Becoming a Treasurer Series, Part 23: Cash Boot Camp

INTRO  0:09   

Welcome to The Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury, news, analysis, and insights in your car at the gym, or wherever you decide to tune in. On this episode of the Becoming a Treasurer series, author Craig Jeffrey continues a mix of interviews around his book The Strategic Treasurer: A Partnership for Corporate Growth. The chapter of discussion “Cash Bootcamp for Treasurers” provides a practical approach to understanding different perspectives of cash, how accounting and treasury can live in harmony and more. Listen in to the discussion 

 

Meredith Zonsius  0:58   

Welcome to the podcast, Craig.  

 

Craig Jeffery  1:00   

Thanks, Meredith.  

 

Meredith Zonsius  1:01   

You know, it’s been a while since we’ve talked and expanded on the popular podcast series Becoming a Treasurer so I’m looking forward to today’s discussion. I’d like to continue our conversation around another chapter in your book, The Strategic Treasurer: A Partnership for Corporate Growth. You know, your book offers a great mix of topics and insights to help treasurers along in their career journey. And the chapter I’d like to cover today is “Cash Bootcamp for Treasurers” to start us off, can you explain the purpose behind this chapter? 

 

Craig Jeffery  1:33   

The focus of this chapter was to make sure that treasurers and anybody else who would be reading the book understands some of the different ideas around cash. What is it? How does it work? What are some of the different ways we look at it in finance, accounting as a view of it? Treasury has a different view, similar, but different view and I think that chapter I started off with a quote, “I can’t be overdrawn. I still have checks” as a playful way of addressing some people’s views, not finance views, but some people’s views on liquidity and I guess some of the old-style payment methods like checks. 

 

Meredith Zonsius  2:14   

Cash is one of the most basic of all finance terms while cash is certainly cash. Can you share some different views and types of cash? 

 

Craig Jeffery  2:22   

Yeah, the totality cash is certainly cash is one way of looking at it and people can equivocate on the term what is what is cash mean? Does it mean currency? Does it mean physical cash? Does it mean available cash? Cash that you have to spend. What are we referring to when we say cash? And that difference can vary when we think about cash if we’re formally trained in accounting, we think that the generally accepted accounting principle of cash is the way to go. Because there’s certain principles that govern accounting. And it’s something that’s cash or near cash is treated as cash and may not take into account some of these ideas related to float or delays. And that doesn’t have to refer only to check flow, mail flow, can refer to any type of delays in a process could be posting, receivables, etc. So, there’s a number of different areas where people can have a different view of cash and that’s really important because how accounts look at cash is for general reporting purposes is a general function of liquidity for their purposes, but there’s a treasury view of cash which is, what funds do I have that are liquid? In other words, I can use them and they’re in the right place, the right currency, the right bank account, that I can take advantage of that to pay down debt to make investments in an efficient manner. And so those two perspectives can be very different. You can have on your financial statements, we’ve got $5 million dollars in cash, well, that might be true, it might not be even you may have great cash needs in one place, and that you have to borrow on and other areas that you have excess liquidity so how do you manage that? And it’s a very different purpose financial reporting, versus liquidity management. I think those are those are key aspects because forecasting has to account for bank geography specific activity, forecasting your cash and it looks very different if you’re doing it from an FP&A perspective. So, location, liquidity, access, those are all some key concepts, and they differ even within finance, as we look at as we look at cash. 

 

Meredith Zonsius  4:57   

So, the chapter also provides an accounting oriented approach as well. Accounting entries may be a bit technical to share on a podcast discussion, but maybe you have some disbursement examples to shed some light on this concept. 

 

