Treasury Management
Effective treasury management is vital for virtually every business. It can spell the difference between a shrewd, thriving business and one that struggles to keep its finances in the black. From ensuring that the organization has plenty of available cash to manage its staffing and day-to-day operations to evaluating different commercial lending and deposits partners to bolster the budget, treasury management is all about keeping the business’s proverbial ducks all in a row.
We’ve put this article together to provide you with a sort of crash course in treasury management. Among other things, we’ll discuss:
- The role, objectives, and scope of treasury management in a well-functioning business.
- Who is responsible for treasury management within an organization.
- The benefits and outcomes of effective treasury management.
- The challenges of treasury management, and how working with a partner like Indiana Members Credit Union (IMCU) can contribute to your success.
What Is the Basic Concept of Treasury Management?
Treasury management is relatively straightforward, as it “involves the management of money and financial risks in a business” (according to the Association of Corporate Treasurers). While this definition is broad, the specific focus of treasury management is considerably narrower than broader financial management. The two-fold focus is to:
- Ensure that the organization has sufficient money available to effectively manage day-to-day operations, and
- Help the organization to develop productive and meaningful financial and risk management strategies, related to the company’s short- and long-term future.
What Are the Key Objectives of Treasury Management?
As described above, the objectives of treasury management include maintaining appropriate cash flow and liquidity and creating strategies and policies that align with an organization’s highest-priority business objectives.
It’s difficult to overstate the importance of treasury management. As noted by Investopedia, treasury managers also work to identify and mitigate financial risks in a manner that protects the company’s value in the present—and, by extension, its ability to continue doing business in the short- as well as long-term.
There are a few different types of risks that treasury management seeks to address, including:
- Liquidity Risk
- Credit Risk
- Currency Risk
- Interest Rate Risk
- Operational Risk
While primarily focused on devising solutions for present and imminent risks, the work of treasury management often plays a key role in the development of policies for future risk management as well.
What Is the Difference between Financial Management and Treasury Management?
While the terms may sometimes be used interchangeably (especially within smaller organizations), a few technical differences separate the roles of financial and treasury management professionals—starting with their area(s) of focus and responsibility.
As noted by Zippia, “the difference between treasury and finance lies with the scope and timeline of their roles in the company.” Treasury management “is more focused on short-term and day-to-day monitoring of the investments,” while financial management “is more focused on long-term and strategic investments.”
As a broad category, financial management includes a wide range of strategic business activities, including:
- Financial Planning | Setting specific and measurable objectives, allocating resources effectively, writing financial plans for the business.
- Budgeting | Increasing financial efficiency, identifying and addressing business areas or functions with the highest operating costs, ensuring enough liquidity to cover operating expenses.
- Risk Management | Identifying, evaluating, and mitigating risk factors; minimizing financial exposure; tracking risk metrics over time.
- Ongoing Procedures | Collecting, tracking, and analyzing financial data in order to make sound financial decisions in both the short- and long-term.
What Is the Role of Treasury Management in Financial Management?
Depending on the size and complexity of the business or organization, treasury management is considered a specific subset of broader financial management, meaning there are many similarities between treasury management and financial management. Generally, the role of the treasury department in a company is more focused on managing short-term liquidity and mitigating financial risks—as opposed to the more generalized responsibilities of financial management. Whether or not this is the case within a particular company, the specific role(s) of treasury management remain important.
Within this context, financial management’s functions are broad and concerned with long-term objectives such as business growth. Conversely, treasury management is more focused on managing the organization’s short-term liquidity and mitigating its financial risks in the present and short-term. In other words, treasury management largely specializes in the “risk management” component of broader financial management.
What Is the Purpose of a Treasury Management System?
A treasury management system (TMS) refers to a type of technology that helps to consolidate and streamline treasury management operations, including the automation of certain processes. As Gartner notes, it “helps companies to manage their financial activities, such as cash flow, assets, and investments, automatically.” These systems help treasury and finance teams to work more efficiently and effectively through improved collaboration and transparency. A TMS will also typically include reporting features, which improve the organization’s communication and connectedness.
Whose Responsibility is Treasury Management?
It depends on how the business is organized. A majority of treasury management functions can be handled internally, by partnering with a financial institution (like a credit union), or a combination of both approaches. A company could, for example, hire its own certified treasury professional (CTP) for this role, or they can seek out a partner with this optional—though often preferred—designation.
Whichever route an organization takes, the basic responsibilities of treasury management really don’t change. And as TopTal notes, the treasury team’s role serves a “powerful function with the ability to influence all the levers of shareholder returns,” though it’s often the case that treasury teams “are structured, staffed, and incentivized poorly.”
Depending on the size of the company, a treasury team might consist of any (or all) of the following roles, which you can learn more about via the Association for Financial Professionals (AFP):
- Treasurer
- Assistant Treasurer
- Director of Treasury
- Manger, Treasury
- Cash Manager, Treasury
- Senior Treasury Analyst
- Treasury Analyst
For smaller organizations, it typically won’t make sense to have each of the above roles in place—they can often get by with one or two dedicated treasury professionals, if they don’t opt to instead rely on a financial institution like a bank or credit union for their treasury management functions. It’s also rather typical for smaller companies to assign treasury management responsibilities to members of their accounting, finance, payroll, or legal teams. Of course, as these organizations grow, they’ll typically re-evaluate and may ultimately establish an internal treasury team if possible.
