Effective Cash Management

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Published: March 2004

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Table of Contents

Cash: "Long Live the King!" 3

Cash Management 101: Maximize Cash Flow 3

Is Your Existing Information System a Help or a Hindrance? 4

The "Report Mining" Response to Optimizing Cash Flow 5

Keeping Score & Looking Ahead: Effective Cash Reporting & Forecasting 5

Succinct, Simple Cash Reporting with Report Mining 5

Steps to Effective Cash Flow Forecasting 6

Report Mining: Cash Flow Forecasting Technology Need Not be Expensive 6

Collaborative Technology Puts Managers on the Same (Web) Page 7

The Report Warehouse Alternative 6

Conclusion: Report Mining Enables Effective Cash Management 8

About the Datawatch Family of Monarch Report Mining Solutions 9

About Datawatch 11

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Cash: "Long Live the King!"

Although every businessperson has heard the old mantra "cash is king," it is amazing, inhindsight, how cash management was treated like a clown jester during the dot-com bubble. Ofcourse, the dot-com bubble has long since burst, with most of the dot-coms suffering theconsequences of virtually nonexistent cash management. Businesses today, particularly amiddifficult economies, realize more clearly than ever how critical it is to pay homage to the king ofbusiness: cash.

Making cash management a business priority means recognizing that profits do not matter if youcannot make payroll or pay your bills.1 Businesses fail for any number of reasons: poormanagement, poor product development, weak marketing, and, as evidenced by scores ofaccounting fraud cases, deliberate and egregious misuse of funds. But it is far more common,even for companies that do everything else right, to still fail because they failed to manage theirincoming and outgoing cash flow.2

While the basic principles of effective cash management are relatively simple, in practice the actualactivities necessary for monitoring, managing and forecasting cash can be cumbersome. This islargely because the data needed for different cash management activities exist in differentsources, both inside and outside the organization, and is often difficult to access and work with.

By understanding the key areas of activity for effective cash management, as well as the sourcesof data necessary to accomplish each activity, we can establish a cash management system thatprovides easy access of needed information. Additionally, the best cash management system isone that is cost-effective, utilizing existing sources of information to the highest degree possible.The irony of expending a disproportionate amount of cash for a cash management informationsystem is surely clear to all finance professionals!

Cash Management 101: Maximize Cash Flow

"Cash Management" can be defined broadly as theoptimization of cash balances, cash flow, and short-term investments. In simplest terms (see diagram),an effective cash management system will consist ofoptimized billings/collection practices and optimizedpayables/disbursements practices, as well as ensuringthe company's information system is optimized tofacilitate these efforts.

Luckily, the first step to improved cash managementisn't exactly brain surgery: just start maximizing cashflow.3 Simply put, begin by making

A basic diagram of an effective cash management system

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sure that billing, collections and payables systems are operating with the highest possibleefficiency. Organizations should review whether existing policies and procedures ensure promptbilling, aggressive follow-up on overdue invoices, and delaying of payables as long as is allowedwithout incurring late fees or interest charges.4

C. Ray Johnson, Fortune 500 CEO and author of the 1998 book CEO Logic, offers highly practicaladvice on improving performance within an organization's billing/collection andpayables/disbursements processes which bear repeating:

Understand that credit collection starts with credit extension. Resist the temptation to cut corners when extending credit terms and payment guidelines to new customers. In other words, avoid using credit extension as a sales tool.

Learn your customers' payable rules. Understand what your top customers' procedures andprerequisites are, so your invoices can more quickly wade through them to avoid administrative delays in payment.

Understand the driving force behind slow/no payment patterns. Johnson breaks all receivables problems into three categories: "should not pay" because the product, service or billing the customer received was not right (errors in business operations); "cannot pay" because the customer does not have the money (errors in credit extension); and "will not pay" because the customer is attempting to be "shrewd" or perhaps unethical.5 Assessing problem receivables in such a manner will allow an organization to quickly identify the correct action for each receivable problem, such as quick correction of product/billing deficiencies, extraction of a partial payment or payment plan, or initiation of aggressive collection efforts.

Avoid printing checks until they are needed. Printing checks before they are needed understates the Accounts Payable balance and risks premature mailing. It is a poor practice and is to be avoided.6

Is Your Existing Information System a Help or a Hindrance?