Craig Jeffery  5:11   

Okay, I think you’re referring to one of the disbursement examples in the book. Yeah, I may come to that. And I think you know, as you asked that question, it made me initially think of debits and credits and think of cash. I’ll just use an example of a term when the bank says we credited your account for $5 million. Usually, you’re pretty happy because that means that your account went up $5 million, but they use the term we debited your account, now, when you think about accounting, an asset account like cash, a debit is the positive side. So, if you had a balance of 10 million in your account, you’d have a $10 million debit balance. And when the bank says we credit your account for $5 million, what does that mean? Does that mean that the credit reduces the 10 million down to 5 million? About 5 million reduced the 10 million by 5 million. So now you only have 5 million? No, it increased your account. So that 5 million credit from the bank is really an entry that you would record a $5 million debit. And for those that maybe haven’t taken accounting or haven’t been to an accounting class, so while you’re thinking, what kind of wizardry is this, that debits mean credits? And so that’s another perspective that’s different between your books and the bank. So, what that means is you view an asset balance, the positive side of the asset account is a debit. And so, an increase is two. If you increase it, you debit the account to build it up. And you would take a credit if you dispersed some funds that would reduce it. So, why does the bank say that it’s a credited your account? When you’re saying I need to put a debit on my accounting side. And for those that are familiar with this, this is probably a boring discussion, but the issue is that the bank that holds your balances, they treat those as a liability to the bank site, they’re holding your cash, and if you have 10 million cash that’s a credit balance on their books because your account is a liability to them. They owe you it’s not their money, they owe you 10 million. If they received 5 million, they credit your account 5 million. So now, their liability has gone from 10 million to 15 million, so their account has gone up 15 million, but it’s a credit on their side because it’s a liability. Cash to you is an asset, and so you went from $10 million debit to $15 million debits are it’s on that side. So, that’s an element of confusion between accounting, understanding if you’re sitting in a different location, you’re sitting in a company or you’re saying the bank, those makes sense, but you just have to realize I have to think of what the bank says from the bank perspective, and I flip it on the corporate perspective. That’s one for example. I know you asked about a disbursement example, I think a there’s another element I’ll just I’ll say it this way, you may have a disbursement payment is a payment process is cut today, maybe it’s an electronic settlement for tomorrow or maybe even the check run. Sorry for those that are outside the US or Canada that don’t know what checks are. But sort of payment goes at let’s say has a future settlement date, the accounting entry is going to hit cash immediately. Whether it clears tomorrow, or a week from now or 10 days from now because they view it as this essentially cash it’s so near cash, the time difference is negligible. It will treat it as an entry to cash now, any self-respecting treasurer or cash manager if there’s a significant amount of funds that are floating or in delay, we’ll use that cash. So, there’s elements on the collection side and the disbursement side where you have to treat liquidity as different from GAAP cash. So, it’s what is the cash I can use? I have to have it in a way that I if I have it so I can use it, I want to use it and I have to have a location where I can access it and use it to pay down debt, make other investments or have an additional margin to cover activity or unsuspecting items. I hope that provides a couple examples to think about cash from a few different views. 

 

Meredith Zonsius  9:54   

Yeah, that’s an excellent summary to explain that concept. Let’s touch on a little bit about accounts receivable. Can you share a little bit around this asset? 

 

Craig Jeffery  10:06   

Sure, so yeah, so on the on the AR side, I know I’ve talked about this with a number of people in the last couple of months. So it’s like I’m really having a couple conversations on this but it’s fun to think about, you know, so the person in charge of accounts receivable, maybe it’s the kind of management role or the head of AR, the VP of the group their usually incented on working capital measurers, and reducing DSO which is a calculation of what’s the level of receivables that’s out there and what’s the average day and so, how does that translate? Hopefully that wasn’t too much for a podcast. But the idea of if a group is behind, posting the receivables they get, let’s say they get a bunch of funds in today and they’re only able to clear some of it there’s too much they can’t post it they don’t know which outstanding invoices their billings that can’t clear it to the billings. Well, they may not post it to cash if they only recorded through AR so let’s say the left 5 million unposted cash is going to be 5 million short in their financial statements for that day or that month end because they didn’t post all of the cash that was received. So, the entry doesn’t hit cash in a traditional way of posting. And so that can create a bit of a whipsaw or a fluctuation in terms of cash where let’s say it was received electronically, it was all available–there’s 5 million more cash. And so, if there’s any variance or delays, or timing lags between items in the bank, whether they’re available or not and timing, those can move the reality of liquidity up and down as compared to an accounting measuring process. And so that that creates some whipsaws and there’s certainly ways to address that better, particularly with technology that exists. 

 

Meredith Zonsius  12:22   

Well, that brings me into my next question. Has new technology provided treasurers and controllers the ability to meet both recording and cash management objectives more efficiently? 

