Having money sitting in bank accounts is often the expensive result of a company’s inability to forecast its cash flows. It is time for treasurers to think again about this ‘unproductive asset’ and look for ways to measure – and improve – treasury’s performance in relation to idle cash.
At the end of any commercial transaction, when the customer has paid its invoice and the cash is received in the bank account, or the customer’s cheque has cleared, a sigh of relief might go through any organisation’s finance team. The transaction that started, possibly with a customer order or a statement of work, has ended. The ordered product has been produced and delivered, or the requested services have been accepted and the risk of non-payment – because the client is unhappy with the work, or worse, the client has gone bankrupt – has been avoided.
While the finance and commercial teams will consider the transaction to have ended with the customer payment, the treasurer of the organisation might still have some work to do. The cash circle will close only when the proceeds of the transaction can be used to pay down debt, settle supplier payables or meet payroll needs.
The treasurer must move the funds from a collection account, or lockbox account, to an operating account. This might involve moving the funds across borders if the transaction involved overseas collections, or converting the funds back to the organisation’s base currency if the invoice was denominated in a foreign currency. Once the funds have arrived on an operational account, the funds can be used for the operational needs of the company, or, if the company does not have an immediate need for the funds, the cash can be moved to an investment account and invested within the guidelines of the investment policy.