data in the financial markets as well as defining and controlling market reporting. Professional standards affect
how we act on the market, which in turn may change
how the market reacts.
3) Regulatory Laws and Statutes – These rules are divided
into three subcategories:
• Legislative Standards: Provide definitions for financial
instruments and processes, and promote fairness in
• Public Policy: Attempts to legislate morality and values as they relate to business transactions, whether
legislated or strongly implied by societies; and
• Tax Law: Funds government operations and restricts
trade on specified commodities.
Our actions to either comply with laws and statutes or to
minimize (or avoid taxation) will have a cause-and-effect
relationship with the market. Now let’s take a look at each of
the three broad categories in more detail:
CFMs must learn to use these rules to more effectively conduct the business of Treasury Management. As noted in Part
1, cash is central to Treasury Management and I concluded,
“it really is all about the cash.” Accordingly, I am going to
talk about market rules that have an effect upon (or drive)
For most of us, some of these concepts may be logical while
others may seem foreign at first. I will also cover cost behaviors, although they include revenue behaviors as well (since
one is simply the opposite, or reverse, of the other).
ACCELERATE RECEIPTS & DECELERATE PAYMENTS
Financial processes should logically seek to achieve receipt
of payments for products or services as quickly as possible;
in turn, CFMs should logically seek to slow down payments
for goods and services to suppliers. The result of these
efforts will be increased cash flow. This is an example of why
I refer to market rules as natural rules. The effective application of this rule will have only one result: increased cash flow.
A SIMPLE APPLICATION FOR ACCELERATING RECEIPTS
and decelerating payments is found in how we choose to
conduct business. If we request that payments from our
customers be made by either Automated Clearing House
(ACH) or wire transfer, or utilizing a bank lockbox feature, then we will accelerate receipts (i.e., receive our
money) more quickly. This will likely mean that our
contracts with our customers require payment by one of
In terms of decelerating payments, the first control is
our standard terms of payment and timing of check
runs. More basic than that, however, is our method of
A check placed at the front desk for pickup by a supplier will likely be deposited the same day, and may even
clear the same day if the supplier banks at the same
bank as our company. Checks sent via overnight carrier
will be processed and deposited on the day of receipt,
which means they will also clear our bank faster. Checks
posted in the mail will gain the benefit of several days of
float time while they move through the mail system to
CFMs should consider the methods used by the company to receive payments from customers and make
payments to suppliers.
MINIMIZE ASSETS & MAXIMIZE LIABILITIES
This set of rules may seem to contradict what most of us
were taught about assets and liabilities: Assets are good and
liabilities are to be avoided, if possible.
Let’s consider the objective of any business enterprise. As
noted in Part 1, “All business enterprises seek to provide a
product or service for a price that is intended to exceed the
direct and indirect costs of providing the product or service,
as well as the entity’s operating overhead. If successful, the
result is a net profit; and, when the transaction cycle is complete, the company has more cash than when it started the
Our objective is to increase cash. The only long-term way
to increase cash is for the company to operate profitably;
however, profit does not become cash until our transaction
cycle is complete. I am not suggesting that the focus of our
businesses not be on operating profitably; however, profit
cannot be our sole focus.
Think of the concept this way: Assets are good things, but
the asset that we want most is cash. Other assets (e.g., property, plant and equipment, A/R, inventory, etc.) are needed
to conduct business effectively.
Just remember that although all other assets absorb cash,
the key is to make effective use of these other assets. We
don’t want any more of them than is necessary to run our
businesses effectively, and we want to make our cash conversion cycle (the time it takes to purchase materials, apply
labor, and engage subcontractors to produce a product or
service for profit) run for as short a time period as possible.
Minimizing assets is similar to accelerating receipts.
[ part 2 ]