Understanding the Role of Corporate Treasury and Cash Management‍

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Efficient cash management matters for the survival and growth of any organization, regardless of its size. It involves managing cash flows, liquidity, and financial risks to ensure that there is enough cash available in the right place at the right time.

In this article, we will explore the key aspects of corporate treasury and cash management, including:

  • Developing a cash management strategy

  • Managing liquidity and cash flow

  • Optimizing cash flow forecasting

  • Utilizing cash management tools and technologies

  • Implementing best practices

  • Managing risk and compliance

  • And leveraging cash management to drive business growth

Before we jump in, let’s clarify a few of the terms and how the different departments interact with each other.

Corporate Treasury vs. A/R Management

Let's start by unraveling the complexities of two major departments that play a pivotal role in the financial health of an organization: the Corporate Treasury and Accounts Receivable (A/R) Management.

The Corporate Treasury department serves as the steward of a company's financial health. Their task is to ensure the company always has the necessary liquidity to meet its financial obligations and operational needs. They do so by managing banking relationships, cash flow forecasting, and the handling of investments and debt. The Treasury also manages financial risks related to currency and interest rate fluctuations.

In contrast, Accounts Receivable (A/R) Management focuses on the company's incoming finances—specifically, money owed to the company by its customers. This team ensures that all due payments are collected in a timely manner, invoices are accurately tracked, and any customer payment issues are promptly resolved.

The CFO or a finance manager typically handles the treasury's duties in a small startup (up to about 100 people), juggling duties like cash management, financial risk assessment, and strategic planning. This setup works well when the financial operations are relatively simple, allowing the company to operate efficiently without needing a full-fledged treasury department.

Companies typically experience an increase in financial complexity above 100 employees as a result of factors like increased funding, scaling operations, or international expansion. It becomes beneficial to create a dedicated treasury function. This department, usually led by a Treasurer, would take on responsibilities such as managing liquidity, overseeing banking relationships, monitoring cash flow, managing debt and investments, and handling financial risks related to currency and interest rate fluctuations.

Here’s a quick table showing the difference in responsibilities between A/R and Treasury:

Accounts Receivable (A/R) Department

Treasury Department

Issuing invoices to customers

Managing company's liquidity

Tracking payments from customers

Managing banking relationships

Following up on unpaid invoices

Cash flow forecasting

Processing credit notes and refunds

Debt and investment management

Dealing with invoice queries

Financial risk management (currency and interest rate fluctuations)

Conducting credit checks on new customers

Managing financial relations and policies

Implementing and maintaining effective collection strategies

Securing financing for new projects and growth

Reconciliation of the A/R ledger with the general ledger

Evaluating new investment opportunities and strategies

Ensuring compliance with applicable financial regulations

Ensuring compliance with applicable financial regulations

It's important to note that while these departments have unique roles, they work closely together to ensure the overall financial well-being of the organization. By striking a balance between what's owed to the company (A/R) and the funds available at any given time (treasury), businesses can effectively navigate financial ebbs and flows, setting the stage for sustainable growth.

Developing a Cash Management Strategy

Developing a cash management strategy is the foundation of effective treasury and cash management. It involves considering various factors such as the nature, size, and culture of the organization, the types of cash flows, the number and location of bank accounts, the need for overdraft or interest-bearing accounts, foreign currency accounts, and maximizing the efficient use of funds while minimizing interest expense. The strategy should also take into account the legal, tax, and accounting implications of the proposed solution.

In more tangible terms, the process could look something like this:

  • Business Assessment: If your organization is a small startup, perhaps you would want to keep an eye on lean expenditure, whereas if you're a large multinational, focusing on managing diverse revenue streams may take precedence.

  • Cash Flow Identification: For a manufacturing company, a considerable part of the cash flow might be tied up in operational activities. Understanding this can help in streamlining processes to free up funds.

  • Bank Account Optimization: If your customer base is largely overseas, having foreign currency accounts could shield you from exchange rate fluctuations.

  • Cash Optimization & Expense Minimization: For an organization with a long cash conversion cycle, offering early payment discounts to speed up receivables or negotiating longer payment terms to delay payables could prove beneficial.

  • Technology Adoption & Regular Review: Leveraging cash management tools like Tesorio can provide real-time visibility into your cash flow. For example, a fast-growing startup might see its financial landscape change rapidly, thus making regular reviews a necessity.

A cash management strategy is typically not a single document but rather a collection of documents, practices, and processes that guide a company's management of its cash. The strategy would typically be set out in a series of internal policies and procedures, which could include documents such as Investment Policy (outlining how to allocate surplus cash), Treasury Policy (defining daily cash management processes), Risk Management Policy (identifying and mitigating financial risks), and Debt Management Policy (setting rules for borrowing and repayment).

Also keep in mind that your cash management strategy should not be a static policy but rather a living and breathing document, regularly revised and adapted to changing business environments and business needs.

Managing Liquidity and Cash Flow

Let’s take a look at tactics for managing liquidity and cash flow. This means ensuring that the company has enough cash on hand to cover its obligations and expenses. Levers to pull include managing incoming cash flows (such as accounts receivable and interest income) and outgoing cash flows (such as accounts payable, payroll, and tax payments).

Imagine you're Atlassian, the team collaboration software powerhouse. Your cash inflow mainly springs from recurring subscription fees, providing a stable stream of revenue. But let's not forget the outflow - significant expenses like the payroll for a global team of tech wizards. Balancing this equation could involve incentivizing customers to pay their annual subscriptions upfront, creating a liquidity boost.

But what if you're a manufacturing giant like General Electric? Your cash inflow is tied to product sales, which are more unpredictable. Your outgoing cash, on the other hand, is wrapped up in costs like raw materials, machinery maintenance, and workforce. A potential strategy here might be to negotiate extended payment terms with suppliers to preserve the cash on hand.

