Cash Management

Daily Cash Management (Disposition)

The task of daily disposition basically requires the balancing of debit and credit balances. Since debit balances in a normal interest rate structure cause unnecessary costs, credit balances can be invested in an interest-bearing manner there is a need for optimisation. If the central cash management has several main accounts, these are generally to be balanced in a yield-optimised manner. Neither should unnecessary debit interest or custody fees be paid nor should credit interest be lost. The disposition of the main accounts is one of the most important tasks in financial management and can be done manually, but also automatically.

In the manual variant, which still prevails in many companies, the account statements are collected from the various banks with electronic banking systems and the balances are examined. Taking into account upcoming withdrawals and deposits for the next few days, reasonable transfers are often determined in spreadsheets. Corresponding levelling transfers with more or less large safety buffers are then executed by the banks.

Account Levelling to Facilitate Daily Account Balance Disposition

Based on this logic, Trinity TMS allows to set up rules to calculate disposition proposals automatically for an accelerated daily cash management. The account levelling function takes into account e.g. predefined minimum balances, credit lines or interest thresholds on the accounts and calculates matching transfers. If necessary, these disposition proposals can be adjusted by users before they are converted into payment orders. Depending on the accounts involved, standing settlement instructions are stored in Trinity TMS that only allow payments via previously defined channels based on the dual control principle.

The account levelling function can also be used to define cash pool structures if a corresponding bank service does not appear to make economic sense or if pooling is not required on a daily basis.

Cash Pooling

Trinity shows current bank account balances for easy disposition and can replicate bank cash pooling. In the case of zero balancing, every entry is registered on (internal) accounts managed in Trinity TMS, so that the credits and debits of subsidiaries can be interest-bearing, just as in the case of a bank investment or borrowing. Trinity gives all involved parties access to the current transactions at any time, whereby users naturally only see what they are allowed to see. Interest is calculated automatically and interest statements are regularly provided by Trinity TMS as reports and/or booking files. As an alternative to booking files, Trinity TMS can also generate electronic account statements (MT940) for the internal accounts, so that the system functions like an in-house bank for the subsidiaries.

When sweeps occur between legal entities, inter-company loans may be created, legal and tax issues have to be addressed. Because legal and regulatory requirements vary from country to country, it is important to investigate the applicable regulations before establishing the service.

What is Cash Pooling?

Cash pooling is essentially the merging of credit balances of different accounts into one master account (sweeping) and the balancing of debit balances at the expense of the master account (topping).

Cash pool services are offered by banks, but can also be operated with a treasury management system such as Trinity TMS. The latter is particularly suitable if daily zero balancing is not required, as credit institutions sometimes charge prices for such a service that are disproportionate to the advantage achieved by concentrating accounts.

While zero balancing attempts to set the participating accounts to zero balance on a daily basis, target balancing involves agreeing on a predefined balance because, for example, the monthly needs of the subsidiary can be well estimated or a certain minimum balance is required in the sub account for other reasons. In both cases, funds are effectively transferred and these cash concentration models are therefore also referred to as “effective” pooling.

The participating accounts are usually interest-bearing and the movements can be replicated in Trinity TMS, so that pool participants that are constantly giving away liquidity receive credit interest, while borrowing participants pay debit interest. Trinity TMS maintains internal accounts for this purpose and automatically generates interest calculations for all participating companies. As an in-house bank, Trinity TMS is able to provide electronic account information in the form of SWIFT MT940 for the pool accounts as well as reports and/or produce booking instructions  for the automatic posting.

Benefits

Securing Solvency

• Insolvency means the end of the company. With professional cash management, liquidity can be better forecast and secured.
• Target Balancing Cash Pools leave pre-defined base balances on the sub-accounts, as the account-holding companies generally want/need/have to maintain a certain balance.