As part of establishing improved operational procedures and workflow within the receivables andpayables departments, an organization's information system must be assessed as well. Forexample, how long does it take for a team of collection reps to receive reports pertaining to theparticular accounts they are responsible for? How are collection representatives identifyingoutstanding receivables that might be heading for trouble? Are they flipping through thick A/Raging reports to find such information? Do you know with confidence how well the collectiondepartment has performed over time; is Days Sales Outstanding going up or down? These andother questions regarding how data is actually accessed and used by billing/collections andpayables/disbursements personnel must be answered.

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If it is determined that substantial manual work is taking place to access data, such as flippingthrough reports, rekeying of data into spreadsheets, or waiting in long queues for custom reportsby the IT department, then the organization's information distribution processes clearly needimprovement as well. Doing this will ensure the existing information systems will facilitate, ratherthan hinder, new efforts to optimize the receivables and payables functions.

The "Report Mining" Response to Optimizing Cash Flow

Many software vendors will recommend implementing a brand new and typically complex dataaccess solution, such as a data mart or warehouse, to provide needed receivable and payabledata. In reality, such a hefty expense of dollars and man-hours can be avoided through ReportMining, a technology that can transform existing paper-based sources of information into live datawithout programming. This data can then be easily accessed, analyzed and exported tospreadsheets or other applications.

The basic diagrams below convey how Report Mining can help optimize the receivables andpayables functions quickly and easily.

Only Report Mining achieves the goal of eliminating the manual work of flipping through reportsand rekeying data for analysis, as well as avoiding a needless new complex layer of technology.

Keeping Score and Looking Ahead: Effective Cash Reporting and Forecasting

To practice a more elaborate form of cash management, you must be able to accurately assessyour current cash position, and make fairly reliable predictions at key intervals about how muchyou'll need to meet the company's expenses.7 These finer aspects of effective cash managementcall for a solid information system to facilitate cash reporting and cash forecasting.

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Examples of how Report Mining, as part of an organization’s information system, facilitates efforts to optimize receivables and payables performance, and in turn, improves cash management.

Succinct, Simple Cash Reporting with Report Mining

Effective daily cash reporting succinctly conveys the company's current consolidated cash balance,as well as such other accounting data affecting cash in the immediate or near term, notably thecompany's collections for the day; receivables and payables data, including unusually large checksor wire transfers; payroll data; and credit line or loan data.

Balance and transaction reports from major banks are routinely available nightly through electronictransmissions or online banking services. Account balances are conveyed, as well as certaintransactions are also reported. The reports show specific electronic collections and disbursements,primarily wire transfers and ACH debits and credits.8 While the delivery of this data from banksmay be automated, working with this data often remains a manual process. Further muddyingthe waters is if an organization does not handle its banking needs through a single financialinstitution, but rather through several different banks for various operational reasons. It isessential for an organization to easily work with this data, which may be delivered to theorganization in different display formats by different banks.

Here too, Report Mining may well prove to be a highly beneficial and economical solution toaccess and work with bank balance and transaction data. Report Mining can extract the datafrom differently formatted reports, files or saved HTML pages into a common format.Additionally, Report Mining can enable accounting professionals to automatically identify thedifferent types of bank transactions appearing in the data, allowing for easy use of the data incash reporting, as well as expediting general accounting workflow. As with the process tooptimize billing/collections and payables/disbursements processes, Report Mining can also play ahighly successful yet inexpensive role in optimizing the cash reporting process.

Steps to Effective Cash Flow Forecasting

With current cash reporting successfully in place, the remaining key aspect of effective cashmanagement is the forecasting of cash flow. Doing so helps to provide the organization withreliable liquidity and maximize investment income or minimize borrowing costs.9 Many cashmanagement authorities agree that there are essentially two ways to forecast cash: eitheraggregate the current detail spending and collecting expectations of the company and allsubsidiaries into a company wide forecast, or just assume that history repeats itself and make afew adjustments to payables and receivables patterns the company has seen in the past.10

Organizations with an unusually accurate long-term view of business activity, such as from long-term recurring contracts or operating in a regulated industry, will find the latter approach quitereasonable. Generally, however, most organizations will find a "bottom-up" approach to cashflow forecasting more sensible.

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Disbursements are relatively easy to forecast: payroll, taxes and debt service tend to bepredictable, and finance personnel know when the company has cut checks to suppliers.Predicting when checks will clear requires guesswork. Receivables are harder to forecast.11

However, the act of forecasting receivables will prove to be easier and more accurate, havingalready made the effort to optimize the billing/collection process as previously discussed.

