With interest rates poised to rise in the coming quarters, financial institutions (FIs) must seriously undertake cash management initiatives that identify and minimize non-earning assets (such as un-needed or excess cash in ATMs, cash dispensing machines, teller drawers and vaults), optimize cash inventory and redeploy excess cash profitably through loans and investments. While most FIs “think” they manage cash efficiently, data shows that cash is often managed up - to limits, not down - to usage-driven levels, resulting in excess idle cash at various points in an FI’s money chain. FIs can go a long way towards minimizing excess cash and maximizing profits if they focus on the three most common challenges in cash management and implement straightforward solutions to them.
Challenge #1: Determining Usage
The first step in optimizing cash management is identifying whether an FI, or its branches, have a problem with excess cash, and figuring out the extent of the problem by accurately determining usage. This starts with inventorying cash and tracking daily inflows (deposits), outflows (withdrawals) and end-of-day balances and denominations. Each cash point of service or storage needs to be considered at a branch to encompass multiple cash points such as ATMs, CDMs (cash dispensing machines), teller drawers and a vault.
Daily flows, end-of-day balances, and starting and ending denominations at each cash point will give the FI a good sense of each point’s daily cash usage and denomination needs, and open the door for a 20-30% reduction in cash levels.
Denomination tracking is also an integral part of cash optimization because some cash points may hold idle denominations that customers don’t really need – bills that could be taken out and profitably invested without impacting service - so it’s important to track the denominations ($1s, $5s, $10s, $20s and $100s) of inflow and outflow at each cash point.
Solution #1: Daily cash flow and denomination information provide “cash data” and help determine cash usage and redundancy at each service and storage point. Cash data can then be analyzed for daily trends and maximum/high/low/minimum demand days such as special local events (ex. county fair), national holidays, and used to determine cash positions and deliveries for each cash point on a daily basis. Cash flow data will also indicate if a branch has a net inflow or outflow (i.e. takes in or gives out more cash).
While a simple spreadsheet is a good start, manually updating and analyzing data across multiple cash points and branches can quickly get out of control. Instead, it’s far more efficient to use applications that track cash flow at each point (by denomination and without manual/teller input), analyze results and present a dashboard on usage and recommendations.
Challenge #2: Setting Cash Limits
Another key cash management challenge revolves around setting, reviewing and adhering to cash limits. FIs set upper-bound, maximum cash limits to guide managers against holding excess cash. While cash limits are necessary and good, there are two major drawbacks in their implementation: a) limits are held static over long durations and reviewed and reset only once or twice each year, and b) managers see the cash limit as a guide to how much cash they should hold, not as the high-water warning mark that it is supposed to be.
Solution #2: Management should make cash limits dynamic and set them based on weekly or monthly cash usage trends, and managers must be trained to minimize daily cash inventory “down to usage”, not up to the maximum cash limit. FIs must reiterate the intent of the cash limit as an upper bound, highlight the downsides of carrying “non-earning” cash, and train managers on how to optimize cash “down to usage”.
FIs must weigh competing cash needs – daily usage, insurance limits, teller drawer requirements, maximum daily outflow, minimum daily inflow and cash delivery schedule - and add in a reasonable buffer to determine the maximum cash limit for each branch or cash point.
A good way to determine the cash limit is to look at cash as inventory. For example, if deliveries happen once a week, you don’t want a limit that would cover 14 days of demand; instead, you want a limit that covers you for close to 9-10 days. In addition, management should set warning alerts at various thresholds that get triggered as a branch approaches its cash limit… so branches don’t use the cash limit as their order amount, but as a high-water mark that they should never touch and only operate below.
Again, manual cash limit management is fraught with implementation hurdles. Instead, FIs should consult cash management professionals to determine limits tailored to an FI’s unique cash flow needs, and implement software-based tools to help manage limits and alert appropriate personnel when limit thresholds are breached.
Challenge #3: Getting a Handle on the Cash Ordering Process
The third key challenge in cash management is optimizing the cash ordering process. Typically, most branches have their own systems for determining cash usage and needs, and use them to place cash orders. And herein lies another opportunity to optimize cash because typical orders placed well exceed actual, usage-based cash needs. FIs must evaluate how each branch or ATM manager determines the amount of cash they order – and see if these branch/ATM orders are placed through the FI’s centralized finance function or whether they are placed directly with the local Federal Reserve branch or money supplier.
Solution #3: To get a grip on the institution’s overall cash flows, FIs must mandate that all branch and ATM managers follow a standardized process to first determine cash usage and needs, and then place cash orders through a pre-approved cash funnel. In addition, all orders must follow the same deadlines. For example, all of an FI’s branches/ATMs should submit orders using a standardized cash order template, by a specified date and time that is set for every week or two weeks, and sent to a centrally designated contact through a standard delivery mechanism such as an internal email on an FI’s secure network, to a fixed address – ideally with confirmation on receipt and cash delivery.
That said, standardized processes such as emails and spreadsheets can easily become hard to track or refer back to, so FIs would benefit significantly by leveraging applications that manage, track and report on the entire cash order process, and streamline and optimize cash ordering.
Financial institutions that address these three key challenges will see quick results as standardized, orderly data-driven processes replace scattered, under-optimized ad-hoc modes of operation, to deliver greater transparency and a 20-30% increase in cash management efficiency.
