What is treasury management? What are its challenges and how can it be optimized? That is what we will discover in this article.
Treasury management: what is it?
The concept of "treasury management" is essential for any company that wants to ensure its financial stability and optimize its operations. A company's treasury represents the money available to finance its day-to-day operations, whether operational or investment-related. Treasury management is therefore the process of managing the company's incoming and outgoing cash flows. It encompasses all activities related to the collection, concentration, and use of money.
What are the challenges of treasury management?
1. Preventing insolvency
A company unable to meet its short-term obligations finds itself insolvent, a situation often synonymous with decline or, at the very least, major challenges.
Treasury management aims to ensure the company's short-term solvency and to optimize the profitability of its financial resources. It is a constant balance between cash inflows and outflows, with the goal of always maintaining a positive equilibrium.
Sound treasury management therefore helps limit financial risks. For example, if the company does not receive an expected payment from its customers, well-managed treasury will allow it to cover its expenses.
2. Improving the company's relationship with its various financial partners
A solid treasury management track record can facilitate access to financing, whether from banks, investors, or other financial institutions. It can also help obtain better payment terms with suppliers. Indeed, treasury is not only a reflection of a company's ability to manage its liquidity, but also an indicator of its financial stability, reliability, and management competence. These are arguments to put forward, particularly with one's banking partner.
3. Saving on bank fees
Still skeptical about its importance? Well-managed treasury reduces the costs associated with banking services such as interest on loans, overdraft fees, and intervention commissions. Indeed, exceeding the authorized overdraft results in additional fees. Optimized management allows leaders to anticipate when treasury financing will be necessary, giving them the opportunity to seek more advantageous financing options.
4. Optimizing your cash surplus to increase profits
A negative treasury position generates additional costs for a company, but a poorly managed cash surplus is no more beneficial.
It is essential to note that banks offer a multitude of solutions for those wishing to optimize their excess treasury. These options vary depending on each entrepreneur's aspirations:
- Invest the surplus to obtain long-term returns,
- Allocate the surplus to finance a future investment,
- Set the surplus aside as an emergency fund to handle unforeseen events.
However, before anything else, it is crucial to determine whether the company has actually generated this surplus. How to achieve this? Through the implementation and regular monitoring of a forward-looking treasury plan.
What are the key indicators of treasury management?
To effectively measure the performance of a company's treasury management, various key indicators are used:
- Cash balance: Corresponding to the difference between liquid assets and liquid liabilities. A positive balance signals good company liquidity, while a negative balance may indicate a lack of liquidity.
- Working capital requirement (working capital): Represents the gap between current assets and current liabilities. It highlights the resources required to finance the company's operating cycle.
- Inventory turnover: Measures the time required to sell inventory. A short period is generally a sign of fast inventory turnover, which is favorable.
- Customer payment terms: Indicates the time companies take to collect payments from their customers. An extended period may signal financial difficulties related to payment delays.
- Supplier payment terms: Evaluates the time a company takes to settle its supplier invoices. If this period is long, it may allow the company to optimize its treasury, but it may also indicate financial pressure.
By regularly monitoring these indicators, it is possible to anticipate and identify treasury-related challenges. Adequate management is paramount to ensure the viability and longevity of any business.
Understanding the difference between treasury and profitability
It is important to note that treasury and profitability are two distinct concepts, although both are essential to the financial health of businesses.
Treasury refers to the money available in the company, either as cash or in the company's bank accounts. It is a measure of the company's liquidity and cash flow. Treasury allows a company to meet its short-term financial obligations, such as paying salaries, suppliers, taxes, and other current expenses.
Profitability, on the other hand, is a measure of the company's efficiency in generating profits from its revenue. Profitability is calculated over a given period (generally a financial year) and refers to the profits made after deduction of all expenses.
It is therefore possible for a company to be profitable but to have treasury problems. For example, if it has not collected payments owed by its customers or if its current expenses are too high. Conversely, a company may have healthy treasury but be unprofitable, for example if it does not invest its resources effectively or if its production costs are too high.
In summary, sound treasury management ensures the liquidity necessary for the company's daily operations, while high profitability indicates good overall management of the company's activities. Both are essential to the longevity and growth of businesses.
What are the levers for optimizing treasury management?
To optimize treasury management, several methods and tools can be implemented:
1. The cash flow statement: This essential tool allows you to track the evolution of treasury and ensure accurate accounting. It records all incoming cash flows (sales, collection of trade receivables, etc.) and outgoing cash flows (purchases, salaries, debt repayment, etc.). Thus, the cash flow statement allows you to visualize the treasury position at any time and forecast short-term treasury needs or surpluses. It is an indispensable tool for mastering accounting, anticipating financing needs, and avoiding liquidity crises.
2. Working capital management: As explained, working capital represents the amount of financial resources a company must mobilize to cover the operating cycle, that is, the cycle that goes from the purchase of raw materials to the collection of sales. High working capital means that a lot of money is tied up in the operating cycle, which can weigh on treasury. To optimize treasury, it is therefore essential to effectively manage working capital and the associated data, for example by reducing customer payment terms or extending those of suppliers.
3. The forecast budget: This is an estimate of the company's revenue and expenses for a given period (generally one year). The forecast budget is essential for planning treasury, as it provides accurate forecasts of periods of surplus or shortage of treasury. Moreover, it is one of the essential tools for identifying the financing sources required to cover treasury needs.
4. The financing plan: The financing plan is a projection of the financial resources the company will have and their use for a future period. It includes both short-term financing (such as bank overdrafts or supplier credit) and long-term financing (such as loans or capital increases). A balanced financing plan ensures the company's solvency and contributes to the longevity of its treasury.
5. The relationship with customers and suppliers: Sound management of customer and supplier relationships can help optimize treasury. This can involve negotiating favorable payment terms, such as shorter payment terms for customers or longer payment terms for suppliers. Moreover, good communication with customers and suppliers can help avoid late payments and disputes, which can disrupt treasury.
6. Investing treasury surpluses: When a company has a treasury surplus, it can invest it to generate additional revenue. This can be achieved through financial investments or investments in new projects or activities. It is a solution for optimizing treasury management in the long term and contributing to the company's growth.
In conclusion, treasury management is an essential component of a company's financial and accounting management. It requires special attention and good planning to ensure the company's longevity and development. Don't forget that optimizing your treasury is an ongoing process that must adapt to the evolution of your business and your economic environment.
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