Cash Management

One of the primary responsibilities of Treasury is to manage the company's liquidity to meet its commitments and earn interests on surplus cash: this is the cash management.

Cash management must include the following elements:

Consolidation of bank account balances
Treasury reconciliation, a key step to understand what is included in the current bank account balances: has an expected payment been debited as per cash flow forecast?
Short and medium-term cash forecasting
Investment yields (e.g., yield of a money market fund) and any interest rate applied to balances of operating accounts
Authorized overdrafts and associated banking conditions
Bank charges related to fund transfers from one bank account to another (cash transfers)
Accounting and tax impacts (e.g., does the cash held in a currency other than the functional currency increase the foreign currency exposure, or does it play the role of a naturel hedge (e.g., in case the company has a liability or commitment in this currency)?

The first step in cash management is to retrieve the bank account balances (operating accounts, deposit accounts, etc.). This provides a snapshot of the cash as of the extraction date. However, this report alone is not sufficient for a comprehensive view of the company's cash. Therefore, a treasury reconciliation is necessary, ensuring that payments (received or issued) align with the cash flow forecasts made in the preceding days. For this analysis, it is usually the value dates of the flows that are considered.

Once the bank account balances are thoroughly understood, the cash forecast should be updated accordingly. This provides a detailed view of the expected bank account balances at short and medium term, which is key for an efficient cash management.

Based on identified cash needs or surpluses (at given horizons) and any authorized overdrafts (associated with their conditions and fees), the Treasurer can:

Fund accounts where a cash need has been identified, including through foreign exchange operations (sell one currency and buy another)
Invest the cash in excess to earn interest, in accordance with identified liquidity needs and the company's investment policy. The investment performance is generally compared to risk-free money market rates)

Cash Management and Investment Process

1. Cash position

Balances of all bank accounts as of analysis date.

2. Cash forecast

Cash forecast in a data base format (date, bank account, amount, currency, realized date, realized amount). The 2 last columns are populated only when payments already occured.

3. Actuals

Actuals from the last update to the analysis date

4. Account balance thresholds

This "master data" will allow to quickly identify cash in excess or funding needs. It is a good practice to keep a buffer for unexpected payments (eg unknown direct debit date).

1. Mark as paid forecasted cashflows as needed, thanks to the extract of past payments (3rd data source above).

2. Update cash forecast with new expected cashflows/information.

Invest excess cash or fund accounts based on the updated cash forecast

Based on the forecasted end of day cash balances, invest excess cash or fund accounts as needed.