Treasury management: Key functions, benefits & best practices

Treasury management is more critical than ever in a constantly evolving business landscape. Especially after the global pandemic, companies are exploring ways in which they can better equip back-office teams to navigate financial uncertainty and gain competitive advantage. Treasury management not only keeps a company’s financial resources in check but also helps manage risks and make informed decisions for growth and profitability. Are you curious about how treasury management can elevate your business’s financial performance?

Let’s dive in and explore the key functions, benefits, and services of treasury management.

Short Summary

• Treasury management is a financial practice that seeks to maximise liquidity, manage risks and optimise returns.
• It encompasses managing liquidity, cash flow forecasting & analysis, mitigating financial risks and making corporate finance/investment decisions.
• Benefits of effective treasury management include improved cash flow, reduced risk and increased profitability through efficient processes & technology compliance with relevant regulations.

Understanding Treasury Management

Treasury management is an umbrella term encompassing a range of financial management activities that aim to maximise liquidity, identify and manage potential financial, operational and reputational risks. The primary goals of the treasury management function are to ensure that the organisation has enough funds to meet its needs. Furthermore, these objectives include reducing financing costs and maximising return on investment. This function is typically managed by the Finance or Treasury departments. The functions vary depending on the size of the organisation and its structure. It is common to see dedicated roles for Treasury professionals while smaller companies will have Financial Controllers or Heads of Finance that will also oversee treasury functions.

Treasury management services are used to monitor and manage a company’s cash flow and working capital. This includes managing accounts payables and accounts receivables. The advantages of effective treasury management include increased efficiency, enhanced risk management, and augmented profitability, which are achieved through the diligent efforts of the treasury team.

The Importance of Treasury Management

Treasury management plays a crucial role in managing business finances. It involves:

• Streamlining financial resources
• Controlling risks
• Guaranteeing cash accessibility
• Preventing potential financial issues

Treasury teams are essential in overseeing, safeguarding, and maximising a company’s cash while mitigating a range of risks. In recent years, Treasury teams have assumed a more strategic position within organisations, cooperating more closely with other departments to produce a positive effect on the business overall. As technology evolves, treasurers are increasingly focusing on how new solutions can facilitate progress within treasury departments and improve treasury management functions.

Core Functions of Treasury Management

The core functions of treasury management comprise:

• Managing liquidity
• Cash flow forecasting
• Mitigating financial risks
• Making corporate finance and investment decisions

Each function plays a significant role in a company’s financial management and overall success.

Let’s explore these functions in more detail.

Managing Liquidity

Managing liquidity in corporate treasury involves ensuring that a company has enough money. The primary purpose of liquidity management is to guarantee that a company has the necessary cash and working capital to fulfil its financial obligations. One aspect of liquidity management is the management of the company’s short-term investments through instruments such as bank deposits and money market funds, taking into account the primary considerations of security, liquidity, and yield (SLY);

• Security - the risk of losing money on an investment. Treasury professionals would invest in assets that are as secure as possible, however, that is governed by each risk appetite of the business.
• Liquidity - the ease with which an investment can be converted into cash. Investing in liquid assets can be sold faster and easier.
• Yield - the return on investment. Investing in assets that have a high yield, will generate a good return on their investment.

Effective liquidity management helps ensure that a company has enough cash to cover its financial obligations, which is essential for maintaining the company’s credibility and avoiding financial distress.

Cash Flow Forecasting and Analysis

Cash flow forecasting and analysis are used to help businesses predict their financial position over time and recognise potential cash surpluses or shortages. The objective of cash forecasting and modelling is to understand prospective cash inflows and outflows to maximise cash. Variance analyses and scenario planning usually accompany cash flow forecasting.

Cash flow forecasting is essential for a business’s cash flow as it helps predict future cash surpluses or shortages, allowing them to make better and quicker decisions. Knowing the cash position in advance gives companies more flexibility in their strategic planning. Accurately forecasting cash inflows and outflows is important, as the resulting information will be used to make decisions regarding essential actions such as funding, investments, and risk management.

Mitigating Financial Risks

Mitigating financial risks involves identifying and managing potential risks, such as FX risk (foreign exchange) and interest rate fluctuations, to safeguard the company’s financial stability. Treasury management is responsible for managing foreign exchange and interest rate risk through various risk mitigation techniques.

Managing foreign exchange risk is particularly important for multinationals, as most engage in business transactions across multiple currencies. Addressing foreign exchange risk is an essential part of treasury management as currency fluctuations and interest rates can result in considerable losses when conducting international trade, especially when larger amounts of different currencies are involved.

