Cash management check-up can yield savings

Healthcare Financial Management, June, 1991 by Leslie N. Masonson

In today's difficult economic environment, financial managers who do not put their cash management systems through regular check-ups may be allowing thousands of dollars to slip away.

Key considerations in a cash management review include:

* Collecting money as fast as possible from payers;

* Disbursing money to vendors as slowly as possible, certainly not before invoice terms indicate, unless a decent discount 1/lo net 30 or better) is part of the bargain;

* Concentrating money in a "main relationship- bank from multiple depository banks as often and as inexpensively as possible; and

* Using competitively priced banks that offer high-quality services.

To assess a cash management system's effectiveness and banking costs, financial managers must gather a variety of information, including:

* Bank statements from every account for the most recent two months;

* Account analysis statements from each bank for the most recent three months;

* If available, a flow chart of a healthcare facility's existing cash management system;

* Daily cash worksheets for the past two weeks;

* Latest bank pricing details and check availability schedules for over-the-counter check and lock-box deposits;

* Accounts payable policies and terms;

* Written agreements with banks concerning wire transfers, automated clearinghouse (ACH) transactions (for cash concentration, debits, or credits), and lockbox, controlled disbursement, and overnight investment (or "sweep') accounts; and

* Written service-level agreements with banks, in which banks indicate that they either will perform to minimum quality levels or credit a client's account.

Once information is assembled for use in conducting a cash management check-up, financial managers should begin looking at it as if for the first time. Many transactions on account analysis statements may be unrecognizable or undecipherable. If so, a financial manager already has questions to ask the facility's banker. To further focus the analysis and determine other questions for bankers to answer, the following functions should be explored.

Collecting money. Financial managers should calculate the total dollar value of funds collected from remitters during the period being analyzed.

If a healthcare facility uses a lockbox, it also should investigate whether it is in the best location. For a fee, a bank can perform a lockbox model analysis to pinpoint optimal collection locations. Healthcare systems may locate their large volume corporate lockboxes in headquarter cities, but this can be a poor decision. Based on recent mail studies, cities with the best mail and availability times include Chicago, Ill.; Charlotte, N.C.; Atlanta, Ga.; Dallas, Texas; Philadelphia and Pittsburgh, Pa.; and Los Angeles, Calif.

A facility's lockbox also may not be competitively priced. Managers should obtain and compare pricing from top banks in the city or area. Each bank's availability schedule and mail times also should be analyzed. A thorough analysis also includes bank tours and reference checks.

Disbursing funds. If possible, most of a facility's employees should participate in direct deposit of payroll. Whatever the case, a facility's payroll account should be a zero-balance or controlled disbursement account.

Trade payables should be set up in a controlled disbursement account that enables a facility to fund the account on the same day by book transfer (if the account is at the same bank) or by wire (if it is at a separate bank). Wire or ACH payments should not be agreed to until terms can be negotiated with corresponding vendors.

Concentrating money. When moving funds from depository or lockbox banks to a concentration bank, three options are available: depository transfer check, ACH, or wire transfer. Wire is the most expensive route because both sending and receiving banks will charge fees, roughly $12 per round trip.

An ACH transfer is the least expensive route, costing as little as 50 cents per round trip.

A facility that is transferring less than $70,000 per day probably should opt for the ACH method. Wire transfers should be used for amounts larger than $70,000, especially when funds are being used immediately for balance compensation, investments, or paying down a loan. Excess balances should not be left in depository or lockbox accounts because the practice is costly. F] Leslie N. Masonson, CCM, is president of Cash Management Resources, a consulting and training firm in Monroe, N. Y, and the author of Cash, Cash, Cash: The Three Principles of Business Survival and Success. Readers' comments and questions are encouraged and can be addressed to Leslie N. Masonson, CCM, Cash Management Resources, 20 McGarrah Road, Monroe, N.Y. 10950.