Treasury management: The key to financial stability and sustainable growth


At first glance, treasury might seem like simply overseeing a company’s finances. But it’s so much more than that.
A company’s treasury department is responsible for managing cash flow, ensuring liquidity, and evaluating risk — in other words, optimising what the company does with its cash.
And this can be a delicate balancing act. The treasury team makes sure the company has enough cash to cover day-to-day expenses while making the most of any excess cash to get a yield. But, that cash also needs to be kept readily available in case it’s required at short notice. On top of all that, treasury departments also need to evaluate potential risks when considering where to hold or invest excess cash.
These functions are crucial for ensuring financial stability and sustainable business growth. Intelligent treasury management helps companies respond to uncertain economic times, a growing norm rather than an exception. By strategically managing cash, treasury teams can create financial resiliency, helping them stay ahead of the competition.
While large companies might have a separate treasury department, in smaller companies this function usually comes under the umbrella of the finance department, along with accounting and finance. But no matter the size of your company, knowing the importance of treasury and how it ties into cash flow management is a key element of business success.
Here’s everything you need to know.
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Cash is king: Treasury’s role in ensuring liquidity
Liquidity is a company's ability to meet short-term financial obligations on time. Examples include paying employees on a set date every month, settling supplier invoices, and paying business rates. While these obligations are usually paid using readily available cash funds, liquidity also includes assets that can quickly be converted into cash. This includes accounts receivable, inventory, short-term investments, corporate savings, and sometimes pre-approved credit or overdrafts.
A key treasury responsibility is maintaining a liquidity buffer, ensuring credit lines and emergency reserves are already in place, so any unexpected costs can be covered with minimal disruption.
Maintaining good liquidity is crucial because, without it, businesses struggle to carry out day-to-day operations. Establishing liquidity also helps:
- Maintain business continuity: Ensuring uninterrupted business operations, even during uncertain economic times like market downturns and recessions.
- Invest in growth opportunities: Having cash available helps companies invest in new assets or grow the business.
- Develop trust and credibility: Paying bills and wages on time establishes trust and confidence with employees, investors, suppliers, and creditors.
On the flip side, poor liquidity management can lead to a range of business-critical issues, including:
- Increased financial costs: Without liquidity, businesses may need to use high-interest credit lines, or sell assets at lower prices than they otherwise would have.
- Reputational damage: Missed payments can create a lack of trust with suppliers or creditors. Paying employees late can lead to increased turnover and damage your employer brand.
- Operational disruptions: Missed or late payments can create delays or halt operations.
Left unchecked, these issues can increase the risk of insolvency, even for businesses that make a healthy profit.
Alongside liquidity, treasury departments also need to balance incoming and outgoing cash, to ensure there are always enough funds to cover expenses. Intelligent cash flow management involves forecasting how much cash on hand will be needed in the future, based on predicted income and expenses. It also includes aligning payment schedules, so that outgoing expenses aren’t due before incoming funds.
“Forecasting cash balances is stressful. If you don’t have enough cash, payments will be rejected, but you also have to think if there’s enough cash in multiple accounts in multiple banks. And with uncertainty, it’s very difficult to forecast, so you’ve got to make sure you have buffers in place.” Amit Kahana, Head of Credit, Pleo.
But treasury departments aren’t just responsible for managing current cash flow and maintaining liquidity — they also need to identify a range of risks and how these might affect the business in the future.
Risk mitigation: Treasury’s role in safeguarding success
Business risks include factors like currency fluctuations, interest rate changes, economic downturns, supply chain disruptions, and more.
Since treasury departments don’t have a crystal ball, evaluating these risks relies on gathering as much real-time information as possible about incoming and outgoing cash flows, liquidity, and budgets. Using this data it’s then possible to test a range of risk scenarios and assess whether the company has the resilience to withstand them or not.
“Uncertainty is always going to be there. Treasury needs to understand what the company has, where it needs to go, and what the risks are, and then test all that out with the data that you have.” — David McHenry, Head of Product Advisory, HSBC.
Another critical aspect of treasury management is working capital, the balance between a company’s current assets and liabilities. The goal is to create positive working capital, which can be used to cover immediate payments and invest in growth. On the flip side, negative working capital is a warning sign that a company may not be able to meet day-to-day expenses.
But, creating positive working capital is a balancing act. Treasury needs to ensure that the company has enough funds to run the business, but also use excess cash to generate a yield.
Treasury departments are also responsible for spend optimisation: the process of evaluating and adjusting a company’s expenses to maximise value. Spend optimisation is about so much more than just cutting costs, though. It involves gaining real-time visibility across all expenses.
Spend optimisation can be achieved using a range of strategies, including using data to identify trends or inefficiencies, leveraging technology to analyse spend data, and regularly reviewing spending strategies to make sure they align with both the current market conditions and the company’s overarching goals.
Using these strategies to optimise spend helps treasury departments unlock these kinds of benefits:
- Improved profit margins
- Enhanced cash flow and liquidity
- Increased investment in growth and innovation
For more details, watch our webinar: The future of financial efficiency: Unlocking the power of spend optimisation.
How treasury supports business success
Treasury isn’t just something for a company’s mysterious team of ‘bean counters’ to tick off — it directly supports business success. But to achieve this goal, treasury departments have a lot to accomplish, including ensuring liquidity, managing risks, and making strategic decisions that help create business resiliency.
In short, treasury involves keeping a lot of very expensive plates spinning.
Pleo’s new Cash Management Suite makes treasury management a whole lot easier. Manage liquidity, stay in control of spending, and optimise your finances — all from one easy-to-use platform.
Want to be one of the first to know more about Pleo’s upcoming Cash Management Suite? Register your interest here.