Cash management becoming an ‘operational imperative’

Treasury management solutions have become a bigger part of some firms’ business continuity planning, helping them sustain a ‘work from home’ mode that complicates cash operations, as well as helping them to forecast the months of uncertainty ahead.

Cash management is becoming an operational imperative as firms work to keep their business continuity plans updated, according to a white paper by Hazeltree.

“Every private fund manager is aware of the need for strong internal controls over cash operations and have implemented many controls, often with the oversight of their independent auditor,” the report states. “The new pandemic-fueled ‘work from anywhere’ operating environment gives rise to the need to rethink cash controls.”

The white paper was authored by Hazeltree managing director Don Jefferis in collaboration with Quintin Kevin, CFO at Adams Street.

Investment into cash operations and cash management platforms has lagged behind traditional technology investments, such as accounting technology, the report says. The  pandemic-related ‘work from home’ orders have proven that maintaining appropriate cash controls is more difficult to do remotely.

“Managers have noted that maintaining the same level of internal controls over cash management, while the operations team is dispersed remotely, has become more challenging and less efficient,” the report says.

From the ground up

For PE firms just getting off the ground, maintaining sufficient cash controls isn’t much of a problem, as a new back office typically deals with a small number of investors and accounts to manage. That picture changes once a firm becomes bigger and, inevitably, more complex.

“Success quickly breads complexity,” the report says.

But for managers hoping to take the first step into managing and forecasting their treasury function, consolidating tech providers may be a place to begin.

“For most private fund managers, the entry point into the digitalization of cash management is the consolidation of all banks and other counterparties, across all accounts, into a single technology platform,” the report says.

Once the single technology platform approach has been established, managers can then apply their own rules of delegation to cash movements, regardless of bank or service provider.

Establishing a treasury management system then allows managers to get more ambitious with their procedures. This might involve using tools such as robotic processing, which takes into account specific fund structures, subscription line activity management and forecasting to predict the timing of future investments.

As the pandemic rages on, LP and regulatory scrutiny will only continue to increase around a firm’s essential functions, the report says.

“Fund managers have a clear fiduciary responsibility to diligently safeguard each investor’s cash contribution, from the moment the first dollar of contributed capital is received to the moment the final distribution is made,” the report states.

“LP and regulatory scrutiny in this area will only continue to increase.”