Why Is Treasury Management Important?
It’s the month-end, and your treasury department is trying to reconcile cash positions across your company’s global subsidiaries. The required data is scattered across different systems and spreadsheets, and it’s an uphill battle to get the numbers to add up. The clock is ticking to make a crucial investment decision, but without real-time and accurate data, any move seems like a risky gamble.
This scenario is all too familiar for many Chief Financial Officers (CFOs). It highlights the challenges many financial professionals face: data inaccuracies, siloed systems, and manual and inefficient processes. In fact, a survey of 2,000 workers revealed that they have inefficient workflows, which can cost companies up to $1.3 million in revenue leaks annually.
This trend demonstrates why companies need treasury management, aiming to optimize the company’s financial resources to maximize liquidity, minimize risks, and increase profitability. This function is essential for businesses that want to ensure operational efficiency, strategic growth, and long-term stability.
What is Treasury Management and Why is It Important?
Treasury Management serves as the cornerstone of a company’s financial health. It covers critical functions, such as cash management and risk assessments, to safeguard assets and develop data-driven strategies. More importantly, it empowers businesses in their financial planning and corporate governance, giving them control over their future.
Essentially, treasury management is the engine that keeps a company moving, ensuring that all parts are well-maintained and constantly upgraded to generate the best value. Treasury management is important because it fulfills five critical responsibilities:
1. Liquidity and Cash Management
Effective cash management assures that a company can meet immediate financial obligations and expenses while maximizing the use of extra cash. This process involves collecting accounts receivable, managing supplier payments, and optimizing cash flow. For example, a retail company needs treasury management to make sure they have enough cash on hand to purchase inventory before the peak shopping season while still having enough liquidity for unexpected expenses like returns.
2. Working Capital Management
Closely related to cash management, capital management involves managing short-term assets and liabilities, which is crucial to a company’s liquidity and operational efficiency. Working capital management enables companies to maintain enough cash flow to meet their short-term operating costs and debt obligations. For example, a company can potentially free up cash by optimizing inventory levels and negotiating better terms with suppliers.
3. Risk Management
Treasury Management addresses several risks, but the two most common ones are foreign exchange (FX) and interest rate fluctuations. These are often caused by various economic conditions and unexpected events (like the COVID-19 pandemic).
- FX Risk Management: Losses due to currency exchange rate volatility can be a significant revenue leak for multinationals. Effective treasury management uses hedging and other strategies to mitigate these risks. For instance, a US company that owes money to a European supplier can lock in a pre-agreed exchange rate through a forward contract or currency option.
- Interest Rate Management: This type of risk management aims to minimize the impact of interest rate fluctuations on debt repayments or investment earnings. Treasurers use financial derivatives and debt restructuring strategies to mitigate interest rate hikes. For example, depending on which interest rate is lower, a company with a floating rate debt can swap to a fixed rate (and vice versa).
4. Investment/Portfolio Management
Treasury is key in deciding how to fund new projects or investments. Poor funding decisions can lead to high debt levels or dilute existing shareholders. Treasury management helps in making informed decisions that balance risk and return through data analysis. Moreover, treasurers act like financial advisors, able to see the whole picture so that the company is as prepared as possible for potential shocks and disruptions.
5. Regulatory Compliance
Having treasury management ensures that the company complies with complex financial regulations to avoid legal penalties and reputational damage. Treasury departments also handle all required documentation and financial reporting to ensure they meet these regulations. More importantly, providing accurate financial reports signals transparency for investors, stakeholders, and regulators.
How Does Treasury Technology Enhance Treasury Management?
With technology integrations, treasury management can be automated and optimized to reduce transaction errors, generate accurate data analysis and cash flow forecasts, and provide a centralized dashboard across all financial teams.
There are three main ways that treasury technology enhances treasury management:
It boosts operational resilience.
Investing in tools and software significantly enhances resilience by allowing companies to adapt quickly to economic shifts and market volatility. As an example, automated risk assessment tools can evaluate the impact of sudden market downturns on cash flow and liquidity in real time. In addition, continuous monitoring and reporting equip decision-makers to make proactive strategies instead of waiting for a crisis to strike.
It identifies cost efficiencies.
Through automating routine and complex treasury functions, companies can reduce the likelihood of errors (and their associated costs) in manual data entry. Automating payment reconciliations reduces admin hours for repetitive tasks that can be better spent on more high-value work. Advanced analytics that come with treasury management tools can also identify cost-saving opportunities, such as overlooked expenses and optimizing cash management to reduce banking fees.
It provides strategic insights.
