A New Window on Cash

Emerging standards for electronic cash transactions promise to shed more light on liquidity and cash flow.

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.

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