Cash Management – Part I: How Online Banking has Changed Business Cash Management for the Worse

To substantiate an assumption that the advent of banking technology has created a shift for the worse, it is necessary to start from a baseline of what once was. In the past, long before online banking came into existence, businesses managed cash much like individuals: they kept a check register, updated it with all transactions and balanced it at the end of the month. Should the register balance come perilously close to zero or worse, below zero, it was quite obvious how to handle the situation (stop spending money or put some in). In the event of a bounced check, it was usually discerned at balancing time what exactly the problem was and corrected accordingly.

Nowadays, many business owners are addicted to checking balances online daily to determine where cash is. This is the beginning of where the wedge drives in and starts causing problems – assuming that a business’ cash management program started with online banking and grew from there. First getting frustrated at the amount of labor involved checking the bank consistently, owners often turn to an office assistant of some sort to manage a form of a daily cash report. This method works fine when there is plenty of cash. When cash levels drop, it doesn’t work. The first few bounced checks usually are the symptom that the method needs to be changed. Business owners’ first response is to then begin tracking outstanding checks to understand what the float is as well as actual bank balance. As cash gets tighter, then business owners extend the report into the future and project deposits coming in and checks to be written, thereby extending the running tally forward. As problems develop, some go down the road of trying to figure out what happened (i.e., what transactions posted that were not expected) and why there is a difference. This gives birth to a report that tracks cash balance history plus outstanding checks and future transactions. Now we have a bloated monster that needs to be tracked, updated and dissected on a daily basis. Visibility on cash in these scenarios is a nightmare.

Obviously not the desired outcome and certainly fraught with excess labor and a substandard outcome.

Back to the Old Days?

To solve this quagmire, a holistic view of the entire cash management process is necessary. For starters, it must be accepted what limits the current available bank balance has. It does not at all feign to present a view on outstanding checks. In fact, it is not a view even of the present – it is merely days in the past. So, the first thing we need to do is center our management system on a starting point in the present.

This idea brings us back to the good old check register. A properly maintained check register presents a view of the present cash situation. It is realistic to assume that all checks written are going to be cashed and cannot be reversed; hence, it is wisest to view that money as spent (the law views checks that are written as virtually spent and carries criminal penalties for writing rubber checks, so we have good reason to adhere to that idea). Hence, the magic equation is: register balance = cash available at present. Bank balance minus register balance = float. Remember our bloated cash report? It can be tossed out the window. Here’s where the challenge comes in.

The problem comes in trying to maintain an accurate cash register. Some organizations do not have their entries posted into their accounting system on a daily basis and therefore cannot produce a check register on an ongoing basis. When pressed to get things in order, then whatever painful issue is preventing reporting is flushed to the surface. Whatever that reasoning is (no matter how painful), it is important to note that all cash entries will eventually make it into the system and be balanced (aka “bank reconciliation” or “balancing the check book”). So, if an organization is already entering everything and balancing it monthly, why on earth would it put up with “solving” the problem by mirroring cash management with separate running ledgers?

Ancient and inane accounting system vagaries and limitations notwithstanding, there will be executives that find it more painful to solve the problem than to just leave it as is. After all, it feigns as “not broken so don’t fix it.” Let’s analyze that view for a moment.

“There is no management without measurement.”

If an organization cannot organize checks received and deposited, credit card receipts charged, wire transfers in, checks written, and ACHs initiated on a timely basis, then the logical question is: what else is the organization not tracking? Cost accounting? Analytics? Real performance metrics on financials (vs just how much money was made)?

Additionally, since cash is reconciled every month, how broken is the system on a day-to-day basis and how much fixing is being done repeatedly on a monthly basis to get cash accurate? For example, are bank fees and owner-written manual checks missed during the course of the month and entered during bank reconciliation?

It is clear that addressing those issues head-on, fixing them and wrapping efficient cash management around it is essential. Continuously repairing broken systems with workarounds and patches to workarounds only bloats and compounds a weak foundation. Furthermore, companies in a crippled position (economically, intellectually, etc) that feel that the problem can’t be solved are in a much less apt position to deal with the fallout of broken systems. Of course, online banking tools are phenomenal and provide excellent cross-checking of cash management and float volumes. However, used improperly, they become a crutch that handicaps an organization.

In our next article, we will delve extensively into the day-to-day issues and realities in building an efficient and high-powered cash management system.