Treasury tech allows businesses to identify growth opportunities through complex financial analysis and scenario planning. For example, predictive analytics can forecast future cash flow trends based on historical data to give insights on how to capitalize on favorable market conditions or avoid potential crises. Modern treasury systems allow a company to adapt quickly to economic changes and regulatory demands.
How Does a Treasury Management System Help?
One of the most commonly used treasury technologies is are Treasury Management Systems (TMS). A TMS automates operations by providing a centralized platform that integrates data from various sources to give a unified view of a company’s financial status. It optimizes cash management, risk mitigation, and strategic financial planning through real-time and transparent data analytics.
Here are the four major benefits of a TMS:
1. Enhanced liquidity through cash visibility/forecasting.
A TMS enhances liquidity management through real-time tracking of cash positions across various accounts and geographies. By automatically consolidating all cash positions, you can quickly identify cash surplus that can be reinvested into the business or used to address shortfall areas. Additionally, these systems can accurately forecast cash flows so that you are better prepared to meet any unexpected financial obligations.
GTreasury enhances liquidity through cash positioning and cash forecasting, enabling treasurers to make timely financial decisions through drill-down reporting and realistic scenario planning. Our automated connectivity feature can connect you with financial institutions for real-time cash visibility access.
2. Reduced financial exposures through risk management tools.
Through integrating risk management tools, you can set thresholds and alerts to monitor risk levels and automatically implement hedging strategies. If expenses in a foreign currency are high, the system can propose or execute forward contracts. Furthermore, a TMS helps mitigate the effects of market fluctuations through financial instruments and other derivatives to protect against sudden changes in commodity prices and interest rates.
GTreasury provides dynamic risk management tools that help businesses understand and act on financial risks. Our solutions include an Asset and Liability Management (ALM) module, Cash Flow at Risk (CFaR) and Value at Risk (VaR) analyses, and advanced modeling that can help you visualize your exposures.
3. Greater financial confidence through informed decision-making.
With access to real-time data and analytics, management teams can quickly analyze cash flow patterns. For example, if a TMS shows a consistent cash surplus during specific periods, you might decide to increase investments or accelerate debt repayments during these periods. A TMS can also generate accurate financial reports to help you quickly reevaluate and adjust financial strategies, reassuring investors of the company’s resilience and proactivity.
GTreasury supports strategic decision-making through its artificial intelligence-driven tools which identify idle cash and forecast future transactions for enhanced cash management. GTreasury’s automated, centralized system can be securely accessed and shared across teams, eliminating manual entries and missed opportunities.
4. Ensures regulatory and anti-fraud compliance.
A TMS ensures compliance with financial standards and regulations through updated information that can be immediately applied to reporting processes. For example, it can automatically generate reports for taxation purposes, eliminating manual errors that can lead to millions of dollars in penalties. In addition, these systems come with features that screen fraudulent activities, such as anti-money laundering (AML).
GTreasury’s TMS includes security and regulatory measures designed to flag questionable financial activities. Our AML screening solution complies with any sanctions against blocked countries, individuals, and financial institutions, ensuring that your company is not participating in financial crimes.
Treasury Management System in Action: Love’s
Known for its chain of gas stations and convenience stores, Love’s started as a family business in Oklahoma and soon expanded into 230 travel stops in 34 states. With its operations generating a jump in revenue from $3 billion to $17 billion in just a decade, Love’s treasury department soon experienced growing pains. The most challenging were the time-consuming processes that could no longer accommodate the increased workload.
The first thing their treasury manager did was to acknowledge that they needed to streamline and automate. They used GTreasury’s TMS to track their accounts across their 110 bank relationships, establish daily cash position and ending balances, and create store deposit forecasts. Thanks to the software, Love’s can now reconcile store accounts daily, a task they could only do monthly before automation, often resulting in overlooked deposits.
GTreasury’s forecasting feature also enabled the company to plan for its cash needs through history reports of store operations. The treasury department now knows exactly how much to transfer from store accounts to their corporate concentration account. Just clicking a button automatically initiates 200-300 daily transfers. Because of these enhancements, Love’s three-person treasury department only needed to add just one staff member, a remarkable cost-saving feat for a fast-growing business.
Conclusion
Understanding the importance of treasury management means prioritizing the needs of strategic financial planning and making it as intuitive as possible. A TMS can facilitate faster transaction processing, reduce errors, and boost cost savings through unprecedented operational efficiencies. With GTreasury’s technology solutions, businesses are not just protecting their current assets but building the foundation for future growth and expansion.
Schedule a consultation today to explore how GTreasury can take your treasury management to the next level. You can also request more information so we can evaluate how to set up the best system that’s tailored to your company’s needs and goals.
Written by ayla-harvey