The Treasury Function And Its Role In Cash Management.

At its most fundamental level, the role of treasury is to manage an organization’s cash. The function must be fulfilled whether there is a dedicated treasurer in the organization or, as is typical in many mid-market companies, handled by the controller. The efficient utilization of cash resources, that is strategically allocating funds to meet short-term obligations such as payroll and vendor payments while optimizing long-term investments, is the aspect of the treasury function that cannot be ignored.

Beyond cash management.

A key part of my role as Airbase controller encompasses several treasury functions beyond cash management.

The first is managing the company’s bank accounts, setting them up, and maintaining those relationships.

Many companies employ people worldwide and buy goods and services from international suppliers and vendors. This adds a layer of risk and complication to the treasury function. With payments taking place globally, it’s essential to ensure that funds are in the right place when you need them to make payroll or pay your vendors.

In many cases, this necessitates the need for foreign bank accounts.

A formal treasury department would also measure and manage the currency exposures that result from international foreign currency payments. This level of risk management is difficult to achieve with smaller teams and fewer resources.

Another treasury function is forecasting and planning where the company wants to be in the next 12 months — and reporting those figures. This largely ties into and informs your cash management. Like many other areas of your company, forecasting and planning will develop more layers as you grow. As a result, there will be changing cash management considerations.

Let’s take a look at the critical area of cash management — ensuring that cash is in the right place at the right time.

What is cash management?

Cash management is the strategic handling of an organization’s cash flows to optimize liquidity and ensure financial stability.

It encompasses activities such as monitoring cash balances, forecasting future cash needs, and having strategies to deploy surplus cash or obtain additional funds when necessary.

By efficiently managing cash inflows and outflows, organizations can reduce risks, meet financial obligations, and maximize returns on their available funds.

Goals of treasury in cash management.

The treasury function is focused on banking relationships and the activities and risks that surround the movement of funds between the bank (or banks) and vendors, employees, and customers.

With respect to banking relationships, the reporting and compliance requirements can be onerous, so it’s important to stay on top of those.

As a company starts to have cross-border payment flows, the work to set up new bank accounts and to pave the way for smooth multi-currency cash flows can be extremely time-consuming.

Specifically, though, there are five goals for cash management:

1. Ensure that cash flows to the right place at the right time — the efficient deployment of working capital.
2. Deploying the right systems to support those payment flows and provide the visibility and control to manage the risks inherent in making global payments.
3. Provide visibility into the cash needs of each part of the organization, both today and in the future. This means that access to good data and good models for forecasting future needs are essential.
4. Balance the appropriate risk return for bank deposits that are tied to your organization’s expectations for the return on working capital.
5. Ensure proper controls are in place to authorize the movement of company funds. Moving cash subjects companies to fraud, so putting the right controls and procedures in place is an important part of a good cash management program.

Controlling cash flow.

I find it helpful to break down cash flows into outflows and inflows and three key areas.

1. Accounts payable.

Accounts payable and spend management are the areas where we have the most control. For example, deciding when to process your bill payments can really impact your year-end cash balance.

When I worked in a public company, we really focused on the areas of AP and spend management when looking at cash management. We would actively delay spending during some periods, or we would pull spend forward (pay prior to due date) in other periods to hit an ending cash target.

2. Payroll.

Payroll is a large expense for most companies but also the most predictable, so tools for this area can be used to automate the process with little ongoing maintenance required.

3. Accounts receivable.

Customer receipts are harder to predict and less under our control. A good team or set of tools is necessary to stay on top of this.

Good data is a cornerstone of cash management.

As a controller, I must guarantee we have the cadence and processes to adequately manage those three areas.

As with most things, it starts with good data, and reporting is a crucial aspect of my role. Ensuring we’re up to date with all of our transactions is critical to the management of those three key areas. A spend management tool, such as Airbase, excellently facilitates that real-time visibility and ensures transactions are synced on a timely basis.

How customer behavior impacts your cash inflows.

Understanding your customers’ payment cycles is vital to understanding your cash flows. Any hardships they might be experiencing which could impact their ability to pay are relevant to you.

If half of your customers make up half of your AR balance, you need an in-depth view of that material activity — which could affect your cash. A large part of your responsibility is ensuring that the relevant cash is flowing into the account you expect it to.

How payroll impacts cash flow.

As you grow, payroll becomes more predictable, so the cash management surrounding payroll sees increased stability. Occasionally, timing issues may arise due to the administration of commission payments or bonus payments.

Additionally, equity items can flow through the payroll. This can have a significant cash impact and must remain on your radar. Aside from these periodic considerations, cash management really boils down to having a good understanding of the three key areas: AP, customer receipts, and payroll.

My favorite cash management tools.

Tesorio is an example of a cash forecasting tool to help understand your customer receivable balances and predict cash inflows. A tool like this is critical for understanding payment inflows, which makes a real impact on your cash forecasting.

