Optimizing the Treasury Function

Cash Management

Cash management is essentially about making the best use of the cash that is available.  There may be opportunity costs and trade-offs to consider.  For example, surplus cash balances could be invested in short-term marketable securities, or a cash balance could be maintained to take advantage of cash discounts for prompt payments to vendors.  There may be opportunities for expansion or growth that will require a substantial amount of cash.  These considerations will vary from one business to another.

The magnitude of the cash management function will also vary between businesses.  A small business may operate with just one bank account, while a larger business may have several accounts, including a separate payroll account, collections accounts, and disbursements accounts.  If more than one location is involved, there may be separate bank accounts at each location.  In this case, it may be useful to have an arrangement to “sweep” balances from different accounts and consolidate them in a central account, in order to invest surpluses in overnight deposits or other short-term investments.

However, in terms of controlling or cutting costs, the emphasis is on liquidity – having sufficient cash available in order to meet obligations and keep the business solvent.  The following are some suggested ways of streamlining cash management:

• Close out dormant accounts or consolidate accounts with little activity.  This will eliminate unnecessary bank charges and is a good internal control practice to avoid any improper use of a bank account.
• Negotiate the best possible conditions with banks, in terms of charges and fees, interest paid on checking accounts, charges for overdrafts, and interest on lines of credit.
• Work with bank accounts on line, to closely monitor transactions and balances.
• Reconcile bank accounts regularly and follow up on any discrepancies.
• Optimize payments to vendors by utilizing credit terms and scheduling payments for the due date (30 days from invoice date, for instance).
• Take advantage of prompt payment discounts (2% for payment within 10 days, for instance).  This may be one of the trade-offs mentioned above.

Debt Management

Debt is a part of doing business, and in the form of financial leverage it may be beneficial and even necessary.  But debt carries a cost – interest – and it should be carefully managed.

Alternatives to debt as a means of financing the business should be considered:

• Increase capital.  A sole proprietor may need to invest more of his or her personal resources in the business.  Partners may need to increase their contributions to a partnership.  A corporation may need to issue additional stock.
• Use cash flow generated by the business for self-financing.  This requires careful planning and cash flow forecasting.
• Leasing may be an alternative to borrowing in order to purchase capital goods.

The type of debt that best suits the needs of the business should also be taken into account:

• A revolving line of credit, that the business draws against as needed, may have a lower overall cost than a loan for a fixed amount.
• Secured loans may have a lower interest rate than unsecured loans.
• It may be possible to negotiate the cost of debt – interest rates, origination fees, and other charges.

Optimizing and Streamlining Operations

Reducing Cost of Sales

Efficiency is a key aspect of controlling the cost of sales.  In a competitive marketplace, the most efficient producer will have the advantage.  Quality control and customer service must be assured while managing and controlling costs.

• Negotiate the best possible payment terms with vendors and verify due dates on invoices to monitor compliance.
• Communicate expectations to vendors and work with them to ensure quality control in the vendor’s place of business.
• Send vendors forecast schedules of purchase needs in order to avoid backlogs and reduce delivery time.
• Train personnel in the proper use of equipment and materials, to avoid damage and the cost of repairs or replacement.
• Evaluate the quality of raw materials, product design, and the productive process, and make improvements where efficiencies can be gained or value can be added.
• Optimize packaging based on what the customer values.
• Charge transportation costs to the customer, if possible.
• Optimize shipments – combine deliveries, schedule routes, and use available capacity.
• Minimize urgent shipments by planning ahead and scheduling deliveries by the most cost-efficient means.

Optimizing Personnel Costs

Keys to optimizing personnel include selection, training, and motivation.  Having the right people, who are knowledgeable, capable and well-prepared, and who are eager to work will be fundamental to the success of any business.

