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

When there’s a problem with cash, the organization’s leaders look immediately to treasury. Faults may eventually be traced back to others, but treasury is expected to give an explanation of what went wrong – and typically what is to be done about it as well. Why? Because the treasurer is responsible for cash. He or she is the organization’s cash manager and the steward of the organization’s most liquid assets (e.g., cash).

In order to appropriately carry out that role and effectively protect and manage cash across the organization, treasury must shoulder that responsibility by taking ownership of corporate cash. While this may look slightly different from one company to another, ensuring that treasury is appropriately shouldering this burden and that company policies support treasury’s ownership of cash constitute a leading practice for corporate treasury.

Before diving into what it means to own cash, the continuum of roles that exist with regards to cash, and how to move toward owning cash if that’s not where you are, we should first clarify what we mean by cash. Different groups in finance define cash differently, but what we mean by the term here is “the control of bank accounts and signers, cash in bank accounts, and short-term investments and short-term borrowings.”*

The “5 Os” of treasury:

While serving as Senior Vice President of Wachovia Corp. (now Wells Fargo), Maria D’Alessandro suggested a continuum of three roles treasury sometimes takes with regard to cash: observer, overseer and owner. Craig Jeffery, Managing Partner of leading treasury consulting firm Strategic Treasurer,** expanded this to five in his book The Strategic Treasurer: A Partnership for Corporate Growth, adding the extreme bookend cases of “oblivious” and “oppressor”.

• Oblivious: Oblivious treasurers are one extreme end of the spectrum. They are characterized by stances such as only seeing their international cash balances based on the GL at the end of the month and being oblivious to any accounts except one or two that are used most often. They consider it the responsibility of other departments to manage their own bank services and cash. While this extreme ought to be unheard of, it is at least fairly uncommon.
• Observer: The observer of cash feels some responsibility to “keep an eye on” cash, but to no particular effect. He or she may forecast cash, but without much expectation of the forecast being accurate or useful to anyone. There may be cash visibility, but only into some of the main operating accounts. The ownership of the cash still lies with other departments in this case, and if the observer wishes to use cash for any reason, such as to pay down some corporate debt, they are likely to feel they must ask others if they can use the cash.
• Overseer: This role is the easiest to mistake for a proper stance, as overseers do many things correctly. They set the policy for opening and closing accounts. They control at least some accounts, and they strongly encourage the use of good account and transaction controls, even enforcing that when possible. However, they do not take full responsibility for ensuring that these controls are always enacted, and they allow other departments and divisions to control and take responsibility for some accounts. They do not take full ownership of cash across the organization.
• Owner: The owner takes full responsibility for cash. He or she maintains adequate visibility to their liquidity positions in real time, with proper controls enforced. They can see all accounts. They view cash as a corporate asset, not a department or division asset, and they recognize that it is their job to steward that organizational asset.
• Oppressor: The opposite extreme from oblivious, oppressors of cash are also thankfully rare. The oppressor is a tyrant of cash, dismissing the needs of others in the organization because they currently have the cash invested and are happy with the yield they’re getting. They may maintain an iron grip on payment terms with little concern for the vendors’ opinions and needs, or they may be too stingy with the cash to allow for appropriate inventory. They may suggest measures such as making everyone pay COD and getting rid of credit and collection staff. While owning cash is appropriate for treasury, this oppressive behaviour is certainly not.

Owning cash means accepting the responsibility for it, ensuring that you have the ability to do whatever is necessary to protect it, and remaining engaged and having a plan to know what needs to be done in various situations. As the cash manager, who will be the first phone call the organizational head will make when something goes wrong with cash, this kind of ownership is treasury’s proper role.

Seeking to own cash is not a way in which treasurers seek to overly leverage their control of this asset to force other actions or behaviours (that would characterize the “oppressor” in our schema above). Rather, owning cash means ensuring that your stance is sufficiently strong to support what the company needs from you. Indeed, it is necessary for treasury to own cash in order to properly protect it, and the company as a whole will run more smoothly and securely with its treasurer in the proper role.

