THE ORGANIZATIONAL SPOTLIGHT is pointed squarely at the treasury function as businesses recognize the need to develop better methods for managing cash flow. Spurred by the need to develop solutions that support Sarbanes-Oxley compliance -- and by companies' increasing activity in global markets with divergent payment terms -- finance executives are standardizing and improving cash-management activities and turning to tools that monitor cash balances in real time enterprisewide. In fact, treasurers today are striving to automate virtually every activity in the cash-management function.
The other thrust in treasury operations is toward implementing new tools and methodologies to deter fraud -- a rising threat to business. Attempted check fraud alone has risen to over $5 billion in recent years. Various safeguards, including positive pay, are helping companies and banks protect themselves against major losses.
In this special section we explore some of the best practices that leading companies are adopting to build a stronger treasury function through automation. And we examine the controls that businesses -- with the help of their banks -- can implement to take a bite out of fraud.
-- The Editors
Companies are deploying new processes and systems to gain better insight into the flow of funds and improve working capital.
Each year, Penn Mutual Life Insurance Co. receives about 30,000 annuity premium payments. And until recently, the company processed all of them manually. The remittances were delivered to the company's home office in Horsham, Pa., where employees would open the envelopes and process the checks according to any instructions noted by the policyholders, recalls assistant treasurer Patricia Chiarlanza. Many of the payments required special handling. "Someone might write down on a Post-it Note how to apply the money," she says. For example, a policyholder might request that a portion of the payment be applied to a loan against the policy and the rest to the premium. After completing the payment processing, employees would send a deposit package to the company's bank each day.
Executives at Penn Mutual Life Insurance wanted to automate the collection process to enhance control and simplify research into exception payments. Chiarlanza and her project team spent about half their time for three months outlining the requirements that an automated payment processing system would have to meet. For instance, it would need to incorporate a decisioning model that could handle about 10 varieties of payment instructions. Many banks' high-speed processing systems don't easily accommodate exceptions, Chiarlanza points out.
In late 2004, Penn Mutual Life Insurance implemented a system from PNC Bank N.A. that meets the company's stringent exception processing requirements. Today, annuity payments head to the company's lockbox at PNC Bank. The bank's system automatically processes the contents of the envelopes and makes the payment deposits. Images of any exception payments are electronically transmitted to the A/R staff at Penn Mutual Life Insurance, who research these items and electronically transmit their findings back to PNC Bank.
"With a couple of clicks, we can identify the payment and where it is in the path and [determine] how to apply it," Chiarlanza says. "In the past, it was labor-intensive and paper-intensive." After processing the day's checks, the bank sends Penn Mutual Life Insurance an electronic payment file, and the company electronically records the information on its books.
The new system has paid off. Penn Mutual Life Insurance has slashed its remittance processing costs by 40 percent. In addition, it has greatly strengthened its control over the collection process. Most payments are applied immediately, and as soon as that happens they're available for viewing electronically.
Proactive treasurers are deploying a broad array of new processes and systems to manage cash flow into and out of their organization more effectively. "Working capital is now under a strong organizational spotlight," says Sanjay Srivastava, COO with Aceva Technologies Inc., an A/R software provider in San Mateo, Calif. "Chief executive officers want to optimize cash management."
In part, that's because more and more U.S. companies are operating in overseas markets. Long lead times are common when companies import products from the other side of the globe, and norms for payment terms vary widely in different regions of the world -- all of which means that cash flows are less certain, says Beth Enslow, vice president of enterprise research with Aberdeen Group Inc. in Boston. And "from a cash-flow perspective, uncertainty is a four-letter word," she notes.
Compliance with corporate governance legislation is another force that's pushing organizations to improve their treasury processes. "Global companies want con-sistent solutions to cash management because of Sarbanes-Oxley," says Dianne Quinn, managing director and head of North American cash product sales with Citigroup Corporate and Investment Banking in New York City. "They want to standardize processes."
Banking on Fewer Relationships
Companies that lead in cash management practices "understand the value of more efficiency in their bank accounts," says Mark Krueger, finance practice leader with The Hackett Group, an Atlanta-based business process advisory firm. "They're smart about how they use their banking relationships." Top-performing companies use 42 percent fewer bank accounts per $1 billion of revenue than typical organizations do, according to Hackett research. (See The Best vs. the Rest below.)
