It’s one of the most basic and crucial things a financial institution does: ensuring that they have the right amount of cash at all times (or as close as possible). Not having enough cash in the ecosystem can be disastrous, leading to lost revenue, hurting a financial institution’s reputation and losing customers (denying them cash access is one of the easiest ways to send them to your competitor).
On the other hand, having too much cash (excess inventory) is a more common problem for FIs and is costly, too, but for different reasons. With too much cash on hand, FIs can rack up costs like disposition and carrying costs—the latter includes storing cash and inventory management.
To help keep the right balance, FIs often offload excess cash to other FIs and get cash from them when their supply is too low—both are also costly. And then there is the ATM machine. According to a Deloitte report, “Retail banks often keep up to 40% more cash in their ATMs than required, when excess cash of 15% to 20% is considered sufficient.”
Effective cash management can help FIs maintain the right balance and control they have over their cash inventory. Because of this, some FIs have chosen to outsource cash management—but it’s still common practice to have bank staff manage the cash in house.
So how do FIs stay on top of their cash activities using their own staff? One way is by cash forecasting which doesn’t exactly involve consulting a crystal ball. There’s a lot that goes into having accurate forecasts, including (but not excluded) to:
- Evaluating customer size and segment
- Taking the time of year into account—for example if it’s tax season that could impact the cash levels
- Monitoring previous cash trends
- Identifying national and local events
- Managing payment and collections
- Ensuring consistency and accuracy
Performing all of these functions, particularly during a pandemic, puts a lot of pressure on your back office. But fortunately, managed services are available as an alternative to going it alone. This year everything changed, pandemic cash use has thrown previous trends under the bus and FIs are in unchartered territory right now. As the number of cash withdrawals have fallen during lockdown, the amount of cash taken per transaction has increased.