Leading practices for owning corporate cash

Thus far, this discussion of owning cash has been largely conceptual. What are the practical implications? How is treasury to take ownership of cash? The answers lie largely in ensuring that certain policies and processes are in place to position treasury appropriately with regards to cash.

• Financial Account Policy: The policy and the framework it flows from should be authored, updated and controlled by treasury.
  • Account Opening & Closing Authority: With every account being a point of exposure, current and accurate lists of accounts and signers must be maintained. While treasury may not be directly performing all the tasks required by this policy, we recommend that treasury take the initiative to perform self-audits on a regular basis to ensure that the policy is being upheld properly.
  • Control of General Ledger Codes: The leading practice for the use of GL codes is two-fold. First is that treasury should have the final say over the use of GL codes for cash and cash accounts. Second, an organization should maintain a separate GL code per financial account.
  • Signer Authority: Per your company’s articles of incorporation or board of directors, treasury should have authority over account signatory processes.
  • Controls: Financial account controls may include transaction-level controls, account-level controls, reconciliation controls, batch-level controls, etc. Some should be regular policy, while others may be left to treasury’s judgment and implemented on a case-by-case basis.
  • Compliance Reporting: Treasury should ensure that the financial account policy has compliance reporting build into it. This will cover exception reporting for account-level controls along with general statistics.
• Reconciliation: There are multiple types of reconciliation. While general ledger reconciliation is usually the responsibility of the controller’s office, and file control reconciliation as a whole is not typically within treasury’s purview, bank reconciliation and treasury reconciliation or “treasury proof” are both important aspects of owning cash.
  • Bank Reconciliation Policy: As an element of cash control, the bank reconciliation policy may need to be created by treasury alone or in conjunction with the controller. A clear definition of what qualifies as ‘reconciled’ is often overlooked.
  • Treasury Proof: This is treasury’s own reconciliation process that is a validation of the daily cash position. For proper ownership of cash, treasury should perform this reconciliation process early every morning. The purpose is twofold: identifying the cause of variances between expected and actual positions from the prior day and determining how this information may impact today’s cash position or the near-term forecast.
• Visibility Requirements: You cannot appropriately take responsibility for what you cannot see. For many companies, proper visibility may require using technology. Through whatever means suit the organization’s complexity, however, treasury should ensure that they have the following:
  • Comprehensive, up-to-date inventory of all accounts and signers.
  • Comprehensive, up-to-date inventory of all debt and investments.
  • Daily visibility to summary account balance data for every account (not just every “important” account).
  • Daily or weekly visibility to each account’s transaction details. The frequency of this may vary from account to account, but it should not be less frequent than weekly.
  • Cash forecasting (short-term) that includes operating, financing and capital cashflows and does not neglect to account for large, one-time items.
  • Automated accounting.
  • A banking structure that is intentionally designed to offer clear views and efficient cash mobilization. For many, this means a concentration or header structure. (We have discussed this at length in another leading practice article.)
• Performance Metrics: “What gets measured gets managed”, or at the very least, it is quite difficult to manage what goes unmeasured. Track various activities that impact cash and use them to help drive balanced behaviour. This includes target balances, forecast variances and timeliness of cash reconciliation.
• Recording: Cash performance can be optimized by ensuring that the cash recording process, while still meeting accounting’s standards and needs, also facilitates treasury’s ability to control cash properly. In order to influence this properly, however, treasury must make sure that they have developed a good understanding of accounting – its goals, processes, standards and so on.

 Having the above processes and policies in place are to some extent leading practices themselves, but they also form the foundation for the vital, overarching leading practice of treasury owning cash. Cash is king. As treasurer, it is your job to protect the king. Taking a stance of thoughtful, responsible ownership in this role will help both you and your organization to thrive.

 

*Jeffery, Craig A. The Strategic Treasurer: A Partnership for Corporate Growth.

**Disclosure: Strategic Treasurer owns CTMfile

 

Read more from this series:

Part 1: Bank account management

Part 2: Bank relationship management

Part 3: Cash concentration

Part 4: Liquidity structure