The Importance of Treasury Management

The end goal of any for-profit enterprise is to maximize owner's wealth. For corporations, this translates into maximizing shareholder wealth. Treasury management drives value creation through maximizing cash liquidity for companies that often have fluctuating cash flow and needs. It achieves this through cash flow management, short-term financing and medium-term financing. Treasury management plays a critical role by ensuring that a company has the cash it needs at all times to run its business.

Treasury management involves the process of managing the cash, investments and other financial assets of the business. The goal of these activities is to optimize current and medium-term liquidity and make solid financial decisions involving invested and investable assets. Treasury management also includes hedging where needed to reduce financial risk exposure.

Cash is critically important for small businesses. Profitable companies can fail due to insufficient cash on hand to pay bills. The treasury management function monitors the timing and amounts of cash inflows and outflows, a critical component of cash flow management. Cash inflows include accounts receivable conversions to cash, short-term and medium-term borrowing, asset sales or dispositions, and accounts payable conversions to actual bill payments. Treasury management also includes monitoring and tracking those activities that require the largest use of cash.

Treasury management's role also involves lengthening the amount of time a company retains the money needed to pay its bills while shortening the time period it forgoes money due from its customers. Treasury management processes therefore include setting accounts payable and receivable policies, setting credit approval policies and defining collection terms. These activities provide a company with float, or extra short-term cash on which it can earn interest. Larger companies may establish savings and money market accounts to use as sweep accounts to earn short-term interest on incoming funds that the firm will soon use to pay its bills.

In larger corporations, treasury management also includes managing shareholder relations, managing financial risk and ensuring adequate and appropriate sharing of financial information. The shareholder relations piece has significance, because strong relations and a belief in the company’s strategy allow corporations that need additional funds to raise those funds from existing shareholders. Financial risk management may range from hedging against commodity or currency risk to establishing alternative financing plans for upcoming projects.

Treasury managers need information from internal departments and groups to make suitable decisions. They must also share information to adequately support those groups and assist with their decision-making. In addition, treasury management plays an important communication role with lenders as part of the financing duties. This function provides lenders and other financial institutions with the financial information required to show compliance with loan terms.