These examples show how liquidity management is tied to the nuances of the business model and industry.

Effective cash management also involves finding opportunities to offset cash flows and reduce the need for external borrowings. This can be achieved through techniques such as netting and the effective management of short-term investments. For instance, a multinational firm might use netting to simplify intercompany settlements and manage currency risks by offsetting receivables and payables against each other. On the other hand, a firm with surplus cash might invest in short-term, low-risk assets like Treasury bills, turning idle cash into a source of additional liquidity and returns.

Optimizing Cash Flow Forecasting

Without accurate forecasts, a company’s financial department will have a hard time making any kind of strategic decision. It involves predicting future cash inflows and outflows to optimize cash utilization and make informed financial decisions. Cash flow forecasting can be challenging, especially in times of uncertainty or when customer behavior deviates from historical patterns. However, forecasting cash flows as accurately as possible is important when optimizing funding, investments, and risk management. This can be achieved through data analysis, collaboration with various departments, and the use of advanced forecasting techniques and technologies.

Typically, cash flow forecasts have been done on spreadsheets and in complex manual models. Commonly employed techniques include the direct method (short-term, detailed forecasts), the indirect method (long-term, high-level forecasts), and scenario-based forecasting. These methods often require complex models and involve sifting through large amounts of data, a process that is typically manual, time-consuming, and susceptible to human error when performed on spreadsheets like Excel.

If you’re not using a tool for forecasting yet, you may want to take a look at Tesorio’s forecasting features. Leveraging AI technology, Tesorio's Accounts Receivable Forecast feature aids in automating the forecasting process, making it more accurate, and providing data in real-time.

Utilizing Cash Management Tools and Technologies

Much like how the advent of smartphones revolutionized communication, cash management tools and technologies are transforming treasury and cash management processes. As we said above, by implementing an AI solution like Tesorio, you may be able to automate tedious manual processes and increase accuracy.

For instance, where traditional cash forecasting might involve manually collecting and analyzing detailed cash inflow and outflow data for the short-term, Tesorio’s AI-powered tool can instantly aggregate this data on a constant basis, analyze it, and provide accurate, real-time forecasts.

One of the advantages of such automation is the real-time visibility it offers into cash collections. This enables companies to track their progress against forecast targets instantly and pinpoint potential issues more quickly than traditional methods.

Tesorio streamlines cash flow monitoring and analysis, improves cash visibility, and provides real-time data integration from various sources. Why not take it for a spin? Tesorio offers a virtual sandbox where you can see features like automated forecasting, advanced analytics, and more. Try it here.

Implementing Best Practices for Cash Management

Now let’s take a look at some best practices for cash management. Key tactics include centralizing cash management activities, optimizing bank account structures, leveraging cash concentration and pooling solutions, utilizing technology for cash flow forecasting and analysis, and implementing robust internal controls and compliance measures.

The specific strategies will always depend on the specific business circumstances:

For example, if you're a global SaaS company like Box with multiple subsidiaries, centralizing cash management activities can provide greater control over global cash positions and streamline operations. You could set up a shared service center for handling global transactions to optimize efficiency.

On the other hand, if you're a traditional manufacturing company with multiple physical locations, optimizing your bank account structures might look different. You may need to maintain local bank accounts in various regions to handle local expenses and revenues efficiently. However, to optimize cash use, you could consider cash pooling solutions, allowing surplus cash from one account to offset deficits in another, effectively minimizing idle cash and reducing borrowing costs.

Managing Risk and Compliance

In the world of treasury and cash management, risk and compliance are the games to master. You're constantly identifying, measuring, and managing a bucketful of risks. Market risks might keep you up at night - exchange rate volatility, for example, if you're playing on the global stage. You're measuring too, quantifying the potential impact of risks such as liquidity (think: cash coverage ratio).

To manage these risks, you might turn to strategies like hedging. That's where derivatives come into play. Another strategy? Diversification of investments. And let's not forget the need for robust controls - think of them as your internal checks and balances to keep fraud and errors at bay.

Last but by no means least, compliance. Here's where you adhere to all those financial laws and regulations. If you're a public US company, SOX compliance is likely on your radar. So, in a nutshell, a comprehensive risk management framework isn't just a nice-to-have, it's a must-have to protect your financial bottom line.

Leveraging Cash Management to Drive Business Growth

Effective cash management can also be leveraged to drive business growth. For instance, if you're a SaaS company with 200 employees, timely and accurate cash flow forecasting can help identify periods of cash surplus and shortfall. If a surplus is forecasted, you could decide to invest more in customer acquisition campaigns to accelerate growth.

If you find that cash inflows from subscriptions are typically higher in the first quarter, you could allocate extra budget for marketing initiatives in the second quarter, leveraging that extra cash to acquire new users.

On the other hand, if you identify periods of cash shortfall, you could negotiate with vendors for longer payment terms to smooth out your cash flow, preventing the need for external financing. This could also involve collaborating with your sales team to offer incentives for clients to prepay annual contracts, thereby getting more cash upfront.

The above actions, which are all guided by optimized cash flow, can lead to better-informed investment decisions, more effective capital deployment, and ultimately, sustainable growth. Moreover, it allows businesses to achieve cash flow harmony with customers and vendors, enhancing overall business operations and profitability.

In conclusion, corporate treasury and cash management are both important parts of a business’ financial success and stability. In smaller companies, they may be handled within the same department. In larger organizations, cash management responsibilities may be split up between A/R and Treasury.

Interested in seeing how Tesorio’s AI can help automate your A/R and Treasury operations? Get in touch with our team of cash flow experts.