Treasury Consultants Uncover Hidden Treasure: Profit

The definition of Treasury is “a place in which treasure is kept.” It can also be a place where treasure is hidden. In the case of the corporate treasury department, that hidden treasurer is profit. To uncover that treasure, you need an experienced treasure hunter; the professional Treasury Consultant.

In today's challenging economy, a dollar saved in a company's treasury function is no less important than a dollar earned from revenue. Moreover, treasury savings are sometimes more expedient.

Many CFO’s may not have the expertise, or the time, to identify all of the potential savings that can be generated by sound cash management. In either event, finance executives should consider hiring outside cash management consultants to help enhance their bottom line. An outside consultant may be quite advantageous in a situation where the treasury department is impaired by inefficiencies due to a lack of expertise or simply understaffed.

If your company’s cash management operation has not been reviewed for awhile, your treasury staff is inexperienced, you lack the budget to add full-time staff, your business has outgrown your current treasury department or you don’t have a bona fide treasury department, you should seriously consider engaging a treasury management consultant. The consultant will be able to focus on the most efficient system to administer your company’s cash.

Once you have identified the need and made the decision to hire a treasury consultant, you need to interview several consultants to determine what services they offer and how they can best meet your needs. During the interview process you should ask the candidates how they would structure your treasury operation. The consultant should be able to exhibit a successful track-record of engagements in implementing and/or streamlining the following operations:

• Accounts Receivable (Collections)
• Accounts Payable
• Daily Cash Positioning and Forecasting
• Banking Services & Products
• Lockbox Facilities
• Automated clearinghouse and electronic data interchange.

The consultant should explain how they would streamline these activities, automate where feasible, improve work flows and procedures and address the cost of banking services to achieve the best service for the best price. They should also be able to illustrate how they have been able to uncover problem areas and recommend practical solutions, At this point, you should be able to determine the scope of the consultant’s involvement and how effectively they will interact with senior executives and other key personnel. Though important, don’t get preoccupied with price. The expert consultant will be able to uncover savings far exceeding their fee. Accordingly, they know what they are worth and expect to be compensated accordingly.

Once you have narrowed your search down to 3 to 5 finalists, send to them a Request for Proposal (RFP) outlining the scope of the project. Their proposal should include the plan, methodology, timetable, fees and references. The RFP must have a deadline for responding with the proposal. Once the proposals are received, you must do your due diligence by calling each reference to determine the consultant’s quality of work, knowledge, interaction with different levels of management, cost benefit, whether the project was completed on time and whether the consultant would be retained again. You may now select the best consultant and begin the project

Cash management consultants are able to provide significant bottom line savings. Many companies fail to provide the required resources to their treasury department due to time restraints, budgetary priorities or a misunderstanding as to the importance of the treasury function. As interest rates rise and inefficiencies coalesce, inadequate cash flow due to inexperienced management of your treasury function becomes more and more expensive

www.treasurymasters.com

The Early-Pay Discount Facade

Simply put, a cash gap is created when cash inflows don’t keep pace with, or stay ahead, of cash outflows. In an effort to prevent an adverse cash gap situation, many businesses will attempt to entice early payments from their customers by offering what is known as an early-pay discount. Conversely, many savvy customers will offer to pay early in exchange for a discount. Don’t get suckered into this machination. It’s nothing but a way to obtain favorable pricing by equating the cost of product with the cost of money.

There are two primary arguments against giving an early-pay discount:

The first reason is cost: Let’s say for example that your standard terms are Net 30 days. Your customer offers to pay you in 15 days for a 2% discount. Basically, they are offering to increase your cash flow by 15 days and you will pay them 2% for that 15 days. Even if they pay on time, that’s an APR of around 48% based on the average funds employed. Sure, the more money you have in hand, the less you need to borrow. However, at those rates, you might as well go to Bobby Bacala

The second reason is Compliance: The fact is that very few customers actually pay within the discount period. In fact, most companies cannot even process invoices fast enough. Nontheless, they take the discount. They have now eroded your margins, and by extension your bottom line, and you have gained little or no working capital in return. In addition, you now need to expend administrative costs attempting to collect the shortage or deciding to write it off.

Companies want their money, and getting paid timely is imperative to a healthy business. That said, the best way to encourage timely payment is to offer a good product at a competitive price to stable customers. Simple. Right? Not really but it’s better than trying to buy customer performance..

The best way to avoid a cash gap issue is to establish sound policies:

First: Don’t sell to companies that don’t pay. Establish a sound credit policy. When you sell on credit, you are giving that customer a company asset and trusting them to pay for it. Do your due diligence. Make sure that that they have the stability, ability and willingness to pay.

Second: Don’t give customers any reason not to pay: Billing errors, shipping errors, invoices mailed late or not at all, etc. are all invitations to your customers to delay payment. Make sure that your billing and shipping departments are double-checking their work.

Third: Establish payment terms that are consistent with your Accounts Payable requirements. If you pay your bills in 30 days, your terms should be 30 days.

Fourth: Establish a tenacious collection policy: Once you have established your terms, they must be enforced. Customers pay beyond terms for a myriad of reasons. It is essential that you educate your customers on your expectations and the consequences if they are not met. Close follow-up of receivables and some “Dialing for Dollars” when needed will, in most cases, keep the payments coming in on time. You should also talk with your banker about establishing lockboxes and electronic payment systems to minimize the float and mail delays.

Most companies need to borrow money from time to time in order to bridge the cash gap. However, you should never pay 48% for the loan…..or even 24% given today’s cheap money. If you have a working capital line of credit, use it wisely but use it first. If not, work with your banker to establish one at the best possible rate. Start at prime and go from there. There are also other ways to enhance working capital. If you absolutely must, use a credit card but don’t borrow money from your customers. It's a windfall for your customer but you can’t afford it.

Picking the Right Global Banking Partner

Growing economic considerations are motivating more and more American businesses to actually set up operations overseas, not just ship their goods abroad. Globalization presents a multitude of challenges. For the corporate treasury professional, the challenges are how to cope with the different regulations in each country, regulatory restrictions on capital inflows and outflows and how to consolidate it all under the one roof of the corporate treasury purview

The demand to consolidate foreign treasury operations within a domestic centralized treasury system is driven by the growing awareness of financial controls, as well as the need for cost and time-effective methods. Accordingly, corporate treasurers must have a consolidated view of their activity. The first, and arguably the most important, step is to establish a common banking platform. They can then manage their treasury operation more effectively across country lines. This begins with selecting a knowledgeable banking partner.

Ideally, this partner will be a global bank with deep roots in local markets across the treasurer’s international sphere. The enormity of these global institutions, however, tends to limit their ability to provide a centric relationship to provide the comprehensive strategic and analytical reporting data as well as compliance, regulatory and country risk information required for effective global cash management.

It is therefore more important that the corporate treasurer select a global financial partner who is familiar with their company, who knows how they collect, how they pay, and how they manage the time zone challenges to ensure maximum effectiveness wherever on the planet they do business.

Lastly, it is imperative that the corporate treasurer not lose any functionality of their local treasury operation. The right financial partner will provide an assigned account manager who will be able to help structure an effective solution by providing electronic banking systems and host-to-host connectivity to centralize the company's accounts payable, accounts receivable and payroll functions as well as a single-contact support point for the treasury professional.