Managing liquidity is important. By positioning cash strategically and reducing its exposure to risk, you ensure your organization has the capital to achieve short- and long-term objectives. To accomplish this, you and your company need to have a deep understanding of treasury management.
For the treasurer, accountant, or financial officer (maybe that’s you), treasury management involves:
1. Consolidating transaction data from disparate systems and bank accounts
Successful management of liquidity, working capital, and risk all depend on data visibility. That means normalizing and consolidating transaction data from across bank accounts into one, centralized location, whether that’s a spreadsheet or treasury management system.
2. Improving the cash conversion cycle
It’s not easy to discover new opportunities to free up working capital and ensure you have enough on hand for short-term investments and debts when you have to manually comb through accounting data. Automating cash reporting helps make the process much easier. With automation, you can stay on top of current trends in real-time, unlocking hidden sources of cash.
3. Forecast and report on changes in cash positioning and flows
Successful liquidity management is impossible without solid cash flow forecasting, and this falls down to you. Cash flow forecasting involves analyzing trends to get a better understanding of where your cash will be in the future. The goal is to inform your decision-making now, so that you don’t run into liquidity shortfalls down the road.
4. Maximizing returns on investment
Treasury managers must evaluate different investment opportunities, determining which may provide the highest return on investment (ROI) while exposing the company to the least risk. They also need to balance the company’s investment ratio, so there’s enough liquidity left over to manage day-to-day expenses.
5. Stay on top of regulatory requirements
Part of the job involves keeping up with evolving tax codes and regulations. This way, you reduce regulatory risk. This becomes even more complicated for companies that operate globally, as regulations can vary widely from country to country.
6. Managing banking relationships
Managing and understanding individual banking relationships can secure access to financing when needed, help secure better terms (not only for financing but for fees and transaction costs), and ultimately strengthen the organization’s financial stability and flexibility. Don’t neglect it!
7. Build up an acceptable emergency fund
Just like in daily life, it’s important for companies to have an appropriately sized emergency fund. Determining the appropriate size involves performing risk assessments, and understanding the company’s risk tolerance. If an event occurs that drastically lowers revenue, your company will be prepared.
Why is Treasury Management Necessary?
The benefits of treasury management include helping you achieve cash visibility, manage risk (including foreign exchange risk, regulatory risk, and reputational risk, to name a few) and improve cash flow. It secures access to external funding when you need it, and ensures you’re not investing so much in capital expenditures that you don’t have enough working capital. The goal is to optimize your use of cash, so that each dollar (or pound, or yen) is working to your business’s benefit.
At the end of the day, treasury management is necessary because your business revolves around cash. Once you have a handle on your cash, you can start building plans for expansion. Importantly, you can use treasury management techniques – for example, cash flow forecasting – to see how those plans will affect your bottom line. By carefully planning expansion, you successfully manage working capital and guarantee the company’s short- and long-term financial health. All this improves stakeholder confidence, whether that means more investment or simply more buy-in from employees (and higher morale).
Traditional Treasury Management Technologies
Traditionally, there have been two main pieces to your treasury management strategy – treasury management systems and ERPs. Both are still useful, but the truth is they’ve had a hard time keeping up with changes to how we do finance. How many actually provide real-time information, or leverage automation processes? Many still depend on spreadsheets. They may slap themselves onto a cloud-based platform and say they’re “cloud-based,” but that doesn’t mean they can suddenly, magically leverage auto-scaling or microservices infrastructures!
Compared to other solutions, legacy treasury management systems bog you down in manual work. You have to go from bank portal to bank portal, consolidating transaction data in spreadsheets, then take the time to normalize it. The very fact that this takes so much time makes it impossible to ever achieve a real-time cash position – legacy TMS have in-built visibility issues!
Given these issues, more and more business owners have realized they need access to real-time cash insights to make faster decisions based on accurate data, and these aged systems have inhibited many from accomplishing this simple objective. Things shouldn’t be that way at all, especially in this day and age.
Enterprise Resource Planning Systems (ERPs)
ERPs are traditionally used to track a company’s product chain, from procurement to sales. They do their job well! But the problem is some businesses try to use ERPs instead of treasury management systems. The idea is good – they want to keep everything consolidated in one piece of software (more on that later). However, they’re not going to get a complete view of their financial picture this way.
Some realize this, and try to fill the gap by customizing their ERP. Customizing an ERP can be incredibly costly, however. Since ERPs were never built to handle the complete suite of treasury operation, it can take a lot of time. The truth is you can’t really shoehorn an ERP into aligning with treasury operation requirements. You can try, but it will be very resource-intensive and you still won’t get complete alignment.
