Cash Management

A New Window on Cash

Emerging standards for electronic cash transactions promise to shed more light on liquidity and cash flow.
Marie LeoneNovember 1, 2009

Despite its evocative name, the committee known simply as X9 doesn’t have anything to do with secret agents, experimental planes, or mutant superheroes. Yet you might say that it is keenly interested in saving the business world from a villain: inefficiency.

A nonprofit group, X9 is an accredited standards committee of the American National Standards Institute (ANSI). It was established more than 25 years ago to draft and codify standards for bank-to-bank and company-to-bank transactions via computer networks. The group’s members include companies, banks, regulators, and trade associations that have a stake in the transactional supply chain. X9 has developed standards for paper and electronic checks, credit- and debit-card transactions, and data security, such as the PIN (personal identification number) management standard.

This past September, the corporate and bank members of X9 “joined forces” to create a working group whose goal is to develop a formal ANSI standard for cash-management reporting, by updating the current communications specifications from the Bank Administration Institute (BAI).

First introduced in 1971, the BAI coding hasn’t been updated since 1987. That’s a problem because the coding hasn’t kept pace with the vast number of new financial products and services — including loans, securities, payment options, and check transactions — that have come into being since the late 1980s. As a result, a patchwork of custom tweaks has evolved as banks and corporations have rewritten code to meet internal needs, whether to adjust messages to work with corporate ERP systems, script code for new and improved bank products, or sundry other needs.

Updating the BAI coding has assumed new urgency in light of the current credit crunch, which has prompted companies to seek transaction efficiencies as a way to cut costs and wring out as much liquidity as possible from cash accounts. “The credit crisis has really highlighted how important visibility into your own internal liquidity is,” says Bill Lundeen, group manager for global banking at Procter & Gamble and a member of X9. “People are looking really long and hard right now at their own working capital, the cash-carrying balances that they need to maintain their operations.”

Others agree that corporate liquidity has become a critical focal point for finance. “Liquidity is bolstering free cash flow in the face of the recession,” says Charles Mulford, an accounting professor at Georgia Tech and director of the university’s Financial Analysis Lab. His most recent study of U.S.-based companies with a market capitalization of more than $50 million shows a “surprising” improvement in cash-flow generation for the first half of 2009, even as profitability continues to sink. “Companies tend to work on their cash cycle when the economic environment is difficult,” comments Mulford.

Still, visibility into corporate cash accounts continues to be foggy. Research shows that four out of five of the world’s largest companies cannot accurately forecast cash flow just two to three months out. In a recent survey of 85 U.S. and European companies with an average annual revenue of $12 billion, only 22% said they can forecast midterm operating cash flow within 5% accuracy. “It’s disturbing to think that most companies are virtually flying blind in this critical area,” notes Michel Janssen, chief research officer at The Hackett Group/REL, which conducted the survey along with the National Association of Corporate Treasurers.

P&G’s Lundeen says cash managers are hungry for banking services that provide enhanced data around transactions. That includes better information on who is being paid, what items have been rejected, what funds are coming in, and what the source or nature of the funds is (a customer check or tax refund, for example).

One Standard for All

With the spotlight on liquidity, the time may be right for X9 to swoop in and improve cash-management visibility. The committee is in a good position to succeed, as its effort is based on the BAI “message” formats, which already are “very rich and detailed,” says Rene Schuurman, global product manager for connectivity services at Citigroup. However, “none of [the formats] are standard anymore,” says Schuurman. “It would be great if we could bring everybody onto a single, harmonized BAI message format, which would simplify the processes and make them much more cost- effective.”

A look at cash-management planning efforts underscores the problem. Take P&G’s global banking department, which Lundeen describes as “sitting at the tail end of the accounts-payable process.” His department owns all of the bank accounts through which P&G makes payments to its suppliers, and all the accounts that customers pay into. Lundeen and his staff must calculate how much money is needed daily to pay suppliers and how much the company will collect from customers, in more than 100 countries and in 60 different currencies.

But every P&G bank, supplier, and customer may use a slightly different interpretation of BAI coding to get the job done, thanks to local coding tweaks. Today, the BAI format is anything but standard. “We would like to reduce the number of options out there so there are fewer ways that the information can be interpreted,” comments Jim Wills, senior business manager for banking initiatives at SWIFT, the member-owned cooperative that operates the communications platform used to exchange financial-transaction information. In that way, “when P&G gets its data from all of its banking partners, it knows the information is prepared in a consistent fashion.”

Harmonizing data formats is an in-house problem, too. Witness P&G, which operates shared-services centers around the world that all use slightly different versions of BAI coding from a bevy of international banking partners. As a result, the company has to build data tables and systems infrastructures so it can translate the myriad coding into a single usable format that will work with its corporate ERP system. “One of the things that we would like to see evolve out of this project is one set of [standards] that we can use around the world,” says Lundeen.

Global Convergence?

For all of its evolutionary shortcomings, BAI, which is essentially a U.S. proprietary standard, remains an indispensable tool for most American companies. For one thing, it is used to reconcile accounts on a daily basis. The transaction information is also fed into ERP systems that generate information for regulatory filings prepared by public corporations and banks.

Many companies outside of the United States are using the relatively new ISO XML cash-management reporting standard, which is similar to the BAI format. With that in mind, the X9 committee says it will develop the new BAI standards with an eye toward converging them with international standards in the future. But replacing one with the other is not an objective.

BAI coding also aids cash-management planning, especially with respect to outbound corporate payments, says Lundeen, as it allows P&G to reconcile millions of transactions “almost automatically.” To appreciate the scope of P&G’s processing efforts, consider that in one year the company sends out 5 million invoices alone, most of which involve multiple payments.

But what Lundeen is looking for from his bankers, and, by extension, from the X9 project, is better ways to understand incoming payments and track the funds as they wend their way through the transaction process. “I’d like visibility into what payments are coming to me before they show up on my account statement,” he says.

For example, when a company sends out an ACH (automated clearing house) payment, there is a one-day settlement cycle for the transaction: the payment is sent out today and paid tomorrow. As soon as the company sends the instruction that it is trying to pay a creditor, information is pushed out into the market. “I would like to know when people are trying to pay me,” says Lundeen. “That kind of strong visibility would enhance my ability to use my own liquidity in a much more efficient way.”

The Legacy Issue

One of the biggest challenges the X9 committee faces is the legacy issue. BAI, in its various flavors, “has been around for more than 30 years,” says Wills of SWIFT. “It is in every mainframe and bank system, so it is deeply embedded in the way business is done.” Accordingly, the project managers must protect existing systems from compatibility problems with a new standard, and assure that there is no destruction of intellectual capital that has been used to customize systems over the years, says Schuurman.

Wills, who along with Lundeen and Schuurman is leading the X9 effort, says that the working group had 40 members when it launched, and continues to grow. The bigger the better, reckons Wills, who wants to hear from a healthy cross-section of constituents and says the added participation trumps any consensus-building snags a larger committee might encounter.

Once cash-management reporting standards are approved by ANSI, the costly cycle of customized tweaks should stop, as formal standards undergo continuous maintenance to keep pace with technology and market changes. While there is no regulatory mandate for companies to use the ANSI standards, market pressure will likely dictate such use.

So the key for corporate cash managers may be to get involved now before the formal standards are introduced without their input. Doing so may not be quite as exhilarating as defeating a supervillain, but it could help make the world of business a better place.

Marie Leone is a senior editor at

Some of the standards developed by the X9 committee for financial products and services.

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