Treasury

Treasury is the management of cash flows within organisations.

To understand what this means, let’s first think about cash flows in an every-day context.

When you move money from your savings account to your current account, you are managing your
cash flow.

• Perhaps you are preparing to pay a bill. In order to pay this bill, you make the cash
available by moving it to your current account. This way, when payment occurs, you are
covered.
• Perhaps you are travelling to a new country, so you expect more volatile or
unpredicted spending. In order to avoid the risk of depleting your available funds, you
move more cash to your current account. This way, if unpredicted expenses do occur,
you are covered.

Like individuals, organisations also need to manage their cash flows. Corporations, governments,
non-profit organisations, and small businesses all need to do this. Some large organisations
manage thousands of transactions every day. Managing these cash flows becomes a full-time job,
and at many organisations this requires an entire team of treasury professionals, each with their
own area of responsibility and expertise.

What do treasury professionals do?

The work of treasury professionals can be divided into three primary disciplines:

• Cash Management
• Risk Management
• Corporate Finance

Above, we provided simple examples of how individuals engage in Cash Management as well as
Risk Management. Every day, people and organisations move money between their current and
savings accounts based on planned and potential expenditures. Large organisations do this as well,
but their process for planned and potential expenditures is much more complex. This is the work of
Cash Management and Risk Management.

Sometimes, for large expenditures that exceed the cash in both the current and the savings account,
individuals and organisations need to finance these expenses by borrowing money. An individual
might take out a loan in order to renovate his or her house. When launching a new product, a
company might also borrow money, but in much larger quantities. As you can imagine, the debts and
financial obligations of large corporations can take quite some effort to manage. This is the work of
Corporate Finance.
Examples of Treasury activities
Let’s dive a bit deeper into each area of Treasury.

Cash Management
Cash Management is a practice devoted to planned expenditures. This discipline of Treasury is
highly focused on operational efficiency and process optimisation. It requires managing cash flows
coming into and out of your accounts, to ensure that the company has the right amount of cash on
hand.

Here is a list of the main activities of Cash Management:

Operations
• Managing receipts and disbursements according to common standards and
practices
• Calculating and managing the company’s overall cash position
• Reviewing transactions and cash balances to ensure the accuracy of the cash
position calculation
• Developing and managing cash account structures, aka “cash concentration”
• Developing and generating cash management reports
Optimisation
• Evaluating receipt and disbursement methods in light of new payment technologies
• Developing and monitoring cash flow forecasts
• Analysing foreign exchange transactions
• Managing merchant services programs (e.g., fees, card security compliance, other
requirements)
• Optimising the availability of short-term sources of cash, aka “liquidity”
Risk Management
Risk Management is a practice devoted to unexpected expenditures. This discipline of Treasury is
highly focused on research and operational controls. It identifies and plans for the potential impact
of changes in technology, company operations, and the financial environment in which a company
operates. This requires financial research in each of these areas and involves the implementation
of operational controls.

Here is a list of the main activities of Risk Management:

Financial Research
• Researching and evaluating risks posed by overseas operations and financial
transactions, aka “foreign exchange risk”
• Researching and evaluating risks posed by fluctuations in borrowing costs, aka
“interest rate risk”
• Researching and evaluating risks posed by changes in the prices of raw materials
required by the business, aka “commodity risk”
• Researching and evaluating risks posed by customers who do not pay their bills, aka
“credit risk”
• Researching and evaluating risks posed by a shortage of cash, aka “liquidity risk”
• Researching and evaluating risks posed by changes in technology and the potential
for fraud, aka “operational risk”
Operational Controls
• Evaluating treasury management systems (e.g., treasury software, third-party
products and services)
• Evaluating treasury management functions and strategies (e.g., internal workflows,
outsourcing)
• Developing, maintaining, and testing business continuity plans (e.g., reporting
processes, funds transfer capabilities)
• Implementing and monitoring operational risk prevention measures (e.g., fraud
prevention tools, internal controls and procedures, cybersecurity, compliance)
• Preparing and maintaining documentation (e.g., bank accounts, service agreements,
resolutions, archiving information)
• Monitoring compliance with internal controls, debt and investment policies,
covenants, regulatory requirements, and other legal agreements
• Preparing and reporting treasury data to stakeholders (e.g., board of directors,
financial services providers, accounting, operations, auditors)
Corporate Finance
Corporate Finance is a practice devoted to financing expenditures through borrowing and
investment. This discipline of Treasury is highly focused on strategic planning. Based on the
objectives set forth by the company’s leadership, it evaluates potential sources of funding and sets
the overall financial strategy that the company will use to meet those objectives. The work of
Corporate Finance involves strategic analysis and executive management.

