Improve cash management when you change banks


Most businesses are motivated to seek a new banking relationship only when they need a new or different loan structure to support their changing or growing business. At this point, the company’s treasury and finance officials may be particularly focused on securing financing, but it is also the right time – during interviews and due diligence with potential lenders. – to capitalize on innovative banking technology in order to improve the organization’s cash cycle.

The effort to improve a key loan structure goes well with upgrading cash management capabilities. The treasury team should take advantage of this opportunity to seek not only a strategic lending program from a bank that understands its market and horizons, but also personalized cash management capabilities that can become essential to the progress of the bank as well. the company than a tailor-made tool. measure the loan relationship.

Here are five considerations treasury teams should keep in mind when exploring and evaluating their options for banking partners: Getting both an appropriately sized loan facility and a tailored cash management strategy.

1. Expand the scope of due diligence.

While capital requirements may be the trigger that sets off the lender due diligence process, they are only half of what the organization should consider when choosing a funding resource. Certainly, a favorable loan structure is one of the pillars of the decision. From there, treasury and finance officials should broaden their research to also look for areas of potential improvement within cash management processes, including accounts payable and receivable.

To understand the impact that better cash management could have on the company’s cash flow, consider how optimizing payments and accounts receivable (A / R) could reduce the amount that the business must borrow. Suppose an organization with $ 20 million in annual revenue has $ 55,000 in receivables every day. Reducing past due sales days (DSOs) by 10 days would equate to $ 550,000 in additional cash flow for this business, which means that the improvements to accounts receivable could reduce the organization’s total debt by $ 550,000. At an interest rate of 5%, this would translate into a savings of $ 27,500 per year.

Beyond these direct financial benefits, well-designed cash management processes provide day-to-day visibility into cash flows and more responsive controls. It is true that capital is king, but the performance of technological cash management solutions can have major implications for the operational efficiency of treasury. Considering what these systems can do, from automating payment processes and streamlining receivables management to reducing the risk of fraud, cash management capabilities deserve a place at the decision-making table. decision when an organization chooses a new banking partner.

2. Expect cash flow visibility.

When the points of the loan agreement look good, the treasury team should assess what else the bank can provide. They need to think about the types of questions their potential banking partners are asking. Some banks think that the loan agreement is the driving force behind the sale, and it certainly is. However, corporate treasurers who want a more complete relationship should seek a widening of openness.

The bank should undertake a thorough exploration of how the business operates in terms of seasonality, customers, suppliers, opportunities and constraints, and should assess whether internal treasury and financing processes are unnecessarily manual and intensive labor. Expect a cash management professional from the bank to participate in the larger discussions to help the organization improve its overall financial processes, which in turn would help make its capital more efficient.

If a potential banking partner just tells you, “Alright, we’ll just switch you over to our cash management products,” that could be a red flag. Transferring today’s processes to a new institution precludes the possibility of maximizing efficiency and benefiting from emerging technologies that could better meet the needs of the client company. Instead, the bank should be interested in helping prospects assess whether the processes and technologies they put in place will continue to make sense for the future state of the business. The treasury team can also initiate these conversations, by asking potential banking partners about their cash management capabilities, to determine if they have any new technologies or methods that the organization may wish to consider.

3. Invest time in the initial assessment of potential banking partners.

Changing banks requires significant effort on both sides of the relationship. The company’s treasury group should spend enough time determining whether the potential banking partner would be a good fit and should share details about how their business is operating.

During this time, bankers should be prepared to invest a lot of time in learning about the business of the business and helping to identify weaknesses and opportunities. It is especially useful if the potential banker understands the particular industry or segment of the organization. Banks need a lot of information to provide a comprehensive set of solutions, so they need to ask a lot of questions, to avoid making assumptions about how the business is run. In fact, they need to have a good understanding of how the business works in order to recommend the appropriate solutions.

For this reason, treasury and finance managers should be prepared to share the operating details of debts and receivables, as well as the specifics of the accounting platform. They should also expect to receive a suitable set of relevant cash management options to consider.

The more time both organizations (customer and bank) spend on upstream reviews, the greater the rewards for everyone downstream.

4. Consider not only the costs, but also the benefits.

Like almost everything, finding the best solution for cash management services involves a cost-benefit analysis. The goal is to determine the right level of services to optimize efficiency and effectiveness by automating processes and potentially freeing up staff. Value-added cash management systems that focus on automating accounts payable (A / P), receivables, and reporting can enable a finance department to maximize cash positions, reduce borrowing requirements, and reduce borrowing requirements. create opportunities to use staff differently.

Banks offer a wide range of these types of solutions, from simple integration of acquisition cards or the automation of supplier payment processes, to PO Box services with state-of-the-art imagery and straight-through processing. Sophisticated online banking solutions allow corporate treasury staff to transact from anywhere, including their phones. And businesses that can benefit from broader system integration may be able to connect their internal enterprise resource planning (ERP) platform to the bank through APIs, to create even more transparent workflows. .

The ultimate goal is to build a set of cash management processes tailored to the specific needs of the banking client company. It requires a significant amount of upfront due diligence, but it can pay off a lot: a truly personalized outcome can save time and money, and provide the elasticity to handle future needs.

5. Integrate fraud prevention solutions.

Cash management services are essential in thwarting potential payment fraud attempts. In 2020, 74% of organizations were the target of payment scams, according to the Association for Financial Professionals’ 2021 AFP Payment Control and Fraud Survey. Businesses that haven’t recently been the target of a scammer are among the lucky few and shouldn’t count on that luck to keep going. Preventing bank fraud is an ongoing effort.

Positive payment services are one of the most effective ways to protect payments by check, wire transfer, and ACH. A series of targeted cash management filters, including segregation of duties, out-of-band authentication, and structured internal entitlements designed to enhance payment security, can further enhance the effectiveness of positive compensation. This is all the more reason to focus on cash management as an essential aspect of any move to a new bank.

It is inevitable that companies that choose a banking relationship will focus on choosing the right loan partner. However, if the due diligence process ends there, the treasury and finance team may miss a golden opportunity to improve the company’s cash management and fraud control capabilities. Choosing the right bank takes time and effort, but working early can ensure that the long-term banking relationship will be much more rewarding.

Head photo: Tim Boothe

Tim booth is the COO of Western Alliance Bank, a national investment bank named the number one and best performing of the 50 largest U.S. public banks for 2019 and 2020, by S&P Global Market Intelligence.


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