What is Treasury Management?

Treasury management is the process of managing an organization’s liquidity, money market instruments, banking, concentration and disbursement activities. Treasury constantly monitors cash inflows and outflows in order to optimize the company’s liquidity position. This includes managing all the financial risks associated with running a business.

In practice, this critical function employs a mix of strategic forecasting, investment analysis and risk management techniques. Treasurers work to maintain the company’s financial health, using real-time data to make informed decisions about where to allocate funds.

What Are Common Treasury Management Processes and Objectives?

The objective of treasury management is to ensure that an organization’s short- and long-term goals are achieved. Treasury management provides a means for an organization to effectively manage its liquidity, minimize risk exposure, and maximize the efficient use of resources.

Treasury management also plays an important role in financial planning. If you want to know when your business will be profitable or how much debt or equity funding is needed for expansion plans over the next few years, having accurate projections about your company’s financial health will be essential.

Treasury management is especially important for large organizations that need to ensure they are never short on cash but also don’t have too much cash available at any time. Examples of these organizations include banks and other financial institutions, governments and major corporations. Treasury management is critical to a company’s success.

Objectives of Treasury Management

Treasury management has a number of objectives to consider:

  • Liquidity and Cash Management: The ability to meet short-term and mid-long-term obligations when they arise (like paying employees or suppliers) is critical for any business that depends on cash flow from customers paying them later rather than sooner (like most businesses).
    • Business implication: Liquidity management involves planning and implementing strategies that ensure that an organization has enough money on hand to meet all its obligations, as well as maintaining adequate reserves for unexpected expenses.
  • Working Capital Management: Working capital refers to the difference between current assets and current liabilities. It is important for treasury to manage this ratio so that it remains in balance with other financial metrics such as profitability and liquidity ratios.
    • Business implication: If your company has too much or too little working capital, it could negatively impact its ability to pay bills on time or invest in new projects that could help grow sales over time.
  • FX Risk Management: To avoid impacts to earnings, treasury works to manage their FX exposure and risk. This can be done by organically eliminating exposures internally or by hedging exposures.
    • Business implication: FX risk management is especially important for businesses that engage in international transactions or have operations in different countries, as it helps mitigate the potential impact of currency fluctuations on financial performance and profitability.
  • Interest Rate Risk Management: Interest rates can change depending on economic conditions, which means they may go up or down depending on where we are in our business cycle at any given moment—and how much confidence people have in their investments at any given moment affects those rates as well.
    • Business implication: Managing interest rate risk means making sure that if interest rates rise while a company has outstanding debt obligations, then those debts won’t become unaffordable when payments increase due to higher costs associated with servicing those loans.

Details of Treasury Management Process

Treasury management is a multifaceted discipline that acts as the financial cornerstone of a company, orchestrating the management of its monetary resources to safeguard the organization’s financial stability and strategic growth. It encompasses a broad range of activities, from directing cash flow to negotiating funding. Treasurers must balance prudent financial stewardship with astute investment to ensure corporate liquidity, risk mitigation and regulatory compliance while aligning with the company’s overarching financial objectives.

objectives of treasury management

What Are the Major Challenges Faced by Treasury?

Treasury management continues to become more complicated, thanks in part to global connectivity and multinational expansion. Here are some of the challenges companies can face in treasury management:

  • Managing cash flow around the world is much more challenging than it once was.
  • Companies must protect themselves from currency fluctuations by hedging their foreign exchange risk or investing in other currencies.
  • Treasury departments need more sophisticated risk management tools to ensure they aren’t exposed too much when they trade currencies on behalf of their subsidiaries or clients overseas.
  • Payments fraud continues to evolve with technology, and treasury must always be on the lookout for the latest schemes.

Keeping track of where money is coming from and going is perhaps the greatest challenge for treasury. A company’s cash flow can come from multiple sources—customers, suppliers, banks and shareholders.

It’s important for companies to always know where its money is in order to make sure it has enough funds available when needed. This is especially true for multinational companies whose business operations span multiple countries or regions with different currencies; if there are discrepancies between what an organization thinks its balance should be and what it actually turns out to be after accounting for all incoming and outgoing payments, then there could be serious problems in the future. This is also true for a market full of volatility where business continuity is all about having the liquidity to keep the business running.

What Are the Differences Between Treasury Management and Cash Management?

Treasury management and cash management are terms that are often used synonymously by financial institutions as they offer similar services. However, they have important differences.

Cash management is the process of managing a company’s money flow and ensuring that it meets all its near-term obligations.

Cash management can involve several different activities:

  • Monitoring daily balances in bank accounts and other financial instruments that are used for payments
  • Forecasting future inflows/outflows from these accounts
  • Deciding how much money should be held at any given time based on forecasts

Treasury management is much broader than cash management. Treasury management allows corporations to manage all aspects of their finances, including cash flow and liquidity.

In terms of technology, both cash management and treasury management systems are designed to help an organization better manage its money. However, they do so in different ways.

A cash management system helps to keep track of how much money an organization has at any given time by making it easy for employees to make payments through the company’s bank account or credit card account (if applicable).

A treasury management system goes one step further by helping companies track all their accounts in one place so they can see where every dollar goes at any given time–including the ones used outside of normal business hours or during special projects such as purchasing new equipment or renting space at an event venue.

What Are the Benefits of Treasury Centralization?

