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Cash Management: The Journey from Assumed to Actual


Our previous blog discussed our treasury management software, Realiti®, and how banking firms are using the software to improve their intraday liquidity management. In this blog, we focus more specifically on cash management, touching on some of the challenges we have encountered whilst supporting our clients.

One of the main objectives of cash management in any bank or organisation is to accurately forecast the closing balances across numerous bank accounts, and to fund those closing balances accordingly in order to ensure all payment obligations are met and to optimise their overnight cash positions in each currency.

That objective remains broadly the same regardless of the bank or organisation, but the capability of each bank and organisation to create real-time, accurate, and informed cash forecasts varies dramatically and so too, therefore, does the accuracy of their funding and cash optimisation.

And why does that capability vary so much? At Planixs we often find our clients are embarking on a journey from an assumed funding model to an actual funding model, and their current capability lies somewhere in between the two.

So what do the two ends of this journey look like?

At one end, in the simplest of assumed funding models, the bank or organisation utilise nothing but internal data to create their forecast, and the sourcing of this data is often fragmented and manually intensive. Here, they take an internal starting balance, and add to this their internal ledger bookings for the given day to create a forecasted cash position. That resulting forecast is then funded ‘assuming’ every booked movement will settle as expected. In a perfect world, this funding model would be ok, but the settlement world is not perfect. Transactions failing to settle on the expected value date (i.e. Fails), and other unexpected activity, will almost certainly result in inaccurate overnight funding, leading to inefficient cash optimisation, increased funding costs, and potentially, reputational damage.

At the other end of this journey is the target of the more efficient actual funding model. Here the bank or organisation utilises the same internal data but alongside external data, all of which is sourced automatically in real-time, to create a more informed real-time forecast together with real-time actual balances. They alternatively take an external starting balance, and again add to this their internal ledger bookings for the given day to create a forecasted cash position. External settlement confirmations are then used to separately calculate real-time actual cash positions. By then reconciling these settlement confirmations against the internal ledger bookings in real-time, information can be provided as to whether those internal ledger bookings have settled or not. Effectively visibility of fails and unexpected activity is then achieved, and so, rather than fund assuming all bookings will settle, funding is instead based on what has ‘actually’ settled. This actual funding model will, therefore, result in more accurate overnight funding, more efficient cash optimisation, reduced funding costs, and ultimately demonstrate better management and control to regulators.

Most banks and organisations will have started the journey away from the simplest of assumed funding models by adapting their current processes in some way, but most fail to reach the end of the journey to achieve that target of a workable and effective actual funding model.

So why do some find the journey from assumed to actual so difficult? Well, there can be many difficulties but broadly they fall into three main categories, data, functionality and business process.

Data: All the internal and external data required to support an efficient actual funding model already exists for the vast majority of banks and organisations. So the issue is not the availability or existence of data. It is instead knowing exactly what data to access, having the means to source that data, applying the necessary rules and logic to make sense of that data, and having the processing power to handle the huge volumes of that data in real-time.

Functionality: Having access to all required data in real-time provides no benefit unless it is utilised in the right way. That data must be combined with well-designed functionality within a usable application that allows the user to easily make use of the huge amount of data and information that is now available. This functionality must provide the ability to collate, analyse and manage that data, e.g. creation of real-time forecasts and actual balances, Intraday Matching, Fails Management, etc, but also to support related Cash Management functions, e.g. Sweeps, Alerting, etc.

Business process: Making the journey from an assumed to actual funding model is not just a technical challenge. Clearly, in order to realise the full benefits from improved real-time data and functionality, the business processes that utilise this must adapt accordingly. The process within many banks and organisations to source and collate the required data is extremely manual, so it requires a huge amount of time and effort just to simply create the forecast. With the required data being sourced and processed in real-time and supported by the appropriate functionality, that forecast is not only enriched and more informative, it is created in real-time, allowing resources the time to better investigate exceptions and so make more informed funding decisions, or to be deployed in other value-add initiatives.

At Planixs we’ve already had to solve all these problems within our Realiti software. We have the means to source and process all required data in real-time, we have developed the functionality and software to effectively and efficiently utilise that data, and we have the industry knowledge and experience to understand how business processes can be adapted to fully realise the benefits from both the data and functionality.

Wherever you are in the journey from an assumed funding model to an actual funding model, Planixs and Realiti can help. As well as Cash Management, Realiti provides support for Treasury services more broadly such as Regulatory Reporting and Stress Testing but in our next blog we will be continuing with Cash Management and looking at those benefits that can be achieved by utilising the Realiti application suite.

We will be producing further blogs in the coming months covering how Realiti supports the optimisation of cash management and treasury services - follow us on LinkedIn and look out for our next blog installment.

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