Managing the Cash Supply Chain: an Opportunity for Treasury

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1 Bank of America Merrill Lynch White Paper Managing the Cash Supply Chain: an Opportunity for Treasury October 2017 Executive summary Contents Managing the merchandise supply chain is second nature for retailers, but better management of the cash supply chain is often overlooked as a way of freeing up valuable working capital. The cash optimization journey can help and can work outside of retail too, says Danny Doran, client engagement executive, Global Transaction Services Advisory, Bank of America Merrill Lynch. Time saving vs. working capital efficiency... 3 The cash optimization journey... 4 No easy wins... 5 Managing the change... 5

2 MANAGING THE CASH SUPPLY CHAIN: AN OPPORTUNITY FOR TREASURY 2 There are few treasurers in large corporations who don t rate working capital as a priority. Many have embarked on working capital optimization projects, focusing especially on the supply chain. For treasury teams in retailers, however, the physical cash in their store networks offers a clear opportunity for optimization, freeing up valuable liquidity that would otherwise be trapped in cash registers and safes. Most retailers will already have detailed a set of policies and procedures for staff to follow as they manage cash between bank branches, stores, and armored courier services. Yet these were usually developed with operational efficiency and risk management, rather than cash optimization, in mind. They tend to be based on factors such as number and type of cash registers, size of store and sales volumes of individual stores. It s the combination of these elements that determines how much cash is held in each store so that tills can be rebuilt. Some policies are detailed enough to specify the amount of each denomination of notes and coins required in each till at the start of the day. You don t have to be a retailer to optimize your cash Physical cash may be king for retailers, but there are plenty of other industries that need to deal with notes and coins as a non-core, but still significant, activity. In healthcare, for example, it s common for parking lots, cafeterias and gift shops to generate cash in sometimes considerable volumes, but these non-patient operations are rarely the primary concern of a treasury function occupied with big-ticket AP and AR activity. The same is true for many other sectors, such as energy and power, where physical cash collections from some customers are large enough to be an issue without being the primary concern of treasury. However, a closer look at the physical cash sitting in these activities in inventory, in transit and on site will often uncover potential savings and working capital benefits. The optimization steps outlined for retail can be adapted for any of these businesses; for example, you may not have a cash office, and staff may not be dedicated to these functions, but there will be equivalent processes and process owners that could benefit from analysis and streamlining.

3 MANAGING THE CASH SUPPLY CHAIN: AN OPPORTUNITY FOR TREASURY 3 Time saving vs. working capital efficiency Over time, retailers have concentrated on improving the efficiency of their cash handling, with greater automation, reduced staff levels and improved security often the aim. For example, one approach seeks to reduce the number of staff hours spent handling cash by creating a clean set of register bags so that dirty tills can be quickly reset. A second set of clean register bags is also created and held in the cash office safe for use the following day. This strategy certainly saves staff time but, replicated over potentially thousands of stores, the two days cash inventory lying idle can add up to a significant amount of trapped liquidity that could be put to good use elsewhere. There may be compelling operational reasons why it is necessary to have a specific system in place, but often daily cash levels were set many years ago and have simply never changed. For treasury, there is an opportunity to undertake an end-to-end process analysis to find the right balance between reducing cost through efficiency and the working capital cost of holding excess cash inventory. The balance will be different for every organization. Store Courier End-to-end cash supply chain Courier Bank By actively managing the end-to-end cash supply chain from store to courier to bank and back, retailers will be able to further optimize cash through better forecasting of cash flow needs to fund and operate stores, as well as maintain reduced levels of cash on hand.

4 MANAGING THE CASH SUPPLY CHAIN: AN OPPORTUNITY FOR TREASURY 4 The cash optimization journey Every case may be different, but a standardized approach can help a retail business transform to one where cash is being managed as inventory within an end-to-end cash supply chain. We call this approach the cash optimization journey: a framework for a detailed process review across four key areas in the management of physical cash in a retail environment: Store cash levels and movement, cash office operations, deposit and ordering processes, and visibility and accountability. 1 2 Store Cash Levels and Movement: Cash Office Operations: Treasury needs to understand how cash levels are determined and how cash moves throughout the store along with the cash supply chain. It should then be possible to spot opportunities to free up trapped cash by redesigning the movement of cash within stores. Redundant cash inventory can be eliminated and intraday reuse of cash can be optimized. The end result should be an environment where the store cash level is determined by actual denomination level demand rather than a rigid plan developed in the past. This can lead to a 30-50% reduction of the amount of cash on hand required to run the daily store operations. Resources here should focus on value-added activities, such as creating or leveraging analytical tools to proactively manage cash. Often that s not the case, so the review should observe and document what goes on. The aim is to uncover opportunities for cash office associates to apply basic systems and tools to improve the cash management processes. One example could be the application of technology such as Smart-Safes to improve information flows and speed up access to deposited cash. Another could be the redeployment of full-time associates to a value-added activity, such as increased interaction with customers. 3 4 Deposit and Ordering Processes: Visibility and Accountability: Treasury needs to know how deposit amounts are determined; are they simply calculated as the difference between the amount of cash on hand and a predetermined, static store cash level? Are change orders based on cash office associate instinct, or a demand calculation? It s possible to discover actual usage by tracking beginning and ending balances, received change orders and deposit amounts at the denomination level. While this isn t a true measure of demand, it will provide a yardstick unless and until more detailed data is available. If armored courier schedules and bank capabilities are included in the review, a retailer will have all the elements needed to develop a robust tool to calculate optimal ordering amounts and frequencies. Too often treasury, the organization responsible for funding the stores, does not have visibility into cash demand or even the store processes. Treasury needs to build an information flow that allows it to understand and optimize the need for cash in-store. It is equally important to establish performance metrics to continuously track and sustain the improvements made. Accountability needs to be assigned at store, market, and region levels, as well as within the treasury or finance organizations. By actively managing the end-to-end cash supply chain from store to courier to bank and back, retailers will be able to further optimize cash through better forecasting of cash flow needs to fund and operate stores, as well as maintain reduced levels of cash on hand.

5 MANAGING THE CASH SUPPLY CHAIN: AN OPPORTUNITY FOR TREASURY 5 No easy wins Authors While the cash optimization journey provides an excellent template for improving the use of cash in stores, there will be challenges along the way. The goals of treasury and those who work in the stores won t always be the same: Store personnel are focused on day-to-day operations, and especially controlling or reducing operating costs. Treasury, on the other hand, owns all cash and corresponding balance sheet responsibility. For example, store operations might focus on decreasing resource cost, which may lead to increased levels of cash inventory, conflicting with treasury s goals of lowering cash levels and freeing up trapped cash. Cash optimization needs to be treated as an end-to-end process, including both store operations and treasury setting aligned goals with shared ownership. The real fear for store operations staff is often that they will simply run out of cash. A proven approach to allaying these concerns is to conduct controlled tests, by changing the processes without physically removing the cash from the store, until the new system has been thoroughly proven. Managing the change The cash optimization journey can help deliver transformational results for a retailer s working capital, even though each step in the process can appear as an incremental change. It is essential to communicate the reason for the changes, and the benefits they bring, to everyone affected. Stakeholders also need to know the timeline for the changes and, where appropriate, receive training to help them manage the new systems effectively. With this done, the retailer may start to see the benefits quite quickly in terms of a boost to liquidity and a reduced working capital requirement. Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and Members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation. ARTPG5V