As organizations grow and commerce becomes more global, organizations can find themselves with bank accounts that have been opened all around the world.  For some organizations this happens out of convenience, necessity and M&A and yet for others it can be a symptom of the lack of an overall cash management strategy.

The financial impact of bank account over-proliferation exposes the business to:

  • Increased fraud risk
  • Low/untimely cash visibility
  • High non-performing (cash in non-interest-bearing accounts) cash balance
  • Lower bank negotiating power (e.g. higher bank fees, minimum balances, lines-of-credit and loans rates, etc..) due to non-centralized bank account management.

In addition to the inconvenience that non-centralized bank account management causes treasury and cash management teams, it also has major implications to how strategic the treasury and cash management functions can be.  In one survey conducted by Financial Executives International, nearly half (46%) of the respondents admitted to spending most of their treasury resources on transactional or cash accounting/reconciliation activities. This makes sense, as many of the treasury functions at companies were born out of accounting. For example, treasury staff often take on tasks such as transactional record-keeping activity, journal entries and reconciliations as primary responsibilities.

Combat Inefficiencies with Bank Account Rationalization

Although bank account complexity and inefficiency is a known problem for many organizations, most do not have a formalized practice of addressing the issue. NeuGroup conducted a recent survey and found that 95% of its middle market members had over 500 bank accounts globally, yet only and handful had a formalized bank account rationalization process. In hard costs alone, this could equal hundreds of thousands of dollars annually in excess bank fees paid out.

Rationalizing the firm’s bank account structure is key to reducing administrative complexity, increasing cash efficiency, improving liquidity and allowing the treasury team to focus on the more important responsibilities such as debt issuance/management, risk, investment optimization and becoming a more strategic partner to the organization. Although not sexy, bank account rationalization should be one of the first steps towards automating manual treasury processes in general.

To begin a bank account rationalization initiative, start by understanding why your organization’s current account structure exists, where accounts are located and the activity (or lack thereof) in each account. In many cases bank accounts may be initially created to meet compliance requirements or limit exposure based on legal entity. Generally, you want to have as few bank accounts as necessary to align with the current legal entities that need them. As a best practice, organizations should consider legal entity rationalization in parallel with bank account rationalization. Over time, many legal entity structures that were created due to the needs at the time have now become obsolete due to organizational, financial or strategic reasons.

“You can’t have three or four accounts for each legal entity. The structure has to make sense for the business…and what is trying to [be] accomplish[ed] as a company” says Rosanne Rosenberger, senior product manager of enterprise commercial payments at KeyBank.

Any bank account rationalization (and legal entity rationalization) process should be executed to move toward cash consolidation using Zero-Balanced Accounts (ZBAs). This can be done via accounts in local currencies or a notional and even virtual account structure when multi-currencies are involved.

The entire process of bank account rationalization will help the organization with bank relationship management, concentrate accounts and cash reserves across a smaller number of banks which may allow for better interest rates, help to standardize the account reconciliation processes, lower bank fees and make the whole Treasury/Cash Management process easier.

Don’t Go It Alone

Planning and effectively executing a bank account rationalization project is hard work. It requires executive buy-in, a careful assessment of a Company’s bank account and legal entity structures, examination of existing contracts, processes and procedures that reference them, prioritization of key initiatives and overall project management. The ability for an existing resource to take this on in addition to their regular duties is a recipe for failure. Using an external partner to work in conjunction with an internal designate produces the optimal mix of internal knowledge and external resources to produce tangible results.

If your organization is in need of a bank account rationalization, there is no need to suffer through it. Contact MorganFranklin today to take the first step in your bank account rationalization journey.

By Walter Ward

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