It’s often beneficial to consider credit unions when looking for professional treasury management services. By working with a credit union like IMCU, business leaders can focus on other critical tasks—like those that will grow the business. Meanwhile, you’ll know that your cash flow is being expertly and expertly managed on your behalf.
What Are the Most Important Treasury Management Functions?
There are several key functions of the treasury department in a company, including:
- Minimizing financial risk by keeping a close eye on potential risk factors or sources of exposure for the organization, as well as developing and deploying efficient, effective solutions.
- Managing liquidity through a focus on working capital and the organization’s ongoing ability—to meet both short- and long-term financial obligations.
- Forecasting cash flow, including variance analysis and scenario planning. These functions help to ensure that the organization is able to make quick, effective strategic decisions in response to expected (or actual) cash surpluses or shortages.
- Assisting with trade finance by ensuring that risk factors are minimized and mitigated. In the context of business, this is especially important for any dealings a company has with one or more third parties.
- Managing and mitigating foreign risk, which is important for companies that do business in multiple countries or involving various currencies. Since the value of currencies around the world tends to fluctuate at different times and at different rates, this helps ensure fair trade while minimizing risk.
- Enabling company growth by evaluating historical and real-time data in order to make timely and effective strategic decisions.
- Processing payments and centralizing payment data so it’s easier to understand the company’s financial standing at any given point in time.
As you’ll find on our website, IMCU offers a complete array of treasury management services to help manage your cash flow so you can focus more time on growing your business.
Who Provides Treasury Management Services?
As we’ve already discussed, not every organization has sufficient resources and internal expertise to handle their treasury management services in-house. These companies have a few different options for treasury management, which can also be mixed and matched as needed:
- They can work with a financial institution like a bank or credit union for treasury management assistance. Financial institutions like IMCU can assist with things like optimizing account usage, automating functions like accounts receivable, or help companies improve their forecasting and budgeting capabilities with a data-integrative approach.
- They could work with an outside organization or consultancy service like Deloitte or Ernst & Young. By taking this approach, companies can entrust treasury management to trusted professionals in the short-term, while they work with these advisors to strengthen their own capabilities and understanding.
- Finally, they could invest in a treasury management system to support the work their in-house treasury or financial teams perform. These systems centralize relevant financial data, which in turn enables improved forecasting and budgeting capabilities, risk management, and more. They can also automate certain processes and play a key role in actionable and accurate financial analysis and reporting.
What Are the Benefits of Treasury Management?
When it’s well-executed, the key benefits or advantages of treasury management underscore its importance for organizations. Here are 5 key positive outcomes of effective treasury management:
- It helps companies to allot funds in strategic and effective ways, to ensure that short-term obligations can be met—or to develop effective remedies to improve cash flow.
- Through the collection, monitoring, and analysis of real-time data, treasury management protects companies through reduced financial risk.
- Treasury management’s objectives of improving cash flow and reducing financial risk/exposure often lead to increased profitability.
- The wealth of data and insights provided by a treasury management professional or team helps with enhanced decision-making.
- Ultimately, the collective outcomes reached through the above points can result in increased efficiency as well as cost savings.
What Are the Challenges of Treasury Management?
One of the biggest challenges of treasury management—and, in turn, one of the strongest arguments for it is the fact that financial factors and market conditions are dynamic. From year to year (or even quarter-to-quarter /month-to-month), it can be difficult to monitor every variable or nuance—even though these variations can be the difference between sustained performance and increased financial exposure or risk.
Some of the biggest challenges a company can address through effective treasury management include the following:
- Understanding present and future risk factors, including their potential impact(s) on the organization. Each individual risk factor must be understood and analyzed, and then it must be determined what intervention or mitigation technique is appropriate on a case-by-case basis.
- Maintaining adequate liquidity, and allocating funds effectively. If an organization doesn’t have reliable processes or personnel in place to understand their level of available capital (as well as potential sources for increasing that capital), their decision-making is going to be hampered and long-term company growth could become a murkier prospect.
- Ensuring regulatory compliance. When a business runs afoul of regulatory requirements—whether intentional or not—it can face costly and disruptive penalties, which may even threaten the organization’s ability to conduct business.
- Communicating—and managing—expectations. The nuances of treasury management aren’t always easily understood by those outside of treasury—yet the nuances often have the potential to impact an organization’s financial exposure. By providing data-backed recommendations, treasury management can bridge the gap and help everyone better understand the current financial picture as well as what changes may loom on the horizon for improved decision-making.
Explore IMCU’s Treasury Management Services
In addition to our well-known commercial lending and deposits solutions, IMCU also offers modern treasury management services to help your business thrive—today, tomorrow, and for years to come. These services include:
- Cash Management | Enhanced online banking functionality including ACH Origination, Wire Transfer, Positive Pay, and Business Bill Pay.
- Remote Deposit Capture | Save time and money by depositing checks from the convenience of your office.
- Merchant Services | Secure and reliable technology, competitive pricing, tailored solutions and prompt services.
- Lockbox | Reduce time out of your collections process by automating receivables posting.