Everything You Need to Know About Treasury Management

Only 43% of businesses agree that they "always" or "most of the time" have optimal treasury management practices in place. That leaves 57% of businesses - the majority - having trouble with managing their cash flows, liquidity, and financial risks effectively.

But why do so many companies struggle with treasury management? Why, at the end of the day, do they face cash crunches, suboptimal returns on investments, or unexpected losses? 

The answer lies in how well businesses are implementing treasury management strategies. This includes forecasting cash flows accurately, managing liquidity efficiently, investing surplus funds wisely, and mitigating financial risks proactively.

Thankfully, effective treasury management isn't a mysterious art that you either know or you don't: it's a skill that can be learnt.

So, let's start mastering treasury management today.

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What is Treasury Management?

Treasury management, sometimes referred to as corporate treasury, is managing a company's cash resources, liquidity, and financial risks to support its business objectives and maximize shareholder value.

To this end, it brings together cash flow forecasting, working capital management, liquidity planning, investment management, debt management, risk management, and bank relationship management.

Of all these aspects of treasury management, effective cash flow forecasting is by far the most important. From there, it's about managing liquidity and risks over the short and long term — all while ensuring the company has sufficient funds for its operational and strategic needs.

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Why is Treasury Management Important?

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Briefly, treasury management aims to optimize a company's cash resources and minimize its risks. In doing so, effective treasury management not only helps maintain financial stability but also supports business growth and value creation.

This happens because treasury management helps to balance:

• Short-term liquidity needs and long-term funding requirements
• Working capital optimization and strategic investments  
• Risk mitigation and shareholder value creation

Let's break down all these benefits:

— Ensure sufficient liquidity

Treasury management is critical for ensuring the company has enough cash to meet its short-term obligations and fund its operations. It gives visibility into future cash inflows and outflows, helping identify and address potential liquidity gaps proactively.

— Support strategic investments

Similarly, treasury management helps identify surplus cash that can be deployed strategically to fund growth initiatives, capex, acquisitions, or other investments. It ensures the company achieves the right balance between risk and return when investing its cash.

Prudent investment management as part of treasury helps improve the return on cash and strengthen the company's financial position.

— Mitigate financial risks

Treasury management also involves identifying, measuring, and managing various financial risks faced by the company. These could include liquidity risk, interest rate risk, foreign exchange risk, commodity price risk, and counterparty credit risk.

By using appropriate hedging strategies and risk management tools, treasury helps mitigate these risks and minimize their potential impact on the company's financials, thereby enhancing stability and resilience.

— Optimize cost of capital

Another key objective of the treasury is to minimize the company's cost of capital. This involves managing the mix of debt and equity, optimizing the debt maturity profile, negotiating favorable terms with lenders, and diversifying funding sources. 

Effective liability management and strong bank relationships help lower funding costs and ensure access to liquidity in times of stress.

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Challenges in Treasury Management

Despite its critical importance, managing the treasury effectively is no easy feat.

Treasury managers often struggle with lack of real-time visibility into cash flows and liquidity across multiple banks, entities, and geographies. Manual and fragmented processes hamper efficiency and increase operational risks.

Here's a look at some of the key challenges in treasury management:

— Cash flow forecasting inaccuracies

A common problem is that treasury managers forecast either too far into the future or with insufficient granularity. This makes cash flow predictions less reliable for decision-making.

Inaccurate cash flow forecasts, in turn, make liquidity planning and risk management increasingly challenging.

— Fragmented liquidity management

Another common pitfall is that treasury managers look at several systems to get a complete picture of their global cash and liquidity positions instead of a central treasury management system. Trapped cash in different entities and geographies, manual reconciliations, and lack of real-time visibility complicate liquidity management further.

— Suboptimal working capital management

Have you ever had a quarter-end where you're wondering, "Wait, why is so much cash tied up in receivables and inventory? How can I stretch my payables without straining supplier relationships?"

If so, you're not alone. Many treasury managers struggle with optimizing working capital across the procure-to-pay and order-to-cash cycles. Lack of collaboration with procurement, sales, and supply chain teams often results in suboptimal working capital.

To avoid this, it's important to take a cross-functional approach to working capital and use appropriate tools and financing structures.  

— Insufficient risk management strategies

Even experienced treasury managers struggle with identifying and mitigating the myriad risks they face - liquidity risk, interest rate risk, FX risk, commodity price risk, counterparty credit risk, to name a few.

But where less experienced managers take a fragmented approach to risk management, advanced ones use an integrated, portfolio approach. They define risk appetite, measure risk exposures, and deploy suitable hedging strategies to remain within acceptable risk thresholds.

— Over Reliance on spreadsheets and manual processes  

Needless to say, you need robust systems and automated workflows to manage treasury effectively. Over Reliance on spreadsheets and manual processes is a recipe for disaster.

That's because spreadsheets are prone to errors, lack controls, and don't provide real-time visibility. Manual workflows are inefficient and expose you to operational risks.

While spreadsheets may suffice for smaller companies, it's important to transition to a treasury management system as the business scales and complexity grows. 

— Lack of visibility into software spend

Today, companies are increasingly relying on software to run their operations. However, many treasury managers lack visibility into their organization's software spend, leading to cost overruns and inefficiencies.

Without a clear view of software expenses, treasury managers struggle to optimize costs, identify savings opportunities, and make informed budgeting decisions.

That's where a software spend management platform like Spendflo comes in. Spendflo provides real-time visibility into all your SaaS subscriptions, usage, and costs in one place. It helps eliminate wasted licenses, rightsize plans, and negotiate better deals with vendors.

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Spendflo provides complete visibility and control over your software spend

By gaining control over software spend, treasury managers can free up cash for other strategic priorities and improve overall financial performance.

