Cash Management
Cash Management
Cash management refers to the day-to-day, short-term management of a company’s liquidity. This involves analysing the balances of the company’s accounts for the current day and the next five to seven days, with the completeness, accuracy and timeliness of the data being essential for optimal management. Starting from the current liquidity position, an account-based view can be used to incorporate the expected developments over the coming days into a cash forecast.
For this purpose, Trinity TMS carries forward the account balances from previous days by adding cash-relevant transactions to the most recent balance of each account. As the certainty with which particular transactions can be expected varies from company to company and from industry to industry, different approaches are used to manage cash.
„With Trinity, we use a highly reliable private cloud-based Treasury Management System worldwide, providing full transparency of our current liquidity position, short-term cash management and long-term liquidity planning.“
Veronika Fichtner, Head of Corporate Finance & Treasury, LEDVANCE GmbH
Topics
Financial Status
Daily cash positioning generally requires debit and credit balances to be offset against one another, as debit balances generate unnecessary costs under a normal interest rate structure, while credit balances may potentially be invested to earn interest. Where central cash management maintains several main accounts, these should generally be balanced in a manner that optimises returns. Companies should avoid paying unnecessary overdraft interest or custody fees, while also ensuring that interest income on credit balances is not lost. The positioning of the main accounts can be carried out either manually or automatically.
In the manual approach, which still predominates in many companies, bank statements are retrieved from the various banks using electronic banking systems and the balances are reviewed. Taking expected incoming and outgoing payments over the next few days into account, appropriate transfers are often calculated in spreadsheets. Balancing transfers with varying levels of security buffers are then submitted to the banks as payment orders.
Account Levelling für erleichterte Disposition
Based on this logic, rules can be configured in Trinity TMS, enabling the system to generate cash positioning recommendations automatically. The account levelling function takes predefined minimum balances, credit facilities and interest thresholds on the accounts into consideration and displays the calculated transfers to the user. Where required, these recommendations can be adjusted before being converted into payment orders. Depending on the accounts involved, standing instructions are stored in Trinity TMS, ensuring that payments can only be made through predefined routes approved in accordance with the dual-control principle.
The account levelling function can also be used to define cash pool structures where a corresponding bank service is not economically viable or daily transfers are not required.
Cash Forecast
A cash forecast generally refers to the projected development of bank account balances over the next few days. Its purpose is to identify projected surpluses and shortfalls in good time so that appropriate action can be taken. This includes, for example, salary and wage payments, major investments and incoming payments.
While bank statements only confirm the position as of the previous day, pending transactions and payment advices, such as SWIFT MT942, camt.052 and camt.5n messages for incoming instant payments, can also be used to incorporate current developments. Adding planned incoming and outgoing payments from financial transactions and operational activities further improves the reliability of the forecast.
The time horizon and quality of the short-term liquidity forecast depend on the company’s industry, its customers’ payment behaviour and many other factors. Nevertheless, every company should attempt to look as far ahead as possible in order not only to safeguard liquidity, but also to manage it optimally. The Trinity TMS Cash Management Workbench provides a valuable addition to the daily liquidity status.
Cash Pooling
Trinity displays current bank account balances to support straightforward cash positioning and can replicate bank-operated cash pooling arrangements. In the case of zero balancing, every transaction is recorded in the internal accounts maintained in Trinity TMS. This allows funds provided or received by subsidiaries to accrue interest in the same way as bank deposits or borrowings. Trinity gives all parties access to current transactions at any time, while naturally ensuring that users can only view the information they are authorised to access. Interest is calculated automatically, and Trinity TMS regularly provides interest statements as reports and/or posting files. As an alternative to posting files, Trinity TMS can also generate electronic bank statements in MT940 format for internal accounts, allowing the system to operate like an in-house bank for the subsidiaries.
Where account transfers take place between separate legal entities, intercompany loans may arise and legal and tax-related issues must be clarified. As legal and regulatory requirements differ from country to country, it is important to review the applicable regulations before establishing the service.
Cash pooling essentially refers to the concentration of credit balances from various accounts in a master account through sweeping and the settlement of debit balances using funds from the master account through topping. While avoiding overdraft interest is generally beneficial, companies should currently also avoid maintaining excessively high balances in their accounts in order to prevent custody fees or negative interest. Cash pool services are offered by banks, but they can also be operated using a Treasury Management System such as Trinity TMS. The latter is particularly suitable where daily zero balancing is not required, as the fees charged by banks for such services may sometimes be disproportionate to the benefits achieved through account concentration.
