Putting Cash to Work

Australian businesses say that understanding their cash position is the single most important factor in driving efficient use of their funds.  

And yet, according to Visa’s 2015 Cash Flow Visibility Index, 70 per cent of leading Australian companies lack the capability to forecast their cash flow more than 60 days ahead.

Given this lack of transparency, cash can go under-utilised as organisations struggle to understand the flow of payables and receivables into their transaction accounts.

Make cash work for you

Many businesses have spare cash in their transaction banking accounts, which can sit around for a short time, while for others it might languish for long periods.

This means opportunities are being missed. Instead of sitting in everyday transaction accounts accruing little or no interest, this cash can be put to work generating returns.

This not only raises the balance of deposit accounts, it can also reduce the dependence on debt funding, with its associated costs.

“When I look across the portfolio of products it is clear that businesses often place too much cash in their transactional accounts,” says Patrick Allan, Senior Product Manager, Everyday Needs for Westpac.

“There is a surprising amount of money held in transaction accounts for long periods, and that suggests that even some companies with sophisticated financial management are not managing their cash to work best for their business circumstances.”

Make a bucket list

Allan recommends that businesses look at cash in much the same way they look at debt, which is best characterised as “looking at different buckets” for different purposes.

In one bucket is short-term debt which, although it might be more expensive, is there to help navigate periods of lumpy cash flow.

Then there is another bucket for longer-term debt, which is sourced from the bank through a commercial loan and from debt markets at a lower rate to fund growth or significant capital purchases.

“If businesses apply some of this thinking around their deposit products, that could help drive the best decisions,” says Allan.

“A good cash-flow accounting tool will give you a pretty good fix on your comings and goings in terms of cash, and once you have that understanding you can then place your money in products designed to give you a better rate of return.”

Choose your accounts wisely

Depending on the period of time the cash will be available, corporates can choose between at call savings and term accounts, which although they may have more restricted access than transactional accounts, should deliver a better rate of return.

Then there is the interest-rate environment, where chief financial officers, treasurers and business owners can take a view on likely movements and deploy their spare cash accordingly.

“You might have a view that rates are going to go down, so if you lock in rates now to a term deposit you will be on the right side of any downward movement, in saying this you should always seek expert advice to guide your risk management decisions” says Allan.

“The bank will reward you for locking those funds away and it does deliver certainty, but at the same time you want to make sure you know you won’t need those funds, because it can be complicated and sometimes expensive to release them or increase your use of short-term debt.”

The key to this is understanding cash flow and having sufficient visibility across accounts.

For many corporates, this means aggregating a single view of their cash position across accounts in multiple currencies, with different banks, in different jurisdictions.

The Visa Cash Flow study showed that Australian corporates do significantly better in this area than regional peers, largely because of greater levels of automation and the implementation of technology.

Larger Australian corporates, for example, spend an average of 116 hours a week manually entering data and preparing cash-flow reports for the analysis that will deliver greater transparency.

Across the ten markets global surveyed the average was 253 hours, with many corporates still tied to the use of spread sheets for their reconciliations.

Control your spending

Another key was controlling ‘rogue’ and ‘leaking’ spending within the payment platforms, which are increasingly integrated with cash-flow management and forecasting.

If the integration of these functions can be optimised, the result is a continuous cycle of efficient working capital management, which identifies and then deploys previously hidden pockets of liquidity to greater advantage.

“It is not only technology, but business processes and a strong governance framework which combine to deliver best practice around cash management,” Allan says.

“All of which helps the bottom line without the business having to generate any new revenue.”

Words by Lachlan Colquhoun

The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.