Corporate TreasuryCentralisationCentralisation OutsourcingFresh Gains to be Made in Cash Management Outsourcing

Fresh Gains to be Made in Cash Management Outsourcing

Traditional or classical cash management can be seen as settlement outsourcing. This is a process where corporates – large or small – handover the final settlement of any transaction to the bank for execution, whether payables or receivables. Further, every settlement involves a change in the nature of the underlying asset or liability. For example, cash converts to raw material on execution of a vendor payment instruction, or work-in-progress converts to finished goods on payment of salaries or utilities and so on. Current cash management services focus on transitions of balance sheet items rather than the items themselves. The future of cash management is to focus on the individual balance sheet items themselves – be they cash, payables, inventory or outstanding as much as to focus on services which merely change the states of the balance sheet items.

Every transaction has its life-cycle, from prospecting to negotiation to contract, delivery and settlement. These days corporates expect banks to complete the entire settlement aspect of the transaction life-cycle so that corporates can concentrate on the core operations of delivery.

Take the example of payroll processing. Every employee has his or her own contract with their employer with its own terms of salary, perks, allowances, responsibilities and privileges. However, the actual payroll processing itself is outsourced to a third-party, which can be a bank or back-office processing organization. Similarly, on the receivables side, collections may be outsourced to a bank or collecting agency. The banks take responsibility for picking up the cheques from the dealers or stockists and to handing it over to the local branch of the main bank or its nominated correspondent. The bank also provides a feed of the data to the corporate and bank head-office. These operations have become highly automated and have evolved an astonishing degree of precision and sophistication in countries like Indonesia, India, Thailand, Philippines – and similar countries with a large geographic spread and large number of clearing locations.

This situation has taken a number of years to evolve but is now stabilizing in most of the countries in the Asia-Pacific region. Stability often means that service differentiation is disappearing – most cash management offerings of banks now provide complete settlement outsourcing, extending to ERP integration, event notification, positive pay and other services which were considered innovations just a couple of years ago. The situation is now ripe for the next level of radical differentiations that banks can initiate with their corporate customers to usher in the next generation of cash management.

Most corporates agree that the bank or the cash management provider is servicing very few line items of the balance sheets, especially in current assets. If one were to consider the working capital cycle of any company – in manufacturing or services – the core cash management services are around the beginning or the very end of the cycle. Traditionally, payment products are at the beginning with vendor payments, salaries and utility payments and collection products at the end, concentrating mostly on converting receivables into cash.

Fig. 1.0 – Working Capital Cycle

Banks need to consider two key areas to expand the scope of cash management services – one is to focus on individual items on the balance sheet of the corporates and the second is process integration – tighter integration with the processes within the corporate to ensure a more seamless transaction experience. Let us look at these concepts in detail.

A. Balance Sheet Items.

Currently, cash management services touch upon the accounts receivable and accounts payable functions of the corporate. Banks should seek to focus on specific items in the balance sheet including current assets like cash, inventory and current liabilities, such as payables, statutory obligations and corporate actions.

Let us look at some of the additional activities that can be taken up under cash management on the balance sheet:

  1. Cash Balances – Cash balances can be maintained in multiple locations, banks and accounts, depending on the business model of the client and the geographic constraints of the company it operates in. Corporates need robust and intelligent liquidity management solutions which can span strategic lines of business, locations, product lines and (legal framework permitting) across currencies and borders. A typical case we encountered recently was a large corporate in a far-eastern country which had over 10,000 accounts in a single bank and had relationships with multiple banks. Each account balance typically represented some line item on the MIS (management information system) – like charges accrued, service fees payable and so on. There was absolutely no need for the corporate to have all these accounts with the bank if the bank could provide them with MIS. The bank in question is now coming up with a liquidity management solution which takes into account the MIS requirements as the number of accounts is rationalized. Sweeping or pooling instructions are applied to the reduced set of accounts.
  1. Inventory – Inventory solutions should focus on two areas – the first is a payments or collections solution which is consistent, economical and provides predictability to the stakeholders of the corporate – vendors and dealers. The second requires a liquidity solution mainly around channel financing and vendor financing arrangements. If banks can set up a consistent and fail-proof accounts payable programme for the corporate, the corporate will automatically get better credit terms and a longer credit period from the suppliers. This in turn will reduce the need for the corporate to resort to short-term borrowings. One auto major in India, working closely with its banker, put in an accounts payable system which was consistent and also very user-friendly for the suppliers in terms of their own reconciliation. The auto major was able to increase the credit period in days by 30 per cent, with the added benefit of adding a dimension of trust in the relationship.
  1. Financial obligations – Collecting bankers have a unique insight into the quality of assets that the corporate has in terms of its accounts receivable. Bankers do not use this information enough, contenting themselves with giving one consistent funding arrangement to the corporates without taking into account the quality of the underlying asset. But a bit of data mining will reveal a wealth of information which the bank can use to provide asset financing and factoring services on a selective basis. Similarly, a consistent and intelligent cash-flow forecasting service by the banks will help the corporates manage their borrowings and repayments better, which will also contribute to the reduction in the net financial obligations incurred by the company.

B. Process Integration

Cash management services are seen as an add-on to the production cycle rather than an integrated service. Banks need to think of applying typical manufacturing practices like just-in-time and greater technological integration of systems and data to make the user experience smoother. Let us look at some places where banks can aim for such integration in cash management services.

  1. Limit processing – A lot of current cash management services offer a fixed limit for guaranteed funding or post-dated cheque discounting which does not take into account business cycles such as peak, slack and average production periods. Banks should strive to provide a limit-monitoring system whereby corporates can avail of additional limits under the right business circumstances. The limits can be algorithmically determined by taking into account the transaction volumes, quality of the stakeholders in the accounts receivables book and track record. This integrates the risk-monitoring process into the operations of the corporate.
  1. Application integration – Corporates would like their internal systems to be integrated with the bank so that they do not need to use electronic banking (EB) terminals to login and transmit data. Integration in the background should ensure that once the data is authorized in the corporate systems and the transaction is saved in the corporate system, it should automatically be transmitted to the bank directly without having to use any EB terminal. Similarly, status updates should move back into the corporate systems from the bank without any visible manual intervention.
  1. Stakeholder relationships – Corporates have stakeholder relationships which are driven by service level arrangements, especially regarding discharge of commercial obligations. Banks need to work closely with the corporates to make sure that they have the infrastructure and personnel to adhere to these service level agreements.


As basic cash management becomes established and even common, banks have to strive to provide the next level of cash management services in order to differentiate themselves. This requires them to take a holistic view of the corporate balance sheet and look at all the services they can offer to the corporate across the various line items. Further, these services have to be integrated into corporate operations to provide all participants a seamless transacting experience.

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