While zero balancing aims to reduce the balances of participating accounts to zero each day, target balancing maintains an agreed target balance. This may be appropriate where, for example, the subsidiary’s monthly funding requirements can be estimated reliably or a certain minimum balance is required for other reasons. In both cases, funds are actually transferred, which is why this is also referred to as physical cash pooling.
The participating accounts generally bear interest, and the movements can be replicated in Trinity TMS. Pool participants that continuously provide liquidity therefore receive credit interest, while borrowing entities pay debit interest. Trinity TMS can maintain internal accounts for this purpose and automatically calculate interest for all participating entities. Acting as an in-house bank, Trinity TMS can generate electronic account information in the form of SWIFT MT940 messages for the pool accounts and provide reports and/or posting files for the automated posting of transactions and interest payments.
Trinity TMS Functions at a Glance
Account-based liquidity view for daily cash positioning
Rule-based cash positioning recommendations (account levelling)
Account transfers (output as pain.001 or MT 101)
Import of electronic bank statements (camt.053/052 or MT 940/942)
Automated reconciliation of cash positions with account transactions
Workbench with value-dated account balances and transactions for the cash forecast
Flexible pivot analysis for multidimensional evaluation of account balances
Mapping of bank-operated cash pools with interest monitoring
Automated interest statements for cash pool participants
Bank account management and authorised signatories
Numerous filtering options
Benefits
Liquidity Management
Insolvency marks the end of a business. Professional cash management improves the ability to forecast and safeguard liquidity.
Target balancing cash pools leave predefined minimum balances in the sub-accounts, for example balances below a custody fee threshold, because the account-holding entities generally wish, are expected or are required to maintain a certain balance.
Process Optimisation
Automated processes for compiling and reviewing data save valuable resources and free up time for other tasks.
System-supported clearing, for example through Account Clearing in Trinity TMS, reduces the workload by making cash positioning significantly easier on the basis of predefined rules.
Recommendations that take minimum balances or maximum debit balances into account can be adjusted manually where required, providing maximum flexibility.
Payment files for account transfers are generated in the appropriate file formats and transmitted to the electronic banking system for execution.
Audit Compliance
All cash positioning activities can be traced at any time through audit trails.
The cash flows recorded in internal accounts can be viewed by the parties concerned.
Increased Transparency
Transparency of cash flows across the entire company is increased, enabling better decision-making.
Return Maximisation
Profitability can be optimised by identifying unnecessary debit balances and unprofitable investments.
Effective cash positioning uses internal financing to avoid unnecessary debit interest and optimise interest income on credit balances.
Zero balancing cash pools, in which the sub-accounts are balanced to zero each day by transferring funds to or from the master account, ensure that neither debit interest nor negative interest is incurred on the sub-accounts.
Increased Efficiency
Reduced workload for subsidiaries through the centralisation of tasks
Cost Reduction
Avoidance of unnecessarily high fees for banking services.
Effective cash pooling generally reduces the workload, as there is no need to manage the cash positioning of sub-accounts connected to a master account.
Best Practice
Case Studies
Payments
“The payment requirements of our customers vary considerably, which is why we are connected to a range of solutions offered by our partners. multicash transfer from Omikron and FinMapp from Broadridge can be fully integrated into Trinity TMS via web services, providing our customers with a powerful best-of-breed electronic banking solution. Our partners support bank communication via EBICS, SWIFT, API or host-to-host connections and offer extensive expertise and many years of experience in this field.”
While operational payments generally originate in the company’s accounting system, Trinity TMS can generate payments from cash management or treasury where required. The complete set of cash flows forming the basis of the cash forecast is already available in the Treasury Management System. Actual payments arise as a result of daily cash positioning or, in individual cases, from financial transactions. The transmission channel and file format for such payments are defined through Standing Settlement Instructions (SSIs), which are created in accordance with the dual-control principle in order to prevent attempted fraud.
For most companies, operational payments to suppliers, employees and public authorities, as well as transaction information relating to incoming and outgoing amounts, account for a significantly larger volume than financial cash flows. The digitalisation and optimisation of company-wide payment processes therefore often play a major role. The ongoing changes affecting available transmission channels such as EBICS, SWIFT, host-to-host connections and APIs, as well as file formats, including the replacement of national formats by SEPA and of SWIFT MT messages by ISO 20022 XML, together with legal developments and the emergence of payment service providers, are creating considerable change in this area.
Together with our customers, we discuss their objectives, requirements and existing conditions and can then recommend suitable solutions and implementation partners.