For that, you really need treasury management systems.
Treasury Management Systems
Where ERPs manage supply chains, treasury management systems manage, well, treasury! The goal of leveraging treasury management systems is to manage liquidity, financial risk, cash reporting, and cash workflow. As pointed out, though, many systems are inhibited by their inability to give you your current, real-time cash position.
Next, without automation, human error is almost guaranteed to occur – according to IBM, 88% of spreadsheets contain at least one error. That means your cash positioning and forecasts will be flawed, potentially leading your company in the wrong direction. The only thing worse than not cash positioning or forecasting at all is getting the wrong cash position, or miscalculating your future cash position.
Finally, handling integrated global cash transaction data is immensely difficult to manage in TMS due to scalability issues. Companies that offer global services require visibility into data generated by their global payment gateways. However, core TMS functionalities are not equipped with the scalable computing resources needed to analyze big data sets and provide visibility into a company’s global cash transactions. For companies hoping to make the switch to international organization, they need a new option.
All that being said, what should a treasurer wanting a high degree of flexibility turn to? Is there an option besides ERPs and 20 year old treasury management services? Fortunately, there is.
Automating Treasury Management With Open-Banking Platforms
The limitations of traditional treasury management solutions and ERPs have motivated organizations to opt for tech that makes it easier to monitor, analyze, and automate their cash workflows. One of the neatest innovations of the past decade or so has been open banking APIs.
Open banking is all about the idea that your banking information – transaction history and all the accompanying insights – belongs to you. You should be able to use it to inform your current business strategy, whether that’s through historical analysis or leveraging machine learning to predict your future cash position.
How do these platforms consolidate your bank information? Through APIs, which allow for communication between financial institutions and third-party applications like Trovata. That’s why you may also see open banking referred to as API banking.
More than that, though, APIs help your team eliminate manual processes through automating cash reporting, analysis, and forecasting. Something TMS have trouble with is consolidating and normalizing transaction data from multiple banks, which means treasurers have to do it manually. When finance teams have the right software, consolidation and normalization is done automatically. ‘
That can be a huge relief. This frees them up to make the move from managing numbers to, well, actually managing the company’s liquidity position – guarding against risk, and growing in a way that guarantees the most returns.
Open Banking: The Answer to Your TMS Woes
Open bank platforms are the perfect answer to the problems with traditional TMS. They also allow for ERP integration, so that you get a complete picture of your finances in one, centralized platform. The out-of-the-box automation and reporting capabilities of open bank platforms empower you to:
1. Save countless hours spent consolidating disparate cash data from multiple spreadsheets
2.Track your cash position and cash flow in real-time across any number of bank accounts, subsidiaries, and currencies
3. Improve forecasting thanks to access to real-time data. This allows you to make more informed investment decisions, optimize working capital, and better anticipate fluctuations in inflows and outflows
4. Make better and quicker data-led decisions with a comprehensive suite of automated reporting functionality that provide a rich trove of real-time cash insights
5. Respond to crises faster, as you have information about your cash position right in front of you – no need to “figure it out” from many different sources
6. Aid in risk management, including foreign exchange (FX) risk as you see your breakdown across currencies from one, centralized platform (and can then adjust it from that same platform)
7. Leverage scenario planning, which allows you to act flexibly should worst-case scenarios occur. Open banking gives you the visibility and forecasting capabilities you need to successfully plan for different events.
8. Improve security. APIs help data be exchanged more securely, which reduces the risk of fraud and unauthorized access.
9. Reduce costs by automating routine tasks like reconciliation and data entry. This way, you can reduce your operational costs and allocate resources more strategically
10. Allow you to scale globally by providing real-time data from international accounts instantaneously. Also help you with scaling due to their cloud-native infrastructure – auto-scaling only charges based on how much processing power you’re using, and microservices infrastructure allows for customized updates to be rolled out as needed
Leverage Open Banking With Trovata
Open banking fits perfectly with the idea of treasury management. It allows for real-time visibility, enhanced efficiency, and improved decision-making. Rather than using just an ERP, you can connect your ERP to your open-banking TMS, which allows you to manage payables and receivables. Through leveraging open banking platforms, you can automate your cash management, reporting, and forecasting.
When the treasury department saves dozens of hours per week, they can make the shift to strategizing and fortifying the company’s position.
Many of our clients have done just that, leveraging open banking to consolidate their business’s position, and then take it to the next level by discovering new opportunities and accomplishing strategic objectives.
Download the Trovata Platform Data Sheet to learn how you can monitor, analyze, and automate your business’s cash reporting, analysis, and forecasting with ease.