 

Craig Jeffery  12:34   

Yeah, I think so. You know, there’s processes and there’s technology. You know, if we think back a number of years, we didn’t have all the technology that allowed us to post transactions from the bank, from integrated lock boxes or integrated receivable systems or payables platforms, as effectively. And what that meant, was that you would usually have the sub ledger, i.e. the payable system or the accounts receivable system that would create entries to cash. And then let’s say if it’s on the receivable side, they’d relieve the receivable they would debit cash for the receipt of cash and they would credit receivables which would reduce the receivables because there’s no longer that amount was no longer a receivable it was cleared. So, they’re relieving the receivable. So that’s coming down. If you have a delay, this latency issue of recording, you’ve made your liquidity, your actual liquidity, that you can use different from what the financial books or the financial cash books say in the organization. So, that creates the problem. Well, how can technology help with that? So, technology can help with this is treasury may be getting feeds from all of their banks on a daily basis on a prior basis, or even on real time basis. They can have the technology set up with rules and logic base rules that will create all of the accounting entries that will hit cash. All the cash that’s received, they’ll create the debits for those. It’ll create all the credits for every disbursement as it clears the bank, those can all be made on an automated basis. Now that can be done for those that might be receivables or payables. Now as you may remember, just a few minutes ago, I said AR might be debiting cash for the receipt and they might be crediting receivables to reduce or relieve their receivables. So now if treasury is booking the cash received, what’s their offset or what’s their credit point to be for the receivables because you don’t want to book twice. So, the debit to cash could be made by treasury. Their treasury platform or system and the credit could be a cash clearing account. And AR would hit a cash clearing account, now those cash clearing accounts are treated as cash for GAAP purposes. So that you know if treasury’s hitting debit to cash and a credit to cash clearing receivables, for example. Those are both treated as cash entries, but you could see what’s the real cash by looking at cash and you could look at cash cash clearing on the treasury side and then AR would debit cash clearing, which is another GAAP cash account and then the individual clearing items and what that means is everything that comes in could be automatically booked to cash by treasury. And then as those receivables are relieved, no matter what the timing differences, they would book cash clearing and so everything that’s related to receivables would be the cash side would be booked by treasury, the cash clearing would match up exactly from treasury to the cash clearing side on the receivable standpoint. And what that means is when you run your GAAP cash, you’re in compliance, you just simply total the cash and cash clearing items. But treasury can look at cash and they can also see where there’s a delay in posting by examining the specific cash clearing accounts and that’s not part that’s not possible or recommended if everything’s manual because you’re saying hey, everything hits the bank now, entering it twice. And I’ve kind of reconcile between a those two and that would be insane in the manual world. That wasn’t done. But in a digital world, all those entries can be made automatically so they take almost no time. They’re matched quickly, and it provides a secondary control point, a balancing between everything that hits the bank cash side it’s booked by treasury and then matches off to those areas that may have sub ledger activity to do with cash, the cash clearing account. And this is this is a real significant change that companies started doing probably about 15 years ago. And it’s really moved through many, many companies. And that’s only really possible through the use of these automated rolls and technology. And it was probably a longer answer than I wanted but you got me going on it. 

 

INTRO  17:24   

No, that makes it makes good sense. So, understanding the different needs and perspectives of cash is of great value to the treasurer and treasury. What are the key concepts to remember? 

 

Craig Jeffery  17:37   

Well, cash is king. That’s one. The liquidity is super important. That’s more important than paper profit on the books. If you don’t have liquidity, you can become insolvent. So that’s one. Second the term cash and perspectives on a differ from the liquidity view of cash for the treasurer to the GAAP oriented view of cash by the controller. It that’s the second point. The third one, when treasury looks to optimize things from a treasury perspective. They can and must address them in a manner that is compliant with GAAP reporting needs. And I just described the way that makes them that way and meets some of the more advanced liquidity needs of most medium and large sized treasury groups. And, you know, finally the ability for treasury to do this cash reporting on an automated rules-based system is superior from a control perspective and helps improve the financial records of the organization, the accuracy, the ability to track those. I think those things taken together are quite significant. It’s not a us versus them. Accounting versus treasury, treasury versus accounting. We can argue about cash. Both views of cash are valid, and they need to be taken into account. And I think that will help us look to the win-win situation. And it’s really a lot easier given some of the new tech that’s out there. 

 

Meredith Zonsius  19:10   

That’s a great summary. Craig, any other final thoughts as we wrap up our discussion? 

 

Craig Jeffery  19:16   

No, it was it was fun talking about cash and accounting. So, thanks for your time, Meredith. 

 

Meredith Zonsius  19:22   

Yeah, absolutely. Thanks for your time as well and sharing some insights from your book. If our listeners want to get a copy of your book. Is there a way that they can do so? 

 

Craig Jeffery  19:31   

There certainly is I think in the show notes there’s information so The Strategic Treasurer is offered by Wiley and Sons, and you can get it wherever digital books are sold, and there’s quite a few locations to get the hardback version as well. 

 

OUTRO  19:51   

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