What is Treasury Management? Key Functions, Benefits & Services

by Stijn Boon

reading time 5 min

What is treasury management

Treasury management is the term for all the activities and processes involved in managing a company's or organization's money. This includes tasks like cash flow forecasting, investing, risk assessment, and day-to-day operations like banking and invoicing. Treasury management is an essential part of any business, and it is vital to understand what it is and what it can do for your company. In this article, we will discuss the basics of treasury management and explore some of the ways it can help your business run more smoothly.

 

What is treasury management?

Treasury management is the process of managing an organization's financial resources in order to achieve its strategic and operational objectives. It encompasses a wide range of activities, including cash management, funding and investment management, trade finance, risk management, and working capital management.


Why is treasury management important?

Treasury management is important because it helps your organization optimize financial resources and manage financial risks effectively. You need to carefully manage treasury operations in order to ensure that you will have sufficient amount of cash to meet any short-term obligations, while also having enough funds available to invest in long-term growth opportunities. Treasury management is also responsible for managing and mitigating risk, for example, related to foreign exchange risk, interest rate risk, liquidity risk, or risks related to strategic investments.


What are the key functions of the treasury management department?

The key functions of the treasury management department include planning, organizing, and controlling the organization's financial resources. The objectives of treasury management are to ensure that the organization has sufficient funds to meet its short-term and long-term obligations, minimize financing costs, and maximize return on investment.

 

Key functions of treasury management departments


There are several key responsibilities that treasury departments take care of in order to do so:


Minimizing financial risk

In a perfect world, your treasury department knows exactly what your company's risk exposure is at any point in time. However, changing circumstances internally and externally affect the financial performance of a business all the time. One of the main jobs of treasurers is to continuously analyze and minimize financial risk to avoid any liquidity issues.

 

Liquidity management

As a treasury team, you always want to ensure that you can meet your financial obligations. Liquidity management assesses whether short- and long-term obligations can be met by analyzing cash in- and outflows with a heavy focus on working capital.

 

Cash flow forecasting

One of the main jobs of treasurers is cash flow forecasting. Departments typically use this process to estimate the financial position of a business over a specific period of time. Two practices usually go paired with cash flow forecasting: variance analyses (checking actuals vs. forecasted) and scenario planning (running different cash projection scenarios to capture all possibilities). If cash flow forecasting is done properly, it can enable you to identify potential future cash surpluses or shortages that help you make better and quicker strategic decisions.

Cash flow forecasting

Trade finance

Most treasury teams take care of trade finance, which is managing trade between your company and third parties and ensuring there is limited risk associated with global trade. Usually, several parties are involved in this process: banks, importers and exporters, insurers, credit agencies, and trade finance companies. As a result, it can be quite a laborsome process for large international companies that trade a lot. Therefore, many larger companies use trade finance solutions to automate much of the trade finance processes. Such solutions allow you to manage the end-to-end guarantee process in one platform, and they increase the ease of setting up intercompany loans.

 

FX risk

Treasury departments are also in charge of managing foreign exchange risk with risk mitigation techniques. Most multinationals do business in various currencies, leading to foreign exchange risk that needs to be addressed properly. Currency fluctuations can cause significant losses when engaging in international trade, especially with more considerable sums of different currencies.

 

Corporate finance

A part of the treasurer’s job is to enable company growth by basing investment decisions on relevant financial data. Through thorough analyses, treasurers can decide on where to allocate funding as well as on short- and long-term investment decisions to help deliver value to the business and its shareholders.

 

Payments

You will find many treasury teams that are also responsible for the payments process. Commonly, payment processes are centralized by treasurers when companies are internationally present with several banks, entities, financial systems, and an ERP system. This way, it is easier to control and analyze all the payments.

 

Key benefits of treasury management

Treasury management has various benefits for companies. There are several key benefits of treasury management, which include:

 

  1. Improved cash flow: treasury management can help improve an organization's cash flow by making sure that funds are being used efficiently and that short-term obligations are being met.

  2. Reduced risk: treasury management can also help reduce risk by carefully managing an organization's exposure to foreign exchange and interest rate risks.

  3. Increased profitability: by reducing risk and improving cash flow, treasury management can help increase an organization's profitability.

  4. Enhanced decision-making: treasury management provides accurate and up-to-date information about an organization's financial resources, which can help decision-makers make better choices about how to allocate those resources.

  5. Increased efficiency and cost savings: when treasury management is done well, many manual processes are automated and less error-prone. As a result, you can significantly increase efficiency and save on costs.

 

Different types of treasury management services

Depending on the challenges within your company, there are several types of services that could be of help to your treasury management practices. For example, banks offer great services when you have only one bank in use and your company operates in only one country, corporate treasury services can help through consulting, and treasury management systems are great for in-house teams with multiple banks and entities globally.

 

Treasury management services by banks

In some instances, banks can help corporate customers out with treasury management. They can optimize your account usage, help with accounts receivable automation, or even integrate data to enhance cash flow forecasting.

 

Corporate treasury services

There are many corporate treasury services like PWC, EY, Deloitte, KPMG, Orchard Finance, Zanders, Touchstone, Enigma Consulting, and Finance and Treasury Services that help companies with treasury management through consultancy. Some examples of services they offer are consultancy in treasury strategies, governance and reporting, funding, treasury accounts, cash management, risk management, and system and data management.

 

Treasury management systems

Growing or established companies with in-house treasury or finance teams typically opt for a treasury management system. With increasingly complicated cash flows, several banks, multiple entities, and various systems, you will need a solution that centralizes all scattered data efficiently. There are various treasury management systems on the market. A few established ones are: Nomentia, Coupa, Kyriba, TIS, FIS Global, Serrala, Treasury Systems, or GTreasury. We discuss the top providers more in-depth in this article.

 

Key challenges of treasury management

Despite the many benefits of treasury management, there are also some challenges that need to be addressed. These include:

 

  • Managing risk: treasury managers need to have a good understanding of risk management in order to make sound decisions about where to allocate funds and how to mitigate risk. Managing risk is often a challenge for treasurers when processes need to be more optimal or data is scattered.

  • Accessing capital: organizations need to have access to capital in order to invest in long-term growth opportunities. Treasury managers need to be able to identify sources of capital and negotiate favorable terms.

  • Keeping up with changes: the field of treasury management is constantly evolving, so treasury managers need to stay up to date on the latest developments to make the best decisions for their organizations. There are especially many technological advancements to keep up with, such as the use of APIs, for example.

  • Meeting regulatory requirements: treasury managers must be aware of and compliant with all relevant regulations. Failure to do so could result in hefty fines or in the worst case even jail time.

  • Managing expectations: treasury management is a complex field, and decision-makers need to have realistic expectations about what treasury managers can and cannot do. Trying to manage an organization's finances without a good understanding of treasury management will likely lead to disappointment. Hence, it is critical for treasurers to manage expectations by communicating with other stakeholders in the company.

 

What’s the difference between cash management and treasury management?

The main difference between cash management and treasury management is that cash management focuses on the short-term goal of ensuring that an organization has enough cash on hand to meet its obligations, while treasury management focuses on the long-term goal of maximizing the organization's profitability. Treasury managers need to have a good understanding of both cash flow and risk management to make sound decisions about where to allocate funds.

 

Both cash management and treasury management are important for ensuring that an organization is financially healthy. Without cash management, an organization could run into financial trouble if it does not have enough cash on hand to meet its obligations. Without treasury management, an organization could miss out on opportunities to invest its money in ways that could improve its profitability. Both departments need to work together to ensure that the organization is making the best possible decisions about its finances.

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