And, of course, for the cash leaving the company, Airbase is an excellent tool because it understands the flow of upcoming payments. All non-payroll spend is there in one platform, so I’m not having to pull data from multiple sources to get a picture of my spend.

There are a lot of tools out there. It’s essential to have one that not only takes what your books say about payment terms but also gives real-time visibility into how such payments will flow in and out of your account.

Risks of cash management.

One of the most important things I remember from my 101 accounting class was:

“Cash is king.”

It sounds obvious but this sentiment is imperative to everything you do as a controller. Ensuring that cash is controlled and that the right people with the appropriate authorizations have access to move the money as required is essential.

You must ensure money is in the right place at the right time. If not, your employees and vendors could be impacted, your website servers could go down, and you could lose business. After all, you have to keep the lights on.

Managing risks involved in your cash management activities is about understanding your business and its needs, including any seasonality affecting it. That varies by company and based on where you operate.

In the U.S. we can estimate U.S. payment flows but, internationally, there are different tax years, and payment timings can differ. Understanding those international distinctions is important in ensuring your subsidiaries have cash at the right time.

Controlling for the risks associated with cash management starts by having good data on your inflows and outflows, and how those will change over time, plus knowing the timing of where money needs to flow.

Putting controls in place around who has access to bank accounts is essential to managing risks of loss from fraudulent activities. And clear policies around the investment of excess capital can control market and credit risk.

Cash vs. accrual accounting in cash management.

The change to accrual accounting signifies a good thing! If your company is making this transition, it’s most likely due to significant growth or preparation for an audit. The different requirements for GAAP accounting — being part of a larger company, having comparable financial statements against other companies as you obtain or seek more funding — are all growing areas of significance for you at this stage.

In the early stages, finance teams care predominantly about bookings and revenue, and less about GAAP financial statements. As your company establishes more significance in the market, financial statements and your margins start to matter more.

Cash accounting shows revenue on the books when it is received. However, the shift to the accrual basis accounting method means that revenue is recognized when it is earned rather than when it is received.

As a result, net income and the actual cash flow are generally different. That is to say, there will be transactions on the income statement that don’t involve cash items.

With accrual accounting, therefore, you’ll need better tools to show when cash from a transaction hits the bank account, not when it shows up on the income statement.

With cash basis accounting, any exchanges or transactions you had to explain were largely cash related — basic inflows and outflows. Now, there are all these timing differences you have to explain.

However, P&L changes begin to appear that don’t necessarily tie to your cash for various reasons. At this stage, cash management is about partnering with the finance team to understand those changes and drivers. Planning for the future is vital here.

The role of credit in cash management.

When you’re making decisions about how to manage your business, credit definitely provides an important lever. Investing in credit involves expenses but many companies see it as a good resource to have. In some instances, companies use credit as a central component in how they operate.

When it comes to extending credit to customers, especially if you plan to do so at scale, bringing in a partner to help is definitely a good idea instead of attempting to cover those risks independently from your own balance sheet and cash.

Credit cards and cash management.

One area where a cash management resource could help the SME population is the ability to leverage cards as part of the AP process, through the ability to keep cash in the bank for longer, for example. This may require training for a traditional AP team but could really provide relief to an SME with cash flow concerns.

Excess cash and cash management.

Venture-backed companies often have money in the bank from the amounts that they have raised. When cash management involves the investment of excess working capital, it can mean that a company is operating in a sub-optimal way. Obviously, the best way to deploy excess capital is into the business itself but many companies hold capital in reserve as runway.

Investing these funds will depend on a few factors. Longer durations tend to have higher returns but may not fit with the forecasted cash needs of the company.

Similarly, higher returns can be found by taking greater risks. For example, U.S. Treasuries are seen as risk-free returns, and higher returns can be found by investing in corporate bonds. Identifying the risks and the returns that your company seeks for its investment strategy should be taken into account when building a cash management plan.

How far in the future do cash management strategies go?

Many high-growth, VC-backed companies operate off of a 12 to 18-month cycle. They will often display the same cadence in their cash management strategies as companies that have successfully raised more money. Other companies may have a more aggressive or conservative approach.

Ultimately, it boils down to your company philosophy. How you operate strategically will generally drive your fundraising needs, results, and your cash management approach generally.

However, you don’t want to become too fixated on one fundraising strategy as your needs can change with growth. Who knows what will happen over the next six months if the environment changes? Many companies do prefer to have additional runway so they never get stuck in a crunch. Alternatively, credit facilities are also a resource that provides extra leeway and can help drive your business forward.

As your company grows and adds complexity, you will need additional resources to fulfill growing treasury requirements. Still, there is a lot a controller can do to manage risks and optimize returns. Increasingly, the right systems can make us controllers a lot more powerful and a lot more effective at managing the cash in our organizations.

To learn more about Airbase, contact us for a product demo.