Bank managers know effective cash management is a multifaceted process. You have to consider each task and step in the process to truly make sure you’re managing cash well.
Despite this complex web of factors, there are four pillars driving the process. If you keep them in mind, you’ll be able to rationalize and streamline how your business handles cash.
1. Cash Holding Measurements Must Inform Cash Management
Perhaps the most fundamental aspect of cash management is knowing how much cash you have to manage at any given time. That’s why cash holding measurement is so important.
You need to know how much cash is in your vaults, processing centres, and on site at any of your branch locations. You also should know just how much cash is headed to any of these locations, as well as how much is being sent out.
Accurate measurements are crucial. You need to know not only how much cash there is, but where it is and where it’s going.
Order processing, supply chain structure, and more affect your cash holdings and your ability to keep track of them. Even interest costs can change how much cash you have on hand, so it’s important to keep tabs on them too.
2. The Logistics of Cash
How does cash get from Point A to Point B? It may seem like a a simple question, but a look at the answer reveals the complexity of it for financial institutions.
Your supply chain, from ordering to processing and transporting cash, is key here. So too are schedules. When are armoured cars available to pick up from your centres and how long will it take them to deliver the cash elsewhere?
Streamlining your operations can help you lower costs and get cash where it needs to go faster. How much does your supplier charge for those armoured vehicles? What does it cost to order cash? What are the labour costs associated with processing it?
All these factors can add up, which is why effective cash management must consider how to streamline the process and keep costs low.
3. The Availability of Cash within the Network
Another fundamental of managing cash effectively is ensuring the availability of cash. How much does it cost you if you don’t have the right amount of cash available?
Good cash management should be proactive and seek to have higher availability than market expectations. You must also be prepared to operate within the constraints of the market. Suppliers may not be able to get cash to you as quickly as you need them to.
The effective management of cash helps you plan for the limitations of the network and cope with them to keep costs down and meet your clients’ needs. All too often, managers resort to increasing cash holdings in safes and ATMs to an excessive level.
When you manage cash well, you strike a balance between having too much and having too little on hand. The use of the right software and measurements will help guide your efforts to find the optimal amount of cash to have on hand.
More often than not, residuals are used to benchmark the effectiveness of cash management. Low residuals mean how you handled cash has been effective. High residuals suggest otherwise.
The best way to measure residuals is to use a simple formula. Cash in divided by cash out will give you a good idea of how effective your management efforts are.
By keeping the four pillars of cash management in mind, you can make better decisions about any individual task within the process.