Understanding funding ebbs and flows, payment cycles and cash calls are critical determinants of business success. This is especially true for high-growth companies, where resources often are in scarce supply. There are several key strategies for reducing costs, streamlining processes and ensuring that cash is available to capitalize on business opportunities.
- Employ Low-Value Electronic Funds Transfers
Streamlining payment operations and migrating to electronic forms of payment brings opportunities and challenges. It can produce significant dividends resulting in increased transparency and forecasting accuracy.
Subsequently, weaning a firm from an over-reliance on the “float” that comes from outstanding checks is often underestimated. Employing low-value electronic funds transfers can be an effective means of cutting costs and ensuring funds are held as close to required payment dates as possible, thereby minimizing the financial impact of no longer having a float from uncleared checks.
Further, an electronic payment that arrives on the assigned payment due date is preferable for vendors to checks that may not only arrive late, but also could be subject to an extended clearing time before the beneficiary receives full value. Accuracy and timeliness are critical in terms of qualifying for early payment discounts — vendors paid in full and on time are often happy, and happy vendors become trusted business partners in the long run.
- Establish a Controlled Disbursement Account
For some vendors, migrating to electronic forms of payment simply isn’t possible. When vendors want to stick with the tried and true, it can be helpful from a cash management perspective to put a controlled disbursement system in place. This is especially valuable when items experience significant clearing times and delays when presented to the bank.
The uncertainty over when checks will clear an account can cause needless fund tie-ups over a sustained period of time in anticipation of the item being processed. A controlled disbursement account effectively provides 24 hours’ notice of an impending check. Implementing such a system enables an account to be funded on an “as needed” basis, instead of parking cash for an indeterminate period in anticipation of the paper item going through.
- Consider Vendor Management Solutions
When the transition to electronic payments is hindered only by the time required to collect and manage banking beneficiary data, it can be helpful to employ a vendor-management solution from a payments system provider that effectively does the bulk of the work. This would include a fully-integrated process that collects the required data, builds electronic beneficiary templates and manages the resultant database on a continuous basis. In the process, it would eliminate much of the initial time investment that delays the decision to move forward with the transition.
- Align Business and Payment Processes
Proper alignment between business processes and payment processing cut-off times and clearing cycles often makes sense for a business to maintain and operate numerous domestic bank accounts for different purposes in order to make cost-based accounting accruals or reconciliations more accurate and timely.
At the same time, managing account balances and ensuring adequate funding levels across multiple accounts pose obvious challenges in ensuring funds availability. Sweep accounts that automatically transfer net balances at day’s end — netting debits and credits on aggregate across all of the accounts as opposed to doing so on an individual account basis — allow for full segregation of the accounts.
Tempting as it is to leverage multiple banking and payment processor relationships for the fullest service access, it makes better business sense to concentrate key cash management and transactional bank needs in the hands of a single specialist. The volume discounts and processing efficiencies gained will almost always offset the loss of incremental relationships with marginal value. That puts the executive in a better position to negotiate fees and leverage available technology when working with a small number of counterparties.
Though electronic payments are constantly evolving, there are a great many tools — especially relating to cash flow management — designed to help maximize the rate of turn and minimize the cost of idle liquidity. By adopting today’s cash management tools and electronic funds payments, cash management may begin to feel more like a science than an art.
Mark Frey is managing director for Cambridge Mercantile Group, which provides international clients with foreign exchange and global payments services.
This article first appeared in Financial Executive magazine.