CASH MANAGEMENT
Most companies have multiple bank accounts. At any particular moment some of these may have positive balances and others be overdrawn. The problem of managing these account balances is exacerbated when the company operates in a number of countries and has accounts in a variety of currencies. Corporate treasurers have four prime objectives in terms of cash management:
Minimize funding costs. Multinationals maintain bank accounts in many countries. At any given moment in time some accounts may have a positive balance and others be overdrawn. It is therefore important to minimize funding costs on those accounts that have a negative balance.
Maximize returns. In like manner the treasurer seeks to maximize returns on accounts with positive balances.
Manage liquidity. The company must also manage its cash positions in order to be able to pay its suppliers, employees and other creditors in a timely manner.
Remain within the law. In many developing countries the laws concerning cross-border foreign exchange transactions are complex and may be open to interpretation. A multinational has to take care to remain within the legal restrictions that exist in each country in which it operates.
This is where banks come into play. Their cash management groups ensure that they remain current on all the legal constraints and provide the necessary systems infrastructure. There are two principal methods employed:
Sweeping. Sweeping involves the physical transfer of funds (albeit by electronic means) between accounts in different countries. Care has to be taken for two reasons. Countries with foreign exchange controls do not permit sweeping. The second reason is that such transfers may be viewed as intercompany loans and this may have adverse tax implications.
To further complicate matters differences in time zones between countries, and even within countries, must be taken into account.
Pooling. Pooling involves a notional consolidation of a company’s accounts. The bank then calculates interest to be paid or due after netting the returns on the balances.
This is a gross simplification of what is a highly complex business segment requiring sophisticated infrastructure, an international distribution capability and secure systems. Some banks use cash management as a loss leader because it gives a huge insight into its customers’ cash positions and flows and because it is likely to give rise to related business in areas such as trade finance and foreign exchange.