By the end of the calendar year (and for many of us fiscal year end) we have a growing mountain of tasks to complete – close the books, conduct our annual budgeting exercise, get ready for the audit, and review upcoming changes to regulations that may affect our cash.
Somewhere in this shuffle, we leave money on the table and important strategic decisions may be left unmade. By adding a couple of actionable yearend items as they pertain to your bank fees, your treasury team can, reduce cash management costs and gain operational advantages by making the right decisions. When not planning for next year with your banking partners, a company can over pay for services, not properly prepare for price increases, and not leverage shifts in the interest rate environment.
Unless your company is under a contract for bank fees, you should expect annual price increases with at least some of your services in January. How does your treasury team plan for this change? At the very least clients should be having annual formal reviews with all banking partners to help codify these changes and discuss any increases, and pushback when necessary. At the very heart of this relationship is one of provider/client, albeit with banks playing a key partnership role in your treasury team’s success. We do not want to use this opportunity to play, ‘beat up the banker’; rather we want to socialize our concerns and be prepared to ask hard questions, backed by internally reviewed data.
‘Who ordered the black and white fax service and how is this a line item’? How often has the analyst come across such line items and scratched their head? Another line item is 99-9999 (AFP Code for Miscellaneous services); simply put, if the bank is unsure of the service item, and how to code it, the service will be assigned this code. Going through line-by-line, at least annually, will help verify that you have the right service mix with your banks, and that new unintentional services were not implemented by the bank during the year. Aligning purchased services with operational and treasury needs is critical – what may have been needed a year or two ago, may no longer be necessary.
Interest Rate Changes:
Since the interest rate environment has changed over the last several years, corporate treasury must be positioned to ask, first internally, and then with their banking partners, a series of questions around interest earned.
With corporate DDA’s now being able to earn hard interest on the accounts – are you? With interest rates rising, how has your ECR moved over the course of the last year or two? Have you negotiated a hybrid arrangement, or even hard interest? Where should you keep your balances – in the accounts themselves to earn ECR, or swept out into another account or vehicle for overnight investment? One important distinction to remember, which has tax implications, is that ECR is a ‘soft’ interest applied against charged services, it is not transferred from period-to-period, and it will not be for an amount greater than your services, while interest earned is considered income.
All of these factors must be accounted for when walking through the different scenarios, and should be considered before approaching the bank to hold discussions around the interest rate structure on your cash management accounts.
Success with bank fee analysis lies within the quality of questions you ask, actionable visibility into your fees, and awareness of your firm’s needs in relation to the services charged by the bank. Even getting to the stage of being able to ask these questions can be a daunting task, especially when your treasury team maybe managing multiple banks, across the globe with different currencies, and relationships that contain hundreds or even thousands of accounts. Add to this inherent challenging tasks; banks do not apply the same logic when assigning AFP codes to what looks to be the same service. If your firm is stuck on any of the above items, or needs a sounding board for best practices, please reach out to us and we can discuss in more detail how Redbridge can assist your treasury team.