This is the third article in a series on leading practices in corporate treasury.

Cash management refers to the collection, concentration and disbursement of cash. Knowing exactly where your cash is at all times is the key to prudent cash management.

Cash concentration involves the transfer of all funds or pooling of cash funds from different bank accounts into a single (master, concentration or target) account, usually at the end of the day (and in some cases on an intra-day basis).

Cash concentration can be structured as per the specific requirements of the company. For example, they may be zero balance accounts (ZBAs), whereby some bank accounts are completely zeroed out by moving the funds to another account, or they could be set up so that sweeps occur only when target balances (pre-set level of cash) have been achieved. Cash concentration is an important treasury tool to optimize a company’s cash flow.

So how can companies with multiple bank accounts, organizations with subsidiaries – particularly those with operations in several countries – and corporations with highly fragmented cash balances repurpose the funds for improved visibility and availability, reduced fee, and debt paydown?

Here are our recommendations on how to apply leading practices for cash concentration. We are aware that these may vary or differ depending upon the location, size and complexity of a business’s operations. Nonetheless, there are some themes that stand out - effective cash management, cash positioning, controls, security and banking relationships.

• Design cash concentration account structure to optimize cash management: Setting up an optimal bank concentration account structure for a corporation not only mitigates risks, but also helps in consolidating cash balances for deployment, loan repayment or maximizing investment potential for the company.

It is imperative to keep the dual purpose of cash concentration accounts in mind while designing the structure. “There are two primary purposes of cash concentration accounts – mobilizing funds for efficient cash management and isolating certain activity”, said Craig Jeffery, managing partner at Strategic Treasurer, a leading treasury consulting firm. ⃰

“If you run and summarize your activity or if you concentrate your balances into this concentration account, it makes it a lot more effective and optimal for your cash position decisions because many organizations may have hundreds to thousands of accounts. This type of modern concentration structure lets the organization consolidate all of that cash in one location and helps you make your decisions for investment or paying down debt much more easily.”

Modern cash concentration structures support a high level of corporate treasury centralization because it centralizes cash from all its bank accounts as an efficient way of passing down funds to those parts of the organization that need them.

 

Cash Concentration Account Structure

By Strategic Treasurer

“Header” Structure versus “Hourglass” Structure

Source: Strategic Treasurer and TIS sponsored webinar held on December 8, 2021.

In the above chart, there are two popular methods of displaying the concentration structure. On the right side, for example, we see the hourglass structure, which reflects a scenario wherein as a company grows, it reaches a state where it has a number of accounts, so it sets up a modern concentration system for its organization. The company may have $100 million or $0.5 billion in revenue or more and is now operating different lines of business and has established depository and collection accounts that feed into the concentration system, and the concentration system funds disbursement accounts.

The concentration account is very clean and has little activity. It only contains summary information from collection and disbursement accounts, which are primarily accounts dedicated to particular types of activity. Treasurers can put controls on them to ensure only appropriate activity is allowed and allows their team to be fully aware of what’s happening. These accounts are actively monitored and provide an easy way of determining the organization’s cash position. Furthermore, it may allow for easier forecast creation and variance analysis activities. It will also assist the corporate treasurer to detect fraud, take a closer look at the cash flows, and possibly have items going to lines of credit, investment accounts, custody accounts and more.

The header structure (left side), where the cash sits at the top of the house, reflects the primary way most European organizations render their banking structure and is a method of cash mobilization or concentration where there’s a top account that money flows up to or down from into the different operating accounts in the structure. They are quite synonymous to the concentration accounts, and the difference is really more of a regional naming and illustrating convention.

The header system has a zero balance account (ZBA) structure to physically move money through the ZBA up to or down from header accounts. In essence, you have the header account with collection accounts feeding up to it or operating accounts, and the same thing with the disbursement accounts, so you have a view of the header just as you have in the concentration system. The concentration activity for some of the header structure may be done manually. The header structure can help you identify discrepancies from your actual forecasts so that you can make or adjust your decisions for today far more accurately.

In the hourglass cash concentration structure, you can view the depository accounts on the left hand side moving over on an automated basis either with the ZBA or automated standing transfer over to a concentration account. To the right side, funding for disbursement accounts would come from the concentration account in the middle vis-à-vis a ZBA or certain types of draw down wire transfer that may be put in place, rendering the structure looking more like a butterfly.

There are a few other ways to draw out a suitable cash concentration structure as well, but the header account and hourglass style structures dominate.

Cash concentration structures can help with bank account management (BAM) and account rationalization as well. Once the treasurer gets to a modern concentration structure, it should become clearer which accounts can be collapsed together, reducing the number of accounts, which will reduce the points of exposure.

“Corporations must consider the downstream effects of other systems like the ERP system, the accounts receivable (AR) system, the accounts payable (AP) system, and payroll. Also, do you set up other structures that relate to this, like pay on behalf of or collect on or receive on behalf of type of structures, which may allow you to collapse items a little bit further? Those are a few of the factors to consider,” commented Jeffery.

Most accounts will cost an organization during the course of the year more than $2,000 to manage, report on, audit, and review, and sometimes it’s five times as expensive. Every account has a cost. It's a point of exposure, and rationalizing can be a good thing when done with proper criteria.

Corporations that adopt a modern concentration banking structure to optimize cash management ought to do so while supporting business operations and established accounting norms for the organization.

Despite the legal, tax and regulatory challenges of integrating multiple currencies and countries into a global framework, cash concentration is a well-established technique.

Corporations often initiate a phased-in implementation of cash concentration accounts by building up local or regional hubs as a first step. Once established, cash concentration builds a sound edifice for effective liquidity management. Corporate treasurers can then align concentration accounts with treasury organizational structures such as in-house banks and shared service centers. 

