Treasury Management 101

Contemporary, corporate treasury management departments focus on leveraging cash and other assets to achieve business objectives. The pace of change in business structures, the banking industry, and regulatory policies has accelerated over the past several decades. This makes developing a treasury strategy even more important. Let’s begin with an overview of the role of treasury management.

What is the role of treasury management?

The role of treasury management is to make sure the business has enough liquidity to meet debts and other obligations while simultaneously making sure that cash is working to achieve business objectives. To do this, treasurers are involved in risk mitigation, payment processing, investments and other assets, fraud and security, and a host of other activities.

Additionally, the team will often develop relationships with a variety of banks and financial institutions. Depending on the size and reach of the corporation, these relationships may extend across national borders, bringing with them the requirement to be aware of policy and foreign exchange issues as well.

How treasury management developed in the US

In the mid twentieth century, corporations had to have a bank in every city in which they did business in order to process payments. Data handling was manual and access to banking information was slow. This slow pace of information meant that treasury management was similarly a slow process: payments cleared in three days, accounts were balanced just monthly. The only real financing available to businesses was bank debt.

Beginning in the 1970s, banks began to automate some of these processes. This increased the flow of information via new treasury management services offered by banks: controlled disbursements, lockboxes, cash concentration, and so on.

By the late 1970s, treasurers were making use of a variety of banking products such as money-market funds to keep their cash working and earning interest. At the same time, payments processing was becoming much faster. The float time to clear a cheque was reduced drastically. Payments were processing faster, information was flowing quicker, and there were more opportunities for treasurers to keep their capital working.

As the banking industry began absorbing more technology through the final quarter of the twentieth century, banks began providing the ability for companies to learn their bank balance on a daily basis. While still far from the real-time information available today, this was a giant step forward. A company could get a much more granular view of their cash flow.

Cash management was now something that required handling a wide array of services and data. Payments and investments could be monitored and produce insights into cash flow or risk management. In order to handle this, specialized software was developed: treasury management workstations that could log on to the array of bank services used by a company. Some of these were provided by banks, some by technology firms, and many were custom-built solutions, made in-house by companies with unique needs.

As banks and these early treasury management systems began consolidating in the 1990s, bank solutions began to address international markets.

In general, as the pace of data has increased and the sources of data consolidated or expanded, legacy treasury management systems have attempted to keep pace. Sometimes successfully and sometimes by requiring a significant investment of time and resources by the treasurers who use them.

Also, as the pace of data has increased, so too has the opportunity to use new services, search out and control new revenue streams, and standardize payment processing and monitoring. Something like cash forecasting was essentially impossible a few generations ago.

Key developments:

  1. Banks automated services and payment floats were greatly reduced
  2. Banking information digitized; daily balances became a reality
  3. Policies changed to allow corporate access to a greater variety of assets
  4. Globalization added foreign exchange as a consideration for treasurers
  5. Consolidation of banks and their treasury management systems

What is a treasury management strategy?

A treasury management strategy outlines how the cash of the business is going to achieve the objectives of the business. This needs to be done in a way that can navigate crises, stay within regulations, and manage risk in an appropriate manner.

A strategic treasurer will address the following core areas:

  • asset liability management
  • trading and hedging
  • asset portfolio
  • funds transfer pricing
  • integration projects

The primary objectives in these areas is to gain lower borrowing costs, get more utility out of existing company assets, and use financial leverage to increase impact. Here’s a post to help you learn more about developing a global strategy.

Get started today by speaking with one of our experts about Trovata, a cash management platform built from the ground up to solve contemporary challenges for treasurers and other cash management professionals

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