Many treasuries are thinning their roster of banking partners, too. That's a departure from practices that prevailed 10 or 15 years ago, when many companies worked with numerous banks. Now, most leading companies find that three to five institutions can handle about 80 percent of their banking needs, Krueger says.
To be sure, identifying the right banking partners takes some work. But the results can be worth the effort, as Accor North America discovered. In 2003, the Carrollton, Texas-based operator of hotels and motels -- its brands include Red Roof and Motel 6 -- conducted a careful review of its banking relationships. As a result, the organization decided that it needed a bank that would consider the balances in all of Accor North America's accounts when determining the amount of cash the company could invest. The goal was an arrangement that would allow the company to "have one account that's negative by a million dollars, others that are positive, and take the net," says Cynthia Green, corporate cash manager.
While many European banks accommodate this request for their customers, few U.S. banks do, Green says. "Most wanted to sweep all the dollars in one account; we wanted the dollars to stay in each account," she reports. The company's current banking partner, Bank of America, provides this service.
Companies are paying close attention to their banking fees these days, notes Jeff Glenzer, director of treasury services with the Association for Financial Professionals in Bethesda, Md. In part, that's because they need to better understand and reduce these costs. Equally important, external auditors are increasingly asking for assurance that a company's bank fees are accurate, he says. Given that many bank account statements run to several hundred pages, a growing number of organizations are leveraging bank account analysis tools, he adds.
The Quest for Real-Time Information
Treasury executives increasingly are demanding tools that will provide real-time -- or close-to-real-time -- infor-mation about their organization's cash balances enterprisewide. Companies often have only a vague idea of how much cash they have lying around in various accounts.
"Right now, companies do a dormant balance review and find that they had all this cash available to them," says Tom Delaney, Dallas-based vice president and group lead, cash concentration, with Bank of America. And, of course, if they're unaware of the money that's sitting there, they can't use it.
That's not a mistake that Gehr Enterprises will make. The Los Angeles-based multinational, which has interests in manufacturing, wholesale distribution, high-tech equipment sales and real estate holdings, keeps a close eye on its cash balances. "Because we have multiple divisions, subsidiaries in different markets, different customer profiles and different industries, the challenge is to bring it all together and create a comprehensive tool to forecast our obligations," says CFO David Lifschitz.
In the past, analyzing and predicting the company's cash flow involved exporting information from its various businesses' databases to spreadsheets. The data was often outdated before it could be analyzed.
In 2002, Gehr implemented Control, a financial management system from Torrance, Calif.-based KCI Computing Inc., to enhance its cash flow forecasting. The tool accesses databases within each of the company's divisions and pulls the targeted information into one repository -- all in real-time. For example, it retrieves the payment terms that each division offers its customers and consolidates that data with information about open orders, enabling Lifschitz to know when the company's outstanding receivables will likely be collected.
The new system's key benefit, Lifschitz says, is that it helps Gehr predict peaks and valleys in its cash needs so that the organization can time its borrowing. That capability has "enabled us to lock more borrowings into lower-cost instruments," he reports. As a result, the company has reduced its borrowing costs by more than 10 percent. Gehr recouped its investment in the software within two years, Lifschitz notes.
Rapid Reconciliation
Treasurers are looking at automating just about every activity in the cash management function, says Glenzer. Hackett research indicates that world-class companies mobilize funds for virtually all trans-actions automatically. Leading treasuries "are more effective in mobilizing funds across their companies," says Krueger.
Accor North America is a case in point. Over the past five years, the company's treasury department has undertaken several initiatives to "tighten its [cash management] processes and make them more efficient," says Stephen Manthey, senior vice president and treasurer. Accor North America owns more than 1,000 properties across the United States, and moving cash efficiently from those operations to its bank accounts is key to closing the books quickly.
Until about five years ago, reconciling the cash deposits from each of the company's properties was a manual process. Given the large number of hotels and motels in Accor North America's portfolio, treasury employees were often unable to review the deposits on a timely basis, says Susie Eddington, systems administrator. "It could be months before we could research an item," she recalls.
