As companies grow and expand their operations and commercial activities, finance teams find themselves managing an increasingly complex cash footprint.
They often manage dozens of bank accounts scattered across a number of financial institutions, handle accounts in various currencies, and oversee cash stored in non-bank institutions like payment processors, PayPal, and FX wallets.
This creates a slew of challenges, from operational friction, to counterparty risk management, and down to a growing lack of control. In turn, these lead us to one of the biggest head-scratchers finance teams face nowadays, which ironically also has the most impact on their company’s bottom line – how to improve capital efficiency when cash is so extensively distributed?
In the current interest environment, every dollar counts. Finance leaders strive to invest excess cash to maximize yield on one hand, and minimize usage of credit facilities to reduce interest costs on the other.
To address the capital optimization challenge, which is likely to intensify given the growing wave of globalization and global expansion, let’s go over a simple 3-step framework that will help your team optimize capital efficiency across multiple accounts:
Step 1 - Define and measure your top-level metrics
The first step to improving any metric is to clearly define it so you can properly measure it. When it comes to capital efficiency, even a simple KPI such as % of cash in interest-bearing accounts (% IBC) is a great starting point.
Monitoring it will undoubtedly help you lead better cash management and at the very least – raise important flags regarding your company’s cash utilization.
Step 2 - Identify drivers and set up buffers
Once a top-level metric is defined, it’s critical to understand what’s driving it in a more methodical way. In the case of % IBC (interest-bearing cash), the second-level metric we should focus on would be the amount of operational cash needed in each account.
Since this number tends to fluctuate significantly over time, it’s good practice to define “buffers” – minimum and maximum cash thresholds that are highly likely to ensure account liquidity. Defining these buffers can help you shed instant light on inefficiencies and opportunities for IBC improvement.
Adding a time dimension to these buffers can often have a massive impact on your capital efficiency. Some accounts require liquidity only on specific dates, which are often monthly and follow a clear historical trend. Enabling the buffers to fluctuate with each account’s monthly needs is therefore a great way to improve your IBC rates on an ongoing basis.
Step 3 - Set up a cash forecast and monitor your liquidity
The highest level of buffers planning is building and maintaining a rolling cash flow forecast. This is a great tool to help you understand upcoming cash needs and identify trends in a granular way, so you can more accurately understand the required buffers that optimize capital efficiency, and then take immediate action when needed.
Bear in mind that access to fresh data is key to be able to properly track balances across your accounts. While monitoring can be performed manually, it’s an incredibly tedious, time-consuming process that becomes increasingly harder to manage as companies open more and more accounts.
Automating your bank connectivity is how you can turn real-time, account-level liquidity insights into timely decisions that will have a direct impact on your company’s performance and bottomline.
In today’s fast-paced and complex reality, the incentive to take back control, proactively manage cash flows, and optimize capital efficiency – is loud and clear. Automatically measuring, monitoring, and managing capital efficiency are key to ensuring cash is efficiently managed and effectively utilized.
Remember: any day in which cash is sitting idle is a waste. It’s time to stop the squander.