Showing Cashbook some Respect

--By Christian T. van Dijk
President, Integra Mortgage Solutions


Often overlooked and mostly oversimplified, the Cashbook process presents an important opportunity for reducing rework and increasing efficiency in custodial reconciliation. On than one occasion, I’ve heard people in Investor Accounting call it a mere formality, a means for validating the depository balance. Some have gone so far as not considering Cashbook its own process at all, but simply a data input to the real star of the show: the Test of Expected Cash (TOEC). Their rationale? Any outages in the account would just fall out while calculating the loan-level TOEC, so performing a full Cashbook reconciliation seems somewhat redundant. I tend to agree, in principle. However, my experience has proven the opposite in certain situations. Any time savings gained in abbreviating the Cashbook process are more than lost when researching certain outages in TOEC.

At a basic level, the goal of Cashbook is to ensure the custodial bank account is in balance. At a deeper level, the Cashbook process presents an optimal tool for certifying the bank statement (i.e., via performing a transactional book-to-bank reconciliation). This is good because collections, for example, recorded in the servicing system would match deposits in the bank statement with any discrepancies falling out as reconciling outages. Yes, TOEC should catch these same discrepancies. How about this scenario? A wire is coded incorrectly and ends up settling within the wrong P&I account. The TOEC process should also catch this, but the outage would not be linked to loan-level activity as it is an account-level item. In a sophisticated TOEC process, the outage may be caught early without missing a beat.

But if the process is not designed to specifically handle these scenarios, things start to get ugly. It may take analysts a lot of extra digging to identify why loan-level activity does not match up with the account balance. Also, consider how this outage would be recorded in TOEC. Is there an appropriate root-cause category code for it? Maybe; probably not. Lastly, consider timing (chronologically, not Reg-AB time). By the time the outage is identified in TOEC, this money may be in the incorrect custodial account for 30 (maybe even 60) days, idle. Then, depending on the process, it may take another 30 days to initiate the transfer and move the money. Another good example for wasting time in TOEC: researching and correcting a true bank error.

All this could be avoided with a disciplined and well-structured Cashbook process, a proactive approach to handling account-level items that get resolved before they reach TOEC. It is time to show Cashbook some very well-deserved--and past-due--respect. In honor of this neglected business process, I propose five considerations for building a sound practice within your operations.

1. Clearly define start- and end-date parameters.

Avoid the common mistake of overlapping cutoff start and end dates by double-checking data filtering parameters. This could get tricky as not all Cashbook reconciliations fall on month-end (think FHLMC), and processing cycles do sometimes become extended to work on a non-business day. In other words, verify that all activity for the bank statement is restricted to this range and that no book transactions enter this process ABOVE the defined range (consideration #3 below will explain why some book transactions from the previous period should be considered in the process). Not following this simple guideline will lead to a lot of transactional “noise” and a disorganized Cashbook reconciliation.

2. Roll from a previous period.

This may sound intuitive, but it is surprising how many times we’ve encountered companies performing their Cashbook reconciliation without considering results from the previous period. The key lesson here: it is important to live with your results (and calculations). The true power of a Cashbook reconciliation summary is in rolling it forward; in other words, start by tying together the beginning balance from the current period to the ending balance of the previous period. Also, make sure to carry forward any reconciliation discrepancies identified in the previous period to attempt resolution or continue ageing (see item #3 for more detail).

3. Track and age discrepancies.

The only sound method for identifying reconciliation discrepancies within the Cashbook process is to perform a transactional book-to-bank matching of bank statement items. This means bumping up collections recorded in the servicing system, for example, and matching them with deposits on the bank statement. The benefits of this process are two-fold: (a) matching book-to-bank transactions certifies the bank statements (i.e. the backbone of the entire Custodial recon process); and (b) the process will reveal any true discrepancies /reconciling items in the Custodial account. Please remember to roll forward any book items not matched against bank statement items (i.e. deposits in transit) for the following cycle.

Adding some additional sophistication to the process, book-to-bank reconciliation could be performed on a daily basis. Bank statement data is available daily via BAI files and there are several reports in Black Knight and other Servicing platforms that provide daily activity, such as the T690 showing daily collections (i.e. daily version of the ZZ80). Performing this reconciliation on a daily basis catches issues quickly and allows those involved to correct the issue well before this becomes an outage in TOEC.

As far as best practice -- track and age any reconciliation discrepancies at the Cashbook level, even if you might be tracking certain outages “twice” if these are also identified in TOEC. Why? The majority of outages in Cashbook will fall under one of two main categories: (1) errors in movements of cash; or (2) true bank errors, such as incorrect settlement amounts. For these types of issues, communicating the discrepancy with corporate treasury, for example, will be more effective at the bank-account level. This, in turn, should reduce the turnaround time for resolution and possibly correct the item before initiating TOEC (particularly if this reconciliation is performed daily).

4. Validate ALL Balances.

The clear figure to validate here is the Depository Bank Balance. The Depository Bank Balance should be comprised of the ending bank balance on the bank statement PLUS any deposits (or withdrawals) in transit that are yet to settle in the account. If your process is already taking account point #3 above, this value should be simple to certify.

Another important balance to validate is the depository balance according to the servicing system. It may sound slightly counter-intuitive, but there could be a discrepancy between the calculated Depository Bank Balance and that which is presented in the servicing system -- think adjustments not entered correctly or manual transaction activity not recorded accurately (or at all) in the servicing platform. We’ve found that it is best practice to perform a simple daily check to make sure both these values are in sync.

5. Track and Measure the Process.

All the considerations leading up to this one center on ensuring a sound Cashbook reconciliation, which is fantastic; however, visibility and metrics gathering over the process as it is happening in real-time distinguishes a proactive team vs. a reactive team. What’s the difference? A reactive team sees smoke and eventually reaches the fire with whatever tools happen to be on-hand to try to extinguish the flames. A proactive team sees the spark that started the fire. This level of visibility is afforded by adopting well-defined work assignments and developing a dashboard to track the resulting metrics.

We recommend doing what most companies already do: create a spreadsheet to assign analyst resources to specific Cashbook reconciliation, but we push it one step further by suggesting the inclusion of triggers to track the progress as it is happening. Create a spreadsheet or tool that listens for status changes in Cashbook reports (i.e. Pending, Submitted, Approved), as well as a means to collect metrics (i.e. number of items matched vs. outstanding) in an effort to get a meaningful pulse of the process as a whole. The development of the dashboard is certainly an evolutionary process; the trick is to subscribe to this mentality or management overview philosophy if the terminology is more fitting. Either way, evaluating the health of a process needs to occur as the process is happening and not after the process is completed – test this statement by applying it to a living body. Find creative metrics (and corresponding triggers) to track the process as it is unfolding to prevent a spark from becoming a forest fire.

Below is an example of real-time processing metrics as offered within SunriseRecon. To get the full picture, it is important not only to see the status of current work completed (left chart), but also to understand when the bulk of the work was performed (right trend analysis).


What considerations can you share about how you manage your Cashbook business process?