In 2000, Accor North America implemented ReconNet, a reconciliation and account balancing system from Addison, Texas-based Trintech Group plc. The software links to Accor North America's banks. Each morning, it calculates the amount of the previous day's deposits, enabling the company to sweep excess funds into an interest-earning concentration account.
The software has greatly accelerated the daily cash transfer from the organization's operating units to its corporate accounts. In addition, it has slashed the error rate for the account reconciliation process. And because cash managers can now monitor deposits more closely, the new system has halved the number of incidents of fraudulent activity. "There's much greater control," says Green.
Treasury executives are leaning hard on automation to accelerate the disbursement side of the cash management function, too. That's a break from the past, when many organizations focused on maximizing mail float -- the time between a check's mailing and its presentment for deposit -- according to Cindy Murray, executive vice president and head of transaction banking for North America with LaSalle Bank in Chicago. "Now, companies see the expense side of processing checks," she notes.
At Seattle-based Alaska Airlines, Dennis Gawlik, managing director of supply management, is taking a hard look at the expense side of A/P as part of the company's drive to transform its supply chain department, which falls within finance's purview. Gawlik and his colleagues are evaluating the airline's process for resolving discrepancies between invoices and purchase orders. The goal is to determine when it makes sense to simply pay an invoice that differs from a purchase order -- as long as the difference falls within a specified range -- rather than spend time researching the discrepancy. "If you're buying $5 worth of office supplies and you're off by 13 cents, does it make sense to research it?" Gawlik asks.
Segment and Conquer
On the A/R side, here's one strategy that certainly makes sense for most organizations: segmenting the receivables portfolio according to each account's value and risk. Doing so enables treasurers to prioritize the accounts strategically, says Andrew Ashby, president of the Americas with REL Consultancy Group in Purchase, N.Y.
Software can help here, too, as leaders at ITT Industries have demonstrated. The White Plains, N.Y.-based engineering and manufacturing company recently implemented a credit and collections system from The Getpaid Corp., in part because it wanted to better understand its customer base. But it laid the groundwork for the initiative carefully. "Process first, tools second," says Daryl Bowker, director of shared services with ITT Industries.
In part, that approach involved analyzing the company's procedures for researching disputed invoices. Back in 2001, many of ITT Industries' departments tasked specific groups of employees with investigating disputes. However, these employees were often one step removed from the decisions and actions that generated the disputes. For instance, they were usually not involved in price changes, a frequent cause of customer questions.
ITT Industries changed its procedures so that information about disputes is now forwarded to the people who are most likely to be able to resolve them. For example, the shipping department receives disputes that involve product deliveries, and pricing disputes are directed to employees with responsibilities in that area.
Next, ITT Industries installed the credit and collections tool, which links to the company's 48 enterprise resource planning systems to access customer transaction information. The software automatically prioritizes customer accounts based on dollar amount and past due amount. When the company's collections reps access the application each morning, they immediately know which of ITT Industries' 20,000 active customers they should contact that day. "We started hitting more people more often," says Bowker.
Before it implemented the new system, ITT Industries' days sales outstanding was just above industry average, says Bowker. It's now in the first quartile, based on a Hackett benchmarking study. The initiative demonstrates the wisdom of the maxim "If it ain't broke, fix it," he adds. "There's always room for improvement."
Where To Put Cash NowOnce an organization has accelerated its cash collections, how can treasury most effectively deploy the gains? Bob Deutsch, managing director and head of global cash with JPMorgan Asset Management in New York City, notes that, with interest rates rising, companies are less tempted to "stretch for yield" these days. Since mid-2005, treasurers have been putting more money into AAA-rated money market funds, he reports. "They are indicative of investors staying short and liquid," Deutsch says. Because many U.S. businesses are expanding globally, treasurers are increasingly investing in foreign currencies. "We're seeing more investments in euros and other currencies," reports Deutsch. He adds that online investing portals -- some of them, at least -- are finally living up to their hype. For example, some of these tools enable corporate investors to move money from one account to another with just a click of the mouse. |