Report Mining: Cash Flow Forecasting Technology Need NOT be Expensive

Technology to streamline the process of cash flow forecasting ranges from specialized applicationsto "treasury workstations," which can cost anywhere from $120,000 to $150,000 or more.12

Yet, no software vendor has been able to build a dominant product because each company has itsown way of predicting cash flow.13 In fact, spreadsheet templates are often used to manage thecash flow forecasting process, combining historical "actual" data with management assumptionsto produce a cash flow forecast.

A common criticism leveled by specialized software vendors on the use of spreadsheets in thecash flow forecasting process is that spreadsheets are not connected to the company's accountingsystem or external bank data. As a result, reason these vendors, all data must be re-keyed intothe spreadsheet; a manual, time-consuming, error-prone exercise. However, Report Mining has aready response: by extracting and transforming data from reports, alone or in combination withdata from other sources, such as databases or other spreadsheets, Report Mining eliminates theneed for manual data entry into a cash flow forecasting spreadsheet. Suddenly, the key objectionby specialized cash management software vendors against using inexpensive spreadsheets such asMicrosoft Excel goes away!

The data necessary for a cash flow forecast, whether using a detailed "bottom-up" approach, orsimply assuming future cash inflows and outflows similar to the past, can be found in commonaccounting system reports already in active use within the company: A/R and A/P Agings, SalesReports, Voucher and Check Registers, Payroll Reports and Registers, and other reports. The datafrom these reports can be loaded into spreadsheet templates for programming-free, data entry-free use for simple, inexpensive, yet powerful cash flow forecasting.

Collaborative Technology Puts Managers on the Same (Web) Page

Internal collaboration is necessary to restore cash flow as rightful "King" of the organization.14

With efforts to optimize the billing/collection and payables/disbursements processes in place alongwith timely cash reporting and informed cash forecasting systems running, the next step is togauge cash management performance over time, and make that information available across theorganization upon demand. For example, by analyzing data from month-end A/R Aging reportsover a quarter, six-month or annual period, an organization can quickly determine the success ofits collection efforts. The company's level of bad debt expense over time is a compelling indicatorof credit extension decision-making. A company's increasing level of finished goods over time

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may indicate multiple problems, from poor sales management to poor production planning, with amaterial and perhaps avoidable impact on cash.

It is indeed essential for an organization to analyze data over a period of time across a wide rangeof specialized activities, which directly impact cash, such as:

Credit collection and extension

Trade payables management

Inventory management

Payroll administration

Capital expenditures

Theft protection and fraud detection

Currency management15

Every business may have a different approach, but at the heart of each technology solution shouldbe a knowledge management system - a means to collaborate and access data and informationanytime, anywhere. Organizational data and information about cash needs to be effectivelyorganized and available for use in decision-making processes.16 Implementation of acollaborative and cash-based knowledge system, married to technology, can move cashmanagement from a few percentage points of a company's Return On Equity (ROE) to double-digit additions to ROE.17

The Report Warehouse AlternativeThe easiest way to make such a collaborative, "always-available" information system a realityagain leverages the technology of Report Mining. Instead of building a data mart or warehouse(with all of their time, resource and cost issues) to store historical data, Report Mining technologyseeks to build a "report warehouse," archiving existing reports as of a certain important time,such as the end of the month, and enabling secure distribution of authorized sections of reportsto the right individuals using just a web browser. Workers can then share comments or questionspertaining to reports online. For example, a collaborative reporting system will enable theinclusion of electronic "sticky notes" directly on a report, as well as allow for online discussionabout a particular report or reports. These collaborative features ensure a company's reports andrelated comments, questions and answers exist in one easily accessed, web-based system.

Moreover, Report Mining then enables users to transform desired reports into live data with justthe click of a mouse. Data can then be exported to Excel templates, or "data cubes" for in-depthanalysis. Existing accounting and other reports therefore serve double duty as an informationalsource and as a live data source.

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Conclusion: Report Mining Technology Enables Effective Cash Management

Working as a team, accounting and operational managers can begin a concerted effort towardeffective cash management by optimizing the billing/collection and payables/disbursementsprocesses, thus increasing operational cash flow. This includes key decision-making regardingpolicies and procedures to help ensure billings and collections are timely and payments anddisbursements are not premature, as discussed in this document. Report Mining will greatlyexpand the organization's success in this optimization process by eliminating reliance on paper-based reports and rekeying of data to determine appropriate collection or payables/disbursementaction.