Some suggestions for optimizing costs include:

• Clearly define responsibilities and expectations, and jointly agree on objectives.
• Do performance evaluations on a regular basis and provide additional training as necessary.
• Give salary increases based on productivity or on the completion of objectives or goals.
• Provide incentives, such as profit-sharing, that give each employee a stake in the business results.
• Delegate responsibility to ensure that the person closest to an operation or cost center is in a position to make decisions or recommendations.
• Cover only the positions necessary – avoid overlap and redundant duties.
• Do time analysis to monitor productivity and to keep overtime to a minimum.
• Analyze the reasons for absenteeism.  Consider a flex-time system, a given number of sick days or personal days off.  Make personnel changes if necessary.
• Prepare for meetings in advance – distribute an agenda beforehand.
• Avoid unnecessary or inefficient meetings.
• Make business trips only when necessary.  Person-to-person meetings and client visits are important and can add significant value if done appropriately.
• Control travel expenses.  Combine trips if possible, quote airfares and hotels, use public transportation when possible.
• Get quotes from different insurance companies or other providers of employee benefit plans.  Contract reasonable deductibles and co-payments for health insurance.  In general, provide good benefits at a reasonable cost.

Reducing Overhead and Other General Expenses

Overhead expenses are present in every business, from a small home-based business to a large production facility, and some of the same cost-control concepts can be applied in all of them:

• Turn off lights or other energy consumers when not in use.  Automatic light switches may be a useful option.
• Maintain an appropriate temperature – not too cold in summer, not too warm in winter.
• Control the use of office supplies.  Keep them in a safe place, in an orderly manner, and assign responsibility.  Keep an adequate stock, but don’t oversupply.
• Control the use of the telephone.  Choose calling plans that most closely fit the needs of the business and avoid overages.
• Use fax machines as necessary, when they are the most efficient form of communication.
• Use e-mail efficiently and prudently.  While the cost may be minimal, the cost in terms of productivity can be substantial.
• Choose the most efficient postage or courier rates based on need.  It may not be necessary to send everything overnight.
• Carry sufficient insurance coverage to adequately cover risks.  Higher deductibles for incidents with a low risk of occurrence may reduce premiums.
• If possible, negotiate rent or lease contracts.
• Design, implement, and carry out an internal control program to safeguard all assets.

Freeing Up Money Tied Up in Assets

Fixed Assets

In a start-up business that may not have sufficient funds or financing available for significant expenditures in fixed assets, including machinery and equipment for a production process, it may be possible to subcontract part of the process to another business that has the necessary machinery and equipment.

If certain equipment is needed occasionally but not on a regular basis, it may be more economical to rent the equipment when it is needed, rather than purchasing it.  Leasing vehicles rather than purchasing them may also be an option to consider.

Inventory Reduction

The amount of inventory that needs to be kept on hand will depend on the characteristics of each particular business.  Inventory should not be reduced to the point where sales are negatively affected, but there may be some strategies that can be used to reach a proper balance, to keep inventory levels down but still satisfy customer demand.

• Increase the frequency of stocking rather than holding a large quantity of inventory over longer periods of time.  Plan ahead based on sales and production forecasts, building in any necessary lead time.
• Make arrangements with suppliers to hold inventory or to produce and delivery based on short turnaround times.
• Reduce the number of products or components.  It may be possible to eliminate slow-moving items, or items with a low profit margin, without a significant detrimental effect on earnings.
• Replenish inventory as sales orders are being shipped.
• Integrate and coordinate the purchasing, production, inventory, and sales functions.
• Liquidate deteriorated or obsolete items in inventory.

Reduction of Accounts Receivable Balances

In terms of general efficiency, the billing function should be streamlined and secure.  There should be sufficient internal controls to ensure that all sales orders or jobs are billed as soon as possible after the sale or completion of the work.

• Reduce the periods between sales orders and deliveries, or between work requests and the start of work.
• Reduce the period between deliveries and billing – invoice immediately upon shipment or completion of the work, if possible.

Credit terms granted to customers may be an important part of a business’s sales and marketing strategy, and in this case it is normal to carry a balance in accounts receivable.  But it is an area that needs to be closely monitored and managed. 

• Select customers carefully – develop, implement and follow through on a credit policy.  Evaluate prospective customers and their ability to pay.  Get credit references.
• Integrate the credit management system with other systems, such as purchases, inventory, production, delivery, and cash management.
• Review the means, conditions and terms of payment – use direct deposit, electronic payment options, offer cash discounts for prompt payment or renegotiate payment terms.
• Monitor compliance with prompt payment discount periods.
• Communicate with customers in advance of the due date on their invoices.
• Incorporate salespersons into the collection process by tying commissions to collections.
• Consider factoring accounts receivable – selling receivables at a discount to improve cash flow.