Putting the squeeze on cash management.

• Author: Forman, Larry

Treasury executives, among their other duties, are tasked with handling their companies' cash management activities. That can include monitoring the organization's daily cash position, overseeing payments and collections, performing cash-flow forecasting, making decisions on short-term investments and managing banking relationships.

Cash management decisions are typically based on a number of elements that change over time, such as the cost of cash management services, prevailing interest rates and expected clearing times. Cash management personnel run the numbers to determine the most efficient solutions at a given time and then move on to other pressing responsibilities.

However, when the elements involved in these decisions change, cash management solutions need to be re-examined in light of the new circumstances. Given current economic conditions, now is one of those times.

What do cash management services cost? Most companies pay for their cash management services through a combination of the value of the balances they maintain at their bank--calculated by the bank's earnings credit rate (ECR)--and explicit or hard - dollar fees to cover the remaining expense.

When interest rates are higher, companies that maintain large balances may pay low or no explicit fees for their cash management services. Banks value high-balance customers as a source of inexpensive funding and reward them with subsidized services. Even customers with smaller balances may see a meaningful reduction in their hard-dollar fees when rates rise.

Unfortunately, the current economic climate is producing a less welcome outcome. Since interest rates and, therefore, ECRs are ultra-low, bank customers are receiving little benefit from their balances and the explicit fees they pay for cash management services have increased noticeably.

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Low interest rates are a lever the Federal Reserve uses to increase liquidity and help stimulate growth during economic stress. Since many companies are feeling the financial strain brought about by the slow down, these higher hard-dollar fees for cash management services come at a particularly inopportune time. And when interest rates drop, they tend to do so quickly, intensifying the impact.

During the previous economic contraction in 2001, the federal funds target rate was lowered 200 basis points in two separate five-month periods. The rate fell from 6 percent to 4 percent between January and May 2001. Then...