Surveys of business efficiency in recent years frequently show the financial supply chain as a significant source of inefficiency. This can sometimes affect the business to a greater extent than inefficiency in the physical supply chain.

In order to improve cash management, businesses must take a holistic approach. Organisations must improve communication and integration between the different parts of the business. They must have effective cash forecasting mechanisms in place and must arrange their banking and finance in such a way as to maximise benefits.

The financial supply chain contains many links. In a large corporate the treasury department may manage working capital, whereas the sales department generates revenues. The operations department manages the assembly and delivery of the finished product/service at the core of the organisation. There is also the procurement department, responsible for managing procurement terms and sourcing, and the finance department, responsible for managing all commercial payments, along with accounts receivable and accounts payable.

The actions of each department will have an impact on the working capital. Each department often has its own set of key performance indicators (KPIs) along with incentive programs, so the efficiency of the supply chain may not be foremost in their mind when it comes to everyday activities. This problem could present an opportunity for treasurers.

Cash management could be the hub activity which co-ordinates working capital, risk management and other processes within the supply chain, thereby ensuring the company takes a holistic approach to the entire supply chain.

Cash-Flow Forecasting

Cash forecasting differs from budgeting. Budgeting is the creation of aspirational out-turns, designed to motivate the performance of individuals and organisations. In contrast cash-flow forecasting should be an objective and independent assessment of the likely outcomes of cash activities, taking into account current trends, plans and budgets. It should be independent of management intervention.

Cash flow forecasting is at the heart of cash management. The most important element of good cash flow forecasting is of course accurate forecasting, not only of sales, but also of the date of payment for those sales. Sales forecasts must be integrated into the internal corporate communications systems and be widely understood throughout the organisation. Not only is cash flow forecasting dependent upon good corporate communications, it also has the potential to improve those communications.

Responsibility is the key. Where the business is composed of multiple separate units, it is important that one individual has clear responsibility for corporate cash management. Additionally, it is paramount that the business-to-treasury bridge reinforces that responsibility.

For many organisations an excel spreadsheet is the tool of choice for corporate cash management. The apparent ease of spreadsheet setup and the flexibility with which it can be changed make it attractive for this application. It is definitely a useful place to begin for any organisation which is starting out on this road. In such circumstances the spreadsheet will be developed and updated by hand. However, in the long term the ongoing maintenance of a cash flow forecasting spreadsheet will become a hindrance.

There is much administration associated with cash flow forecasting spreadsheets and the very flexibility of the spreadsheet can often be its weakness. If the system is flexible, then adherence to targets becomes more easily flexible. Eventually, a complex business may consider an integrated system to be chosen from the many such tools available on the market.

The benefits of cash management may sometimes be enhanced by restructuring banking arrangements. For a conglomerate, it may be possible to arrange cross-company pooling to maximise the benefit. Increasingly with the progress of SEPA, it will become easier to manage cross-border businesses within the Euro area from a single bank account. Even cross-currency pooling may be possible where the organisation is operating across multiple jurisdictions.