Cash management and the CPA

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By Edward D. Peterson, CPA

The Credit Crisis of 2008/2009 has put new emphasis on cash management and corporate liquidity. As a result, financial managers are seeking to expand their knowledge of treasury management to better meet the needs of their companies. CPAs have the opportunity to assist their clients due to their unique relationship and knowledge of their client’s financial position. This article will examine selected areas of cash management and the impact the CPA can have in helping their clients with their cash management needs.

Determining Cash Flow Practices  -   Examining CPAs spend considerable time reviewing cash receipts, disbursements, balances and reconciliations. While performing these duties, it is important to note the practices and methods clients use in managing cash. A good starting point is analyzing bank reconciliations and company cash flow. 

Sources of Cash  -  Company revenue sources should be examined and reviewed since they determine how remittances are received. For example, some firms receive remittances at the point of sale receiving cash, checks or plastic cards drafts. Others receive check remittances by mail or electronic transfers. Where checks are received, the company has several processing alternatives. Traditionally, checks are accumulated, deposit slips created and forwarded to the firm’s bank for deposit. In recent years, many companies now use a processing method referred to as “remote deposit” or “remote capture” where a company employee scans the checks into an electronic image capture machine, prepares a deposit slip and in turn electronically deposits the checks into the firm’s bank account. This system has the advantages of saving labor and travel time, and shortening the check-clearing time. Often, the firm’s bank will give credit for electronic deposits made as late as 8 pm as if the deposits were made at midday. CPAs should recommend this type of deposit processing where check volume warrants.

Many firms receive payments from customers on a recurring basis. These firms often have the option of receiving cash at the point of sale, credit and debit card drafts, check remittances or electronically transferred funds. Processing check remittances can be performed similar to the remote deposit method discussed above. As an alternative, these remittances can be more efficiently received by using electronic transfers via the Automated Clearing House (ACH). For example, a customer can establish a periodic payment using the ACH thereby bypassing the mail system, paper checks, and deposit processing altogether. Funds are considered “collected” when transferred via the ACH.  Discussing the firm’s methods of receiving remittances and recommending these enhancements when appropriate can help clients improve cash balances and streamline processing operations.

Methods of Disbursement - For many years, companies made disbursements via paper checks which served them well. Recently, check fraud has increased to the extent that the cost of such fraud is in excess of one billion dollars annually. As a result, systems have been created to counter check fraud. One of these systems is called “positive pay”. This service incorporates the best of paper checks and electronic banking. Here, information on the paper check being presented for payment is electronically matched by the bank against a “checks written” file in order to determine if alterations have been made. As a result, check fraud exposure is reduced for companies utilizing this banking service. 

 As discussed earlier, the ACH has gained great momentum in the transfer of funds. Many firms also utilize the ACH for disbursements which has the advantage of ensuring timely payments, saving labor and postage costs, and reducing check fraud exposure.  Payments using the ACH are an inexpensive method of controlling disbursements while retaining cash balances up until these funds are electronically disbursed. CPAs should look at their client’s methods of disbursing and recommend appropriate services and enhancements that will fit their activity, while ensuring that payment fraud is kept to a minimum.

Cash Flow Projections and Monitoring Liquidity - With cash flow being the life blood of any business, it is important not only to know the firm’s current cash balances, but to determine where cash balances will be in the future. Time spent forecasting cash flow and monitoring overall company liquidity is a must in today’s environment. The best cash mobilization and disbursing systems (while important for enhancing cash balances) cannot fully compensate for the need to continually monitor cash inflows, outflows, and balances. While managers utilize different methods of forecasting, the end result of accuracy and usability are key factors when evaluating forecasting methodology. In order to improve accuracy, the manager needs to tread into areas not normally visited. Coordination of cash inflows and fund requirements with other company department heads are the responsibilities of the financial manager in order to ensure that company funds are not only sufficient but utilized in the most efficient method. Examining CPAs should review cash projections, discuss their effectiveness with management, and make suggestions where needed.

Banking Relationships and Borrowing Methods -   The overall success of any firm’s cash management practices includes the relationship it maintains with its banks. Personal relationships with one or more bankers are keys to strong banking ties and need to be continually strengthened. Many financial managers who receive needed banking services or acquire special benefits credit much of the success of the transactions to the relationships they have with their bankers.   

A firm’s banking relationships often includes the extension of credit. Loans take various forms, dependent on the type of financing required and the nature of the firm’s business. A strong banking relationship will allow the manager to seek advice from the firm’s bankers to fit the best loan arrangements to company needs.  Recently, banks are requiring expanded financial information to accompany loan requests. Such application requests should be well organized and documented. Here, CPAs can assist their clients in reviewing or helping prepare such loan applications and lend added credibility to the information being submitted.

Investing Short-Term Cash – Reviewing the firm’s cash flows will reveal that there are times when the firm has excess funds on hand. Typically, excess funds have been used to invest in short-term investments such as U.S. Government obligations and other short-term instruments. In the current financial environment, safety has taken on an added priority, replacing yield as the number one investment consideration. Today alternative investments with attractive returns include taking full advantage of cash discounts offered. Where cash discounts are not offered, managers who request these discounts will often be rewarded. Paying down revolving debt also presents a safe and sound use of excess funds. Care must be given, however, to ensure that such funds can be re-borrowed in the future, if needed. Rates of return from such transactions will generally exceed most alternative investments while providing complete safety.

When cash discounts and paying down revolving debt opportunities are exhausted, other investment alternatives can be considered. With yields at near historic lows, safety and liquidity are again key investment factors. Safety in bank investments has been recently enhanced with FDIC insurance being increased from $100,000 to $250,000. Use of repurchase agreements backed by U.S. Government obligations have also increased when short-term investments are in excess of the new $250,000 insurance limit. In addition, the use of U.S. Government money funds is becoming more popular as safe, liquid short-term investments.    CPAs are in an excellent position to review company short-term investment policies and practices and make recommendations where appropriate.

Summary - The Credit Crisis of 2008/2009 has put cash management front and center. Company financial strength is very dependent on the systems and attention a firm puts on monitoring cash flows and overall financial liquidity. CPAs spend substantial time reviewing the financial records of their clients in order to attest to their accuracy and appropriateness, and assisting in financial compliance. While conducting these activities, CPAs are in a great position to review their client’s cash management policies and practices. With the knowledge gained of these activities, CPAs can apply their knowledge of cash management and assist their clients strengthen their overall financial position by recommending policies and methods for improvement.

About the author:

Edward D. Peterson, CPA, is President of CM Financial Solutions, Inc., a developer of CPE seminars in the cash management field. He recently authored the text Cash Management Fundamentals, Solutions for MaximizingCorporate Cash and a CPE course on the subject. Peterson has held several senior positions in banking, public accounting, real estate, and financial consulting. He has also served as an adjunct professor at Brigham Young University and San Diego State University. For further Text and CPE information, e-mail Mr. Peterson at [email protected].


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