Cash reporting and forecasting help an organization to ensure liquidity and maximize investmentincome or minimize borrowing costs. Report Mining plays a simple yet highly beneficial role incash reporting by extracting data from external bank balance and transaction reports, saved HTMLpages or files, without programming. Report Mining helps eliminate the need for expensive,customized technology solutions designed exclusively for cash flow forecasting. Report Miningnot only enables companies to extract business intelligence from external bank reports andinternal reports and data, but also enables the automatic loading of data into cash flowspreadsheet templates for inexpensive yet powerful automated cash flow forecasting, requiring nore-keying of data. Additionally, Report Mining will enable accounting and finance professionals towork with the data from any report, alone or combined with other data, without programming,to easily expedite any accounting-based activity.

Finally, Report Mining is an easily implemented technology for establishing a web-basedcollaborative archive of reports and data, for collaborative reporting and data analysis withoutdata marts or warehouses. Such a system enables analysis of data within reports, alone or withother data sources, over a period of time, to assess to what extent cash management efforts areresulting in improved business results.

The data necessary for effective cash management exists outside of the company, most notably inthe form of bank account balance and transaction reports, and internally in the form ofaccounting and operational reports, and data in other sources. Only Report Mining leverages allof these existing data sources, minimizing the time and effort necessary to access and work withdata from these sources, while maximizing the benefits of these data sources, for day-to-daymanagement of receivables, payables, and other business areas affecting cash, as well as a web-enabled source of information and data for analysis of performance over time. With ReportMining, the reign of cash as king in the organization will be stronger than ever.

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About the Datawatch Family of Monarch Report Mining Solutions

Datawatch's family of Monarch Report Mining software products are the de facto standard inreport mining and business intelligence. Datawatch has a complete Report Mining technologysolution to match your business needs.

Monarch is Datawatch's worldwide leading desktop Report Mining personal productivity softwarethat can easily extract, analyze and export data from existing reports, without programming.Monarch ends flipping through thick reports and rekeying data into spreadsheets. Monarch Prolets users also extract data from HTML files, plus combine and import data from additional datasources, such as databases, spreadsheets, etc.

Monarch Data Pump is designed to automatically capture, process and publish content createdby ERP, CRM and other enterprise applications. You can schedule and automate Monarch DataPump to combine data from reports and other sources together in a wide variety of ways, topublish final data as Excel spreadsheets or templates, Access files, and more. Monarch Data PumpServer Edition also lets you upload data into any ODBC-compliant database, or automatically e-mail published content to desired recipients.

Datawatch|ES is a web-based report archiving and distribution system, providing online reportmanagement and business intelligence all in one system. A great complement to existing finance,healthcare, ERP and other systems, Datawatch|ES lets organizations easily access, store, distribute,transform and analyze information throughout the enterprise with complete security and no newprogramming. Users can analyze data from reports through their browser by pointing and clicking,plus download the data to PDF, Excel, or our multidimensional data cube module for furtheranalysis. Other capabilities include XML-based forms management.

Datawatch|RMS is a web-enabled add-on solution to provide powerful report transformation andanalysis to organizations already utilizing an existing document/report management system.

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Endnotes

1C. Ray Johnson, CEO Logic, Career Press (1998), p. 203.2Ibid., pp. 203-204.3Jill Andresky Fraser, "The Art of Cash Management," Inc., October 1998, via Inc.com website.4Ibid.5Johnson, pp.209-211.6Johnson, pp. 212-213.7Fraser.8Richard H. Gamble, "Concrete Information," Controller Magazine, November 1997, via the businessfinancemagazine.com website.

9Richard H. Gamble, "Cash Forecast: Cloudy But Clearing," Business Finance, May 2001, via the businessfinancemagazine.com website.

10Gamble, "Cash Forecast: Cloudy But Clearing."11Ibid.12Gamble, "Concrete Information."13Gamble, "Cash Forecast: Cloudy But Clearing."14Rod Hewlett and Lori Willoughby, "Innovations to Enhance Cash Management," Association

for Financial Professionals, May 21, 2003.15Johnson, p. 215.16Hewlett and Willoughby.17Ibid.

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About Datawatch Corporation

Datawatch Corporation (NASDAQ: DWCH) helps organizations easily access, store, distribute,transform and analyze information throughout the enterprise. From Report management andanalytics to data transformation and Internet presentment, Datawatch provides solutions thatallow organizations to fully integrate and leverage their existing sources of information.Datawatch products are used in more than 20,000 companies, institutions and governmentagencies worldwide.

Founded in 1985 and headquartered in Lowell, Mass., Datawatch sells and supports its productsthrough sales offices in North America, Europe and Australia. Datawatch also works with VARs,integrators, consultants and independent software vendors who sell and support Datawatchproducts. In addition, Datawatch works with OEM customers who embed Datawatch componentsand technologies in their own solutions.

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