Note: Technically, the term Corporate Finance involves both short- and long-term financial planning,
but it is generally associated with corporate strategy, which by nature is oriented towards the long-
term. Most short-term financial planning is covered by a sub-discipline of Corporate Finance, known
as Working Capital Management.

Here is a list of the main activities of Corporate Finance:

Strategic Analysis
• Evaluating current market conditions related to long-term borrowing and investment
strategies (e.g., credit availability, spreads, interest rates, terms, risk) and the company’s
long-range forecast (e.g., new products, acquisitions, divestitures, capital expenses)
• Developing long-term investment strategies, including capital and financial
investment
• Developing long-term borrowing strategies, including arranging financing and
capitalisation for operations and projects
Executive Management
• Implementing long-term investment and borrowing strategies
• Aligning treasury activities with the company’s overall financial strategy
• Managing the capital budgeting process
• Optimising sources of short-term and long-term funding
• Balancing sources of internal and external funding
• Managing shareholder expectations and relationships with banks and other lenders
Frequently asked questions about Treasury
1. What is the difference between Treasury and Accounting?

It is Treasury’s job to optimise cash flows based on business objectives, whereas it is the job of
Accounting to prepare financial statements that present the clearest possible picture of the financial
health of the company.

To understand the difference between Treasury and Accounting, you must understand the difference
between cash flows, on the one hand, and income and expenses, on the other. In Accounting,
revenue is booked when a sale is made. However, it might take some time before this revenue
actually reaches the company in the form of cash. Until it does, booked revenue is generally
irrelevant for Treasury. The same is true for expenses. An expense may be booked, but from a
Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand.

2. What is the difference between Treasury and Corporate Finance?

In general, Corporate Finance refers to the borrowing and investment strategies used by
corporations in order to finance operations and meet strategic objectives. Corporate Finance is a
broad field, which is related not only to Treasury, but also to financial accounting and banking. From
a financial accounting perspective, Corporate Finance is concerned not only with cash flows but also
with the overall financial health of the company. From a Treasury perspective, Corporate Finance is
the long-term strategy that determines the scope and objectives for Cash and Risk Management.

Note: Within banking, the term “corporate finance” is often used differently. When bankers speak of
Corporate Finance, they are usually referring to a particular line of business for the bank, which
involves raising money for corporations or acting as advisers on their behalf. From a banking
perspective, Corporate Finance usually means brokering deals between corporations and potential
investors.

3. Who is in charge of Treasury within a company?

In small organisations, Treasury work is mostly done by the Chief Financial Officer or finance
department. Larger organisations often have their own treasury departments, which are headed by a
treasurer who reports to the CFO. Ultimately, Treasury is controlled by the CFO.
4. How has the role of the Treasurer changed over time?

Although the basic role of the treasurer remains the same over time, the content of Treasury activity
evolves over time. Due to external factors, such as technology, regulations, and new financial
products, some tasks are less time consuming nowadays then they were in the past.

Traditionally, the job of the treasurer was filled primarily with tasks like bank selection, reconciling
bank statements, and managing daily transactions.

