Municipalities and private businesses with cyclical inventory and production requirements often struggle to ensure that they have sufficient cash to consistently fund operations throughout the typical peaks and valleys across a year. A treasury management specialist can help them better manage their cash, both with changes to how they do business and with appropriate treasury management tools in place. There are a number of options that can help improve cash flow, and this post breaks them down into operational changes that can implemented, and treasury management tools that can be utilized.
Whether you are the director of finance for a medium-sized municipality or owner of a seasonal business, you know you need to be extremely disciplined in managing cash, and often that means changing how you do things. Some of the most impactful changes can be made in your collection and disbursement practices, and in how you use excess cash:
Consider changing your municipality’s investment policy. Municipalities tend to like to have deposit accounts secured by collateral, but it is not a Wisconsin regulatory requirement. Removing the collateralization requirement from your Investment Policy Statement allows you to work with one institution, potentially earn a higher rate of return and eliminate the need to look elsewhere to house funds, improving your efficiency in managing cash.
Do year-round cash flow projections. Eighty-two percent of small businesses that fail do so because of cash flow issues. For seasonal businesses, it’s critical to watch cash flow and plan ahead with as much foresight as possible. While many businesses rely on six-month projections, best practice for small businesses is to maintain a 12-month rolling cash flow projection. This will give you a more accurate look at the challenges you face during peak and slow periods. Update monthly as you do your monthly close.
For municipalities, Deloitte, an international audit, consulting, tax and advisory services organization, recommends even greater frequency: weekly or even daily. This allows greater visibility into the municipality’s cash requirements in the short term.
Maintain a cash cushion. A 12-month rolling cash flow projection will help you identify how and when to start building a cash cushion. Ideally, you should have enough liquid assets to pay six months’ worth of business expenses in order to cover requirements during slow periods.
Invoice quickly, encourage early payments and extend payments to suppliers. Three simple actions can help almost any business improve its cash flow. First, invoice as soon as work is completed or a sale is made. If work is project-based, consider invoicing a third or half of the total project upfront, depending on the duration of the project. To encourage customers to pay faster after invoicing, offer multiple payment options and terms that reward them for paying quickly. Finally, extend payments to suppliers (within their stated terms) so that you’re holding on to that money as long as possible.
Treasury Management Tools
As explained below, your bank’s treasury management expert can guide you in the use of “behind the scenes” treasury management tools, such as money market accounts, wire transfers, ACHs, CDARs and ICS.
ACH (Automated Clearing House) is a computer-based clearing and settlement facility that processes the exchange of electronic transactions between participating depository institutions. ACH origination lets you electronically send and collect payments through the ACH network, giving you precise control over your cash flow by allowing you to specify the settlement date of remittances and payments. Knowing when cash moves in and out of your account makes forecasting more accurate and cash flow becomes easier to project.
CDAR (Certificate of Deposit Account Registry). This program allows businesses and municipalities to spread money across various banks. The purpose of CDARs is to help people who invest in certificates of deposit, or CDs, to stay below FDIC insurance limits at any given bank, while providing FDIC insurance protection on their entire deposit portfolio.
ICS (Insured Cash Sweep). With the ICS service, businesses and municipalities can secure large deposits while maintaining access to funds and earning interest on funds placed into demand deposit accounts and/or money market deposit accounts. So their cash earns interest while remaining liquid.
Fraud prevention tools. Tools like Positive Pay are put in place to help detect fraudulent checks from being presented to your business account. Because it allows only checks matching your pre-approved list to be paid, you mitigate the risk of fraudulent transactions affecting your cash flow.
Backup financing. A line of credit can serve as a safety net, providing cash needed when the unexpected happens, like unanticipated A/R stalling or the need to invest in new inventory or staffing to address growth.
Managing cash flow is critical to the ongoing vitality of an organization, especially for seasonal small businesses and municipalities. Talk to your bank’s treasury management expert for insights that will help you mitigate the effects of cyclical highs and lows. He or she will review your business and its goals and work with you to find practical solutions aligned with your needs.
Learn more about the role of fraud prevention in helping you manage cash flow by downloading Protecting Your Business From Banking Fraud.