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Alexander Hamilton Best Practices: cash management.



Pushing the Depository Envelope: U.S. Postal System

The U.S. Postal System tested the limits of nationwide depository services providers and found banks and armored couriers couldn't do as much as first thought. Nevertheless, USPS centralized, standardized and automated much of its depository activity and cut 11%, or around $3 million a year, from its fees.

Centralization and automation (implementing Weiland Financial Group's BRMCdge) reduced from 80 to 2 the number of employees responsible for reviewing account analysis statements and paying bank fees. In addition, research and reporting that used to take 90 people 90 days can now be performed by three people in three days. Much work was brought from field locations to the central treasury, without increasing the headcount in treasury.

Consolidation into a single network was an ambitious goal but looked promising at first. "But no bank bid for all 80 of our districts," reports treasurer Robert Pedersen. "The largest bid covered 74. The market, we discovered, was unable to support a truly nationwide solution for depository services for a large, cash-intensive retailer."

The problem was partly geography. No bank or courier service covers the whole country as USPS does. A bigger problem was volume. The Postal Service deposits huge amounts of cash and checks daily, totaling $160 million. The $65 million in checks was not a problem; the $95 million in currency was. In the end, banks and couriers declined to build the capacity needed to process all USPS deposits under one contract.

The project still had legs. It called for USPS to move from decentralized contracting for depository services, with nine area negotiators coming up with nine pricing and service agreements, to a single standardized contract. Under the old process, the same bank might charge different prices for the same kind of deposit, depending on where it was made. To achieve simplicity and clarity in evaluating bids, USPS required all bidders to bundle prices into nine categories, regardless of how the banks identified and charged far specific services. This pricing template allowed USPS to see at a glance which banks were high or low. At the end of the process, the business was spread among 15 banks, with the top five handling 73% of the deposits and the top two handling 47%.

In the past, USPS had not sought bids directly from couriers because it assumed that banks with their aggregate volume were already negotiating the best prices possible. For this project, it went directly to couriers and found it could drive a better bargain. Armored couriers were cut from a to seven and banks from 21 to 15, in the latest step in a squeeze that has brought USPS' depository banks down from around 5,000 in the late 1990s.

The $3 million savings in fees was a pleasant surprise. "Since we had just cut about $3 million from bank fees in 2004 through contract negotiations, we were not sure further savings were possible," Pedersen says. And the money saved was only part of the payoff, he says. "We took a decentralized organization, restructured and centralized it at headquarters under treasury, and integrated our provider banks and armored courier services into a standardized nationwide system of daily pickup and depository services."


Creating a Tiered Dollar Pool in China: Honeywell

Honeywell overcame another obstacle to effective liquidity management in China by creating a first-of-its-kind pooled account for its U.S. dollar cash balances in that country.

The USD cash pool complements a pool created earlier for its growing renminbi cash balances in China. By partnering with Citigroup, Honeywell was able to move 60% of its U.S. dollar cash into the pool. Today, USD balances in the cash pool are earning competitive USD Libor-linked rates, making the money more productive than when much of it was scattered and earning only regulated interest rates.

Pooling also allows cash to be mare efficiently distributed among cash-positive and cash-negative operations in China, thereby reducing borrowing and interest expenses for the cash-negative businesses. USD cash pools are exceptions to standard banking practices in China and have to be approved individually. No previously approved USD cash pool could serve as a template because none met Honeywell's needs, so its treasury invented one from scratch and shepherded it through the regulatory process.

Honeywell treasury can now pass through better investment returns and lower borrowing costs to the subsidiaries. Honeywell was also able to get better bank pricing and service. Moreover, by automating the formerly manual process for setting up entrustment loans in U.S. dollars, it achieved time savings and stronger regulatory compliance.

In China, separate bank accounts have to be set up for specific purposes, and commingling monies is prohibited even when they belong to the same legal entity. To address these regulatory requirements, Honeywell set up a three-tiered structure. All operational accounts for the various legal entities are on the first tier. All loan accounts are on the second tier. The pool header loan account makes up the third tier.

"The three-tier account structure clearly segregates and isolates the automated entrustment loan operations so that a one-to-one relationship is established between each participant and the pool header, using the tier two and three accounts. This prevents any commingling of funds across participants and assures regulatory compliance," explains treasury manager Linlin Wu. "It also simplifies the cash pool interest allocation process."


Taming the Juggernaut: City of Los Angeles Treasury

The City of Los Angeles was bogged down in fragmented, antiquated banking and cash management practices when treasurer Joya De Foor and assistant treasurer Crista Binder tackled the juggernaut spanning 42 disparate lines of business. They started by dividing city enterprises and departments by the complexity of their banking and cash flow activities. Then the project team looked at how it could rationalize, streamline and automate one after another of the parts of a $17 billion municipal business with more than $60 billion in annual cash flow, at the same time the city wrestled with the worst budget deficit in its history.

The team took care to separate ownership of the project Pram the city's policymakers and keep it in the hands of the treasury, controller and IT offices, Binder explains. Together, they developed a blueprint for an efficient account structure, greater use of electronic services, and improved visibility and controls. Then they tackled implementation. An RFP last spring led Los Angeles to two banking partners, Wachovia and Wells Fargo, which became one when the credit crunch hit. When treasury workstation providers couldn't deliver what Los Angeles needed, city programmers built their own.

The account structure features hundreds of zero-balance sub-accounts that roll up to one master concentration account, dramatically simplifying reconciliation and improving visibility and control. Remote deposit capture proved the key to cutting lockboxes from 14 to 16. Data capture, daily transmission and image availability were added to the complex lockboxes used by the Office of Finance for tax and permit payments, causing the hit rate for automatic cash application to soar from 9.33% to 85%. Ten disbursement accounts were eliminated, including all stand-alone accounts. "By carefully understanding the complexities of each organization from a cash flow, technology and accounting perspective, treasury was able to implement multiple solutions that complemented each other in 18 months," Binder says.
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Title Annotation:Honeywell Inc.; United States. Postal Service
Publication:Treasury & Risk
Date:Nov 1, 2009
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