The Fear of “Running Out of Cash” is an Illusion

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Every responsible branch manager strives to satisfy his/her customers’ banking needs, especially when it comes to their demands for cash. Not being able to fulfill a customer’s request for cash at a bank or credit union branch is probably every head teller’s nightmare! Every banker wants to have more-than-adequate cash, and is pretty fearful of running out of cash (total cash holdings at the branch; not to be confused with cash flow at the branch). This fear, however, is an illusion that leads to irrational and inefficient branch cash management practices which hurt branch earnings. The best way to overcome this fear is to quantify various cash usage scenarios, develop prudent branch cash management processes, and install systems that optimize cash without the risk of running out of cash – thereby meeting profit goals and having peace of mind on cash adequacy.

Fear Leads To Excess Cash

This fear (of running out of cash or certain denominations) causes cash surpluses. Excess cash exceeds customer or member usage – not limits. A branch can maintain cash to a limit and still be carrying 20% - 30% in excess of demand. Adhering to a limit, is not optimizing cash. However, the fear of running out of cash sometimes results in branch managers or head tellers being hesitant to trust branch cash management systems because they fear this “optimization” will reduce cash to the point where they will run out of cash or desired denominations.

However, this fear is typically an illusion and most managers do not realize that this leads them to carrying overly excessive levels of cash – to the point where even if they lowered their cash holdings by 20%, they would still never run out of cash. This overabundance of caution comes at the price of higher cash delivery frequency, extra non-interest earning assets (cash) sitting in a branch, and lower branch profits.

The solution - to this behavioral problem - lies in demonstrating the high-level of excess cash holdings relative to routine and peak cash usage, which can only be accomplished through the analysis of actual data on cash holdings, cash patterns and extremes.

C3 Financial For Cash Analysis

A system, such as logicpath’s C3 Financial solution, comprehensively addresses the problem of excess cash through precise algorithms which consider competing cash needs - delivery schedule, customer demand and historical trends - to forecast cash levels, and recommend order and deposit amounts. C3 Financial is a web-based cash analytics tool, with 95% proven forecasting confidence levels, that branch managers or head tellers can use to more effectively manage cash.

The Solution: Human Decision Makers Emboldened By branch cash management Systems

Change is hard because people overestimate the value of what they have and underestimate the value of what they may gain by giving that up. – James Belasco and Ralph Stayer

Proof of how much excess cash exists and the visibility into how much cash a branch uses, begins to address branch staffs’ fears and starts the process of overcoming it. In addition to evidence of overstocking, the best branch cash management solution combines human decision-makers and systems. The system isn’t there to replace humans but to give them tools to make better and more confident decisions, while also relying on a manager’s local knowledge of events and happenings in his/her city that might influence cash demand. The goal of branch cash management technology is to help branch staff complete their daily job duties and accomplish their goals in a more efficient manner. Think of it as a feature on the newer car models, the parking assist, but for cash. A person knows how to parallel park; but having the car technology help, saves most people from at least 4 attempts and parks the car the perfect distance from the curb. branch cash management software helps branch and ATM managers ‘park’ cash at the perfect level with one click.

logicpath’s branch cash management system, C3 Financial, has never had a branch or ATM run out of cash because the system has buffers that allow wiggle room to accommodate reasonable outlying events based on an analysis of the branch’s own historical cash data. For example, a reasonable outlying event at one branch could be a request for $10,000, not $100,000; so having cash on hand for the $100K withdrawal is clearly excessive. Moreover, branches generally do not hand out $100,000 in cash on the spur of the moment, so why prepare for something that’s never going to happen??

Let Go of Fear

Getting intelligent people to change strongly held beliefs is not easy. Consequently, banks and credit unions should test the system. For instance, a branch could take C3 Financial’s recommendation, collect that amount of excess cash (from the vault, teller drawers, ATMs, etc.), bag it up as if they were going to ship it out, but then simply ‘set it aside’ with clear directions that the bag not be opened. Then, try this for, say, three weeks.

If, within that three-week span, the bag with excess cash was never touched and remained unopened, branch managers and head tellers will start to feel comfortable with the system’s recommendations, and realize that their fear of running out of cash was an unwarranted illusion.

Ultimately, there is no magic in mathematics; it’s just a logical combination of data and proven inventory management calculations that can go a long way towards boosting your bank or credit union’s bottom line.

 

Interested in evaluating your cash? Check out our blog: 'Internal Cash Studies: Doing it Yourself vs. Hiring a Professional