These days, many of these tasks can be automated. A treasury management system (TMS) can
handle much of this work for the treasurer. Instead, the modern treasurer works increasingly closely
with colleagues in the finance and risk departments. The risk of cyber fraud, for example, is now an
ever-present concern. In the past, a treasurer only went to the company’s bank for financing. These
days, there are many other options for financing, or for reducing financial risk.

Increasingly complex banking and governmental regulations also take up more and more of the
treasurer’s time.

It is the task of the treasurer to keep up to date with developments, and to be the consultant for the
organisation on all treasury-related subjects.

Treasury summary
The purpose of Treasury is to manage a company’s liquidity and to mitigate its financial and
operational risk. Made up of three sub-disciplines, Treasury’s overall objective is to safeguard the
company’s holdings and to follow the long-term strategy set forth by Corporate Finance. Cash
Management, on the other hand, is primarily focused on operational efficiency and process
optimisation, whereas Risk Management is oriented towards financial research and operational
controls.

Many businesses need the type of banking services that helps with assets and
holdings. Treasury management services and products are designed to assist with the
management of these financial assets, cash, and investments. In essence, treasury
management is a system designed to decrease financial and operational risk while
optimizing an organization’s liquidity.

Learn more about treasury management here, along with products and services in this
niche.

What is Treasury Management?

Every business has a set of financial obligations that must be met. The objective of
treasury management is to ensure the business in question has the right mix of cash
and cash equivalents to ensure financial risk is mitigated. Under the treasury
management umbrella, procedures and policies are designated with the goal of helping
businesses to improve the management of their cash flow from interest rates to
payables and receivables.

Even highly profitable businesses can fail if they don’t have enough financial resources
to cover their financial obligations. Treasury management also helps businesses to
decrease the amount of time it takes to collect payments from customers.

Treasury management is highly specialized. It falls under investment banking and

offers services and products to assist with the functions of financial planning. Some
ways treasury management can help are through the automation of accounts
receivable, by infusing bank data with internal business systems to improving
forecasting, and by addressing account inefficiencies. Treasury management can also
help with fraud.

Learn more about ProcessMaker’s workflow software and treasury services for banking
Benefits
How do you know if your business can benefit from treasury management? Often,
financial institutions already have guidelines in place to determine the types of banking
services that will provide the most benefits to their customers. The overarching objective
is to ensure your business has a persistent cash flow…

The largest benefit of treasury management is time and cost reduction. A treasury
management system can streamline payment processes to ensure less time is spent on
payment initiation and authorization.

There are also cost benefits where businesses can use various tools to better manage
related bank transaction fees they might not have noticed otherwise. As a result, you
save time, improve productivity, and enhance efficiency. Although, it does boil down to
cash flow. With treasury management, businesses can make better bottom line
decisions. Further, you get forecasting tools and detailed variance analysis.

Instead of having multiple, disparate departments and systems managing various

aspects of financial obligations, a treasury management system offers payments,
reporting, accounting, banking information, and more from one centralized hub.
Organizations can have much more control over their finances.

Treasury management systems can also handle capital management, currency

management, collections, reporting, and disbursement. All businesses need cash flow
to continue effective operations. Not to mention, businesses of all sizes can benefit from
treasury management.

Why is treasury management important?

• Liquidity optimization – Monitor timing of cash inflows and outflows.

• Collection management – Set the right policies for accounts payable and receivables.
• Risk hedging – Decrease financial risk.
• Information sharing – Obtain real time data around current financial status.

It’s about maximizing the financial outlook. For example, a treasury management
system can consolidate any redundancies around accounts to minimize service fees. It
can also ensure that receivables are posted quickly while reducing vendor disruptions or
processing delays. And, various services are designed for fraud prevention.

Businesses with a treasury management system in place can spend more time on
strategic business tasks and less time worrying about finances. CFOs want to know
where their cash reserves are and in what currency. In addition, they need to know
whether they should invest or borrow. Moreover, it’s always important to know if they
are financially over exposed, are over borrowed, or are under invested.