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Best Practices for Treasury Management

Some key best practices that can help elevate the maturity and effectiveness of the treasury function include:

Establish clear treasury policies and governance 

Define and document treasury policies covering areas such as liquidity management, investment, risk management, and compliance. Set up appropriate governance mechanisms and oversight committees.

Regularly review and update policies to align with evolving business needs and regulatory requirements.

Set up a global cash pooling structure 

Implement a global cash pooling structure to centralize cash management and optimize liquidity across entities and geographies. This helps reduce idle cash, lower interest expense, and improve visibility.

Consider physical cash concentration, notional pooling, or a hybrid approach based on your company's geographic footprint, regulatory constraints, and banking relationships.

Adopt a multi-layered liquidity management approach 

Manage liquidity in layers to optimize return on cash while ensuring sufficient liquidity for business needs:

Operating cash: Maintain adequate cash balances to meet daily working capital needs Reserve cash: Set aside cash to cover short-term contingencies or opportunities
Strategic cash: Invest surplus cash in line with the company's risk appetite to generate higher returns Align the maturity profile of investments with the liquidity horizon and regularly rebalance the portfolio.

Implement a payment factory 

Centralize payment processing with a payment factory to achieve economies of scale, standardize controls, and improve transparency. A payment factory enables you to:

Consolidate payment flows across entities and banks Automate payment file generation, validation, and release Segregate duties and enforce maker-checker controls Integrate with ERPs for straight-through processing

Monitor and optimize software spend 

Spendflo is a software spend management platform that helps you gain visibility and control over your organization's software expenses to optimize costs and drive efficiency.

With Spendflo, you can:

• Track and manage all your SaaS subscriptions in one place. This centralized view allows you to easily identify and eliminate unused or duplicate licenses that are secretly eating away at your budget.

But Spendflo doesn't stop there. It also:

• Helps you right-size your subscription plans based on actual usage data. By analyzing your real-world usage patterns, Spendflo can recommend the optimal subscription tiers for your needs, ensuring you don't overpay for features you don't use.

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Bonus points: RFIs in Treasury Management

What exactly is an RFI, you ask?

RFI stands for "Request for Information". It's a tool that treasury teams can use to gather information about potential vendors, products, or services when exploring new solutions or improvements.

In treasury, RFIs can help you:

• Identify TMS vendors and evaluate their capabilities
• Assess banks for cash management and liquidity services
• Explore risk management solutions like hedging platforms

So, what does an RFI contain? Typically, it includes a list of questions covering key areas such as:

• Vendor background and financial stability
• Product features and functionality
• Pricing models and total cost of ownership
• Implementation process and timelines
• Customer support and service levels

The RFI responses from various vendors help you compare options and create a shortlist for deeper evaluation and demos.

Now, when should you consider issuing an RFI in treasury? Here are some common scenarios:

Scenario 1: Exploring new treasury tech  

Let's say you're looking to implement a new TMS or treasury technology. An RFI can help you understand the market landscape, compare different solutions, and identify the best fit for your needs.

Scenario 2: Expanding your banking network

If you're expanding globally and need new banking partners, an RFI can help you evaluate banks based on their geographic coverage, liquidity solutions, and service capabilities.

The RFI process typically looks like this:

1. Define your requirements and evaluation criteria
2. Develop the RFI questionnaire
3. Identify potential vendors and issue the RFI
4. Evaluate RFI responses and score vendors
5. Create a shortlist for RFPs or demos

Related Reading ➡️ Top 7 strategies to streamline PO management

How Treasury Management Helps Extend Your Budgets

Effective treasury management isn't just about keeping the lights on. It's also about making your budgets go further and work harder for your business.

Think about it. When you optimize liquidity, you free up trapped cash that can be put to work in growth initiatives or strategic investments. That's money that would have otherwise sat idle in low-yielding bank accounts.

But how exactly does the treasury make this happen? Here are a few ways:

1. Cash flow forecasting and visibility
   By accurately predicting your future cash inflows and outflows, treasury helps you optimize your working capital and free up cash for better uses. No more guesswork or surprises.

2. Strategic investment management
   Treasury can help you invest your surplus cash in line with your risk appetite to generate higher returns. They can create an optimal portfolio mix that balances safety, liquidity, and yield.

3. Dynamic liquidity management
   Treasury can set up smart cash pooling structures that help you consolidate funds across entities and geographies. This reduces idle cash and external borrowing needs.

How Spendflo Helps You Cut Down Excess Spending on SaaS

If you want to maximize your treasury efficiency and minimize costs (because who doesn't?), one sure way to go about it is by optimizing your SaaS spend. And that's where Spendflo comes in as your trusty sidekick.

Think about it. With the explosion of SaaS apps, it's easy for costs to spiral out of control faster than you can say "budget blast". Unused licenses, duplicate subscriptions, and lack of visibility can quickly add up to wasted spend. And that's cash that could be put to much better use elsewhere.

Here’s how Spendflo’s intake-to-procure can help:

• Complete SaaS visibility

Spendflo gives you a single pane of glass to view all your SaaS subscriptions, usage, and costs across the organization. No more juggling multiple spreadsheets or chasing down info from different teams.

• Identifying unused licenses 

With Spendflo, you can easily spot zombie licenses that are eating up your budget like brain-hungry undead. It shows you which licenses are being underutilized or not used at all, so you can reassign or cancel them faster than you can say "off with their heads!".

• Rightsizing subscriptions 

Spendflo helps you match your SaaS plans to your actual usage needs. It recommends the right subscription tiers based on utilization data, so you don't overpay for features you don't need. 

• Renewal management

Never get caught off guard by auto-renewals again. Spendflo alerts you of upcoming renewals well in advance, so you can renegotiate terms or cancel unnecessary subscriptions.

See how much you can save on your SaaS with Spendflo

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