Enhancing Treasury Management When You Change Banks

Most companies are motivated to seek out a new banking relationship only when they need a new or different loan structure to support their changing or growing business. In that moment, corporate treasury and finance leaders may be singularly focused on securing funding, but that’s also the right time—during interviews and due diligence with potential lenders—to capitalize on innovative banking technology to improve the organization’s cash flow cycle.

The effort to improve a key loan structure marries well with upgrades to treasury management capabilities. The treasury team should leverage this opportunity to search not only for a strategic lending package from a bank that understands their market and horizons, but also for customized treasury management capabilities that may become as integral to the progress of the business as a made-to-measure lending relationship.

Here are five considerations treasury teams should keep in mind when exploring and assessing their options for banking partners—to land both a right-sized lending facility and a tailored cash management strategy.

1. Expand the scope of due diligence.

Although capital needs may be the trigger that sets in motion the lender due diligence process, they are only half of what the organization should consider in selecting a financing resource. Certainly, a favorable lending structure is one pillar of the decision. From there, treasury and finance leaders should expand their search to also look for areas of potential improvement within liquidity management processes, including accounts payable and accounts receivable.

To understand the impact that better treasury management might have on corporate cash flows, consider how optimizing payments and accounts receivable (A/R) could reduce the amount that the company needs to borrow. Suppose that an organization with $20 million in annual revenues has $55,000 in receivables each day. Reducing days sales outstanding (DSO) by 10 days would equate to an extra $550,000 in liquidity for this company, which means that A/R improvements could take $550,000 off the organization’s total debt. At an interest rate of 5 percent, this would result in a cost savings of $27,500 per year.

Beyond such direct financial benefits, well-designed treasury management processes deliver day-to-day visibility into cash flows and more responsive controls. It is true that capital is king, but the performance of treasury management technology solutions can have major implications for treasury’s operational efficiency. Given what these systems can do—from automating payment processes and streamlining receivables management to minimizing the potential for fraud—treasury management capabilities deserve a seat at the decision-making table when an organization is choosing a new banking partner.

2. Expect visibility into treasury.

When the lending deal points look good, the treasury team should assess what else the bank can provide. They should think about the types of questions their prospective banking partners are asking. Some banks believe the loan agreement drives the sale, and it surely might. However, corporate treasurers wanting a fuller relationship should look for a widening of the aperture.

The bank should undertake an in-depth exploration of how the company operates in terms of seasonality, customers, suppliers, opportunities, and constraints, and should evaluate whether internal treasury and finance processes are unnecessarily manual and labor-intensive. Expect a treasury management professional from the bank to become part of the broader discussions to help the organization improve its overall finance processes, which in turn would help make its capital more efficient.

If a prospective banking partner says simply, “Great—we’ll just roll you over to our treasury management products,” that might be a red flag. Taking today’s processes to a new institution precludes the chance to optimize efficiencies and benefit from emerging technologies that might better meet the corporate customer’s needs. Instead, the bank should be interested in helping prospects assess whether the processes and technologies they have in place will continue to make sense for the future state of the company. The treasury team can also initiate those conversations,  asking potential banking partners about their treasury management capabilities, to determine whether they offer new technologies or methods that the organization may want to consider.

3. Invest time in up-front evaluation of prospective banking partners.

Changing banks requires significant effort on both sides of the relationship. The corporate treasury group should invest adequate time into determining whether the prospective banking partner would be a good fit, and should share details about how their company runs.

Meanwhile, bankers should be ready to invest a significant amount of time into learning the company’s business and helping identify pain points and opportunities. It is especially helpful if the prospective banker understands the organization’s particular industry or segment. The banks need a great deal of information to provide a holistic set of solutions, so they should ask lots of questions, to avoid making assumptions about how the business is run. In fact, they need to fully understand how the business operates in order to recommend the appropriate solutions.

For this reason, treasury and finance leaders should be prepared to share operating details for payables and receivables, as well as accounting platform specifics. They should also expect to receive a tailored set of relevant treasury management options to consider.

The more time both organizations—customer and bank—put into the front-end assessments, the greater the rewards for everybody on the back end.

4. Consider not only costs, but also benefits.

Like most everything, finding the best fit for treasury management services involves a cost-benefit analysis. The goal is to determine the right level of services to optimize efficiency and effectiveness by automating processes and potentially freeing up headcount. Added-value treasury management systems centered around automation in accounts payable (A/P), receivables, and reporting can enable a finance department to maximize its cash positions, reduce its borrowing needs, and create opportunities to utilize staff differently.

Banks offer a wide range of these types of solutions, from simply integrating purchasing cards or automating vendor payment processes, to lockbox services with state-of-the-art imaging and straight-through processing. Sophisticated online banking solutions enable corporate treasury staff to transact business from anywhere, including their phones. And companies that can benefit from broader system integration may be able to connect their internal enterprise resource planning (ERP) platform to the bank through APIs, to create even more seamless workflows.

The ultimate goal is to build a set of treasury management processes that fit the specific needs of the banking customer company. This requires a significant amount of up-front due diligence, but it can pay off handsomely: A truly customized result may save time and money and provide elasticity for handling future needs.

5. Integrate fraud prevention solutions.

Treasury management services are integral in foiling potential payment-fraud attempts. In 2020, 74 percent of organizations were targets of payment scams, according to the Association for Financial Professionals’ 2021 AFP Payments Fraud and Control Survey. Companies that have not recently been the target of a fraudster are among the lucky few and should not count on this luck to continue. Preventing banking fraud is an all-hands-on-deck endeavor.

Positive pay services are one of the most effective ways to safeguard check, wire, and ACH payments. A series of targeted treasury management filters—including segregation of duties, out-of-band authentication, and structured internal entitlements designed to bolster security of payments—can further strengthen the effectiveness of positive pay.  This is one more convincing reason to focus on treasury management as an essential aspect of any move to a new bank.

It’s inevitable that companies selecting a banking relationship will place significant emphasis on picking the right lending partner. However, if the due diligence process ends there, the treasury and finance team may miss a golden opportunity to improve the company’s cash management and fraud control capabilities. Choosing the correct bank requires time and effort, but early work helps ensure the long-term banking relationship will be much more rewarding.

Tim Boothe is the chief operating officer of Western Alliance Bank, a national business bank named the number-one, best-performing of the 50 largest public U.S. banks for 2019 and 2020, per S&P Global Market Intelligence.