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Treasury management is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances. It can provide governance over a company's liquidity, establish and maintain credit lines, optimize investment returns, and strategize the best use of funds. As a company raises, earns, or uses cash, treasurers or senior financial officers ensure that there is working capital to maintain operations and reduce financial risks.
Why Treasury Management is Important
Aside from managing funds, companies also use treasury management to mitigate potential future risks. Typically, risks can present as financial, reputational, and operational.
For instance, business owners can’t foresee natural disasters, global pandemics, or other issues that can disrupt a business. Treasury management can take steps to cushion the financial blow of unexpected losses, how to bolster their internal processes and how to share the information with customers or partners. Overall, treasurers are like financial advisors to their companies. They look at the economic landscape of the industry, and advise management on ways to handle potential changes.
Treasury management plays an important role in banking relationships. These key relationships require ongoing reliance and transparency. A trusted advisor will help a company find the value in data to capitalize on opportunities that may not otherwise be known to them. Treasurers also handle foreign exchange risk to determine any underlying exposure.
How does Treasury Management Work?
Let’s say that a startup called MyPieDoe plans to build and launch a new product and the treasury team needs an investment of $5 million for the project. Part of their job is to determine whether that initial investment comes from raising capital or accessing bank loans—and how to distribute those funds.
After securing funding, MyPieDoe launches the product and generates a profit. The treasury team manages the incoming cash and optimizes how it’s used within the business. Whether it’s paying back the initial $5 million dollar loan or preparing for possible liabilities and financial risks, the process of treasury management ensures that the company does not go into unwanted debt.
One important aspect of treasury management is a need for real-time visibility so treasurers can oversee when and how cash is moving through various bank accounts. In this case, MyPieDoe’s treasury team needs to forecast future shortages or risks while budgeting to pay back the initial investment. Without immediate visibility into its cash flow, the team cannot accurately anticipate these future cash needs.
How Cash Management Relates to Treasury Management
Cash management is a sub-function of treasury management. It is the process of overseeing daily cash flow to maintain sufficient access to working capital. If there’s a risk of cash depletion, comprehensive cash management can make it easier to balance cash flow and replenish funds.
They may also acquire funding through venture capital, bank loans, or smart investment decisions.
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Learn about the key processes involved in treasury management.
A clearing account acts as a temporary account that holds transactions before they are finalized or allocated to the correct permanent account.
Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.
Financial reporting empowers businesses to make informed financial decisions by identifying trends and tracking performance. It also offers insights into a company's assets, liabilities, and debt management strategies.
Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.
Recoupment refers to the recovery of spent or lost funds, especially in business operations.
Treasury Management Systems (TMS) are software applications that serve to help businesses simplify their payment operations by automatically tracking things like cash flow, assets, investments, and more.
Asset risk management is essentially a fusion of asset management and risk management.
Cash forecasting is a way for companies to look at “cash in” vs. “cash out” for a business over a window of time.
Cash pooling is a centralized cash management tool that companies with multiple subsidiaries sometimes use to optimize the cash balances of all legal entities.
Liquidity management provides visibility into cash positions over past, present, and future dates and provides an overview of the financial health of a business.
Treasury management is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances.
The 10-K is a comprehensive report mandated by the U.S. Securities and Exchange Commission (SEC) that publicly traded companies must file annually. This report provides a thorough overview of a company's financial performance over the past year.
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