Best Practices in Treasury Management.

• Author: Greifer, Nicholas
• Position: Statistical Data Included

Leading state and local treasurers have improved management practices affecting the fundamental areas of cash management: payment processing, investing, and disbursement control. This article summarizes significant changes in the treasury management arena.

Within the financial management profession, perhaps no area is undergoing as great a transformation as treasury management. Forces such as the Internet are fomenting change in how state and local treasurers manage cash, indeed raising questions about the future of cash and checks as a means of payment. This article will shine light on the changes occurring within the treasury management field, with the caveat that what is considered best practices today may be dramatically different in a few years time.

Background

For the purposes of this article, best practices will be broadly defined to include a) management techniques, b) procedures, or c) applications of technologies that improve the cash management function and may be worth replicating in another jurisdiction. As a result, the focus will not be on one-time solutions that can be done in only one jurisdiction, but on initiatives that can be repeated.

Best practices is a concept closely related to the notion of "recommended practices." The Government Finance Officers Association, through standing committees such as the Committee on Cash Management, develops recommended practices that give fundamental guidance to financial managers and advisers. These convey the accepted wisdom of experienced treasurers and cash managers on topics such as portfolio diversification, selection of investment advisors, and lockbox services. Best practices in this article are illustrated by case studies of recommended practices in action. In other cases, best practices represent entirely new management or technological approaches not yet addressed by a previously released GFOA recommended practice.

Selection of Best Practices

To catalogue best practices in treasury operations, the authors relied on existing GFOA research illustrating effective management techniques. For example, from the last four years the authors reviewed Government Finance Review articles, Public Investor articles, and previous GFOA Awards for Excellence. In addition, this research was supplemented with new information obtained from two telephone surveys of members of the GFOA Committee on Cash Management. The first survey was conducted in June 1999 and the second in February 2000.

In terms of functional areas, best practices were divided into a) accounts receivable or payment processing, b) accounts payable/disbursements, and c) investing. This is consistent with typology set forth in "Cash Management," Local Government Finance: Concept and Practices:

1) cash mobilization: Get the cash in as fast as you can...;

2) controlled disbursement: Release the cash at the last possible moment;

3) the investment program: Do something worthwhile with the cash in the meantime.

The article will review all three areas. However, the focus will tend to be on payment processing and less on investing and disbursing, for two basic reasons. First, much of the innovation has occurred in payment processing in recent years. Second, one government's investment process may be difficult to replicate since investment procedures are closely regulated by state law.

Payment Processing

Governments of all sizes have taken advantage of technological advancements that allow for more efficient handling of traditional forms of payment (e.g., cash and checks) and entirely new forms of payment (e.g., electronic funds transfer). Improving payment processing can yield gains in a) staffing efficiency and b) reductions in float. In general, float is the lag time involved in accepting a payment and processing it before it can be invested.

Processing Checks. Lockbox check processing is certainly not a new technique. Nonetheless, surprisingly few local governments have adopted this service. For example, in a 1999 survey of mid-sized California municipalities, Public Investor found that only 33 percent of surveyed governments used a lockbox. The survey obtained responses from 93 percent of 42 California municipalities surveyed having populations between 75,000 and 125,000.

Lockbox service providers (either banks or other vendors) deploy equipment that convert manual tasks--mail opening, reading of checks, reading of remittances--into automated functions. By 1) using high-volume equipment and 2) obtaining large economies of scale from multiple clients (both municipal and private-sector clients), they are able to process transactions at a low unit cost.

GFOA Research Center staff observed first-hand one lockbox, which has a number of municipal clients. The City of Evanston, Illinois, for example, uses a "retail" lockbox for vehicle stickers that can be scanned using Optical Character Reader (OCR) technology. The vehicle sticker remittance forms are machine-readable, containing numbers similar to the Magnetic Ink Character Recognition (MICR) codes found at the bottom of a check. In summary, this lockbox is essentially a package of services that would ordinarily be done by a team of different municipal workers--namely, sorting mail, opening mail, recording payments, preparing payments for deposit, and verifying the accuracy of moneys to be deposited. Furthermore, banks can MICR-encode checks for internal bank processing and upload account receivable data to its government clients.

Processing Cash. As in other fields, technology has increased the efficiency and accuracy of receiving, receipting...