Is knowing what’s going on in the low-value, low-activity accounts really matter?
One of the goals of any corporate cash manager worth his or her salt is to get as much visibility of cash as possible. But what about the little accounts? The ones that really don’t generate much activity? As part of its World Class Initiative (see related story here), members of the Neu Group’s Global Cash & Banking Group (GCBG) looked at liquidity management. And at a recent GCBG meeting, one member posed a philosophical question on the meaning of visibility: “Is it really world class to have 100 percent visibility?”
The question of course supposes that some low-value and low-activity accounts may not be worth the trouble and expense. Assuming a world-class company works from a cost/benefit perspective, some accounts could thus be excluded from the “100 percent” visibility goal. Still, some members argue that omitting even a small, inactive account is too much risk because you never know when something significant and inappropriate could occur. In the group’s pre-meeting survey, most survey respondents (79 percent) do have visibility to at least 76 percent of their balances, while much smaller number have visibility to more than 95 percent.
More visibility, more pooling. With greater visibility follows the mandate of improving the efficiency of liquidity management, for example through pooling. Most members agree that they rely heavily on bank products, namely ZBA accounts, to support pooling. Further, cash concentration into a central pool occurs daily for just over half of respondents. For the rest, the frequency of concentration varies by region.
The key issue for pooling is not – as many would initially presume – who should execute pooling (corporate versus regional or local offices) but whether corporate controls the governance of pooling. In other words, treasury does not need to execute the activity as long as they effectively oversee it centrally.
This is an activity that treasury cannot perform in isolation but must partner with tax for optimal results. As a result of the sometimes conflicting goals of tax (to minimize tax liability) and treasury (to maximize cash efficiency), only just over half of participants have more than 75 percent of their operating cash flows in their pooling structures.