Treasury management services in banks

Treasury management services were built to help companies improve processing of

cash flows, manage funds better, and enhance banking visibility.

Treasury management can be categorized into five different services:

• Liquidity management
• Fraud
• Receivables
• Information
• Disbursements
• FX risk management
• Digital treasury services

Let’s go through these categories in more depth…

1. Liquidity management — Liquidity management is important because it helps to

ensure businesses have cash flow when they need it and any excess can be stored in
interest-bearing accounts.
2. Fraud management — Fraud solutions are offered to mitigate potential risks before any
permanent damage is incurred.
3. Receivables management — Collecting, and processing, receivables is one of the
most important activities for any business. Yet, this process can be both costly and time
consuming. Receivables management aims to streamline receivables and accelerate
processing times.
4. Information management — Effective decision making requires having the right data
on hand, when needed. It’s always crucial to have an accurate view of the company’s
financial position.
5. Payables management — Businesses must also distribute funds, but it should be done
both quickly and efficiently.
6. FX risk management — There is always a risk with foreign exchanges. Treasury
management offers services that will identify risks and exposure while analyzing risks
using metrics such as Value at Risk (VaR). Then, risks may be treated with hedges and
daily monitoring to ensure the hedging strategy works.
7. Digital treasury services — Company CFOs need to make decisions from their
devices. They want interactive dashboards and connected technologies.

The use of treasury services is a growing trend, especially in today’s business climate
and online markets. The potential for fraud continues to surge, while efficiency is a
mandate. In addition, businesses can have access to financial experts who understand
how to keep a company in operational flux. Treasury services can be complex –
depending on the circumstances – so it’s not an activity suitable for anyone other than
experts.

Outsourcing Treasury Management Services

There are also two models for outsourcing treasury management services: Ring-fenced
and outsourced.

• Ring-fenced means that treasury services operate in isolation.

• Outsourced would refer to a complete suite of treasury services and products
customized to meet a company’s needs.

Why should you outsource treasury services? Here are a few reasons below:

• Cost.
• Lowers investment in technology infrastructure.
• Decreases the cost of on-site teams.
• Access to expertise without having to pay full-time salaries and benefits.
• Better control over finances.
• Simplified setup and configuration.

Extended bank services include the following:

• Treasury research
• Industry benchmark study
• Treasury management services for restructuring
• Advisory services post-acquisition
• Treasury consulting services for debt refinancing

What are treasury management products?

Once thought of as only an enterprise product, there are actually a wide variety of
treasury management products which can be tailored to meet the needs of small and
midsized businesses.

You can pick the products you need, a la carte. Let’s take a look at the more relevant
and popular products within the treasury management niche.
Here are the most essential treasury management products:

• Automated Clearing House (ACH) — With 23 billion ACH transactions processed

annually, most businesses already use ACH. And, the four main types are: Direct
deposit, tax payments, corporate payments, and consumer payments. ACH helps
businesses cut down on the manual time spent on processes such as writing paper
checks.
• Wire transfers — Wire transfers are incredibly useful for large payment amounts that
are needed on the same day. Instead of visiting a bank in person, just send a wire
transfer. Although, these are usually for amounts of $25,000 or more. You can use ACH
effectively for amounts of $25,000 and lower.
• Remote Deposit Capture (RDC) — With this service, you can scan check images for
deposit into your business bank account. As a result, it helps to improve cash flow and
reduces time spent driving to the bank.
• Merchant services — Contemporary customers expect all businesses to accept any
form of payment from cash to credit and debit cards to services such as PayPal.
Businesses that don’t accept credit or debit cards risk losing a large volume of sales.
Additionally, merchant services improves cash flow since clearance takes only a few
days as opposed to waiting weeks to receive paper checks.
• Fraud detection — Receive alerts of potential fraud before they hit your accounts. It’s
really important for businesses to be more proactive about fraud.
• ACH fraud detection — Think of this as the ACH version of fraud detection for any
debit that may post to your account. You can even use this to manage vendors and
partners.