The key factors in assessing the potential for optimisation are
the distribution of payment accounts across different countries and continents,
the type and number of transactions, including account information and payments,
the customer’s intention to centralise these activities and, where applicable,
to optimise the underlying processes.
The following scenarios can be broadly distinguished:
Scenario 1: Your company operates only in Germany and, where applicable, Austria, Switzerland and France.
⏵ In most cases, an up-to-date EBICS connection to the banks is sufficient for retrieving account information and handling standard payment transactions. This connection can be established by the electronic banking specialist at your relationship bank. We are happy to assist you in selecting suitable banks and specialists or recommend the bank-independent MultiCash@Web solution provided by our partner Omikron Systemhaus in Cologne.
Scenario 2: The company described in Scenario 1 also maintains accounts in other countries but only requires information about the current balances and transactions on those accounts. Payments will continue to be processed locally.
⏵ This can also be handled through an EBICS connection. To obtain the additional bank statement information, the company asks its major bank with a SWIFT connection to request the statements for the relevant accounts from the foreign banks and make them available via EBICS together with the domestic account information.
Scenario 3:The company described in Scenario 2 now wishes to transfer funds from its foreign accounts centrally at irregular intervals. As these are only sales accounts, employing a local person to manage each account would not be economically viable.
⏵ An EBICS connection can still be used in this case. Such instructions can be processed using bank- or country-specific pain.001 files under the Common Global Implementation (CGI) framework. Alternatively, a Request for Transfer instruction, formerly SWIFT MT101, can be created and submitted to the global SWIFT network via EBICS through the company’s relationship bank. However, MT101, as a legacy ASCII format, is also being replaced by pain.001. Any new implementation of this approach should therefore be based directly on pain.001 Version 09 or later.
How the pain.001 file reaches your foreign account-holding bank depends on several factors. In the most favourable case, the foreign bank has a branch in Germany with an EBICS connection and can act as the main entry point, potentially also converting the files into the required national destination formats. Host-to-host connections, APIs or bank portals may also be suitable solutions. Since bank portals differ from bank to bank, are not standardised and often do not provide user-specific authorisation, their use should be considered carefully.
Find out more about our partners here
Scenario 4: If the company described in Scenario 3 continues to grow successfully and receives substantial daily payments into its foreign sales accounts, implementing cross-border cash pooling may become worthwhile. However, this step depends not only on the costs of the banking service, but also on legal and tax requirements. Each transaction route should therefore be assessed individually and in detail before implementation. Furthermore, not all banks offer the same services in every country.
⏵ Nevertheless, up to this point companies do not require their own SWIFT connection. They can use EBICS and banks that are suitable for the required services to establish effective and comparatively cost-efficient cash management.
Scenario 5: If the company maintains a large number of foreign accounts with many different banks and, after reviewing their necessity, wishes to continue using and centrally managing them, a concept extending beyond EBICS becomes increasingly likely. To identify the optimal solution, it is essential to analyse the existing banking landscape carefully and prioritise future requirements in advance.
The current situation becomes clearer by documenting which accounts are maintained with which banks and for what purposes, which types of payments are processed through them, such as individual or bulk payments, urgent transactions, credit transfers, direct debits, cheques, salary payments and tax payments, and the resources required to operate the existing account structure.
The information-gathering process alone often reveals numerous specific circumstances that may lead the company to abandon the idea of centralisation for certain countries. In all cases, the current situation helps establish priorities when payment volumes and transaction numbers are considered alongside the types of payments. A single annual payment of USD 10 million requires a different solution from 100,000 payments averaging USD 100 to 20,000 recipients.
⏵ The same principle applies here: not every bank offers the same services in every country. Companies can now also connect directly to the SWIFT network to submit payment instructions, receive account information and use additional services.
To operate such a connection economically, the company first requires approval and its own address in the form of a SWIFT BIC. It also needs in-house expertise, patience during contract negotiations and transaction volumes that are proportionate to the future recurring costs.
Alternatively, the company can engage specialists that operate as a SWIFT service bureau or intermediary and simplify the implementation by providing ready-made interfaces, standardised formats and existing active agreements. We are happy to provide practical support and advice in selecting the solution that is most suitable for your company.
We connect Trinity TMS to your electronic banking system or work with our partners, including Omikron, Broadridge, TIS, EFiS and Serrala, to identify the solution that best meets your requirements. Where required, this may include a payment factory, format conversion, bank fee control, sanctions screening, eBAM and fraud prevention.
Find out more about our partners here…