Cash management or treasury management is used as a broad description of the discipline of handling cash.
In this series of 10 steps of better cash management we will focus on a company’s outgoing and incoming payments, typically paying of invoices from the company partners such as vendors and getting paid from your customers.
In this introduction, step 1, we will describe some basic definitions and establish some basic criteria, you can use to analyze your payment flows.
We will call the company that sends the money the sender and the company that receives the money the receiver. We are only focusing on the money transfer, not to be confused with the transfer of goods or services involved.
A transfer is made electronically – money transfers from one bank account to another. Usually these are called wire transfers, account-to-account transfers or something similar.
Each time a sender transfers money from one bank account to another, the bank draws one or more fees and in the case of a currency conversion an exchange rate margin. We will focus on these costs.
In fact, the fee and exchange rate margin are not payed only by the sender of the money, but in cross border transfers the receiver is paying as well. This means you should not only focus on your outbound payments and the costs for these, but also your inbound payments and the costs for those.
Before discussing this matter we need to know about more definitions. The country of origin is defined as the country where the money comes from, e.g. the sender’s bank account. The country where the money goes to is called receiver’s country.
At last we also need to know how the money is transferred. This is defined as payment types. The payment types can be grouped into two categories. Domestic payments and international payments. We will not go deeper into the different payment types and their advantages/disadvantages in this chapter, but for now it is important to distinguish between domestic and international payments.
First of all if you want to be able to decide whether a “system” or anything has been better or worse over time, you need to do some measurements that you can compare. The same rules apply cash management.
The interesting thing in this article series will be the costs you are paying to your bank(s) for money transfer, the effort needed to handle cash and the need of cash for doing business. This sounds easy, but unless you have very few payments and the types of payment are similar, it is difficult to accomplish. Nevertheless we do not need to be precise here, we only want to be sure that our trend is correct. You could summarize all costs per month for the last 6 months. Try to identify your costs to originate only from the payment transactions. Easy, that should be stated on the account statement! Very often it is not, or in other words many banks are summarizing all or groups of costs at the statement. To avoid that you need to contact the bank and ask them to stop summarizing at all. Unfortunately many banks will say it is not possible for them to do so. Anyway, when you have analyzed the account statement, you will find the “rules” for your bank’s fees.
Now you have the opportunity to realize what and how much you are paying for the services from the bank. If you are paying a small amount of money, you do not need to measure your costs, but in most cases people are surprised of the costs they are paying. If you realize that you are paying a lot, you have accomplished the step 1 in cash management, and you would very likely be paying less for the money transfers.
To get an overview you could make following chart (or similar):
If your costs fluctuate, it would be a good idea to make a more detailed analysis. Maybe you could measure it over more than 3 months and/or analyse it to a more detailed level.
Many believe that the prices for bank services are static, but they are not! Most banks calculate a complete business case of each of their customers and many customers will be able to negotiate a better deal with their bank. Try it.
When you have an idea of your payment transfer costs, you can change your agreement and/or the way you are doing your payment transfers and be able to notice if the changes have a good or bad effect on your costs.
- Give you an idea of your enterprise’s payment transfer costs per month per year.
- Can be easy to get a better deal with your bank and an easy way to reduce your costs.
- Need some effort from you to investigate and do the chart.
- No catch, you should always be updated with your enterprise payment transfer costs.