Now may be the right time to reassess your organization’s banking needs, especially as businesses enter an environment of rising interest rates.
As both the economy and employment rates have improved over the past few years, it’s likely that the Federal Reserve will continue increasing the prime interest rate into the foreseeable future. Banks will continue to raise interest rates on borrowed capital as well (but don’t expect to see an immediate improvement—if any—on the rate of return for your organization’s deposits).
Such factors should be a catalyst in reviewing your organization’s accounts and optimizing your current banking services. Here are 5 steps that can help you get the most from your banking services.
- Rationalize your banking network
If your organization has experienced recent mergers and acquisitions there are likely a number of bank accounts floating around that are underutilized. Maintaining surplus accounts steals time away from other vital staff responsibilities, makes forecasting more difficult, and obscures the accuracy of internal funds that are available for business use.
By reviewing and finding opportunities to remove unnecessary or redundant bank accounts, your organization will be able to manage vital accounts more effectively and pay fewer banking fees.
- Set target balances for cash by bank or operating unit
If your organization’s bank accounts have surplus cash that isn’t being effectively reinvested in the business and instead your organization is borrowing money for capital investments at increased interest rates, your organization can easily become over borrowed. By setting target cash balances for specific bank accounts or operating units, you can ensure that cash on hand is being utilized effectively without taking on more debt (and paying more interest) than necessary.
- Compare bank service prices to a market index
Most companies are overpaying for banking services and don’t even realize it. It’s not uncommon for bank service fees at many companies to exceed staff costs in treasury or controller entities. Available ways to make sure your banking costs are aligned with industry standards is to benchmark against peers or available market information. The Association for Financial Professionals website also has helpful information and price references available to members.
More importantly using the “wrong” services can cause back office delays. An annual Treasury review with your bank may shed light on redundant, underutilized, or inefficient processes that may need to be updated.
- Reexamine / establish working capital goals
Developing working capital goals will help to fund business initiatives without having to lean on additional outside resources as interest rates could continue to rise. By focusing on the dynamics between accounts receivable, accounts payable, inventory, and cash your organization can maximize operating cash flows and rely less on external capital needs.
- Move away from spreadsheets
Companies with treasury departments should use their current or an upgraded version of their Treasury Management System (TMS). Larger companies are moving away from using spreadsheets as they are manually intensive. Software solutions are available that extract the treasury fees and provide information for fees spent on various transactions. To gain a big-picture view of their overall financial outlook, smaller companies should learn how integrating information from multiple bank web sites can improve corporate-wide cash visibility, which ultimately allows companies to borrow less.
By taking the steps outlined above, companies can gain a better handle on their overall financial picture and optimize their banking accounts to ensure that they have the accounts that are most appropriate for their business and are not overborrowed in an era of rising interest rates.