Cash management challenges and issues

Cash management challenges include poor cash flow forecasting, inconsistent revenue, late payments, high overhead costs, settlements or transactions in multiple currencies, regulatory changes, economic fluctuations, etc., which can strain the overall financial performance of an organisation.

Cash flow refers to the real-time movement of money in and out of a business, showing the liquidity and immediate financial reality. It’s the actual inflow and outflow of cash, highlighting the company’s ability to meet obligations at any given time. A forecast, on the other hand, outlines expected income and expenses over a period. It’s a financial roadmap, setting financial goals and limits for the business.

Cash forecasting is a tool used by banks and corporates to identify future cash needs. Organisations are looking at ways to deliver more value to customers while improving profit margins, together with economic uncertainty, and more and more competitive market conditions.  As cash volume continues to grow, cash management will gain significant importance. However, inaccurate cash forecasting and an asymmetric level of consistency or uniformity in certain practices and operations continue to hinder effective cash management.

Inaccurate Forecasting:

The cash flow forecasts of several companies are based on the information the accounts department gathers from internal and external sources. However, access to limited information often leads to inaccurate cash flow forecasts. The reporting and forecasting accuracy is therefore dependent on that incoming data. Additionally, they rely on historical data to predict the future.

Redundant system of forecasting:

Despite its importance, many organisations still rely on error-prone spreadsheets for current cash forecasting methods. Forecasts often differ from actual cash needs due to the lack of an ideal automated process that further enhances the chances of inaccuracy caused by human error.

Reconciliation and currency-related complexities:

 Cross-border receivables can be costly and complex without proper cash flow in place. The top challenges associated with cross-border receivables fall into three broad areas: reconciliation, currency-related complexities, and sub-optimal payment terms. Poor back office reconciliation may run the risk of fraudulent transactions, inaccurate financial reporting, compliance issues, errors in tax reporting, bad credibility, and poor cash flow management. Consequently, currency rate fluctuations can negatively affect the profit. Multi-currency reporting requires merging the financial information from all of organisation’s worldwide entities, each with a unique reporting currency, into a single business with a single reporting currency, which can be rather complicated. There may also be other complexities, like the trading of a single entity in multiple currencies, and the existence of multiple bank accounts in various currencies. Spreadsheets are very error-prone and can easily turn into a nightmare when used for multi-currency aggregation.

Inconsistency in certain practices and operations:

The purpose of standardization is to enforce a level of consistency or uniformity in certain practices and operations. While standardization and centralization can provide benefits such as cost savings and increased efficiency, they can also pose challenges in cash management. For example, Commercial Bank branches in India should operate within a cash retention limit normally equal to 0.25% of their total deposits or as decided by their Regional office which will be advised by the respective Regional Offices. If a higher cash retention limit is desired, the branch concerned should obtain approval from the Regional Offices by giving justification for the enhancement. Region should ensure that the overall cash holding of the Region is maintained at 0.25% of the total deposits of the Region or as decided by the Head office, by reducing the cash holding limits of branches having easy access to the currency chest of other banks.

Regional Offices should generate a statement through CBS and verify the cash position at branches at fortnightly intervals and the percentage to be checked, corresponding with the reporting Fridays for Form ‘A’ submission. This is to monitor compliance of the maintenance of statutory reserve requirements. This system-generated fortnightly return would give the controlling offices a ready picture of the fluctuations in cash balances during the fortnight and initiate corrective steps where necessary.

 It should also be ensured that the Branch cash balance consists of currency notes of different denominations in adequate proportions so that the Branch can pay currency notes in the denominations required by customers.

Branches having accounts with other Banks may manage their cash position with the respective Banks of their accounts.

The Regional Offices will submit every Friday, the branch-wise cash position, indicating separately the balances held with other Banks. This information is vital for the Head Office for maintenance of the cash liquidity ratio.

However, the system for maintaining adequate cash balance in branches and transferring excess cash from surplus branches to Head Office or deficit branches, are, indeed, major tasks faced by commercial banks in India.  The Head Office controls the Regional office for maintaining adequate cash balance and transferring excess cash from surplus branches to Nodal Branch Currency Chests or deficit branches.  Commercial banks face the major task of transferring excess cash to other branches. This is because, at the branch level, the problem is determining the amount of money to be drawn from/remitted to the Nodal Branch and the timings of remittance/withdrawal with security arrangements.

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