Process Optimisation

• Automated processes in the compilation and control of data save valuable resources and give more time for other tasks.
• System-supported clearing (e.g. by means of rule-based account clearing in Trinity TMS) makes work easier.
• The proposals, which take into account minimum balances or maximum debit balances, can be adjusted manually if necessary, giving maximum flexibility.
• Payment files for account transfers are generated in appropriate file formats and transmitted to Electronic Banking for execution.
• Effective cash pooling generally makes work easier, as no one has to worry about the disposition of the sub-accounts connected to a master account.

Audit Proof

• All transactions are traceable at any time via audit trails
• The mapping of cash flows to internal accounts is visible to the parties concerned

Maximum Transparency

• The transparency of payment flows in the entire company is increased, forming the basis for better decisions.

Higher Returns

• Optimisation of profitability can be achieved by discovering unnecessary debit balances and unprofitable investments.
• Effective cash management ensures that unnecessary debit interest is avoided and credit interest is optimised through internal financing.
• Zero Balancing Cash Pools, where the sub-accounts are cleared daily, ensure that all interest accrues on the master account.

Enhanced Efficiency:

• Relieving the subsidiaries through centralisation of tasks

Cost Reduction:

• Avoiding unnecessarily high prices for banking services.

Best Practice

• Cash management is used for the short-term observation of payment flows at account level with the aim of securing and controlling liquidity and the company’s solvency.
• A complete and correct information base is important for securing liquidity.
• All incoming and outgoing payment flows should be taken into account correctly in terms of value dates.
• Outgoing cash flows are mostly caused by the company itself and should therefore be known. Outgoing cash flows collected by direct debits from payees are usually also easy to forecast in terms of amount and value date. Information on outgoing cash flows can usually be planned well and can be stored in the system accordingly at an early stage.
• Incoming payments are difficult to estimate for most companies. In many industries, they depend on the behaviour of buyers, who in turn are influenced by very many different factors (e.g. fashion, income, weather, pandemic, trade restrictions).
• The aim of daily planning is to determine the account balances for the next (usually 7-10) days as accurately as possible. Too low and too high account balances without a good reason are to be avoided.
• After securing liquidity, profitability is usually the next most important goal of the cash manager, i.e. unnecessary debit and negative interest, custody fees and transaction costs are to be avoided.
• Planned values for incoming and outgoing cash flows help to determine future account balances (based on correct opening balances from account statements). Outgoing cash flows from financial deals automatically enter the cash forecast in treasury management systems if the transactions have been previously recorded there. Outgoing payments from operational business and human resources management are regularly imported from accounting.
• Receipts that cannot be predicted precisely in terms of amount and time can only be estimated. Intraday advices (SWIFT MT942 or camt.052) from banks can give indications of expected inflows and improve the quality of disposition.
• To avoid insolvency, the account balances of the bank accounts should be monitored daily and different balances should be levelled for profitability reasons (avoidance of debit and negative interest). Treasury management systems such as Trinity TMS provide suggestions for this (account levelling); when balancing between accounts at the same level, one speaks of account clearing. The observation of the balance development usually covers a few days in order to be able to take countermeasures in time in case of shortfalls.
• A cash management workbench is often used to view the development of account balances, which graphically illustrates the liquidity trend, supplemented by a financial status adapted to the company.
• The control of each days’ cash disposition takes place the next day on the basis of electronic statements, whose turnover items are compared with the planning data of the disposition. Based on defined rules, cash management systems perform this automatic statement reconciliation quickly and with high precision.
• Cash management often also includes liquidity planning, credit line and limit management as well as receivables management and multilateral netting.
• In a broader sense, a TMS includes all possibilities for increasing efficiency and optimising profitability in a company's financial management, whereby bank account management and bank charge control usually also fall under the remit of the cash manager and the management of financial transactions and risk management to other people in the treasury department.
• Category-based liquidity planning is generally used for medium to long-term liquidity management.

Case Studies

Ledvance

CECONOMY

E.DIS

Vitesco

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Tags

Cash management, liquidity status, forecast, disposition, clearing, pooling, account balancing, liquidity preview, balance reconciliation, statement reconciliation, interest optimisation