Treasury is the management of a firm’s liquidity in all its forms. Most basically it comes down to:

1. Having enough cash liquidity
2. where you need it and when you need it
3. at best value for money

It deliberately is broken up in order of importance. If there is a liquidity shortage it is simply not possible to transfer cash to the account to pay your suppliers. Costs play a less important role in this scenario as well as it is most important to at least get some cash in the first place.

Once there is sufficient cash available now and in the foreseeable future, optimizations in transferring it around start to make sense. And only then discussions with counterparties on costs of funds for example can pay off.

Within Treasury there is lots of jargon. Let’s look at three common ones and what they actually mean.

Having enough cash liquidity

This is all about funding the organization with for example factoring, credit lines, 3^rd party financing, private placements, initial public offerings (IPO), bank loans etcetera. It can also be referred to as debt management. In larger organizations Corporate Finance typically has links to Business Control, Investor Relations and Mergers & Acquisitions departments.

Where you need it and when you need it

The most operational part in Treasury where cash is moved from A to B to ensure that suppliers and employees can be paid in time. Cash management also is tasked with ensuring that all cash in the organization is always visible to them and is available. This is also the area where short term excess cash positions are invested in savings accounts at banks or at so called money market funds.

Cash pooling, bank account management, in house banking and forecasting are all topics part of cash management. Cash management works closely with the departments accounts receivables, accounts payables, accounting and controlling.

at best value for money

Best value is not only a monetary value. Value to a firm also means that it is at acceptable risk levels. Risk management does just that, weighing cost against the associated risk. The risk appetite of an organization determines how much money is allowed to be spend to justify a transaction. This is nothing more than price versus quality.

Intercompany credit ratings modelling, Hedging, Foreign exchange, Interest rates, Commodities, Counterparty risk are all items that are handled by the risk manager. Closely tied to the internal auditors the risk management also guards policies and procedures.

No matter how small or large an organization it will always have a combination of these 4 enablers. Even if treasury is handled part-time by a staff member of the accounting department he or she still uses some technology like an electronic banking system to transfer cash around. He or she will have some form of process even though it may not be documented at all and there will be controls where the finance director authorizes payments before they are executed by the bank.

In large organizations segregation of duties will be introduced, processes will be documented, policies will be setup to guard risk appetite, specialty systems will be introduced to manage and track cash, forecasting and risk or a combination thereof.

As we have seen it is all about Liquidity at the right Place and Time against best Terms and Conditions. No matter how small or large your organization, there is always opportunity for improvement. Here are some ideas how.

Improve your liquidity by reducing complexity in your bank structures, cash pooling, in house banking and better forecasting. Idle cash balances are reduced as a result. Funding needs will decrease leading to reduced interest costs. Additional benefits are reduced bank charges. Efficiency gains are achieved due to automation and the implementation of payment and/or collection factories.

Have your cash where you need it, when you need it with using cash pooling, in house banking and reviewing your bank account structures. Increased accuracy from forecasting and reduced foreign exchange transactions due to intercompany netting add to reductions in cash management operating time and cost.

Reduced complexity in bank structures leave only the real important counterparty banks in your portfolio. Better relationship management will lead to better terms and conditions for your cash management operations and funding agreements. Intercompany pricing done right will aid in securing your transfer pricing documentation. Your customers and suppliers may benefit from granting better payment terms which will positively support your sales and purchasing departments.

Contact us for an introductory meeting. We can do a Treasury Scan where we investigate your treasury processes and come up with improvement suggestions.