Company treasury management: What is it and how to manage it?

A company’s treasury management encompasses the set of activities and processes that involve the management, monitoring and control of cash flows and other financial instruments within the organisation. The main objective of treasury management is to ensure that the company has sufficient financial resources to meet its obligations and day-to-day operations in an efficient manner. In the dynamic environment of the entrepreneurial ecosystem, treasury management is emerging as a cornerstone for any startup’s finances.

Effectively reducing expenses, exploring strategies to increase operational efficiency and considering new sources of funding are key tasks in the day-to-day running of startups. These are common practices to extend the runway, which in essence represents the time horizon over which the company can sustain its operations with its current liquidity. Effective treasury management is the main tool for extending this time horizon.

Importance and key elements of treasury management

Liquidity is to a company what blood is to the human body, and startups are no exception. That is why treasury management plays such an important role in  financial planning and management. These are its main functions:

• Cash forecasting. This is the backbone of treasury management. By projecting future cash flows, you can anticipate and prepare for potential financial challenges. This strategic tool enables you to make informed decisions about investments, spending and funding.
• Cash control. Efficient management of accounts payable and accounts receivable is essential to maintaining a healthy cash flow.
• Liquidity management. Treasury management involves making smart decisions about how to invest short-term cash surpluses and evaluating investment options. Being prepared for strategic opportunities or facing unforeseen situations can largely depend on how resources are managed.
• Risk analysis. Treasury management involves the identification and proactive mitigation of risks related to interest rates, exchange rates and other external factors. Being prepared for financial volatility is essential to maintaining stability and operational continuity.
• Capital structure. When deciding how to finance the business, treasury management will involve optimising the capital structure by finding the right balance between debt and equity. The aim is to maintain sufficient financial flexibility and maximise the return on investment.
• Bank account management. Maintaining relationships with banks and financial service providers is important for monitoring accounts and managing balances, deposits or cash withdrawals.

Treasury management or working capital: key differences

When talking about cash management, it is important not to confuse it with working capital. Both concepts relate to the financial side of the business but focus on different aspects of financial management.

They are both linked to liquidity and the company’s ability to meet its short-term financial obligations, as both cash and working capital seek to optimise financial resources.

While both are good indicators of the company’s financial health, treasury management focuses on cash flow management and day-to-day operational decision making, whereas working capital is a broader measure that assesses the efficiency with which the company manages its current resources.

In addition, treasury focuses on the management of liquid assets, such as cash, but working capital takes into account both assets and liabilities, assessing how the company uses its assets to fund operations and meet commitments.

Keys to improving treasury management

There are a number of recommendations that can be made to optimise cash management and use liquidity to support business objectives:

• Estimate income and expenditure. It is recommended that a detailed cash forecast for one year be prepared, estimating monthly income and expenditure to identify patterns and needs.
• Collection and payment control. It is important to monitor collections and keep up to date with financial commitments and payment terms. Negotiating favourable payment terms with suppliers and ensuring that customers meet their obligations on time are strategies that can make a difference to cash flow.
• Technology. Using financial management software and tools can help automate processes, track them in real time and simplify administrative tasks. This can improve efficiency and reduce errors.
• Inventory management and expenditure policies. Avoiding unnecessary surpluses and minimising costs will free up capital for more important needs.
• Funding sources. Exploring different funding options will help reduce risk and increase financial flexibility.
• Continuous monitoring. Ongoing risk analysis and monitoring of financial performance indicators should be part of treasury management’s day-to-day work in order to adjust the strategy as necessary.
• Contingency planning. Contingency plans are designed to mitigate the impact of unforeseen situations, such as falls in sales or unexpected costs. In this context, it will be important to make provisions for outstanding payments.

From cash forecasting to making strategic investment and funding decisions, every aspect of treasury management contributes to the overall financial health of a startup. Ultimately, managing liquidity in this way can be the key to survival in the entrepreneurial marketplace.