• Cash positioning and proof of cash: Cash positioning seems to be a rather simple activity but does pose its challenges.

Treasurers need to monitor, manage and maintain daily cash flows, and this includes the monitoring of group-wide account balances that need to be collated to determine the cash position.

For a global corporation that has several bank accounts across countries and in a variety of currencies, it can be quite daunting to determine which payments have been received or disbursed. Which payments and transfers have to be initiated? What’s the accurate closing balance for the previous day, and the precise opening balance for the current day? How much cash will flow into multiple accounts, where and in which currency during the day, and what disbursements will the treasurer have to make and from where?

Establishment of a modern cash concentration system should be spurred by real-time cash position reporting capabilities, which will help overcome these challenges and facilitate better determinations on cash positions and cash forecast levels. This will also enable adept inter-company funding and administration and empower corporate treasurers to focus on strategic decisions relating to the investment of surplus cash or the consolidation of debt.

“Cash concentration fits into the overall cash management structure where you have different types of activity going through different types of accounts. This also helps with the forecasting process, not only because you can see and spot differences on a zero day basis, but also because you can see and manage flows with the level of detail you get back from the regional or global banking system, and it tends to help in that way significantly,” observed Jeffery.

A cash concentration structure that is automated and provides real-time comprehensive visibility, greater oversight and control into cash positions enterprise-wide is more important than ever. This also abets better understanding of proof of cash. It highlights an array of reconciliation issues in a company’s accounting records, including errors in recording interest income or interest expense, irregularities in cash disbursements or cash receipts, and more.

Adoption of automated cash concentration solutions makes it possible for the system to take over and move cash when required. This automatic cash movement presents to the corporate treasurer a consolidated view of a corporation’s cash position that aids in optimizing interest and working capital, lowering borrowing costs, reducing the need for external debt, avoiding a liquidity crunch during uncertain market conditions and also maximizing opportunities during times of growth.

• Security: According to the December 8, 2021, webinar poll conducted by Strategic Treasurer and TIS, 62% (103) of the 166 respondents polled use a cash concentration system and purpose specific accounts as a security measure to protect their accounts.

 

Source: Strategic Treasurer and TIS webinar poll conducted on December 8, 2021.

 

This lends veracity to our belief that automated cash concentration not only offers efficient access into available cash but is also considered a prudent security measure to protect a corporation’s data and assets.

“There is a lower level of risk with modern concentration structures. Every single account represents a point of exposure, and some people say, ‘Well I don’t want to concentrate funds because then someone could get all my cash as opposed to having separate accounts.’ This allows you to see and manage separate accounts but doesn’t prevent you from setting up other types of account level or transactional level controls to protect it, so while there’s always a risk with your banking structure, including use of concentration accounts can help you reduce those risks,” remarked Jeffery.

“It can also help with fraud detection because you can, in many cases, more readily spot anomalous activity that shouldn’t be there, and so it helps in a number of ways – from traditional cash management to security.”

Automating the cash concentration process will assist the corporate treasurer in eliminating manual intervention. This will create a more secure, convenient and cost-efficient system for the company.

• Control: It’s the structure that helps a treasurer layer in complete and responsive account level and transactional controls.

A well-designed, real-time visible concentration structure will give treasurers a high degree of direct control across banking relationships and over their funds, while alleviating liquidity and counterparty risk and protecting assets and data.

This means that they would be able to take instant and on-demand action from anywhere in the world. As global market conditions fluctuate, the company’s fortunes change or pressing financial needs arise, corporate treasurers should be able to modify target balance parameters or suspend or reactivate sweeping.

It is also recommended that treasurers periodically review the inherent controls of a modern cash concentration system, such as target balances, inter-company lending rates, market rates, or calculations of inter-company loan balances.

Those using cash concentration should implement policies, procedures and guidelines to identify, measure, monitor and control risks and to ensure that corporate governance, compliance and regulatory obligations are fully met. The treasurer should have built in checks and balances to ensure that a change cannot be made to a liquidity structure without approval.

• Banking relationships: Treasurers manage group-wide risk and liquidity, enable growth and make a corporation financially efficient and robust with the help of their banking partners.

Corporate treasurers’ cash concentration processes must get support from their banking partners. They should partner with banks that provide liquidity positions in all of the currencies in which the company conducts business and also capture varied sources of liquidity risk. The bank’s liquidity solutions should be integrated with the corporate’s systems, like AR and AP solutions, for faster and improved decision-making.

Cash concentration is an important requirement for a global company that regularly needs to move funds across borders involving multiple accounts and currencies. Corporations should seek banking allies that can help them optimize their cash flows, save heavy interest costs, and reduce external debt by offering an efficient cash concentration solution encompassing zero balance sweeps, target balance sweeps, fixed sweeps, investment sweeps and threshold sweeps. In addition, those banks that can offer corporates regional banking relationships for localized services can end up as the primary bank or the lead bank to consolidate funds from other banks as a part of the ZBA sweep.

Cash concentration is primarily an aggregation of cash to increase cash management efficiency. Corporations can improve the visibility and availability of their funds and gain more control over deposits from diverse locations while ensuring that they earn higher yields by investing its consolidated balance, maximizing internal self-funding to reduce interest costs, and more.

Having a strategy for cash concentration is relatively commonplace, but adopting our recommended leading practices in cash concentration remain an important step and differentiator toward optimizing cash management for treasurers so that they become more strategic and drive a future of possibilities for their organization.

⃰ Disclosure: Strategic Treasurer owns CTMfile.

 

Read more from this series:

Part 1: Bank account management

Part 2: Bank relationship management

Part 4: Liquidity structure

Part 5: Treasury owns cash