of its loan portfolio and the likelihood it will be acquired. Finally, the CFO must view the bank as a partner. This involves understanding that the bank must charge fees to earn an adequate return as the lending business is a low margin business.
Bank relationships involve balancing services received against the costs of the relationship. We suggest several practices to manage the costs of the bank relationship. One important tool is to obtain a earnings credit rate whereby the bank credits back a portion of fees based on the volume of bank services the firm utilizes. We also recommend the firm get bids form several banks every three years as well as a two year price guarantee. Third, the CFO should utilize information from associations such as the Bank Administrative Institute. This information provides quantitative and qualitative indicators for different banks.
The CFO is responsible for the Treasury function in most firms. Among the key duties of the treasury effort is cash management. Effective cash management is critical for a company , because effective deployment of cash is the lifeblood of the firm, its profitability, its growth, and hence its value.
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