All businesses manage their cash flow, but most don’t have a professional treasurer to help them with the task. And without that professional input, you may be paying for services that you are not fully utilizing or overlooking services that could benefit your business, says Tom Hoffman, senior vice president of Treasury Management at Bridge Bank.
“By forming a strong relationship with your banker, you can reach out to your bank to fully understand things such as account analysis,” says Hoffman. “Most companies just implement whatever they’re told and do not realize there are services they are paying for that they do not take full advantage of.”
Smart Business spoke with Hoffman about how to avoid missteps in setting up your cash management system and how technology has changed the way businesses handle their financial relationships.
What are some common missteps that businesses make when setting up their cash management systems?
Their biggest mistake is not reaching out to a banking professional to better understand their choices and make the best ones for the business. It is similar to people who go to the same restaurant for years, buying the same thing over and over. What they have not realized is that the menu changes and there are choices they would like better or are better for their health. That’s what happens in banking products; they change dramatically over time, and there may be better choices for your business.
How should business owners begin looking for a new banking relationship, and what should they be asking?
If you think it’s time to change your banking relationship, first go to your existing bank and take a close look at what services you have there, what you are paying for and what you are missing. Then, when seeking a new bank, before you ask anything, you should explain to a potential banking partner what your business does. Sit down with someone at that bank and have that person evaluate, in a consultative way, what your treasury platform is, and that includes not only how cash and information flow in and out of your business, but also the capabilities of your personnel.
Then once you choose a banking partner, your new bank should review your account analysis statements with you on a periodic basis to understand what products you are using and if you are using them in the best possible way. Your accounts should also be reviewed if something changes at the company, for example, turnover in the accounting staff. A treasury management services review will lay out what your services are, who is entitled to what services in online banking, what payment limits you have in place and then determine if any changes need to be made.
Because most businesses do not have a professional treasury staff, companies should look to their bank for advice and take advantage of their expertise to use them as an outsourced treasurer. That is what your expectation should be of your banking relationship.
How is technology changing the way businesses handle their financial relationships?
There has been an evolution in treasury management as systems have moved from paper-based processing such as writing checks. Over the past few years, online banking — e-banking platforms — have become the primary vehicle for obtaining information about accounts and tracking activity on a daily basis. Businesses can download transaction data, initiate payments, process wire payments and foreign exchange trades, do ACH transactions and do payroll all online. The online capabilities are cheaper and faster than the old paper-based way.
How will treasury management services be different in five to 10 years?
Over time, there will be fewer and fewer checks being written and more electronic payments being processed in an e-banking platform. The paper payment system in the U.S. is very inefficient. To bill a client, an accounting department creates a paper invoice, puts it in an envelope, puts a stamp on it and someone takes it to the post office, which puts it in a truck and delivers it to the client. The client then writes a check and it goes through the whole manual process again to get payment back to the provider.
In the next five to 10 years, instead of writing paper invoices, the entire process will be electronic. Companies will initiate an electronic invoice to the client, the client will get that in their inbox and reply, authorizing the vendor to process a payment against its account, and the payment will be made electronically. The efficiencies gained are tremendous; it speeds up cash flow, and it’s also good from an environmental standpoint.
But the challenge today is the information that is related to that invoice. For me to process a payment against you, that means I’m pulling money out of your account, and you want to know what that payment is for. If you have 100 vendors with invoices coming in, you need a way to match those. So the trick will be tying the invoicing process to the payment process.
The international area is also inefficient and there are going to be a lot of changes there, not only in transferring information between countries but in payment information, as well. Right now, there are many different silos, and each payment type is in a separate silo, and may be in a different currency, so they don’t connect. Today, you see bridges between silos with companies such as PayPal making that connection between entities. But in the future, those intermediaries will go away.
The first step for a handful of countries is an international ACH payment system, allowing companies to deliver and collect funds overseas much more efficiently, and that system will only continue to grow.
Tom Hoffman is senior vice president of Treasury Management at Bridge Bank. Reach him at Tom.Hoffman@bridgebank.com or (408) 556-8353.