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Historical Perspective

The birth of cash management can be traced back more than half of a century when, in 1947, RCA became one of the first companies to use a lockbox to accelerate collection of payments from dealers. According to the “Global Payments 2000/1 Report” of the Boston Consulting Group, by the year 2008, the worldwide cash management revenue associated with domestic and cross-border payments is estimated to reach almost $310 billion per year.

Prior to the late 1940s, interest rates were low—in March 1948, the three-month U.S. Treasury Bill rate first rose to 1 percent—and there was little incentive to manage cash flows on an active basis. However, when interest rates began to rise in the late 1960s—the three-month Treasury Bill rate was almost 8 percent by the end of the decade—banks developed new investment vehicles to attract funds, such as the negotiable certificate of deposit, and companies began to manage cash more aggressively.

The 1970s saw the wide-spread use of one of the first major technological innovations in cash management: the lockbox model. These computer programs used mail times between cities and bank availability schedules (see Chapter 3) to develop optimal lockbox locations to minimize total collection float.

The 1980s produced a combination of conditions that encouraged the rapid adoption of cash management techniques:

• Significant inflation, driven to a large extent by the OPEC oil embargo of 1973–1974

• High interest rates, with the prime rate reaching nearly 20 percent by 1980

• Financial innovation, including the first products to cross traditional financial services boundaries, such as Merrill Lynch’s cash management account (CMA)

• Technological advances in electronic banking, including treasury information systems (see Chapter 6) and the introduction of automated teller machines (ATMs)

Financial innovation gave rise to new products and services to meet the needs of the corporate customer, including:

• Remote (later, “controlled”) disbursement. Exploited the time checks take to clear

• Depository Transfer Checks (later ACHs). Permitted the transfer of funds from local collection banks to concentration banks

• Automated Clearing House (ACH) transfers. Introduced an electronic payment alternative to wire transfers for low-value, nonurgent transfers

• Bank balance reporting. Provided previous day balances and transaction detail electronically

• Commercial paper. Offered large companies a less expensive short-term borrowing alternative to traditional bank lending

Taken From : Essentials of Managing Corporate Cash

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