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4 Questions to Help Treasurers Assess Their Effectiveness

  • By Tamir Shafer
  • Published: 7/14/2017
How does one evaluate a treasurer or cash manager? The following four questions and explanations should help you assess their effectiveness.      

1. Exactly how many bank accounts are currently open, and how many are being actively cash-managed?

Among the list of roles and responsibilities of a treasurer, at the top of the list is managing daily liquidity, specifically cash. Each treasurer should have a precise answer or at least a range to the question listed above regarding the number of bank accounts.
Anything less precise is likely an indication that this treasurer is not fully aware of:

a) Where all the company’s liquidity and cash is
b) How much cash/liquidity exists at any point in time and
c) How to access this cash/liquidity.

2. Is a bank-to-book reconciliation process performed at least weekly for each bank account?

This question speaks to the practice of reconciling actual cash activity at each bank account, to the line item activity recorded on a company’s general ledger (or ERP). It is the active management of the company’s checkbook, for each bank account. It is a crucial yet overlooked process and responsibility—and it is something that deserves a higher priority.

Among the multiple benefits for performing timely bank-to-book reconciliations is the identification of missing cash and preventing fraud. Activity occurring within a bank account but not reflected on the ERP is a sign of something possibly being wrong (e.g., a disbursement sent from a bank account that no one in the company has posted for on the general ledger).

While I have consulted with companies that perform a reconciliation process at least monthly, a best practice is to do so either weekly or even daily.

3. Is the treasury team currently projecting daily cash flow, and is the accuracy of this projection measured and reported the following day?  

Another core responsibility is projecting daily cash flow, for the purposes of:

a) Ensuring enough cash and liquidity exists to make all necessary disbursements (wires/ACHs/checks) from each bank account and

b) To ensure that yield-on-liquidity (i.e., the interest rate or similar alternative earned on available cash overnight) is competitive.

A cash manager should have some daily cash projection process in place for the bank accounts that they are responsible for. This projection should be robust enough to have visibility across multiple parameters—by bank, by legal entity, and by currency, etc. Once a projection process is in place, a cash manager should be able to identify distinctly what their target end-of-day balance in each of their bank accounts should be.

If the projection from earlier in the day differs from the actual and final end-of-day closing balance, it is an indication that something unexpectedly happened (or did not happen). This practice of projecting daily cash, measuring the precision of the projection to the actual, and then reporting on it by also identifying the cause of the projection not being accurate, is critical for a treasurer and treasury team to improve at managing liquidity and improving yield on a daily basis.  
4. How many overdrafts have occurred in the last month?

It is a core competency of a treasury team to make sure that their bank accounts do not go overdrawn. If a treasury team is not actively monitoring balances intraday (which I would argue they ideally should be), they may only find out the next business day that an account ended the previous day overdrawn. The impact of an overdrawn account is potentially threefold.

a) The overdrawn position could lead the bank to prevent additional disbursements (i.e., wires/ACHs/checks) from being made, which is a problem if any of those disbursements are critical.

b) Bank fees associated with overdrafts are considerably high—several multiples of the yield that cash sitting in an account earns.

c) There could be regulatory impacts, depending on what industry the company or legal entity is in. Certain bank accounts cannot go overdrawn due to the regulatory environment.

Ideally, rigorous cash management techniques will prevent overdrafts. In the rare circumstances when they occur, a treasurer should be aware of them, and work to prevent future occurrences. If a treasurer does not know whether overdrafts have occurred, the risk of ineffective treasury operations increases significantly.

Tamir Shafer is senior director at Redbridge DTA.
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