Corporate Finance and Investment Decisions

Corporate finance and investment decisions involve analysing financial data to make sound decisions that will result in the growth and profitability of the company. The corporate treasurer’s role in corporate finance is to make prudent investment decisions based on financial data.

Corporate finance is a subdivision of finance that deals with:

• How corporations address funding sources
• Capital structuring
• Accounting
• Investment

Making sound corporate finance and investment decisions can result in increased profitability, reduced risk, and maximised return on investment for a company.

Benefits of Effective Treasury Management

Effective treasury management can result in the following benefits:

• Improved cash flow
• Reduced risk
• Increased profitability
• Improved decision-making
• Increased efficiency and cost savings

These benefits are achieved through the combined efforts of the Treasury team and efficient financial processes.

By employing treasury management services and systems, businesses can reduce the workload of their internal financial team, decrease expenses, and optimise financial performance. The advantages of effective treasury management are substantial, making it an essential aspect of any successful business.

Treasury Management Services and Solutions

Treasury management services and solutions encompass bank-provided services, corporate treasury consulting, and treasury management systems for optimised financial management. Banks provide services for companies with a single bank and operate domestically, while corporate treasury managers' services can be accessed through consulting for more extensive support. Treasury management systems are advantageous for in-house teams with multiple banks and entities on an international level.

Corporate treasury management includes various services that provide guidance in different treasury operations. These include strategies and governance, funding and accounts, cash management, risk management, and system and data management.

Overcoming Challenges in Treasury Management

Key difficulties underpinning treasury management are:

1. Access to data: collecting and analysing data from multiple sources, ensuring data accuracy, and maintaining data security
2. Resource designation: managing cash flow, budgeting, and forecasting as the business volumes scale and complexity increases
3. Technology and automation: adopting new technology

To overcome these challenges, businesses can adopt efficient processes, leverage technology, and ensure compliance with relevant regulations. Technology can help streamline processes, automate many manual processes and tasks, and reduce costs while improving accuracy. Also, technology can assist in ensuring compliance with applicable regulations by granting visibility into financial operations, automating processes, and offering real-time data.

Cash Management vs. Treasury Management: Key Differences

While cash management focuses on short-term financial goals, such as managing payments and overseeing cash balances, treasury management has a broader scope, involving both short-term and long-term goals to maximise a company's liquidity, funding, investments, and banking operations. Cash management is a component of treasury management, and both functions are essential for optimal financial management.

Both cash management and treasury management must collaborate and ensure that the organisation is making the most advantageous decisions regarding its finances. By working together, these functions can help streamline financial processes, mitigate risks, and optimise a company’s overall financial performance.

Implementing Treasury Management Best Practices

To achieve efficient and effective treasury management, it is recommended to adopt the following optimal practices of treasury management:

1. Monitoring daily cash flow with precision
2. Optimising cash resources
3. Maintaining access to short and long-term financing
4. Implementing an effective financial risk management policy
5. Strengthening governance and compliance processes
6. Enhancing treasury management systems with automation

By implementing these best practices, businesses can optimise their financial performance, mitigate risks, and ensure their treasury management operations run smoothly. Embracing efficient processes and technology can lead to a more robust and resilient financial foundation for any organisation.

Summary

Treasury management is a vital aspect of any successful business, encompassing critical functions such as managing liquidity, cash flow forecasting, mitigating financial risks, and making corporate finance and investment decisions. Implementing Treasury management best practices and leveraging technology can enhance financial performance, streamline processes, and mitigate risks. By understanding and actively managing treasury management functions, businesses can maximize profitability, reduce potential financial issues, and ensure their long-term success.

Frequently Asked Questions

What is the difference between finance and treasury management?

Treasury management focuses on the management of an organisation’s short-term liquidity and financial risk, while financial management concentrates on long-term financial performance and strategy.

Treasury management also pays attention to the day-to-day monitoring of investments, whereas finance professionals are focused on strategic investments.

What is treasury management also known as?

Treasury management is also commonly referred to as cash management. The two terms are similar but have distinct meanings, with treasury management being more comprehensive in scope.

What is treasury in financial management?

Treasury management is the act of managing a company’s treasury activities, daily cash flows and larger-scale decisions when it comes to finances. It involves overseeing money and financial risks, while also ensuring the business has enough funds to meet current and future liabilities.

What is the primary objective of treasury management?

The primary objective of treasury management is to ensure adequate funds, less liquidity risk, minimise financing costs and maximise return on investment.

What are the core functions of treasury management?

The core functions of treasury management include managing liquidity, cash flow forecasting, mitigating financial risks and making corporate finance and investment decisions.