Working Capital Management: Applications and Case Studies

Working Capital Management: Applications and Case Studies
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Centralized collections group, with global policy and procedures that are audited periodically. Focus on managing exceptions, rather than the entire process. Look at the corporate trade exchange CTX to go from checks to electronic collections. Nuisance check collections should be managed by remote deposit for quickest access and availability of the cash,.

Allow for straight-through processing based on electronic invoicing, collecting, application and reconciliation. If you have disputes, do a root-cause analysis. If you can automate high-volume, low-income expense, do so. Leverage the company website to allow customers to view order status, outstanding invoices and make payments. Centralize the vendor master: Get information from vendors on banks and how, where they want to get paid. Protect this data by limiting access and the ability to make changes.

Turn receivables into cash flow and payables into income

Banks often offer systems where they hold all of that information. Centralized procurement-negotiated global contracts to capture volume pricing, better terms and early pay discounts. Question how many vendors in each category you really need to have. Tie payment terms to payment type to encourage electronic payments over checks. Purchase orders should be created and delivered electronically to vendors.

Due date should auto-populate based on match of what was ordered, what was received and what was invoiced.

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Automated three-way matching is functionality that most ERP systems offer. Fully automated, best-in-class firms can process invoices within three days. With the growth in ACH and card usage, remove all checks and paper-based transmissions and offer electronic payment and electronic remittance information. Outsource any check printing to reduce costs and protect against fraud. Leverage early pay discount; use ERP to measure terms and see how often you take advantage of the discounts.

Enhance your business with working capital management best practices

Manage the exceptions. Track how long it takes to close the books what is causing any delays; will automation lead to faster accounting close and reduce costs. If payments are made by check, accounts should be reconciled on a daily basis.

Internal duties for financial activities should be segregated. In general, personnel should be fraud-focused on inquiries from banks and institutions regarding legitimacy of checks. Suspicious activities should be elevated to the management team. For added security, management may want to consider migration from check payments to electronic payment products or consider outsourcing check processing to secured vendor. To prevent online fraud, all company users should learn to recognize phishing scams and know to not open file attachments or click links in suspicious emails.

Anti-virus software and system patches should be kept up to date. Users should be cautious when visiting Internet sites that are not trusted and used for business purposes. User names and passwords should never be shared and companies should avoid using automatic log-in features that save them. By following these best practices, the treasury and finance functions can be transformed from transactional processors making payments and moving cash to advisors on risk and investments to forward-looking strategists.

The opportunities for strategic working capital management can be found throughout an organization. Incorporating lean finance concepts can lower costs. Reviewing policies and ensuring tight controls are in place can prevent fraud. Building better, automated processes rather than replicating old processes can result in greater efficiency. Capturing cost synergies between companies can allow a merger or acquisition to realize value sooner than it might have otherwise. The law allows the creation of a digital version of the original check, eliminating the need for further handling of the physical document and expediting its clearing.

Lockboxing relieves companies of the burden and delay of handling mail and check deposits. Imaging is a technology that permits the digitized scanning, sorting, cataloging, and retrieval of paper documents, including checks, remittances, envelopes, and correspondence. How Does Lockboxing Reduce Float?

Lockboxing eliminates the delays experienced when checks are directed to a business. The problem was that there were four separate workstations and four days at best before the checks were deposited! For convenience, many companies use nearby branches of their banks for deposits.

The Vision

The problem is that the bank courier stops by once a day at each branch, often as early as noon. How Does Lockboxing Prevent Fraud?

Fraud may occur when cash and accounting functions are performed by the same individuals in a business office. Lockboxing places all cash handling under the management of a bank, which takes full responsibility for open- ing mail, pulling checks and other documents received, and making deposits of monies received.

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Any loss due to bank error or theft is the respon- sibility of that financial institution. In this situation, the only checks that are not under the direct supervision of the bank are those that are mailed or couriered to an office address rather than to the lockbox, and those handed to sales representatives rather than mailed.

If a company aggressively pursues these practices, the possibility of theft is largely eliminated. This practice is inef- ficient due to float considerations and potentially risky due to the possibility of theft and fraud. Control of Access Regular bank accounts are difficult to monitor in terms of access, as companies often allow several authorized check signers to disburse deposited funds. Furthermore, a disgruntled former employee who has taken check stock may write those checks to a phony business and then pocket the funds.

Multipurpose Accounts Bank accounts are frequently opened at each facility of an organization for the convenience of staff, check encashment cashing employee checks , or other reasons. Large companies with widely separated operations may receive requests to have access to local banks, and if funds are collected by a branch office, may simply open a local account, deposit these receipts, and disperse the funds for local expenses.

All openings of bank accounts should require a board of directors resolution, and any such violations should be treated as a serious breach of company policy.

Account Options

In Chapter 4, we examine the management of the bank relationship, includ- ing the mobilization of funds from depository accounts to the major banking relationship. Too Many Accounts As merger activity resumes, the surviving company may find that the number of their bank accounts is excessive and expensive.

However, it may be reluctant to close accounts against which checks may have been written or which receive deposits. It is difficult to manage a large account configuration, particularly as accounts may have different purposes, authorized signatories, and other characteristics. Some accounts may be dormant, yet are costing monthly bank fees.

The entire banking system should be investigated and accounts closed wherever possible. This requires that idle cash balances be main- tained in those accounts to cover such checks. Controlled Disbursement Procedures Controlled disbursement accounts are located at large bank suburban or coun- try locations specifically established for the purpose of receiving the present- ment of a cash letter once or twice daily in the early morning hours. The customer then funds the debit once daily, eliminating the need to leave balances awaiting possible later clearings. Banks offering this product hold checks received later in the day or make clearing adjustments the next day for debiting to the account, eliminating the need for supplemental funds transfers to cover any shortfall.

Funding options include an internal bank transfer and an electronic trans- fer through Fedwire or ACH, both of which are discussed in the next section. The ACH credit does not become good funds until the next business day, so the bank will require the equivalent of the average check clearings of one or more days to be maintained in the account to cover the ACH float.

Partial rec- onciliation is simply a list of paid or cleared items, including check numbers and dollar amounts, that the company must then reconcile against its own ledgers. The cost is about three cents per item. An affiliated and recommended bank product is full reconciliation, which takes the issued and cleared item files and matches them monthly.

Com- panies are notified of matches, checks still outstanding, items cleared but not issued when the bank did not receive the issued file or notice of a late excep- tion item , duplicate items forced postings , and other problems. This step can ensure that only checks properly issued are charged against the account.