Treasury centralization refers to the process where companies consolidate their cash and treasury management functions into a central point or location, rather than managing them in a dispersed or decentralized manner across various subsidiaries or regions. This approach is often taken by multinational corporations to gain greater control, efficiency, and visibility over their global cash and financial risk management operations. Such central point or location is often referred to as ‘International Treasury Center‘ or ‘Regional Treasury Center‘.

Key benefits of treasury centralization include:

  • Enhanced Cash Visibility: Centralization offers a clearer view of global cash positions and cash flows, enabling better cash forecasting and liquidity management.
  • Improved Control: Companies can implement and enforce uniform treasury policies and procedures across the organization, leading to more consistent and secure operations.
  • Efficiency and Cost Savings: By consolidating functions, redundancies can be reduced, leading to operational efficiencies and potential cost savings. It may lead to fewer banking relationships and reduced transaction fees.
  • Risk Management: Centralization allows for a more coordinated approach to managing financial risks, such as foreign exchange and interest rate risks. Hedging strategies can be managed centrally, often resulting in more favorable terms and reduced exposures.
  • Optimal Use of Resources: With a centralized approach, companies can better utilize their treasury personnel, leveraging their skills and knowledge more effectively.
  • Standardized Technology and Systems: Centralized treasuries often use a single treasury management system (TMS), which can lead to uniform reporting, efficient transaction processing, and seamless integration with other enterprise systems.
  • Improved Investment and Borrowing Decisions: With a holistic view of the company’s finances, the centralized treasury can make better-informed decisions regarding investments, borrowings, and the deployment of surplus cash.
  • Consolidated Banking Relationships: Centralization often results in a reduced number of banking partners, which can simplify bank communications, negotiations, and relationship management.
  • Regulatory Compliance: A centralized structure can ensure that the organization complies with various local and international regulations more effectively and consistently.

It is important to note that while treasury centralization offers numerous benefits, it may not be suitable for all companies. Some might find that a hybrid model, which combines central oversight with regional treasury centers or specific local functions, is more practical given their business model, industry or specific geographic considerations.

What Is a Shared Service Center (SSC)?

International Treasury Centers (ITCs) and Shared Service Centers (SSCs) are both mechanisms by which multinational companies centralize and streamline specific functions. However, their primary roles and objectives differ considerably when it comes to the overall purposes, roles and responsibilities.

  • Functionality and Focus:
    • Internal Treasury Centers (ITCs): They are primarily concerned with a company’s financial management. Their roles may include cash management, debt and investment management, financial risk management (such as hedging foreign exchange and interest rate risks), and other corporate finance activities.
    • Shared Service Centers (SSCs): These are centralized units where resources are pooled to serve various departments or units of a business with standardized processes. SSCs can cover a broad range of functions, such as HR, IT, finance and accounting (beyond just treasury functions), customer service, and procurement, among others.
  • Objectives:
    • ITCs: The main objectives are to optimize liquidity, manage financial risks, secure financing at preferable rates, and enhance investment returns.
    • SSCs: The primary goals are to achieve process efficiencies, reduce costs, improve service quality, and foster standardized best practices across the organization.
  • Transactions:
    • ITCs: Deal with high-value, low-volume transactions like foreign exchange hedging, investment decisions, or corporate finance activities.
    • SSCs: Handle high-volume, low-value transactions like invoice processing, payroll, IT helpdesk tickets, etc.
  • Stakeholders:
    • ITCs: Generally interact with banks, financial institutions, internal business units, and the top management team.
    • SSCs: Engage with a broader set of stakeholders, depending on their function, which can range from employees seeking HR assistance to vendors sending invoices or IT users needing technical help.
  • Regulatory and Compliance:
    • ITCs: May be subject to specific financial regulations, especially if they handle activities like financial market trading or cross-border fund movements.
    • SSCs: While they also adhere to regulatory standards, the focus might be more on compliance related to their specific function, such as data protection regulations for HR or IT.
  • Strategic Importance:
    • ITCs: Play a crucial role in a company’s financial strategy, capital structure decisions, and risk management.
    • SSCs: While they can have strategic importance in ensuring operational efficiency, their main emphasis is on operational effectiveness and service quality.
table listing differences between international treasury centers and shared service centers

Source: TMI Magazine Issue 277

Advantages of Using a Treasury Management System

Treasury management is a crucial part of any business, but it’s especially important for multinational companies. This is because they have to deal with both local and global factors that affect how money flows around their operations and between countries. Here is where Treasury Management System comes in to help.

Table: How a cloud-based Treasury Management System can help global organizations to achieve treasury success

How a cloud-based Treasury Management System can help global organizations to achieve treasury management success

What Is Effective Treasury Management?

There are many different paths companies can take to achieve treasury transformation. You can start with process standardization, payments transformation or the simply reduction of bank fees. Below are three great examples from Kyriba’s client community.

Kyriba client Beam Suntory chose to modernize their operations in a decentralized environment. They worked with Kyriba to future-proof cash and liquidity management to protect their future growth. The interconnected ERP, TMS and Payments systems ensures business continuity, visibility and confidence in liquidity optimization.

Kyriba client Lowe’s has an extremely large bank account environment with over 2000 bank accounts at 33 banks. With Kyriba’s Bank Fee Analysis, Lowe’s is able to pull reports on a macro scale to immediately identify any outliers by comparing services across banks and drilling down to a micro-level for any out-of-policy store activity.

Kyriba client Align Technology built an FX Hedging Program in alignment with senior management’s goals by integrating Kyriba FX with SAP ERP and implementing Data Integrity Analysis to validate exposure and identify inconsistencies.