IT's role in treasury management: A tutorial

What is treasury management?

Generally speaking, the treasury management department has overall responsibility for a company's cash. Sounds simple, but the treasury department has many different facets that require great attention to detail. Read on.

Cash management. Treasurers must ensure there is adequate "working capital" to allow the business to run on a day-to-day basis. By definition:

Working capital = Current assets – Current liabilities.

In short, there must be enough funds to maintain inventory levels and pay current bills (accounts payable), and accurate accounting data must be readily available to the treasury department. As important as this job is, working capital is relatively simple to measure in comparison to long-term investments or capital expenditures that the corporation undertakes.

Capital expenditures, such as acquiring another company or building new factories, are highly detailed transactions that involve a lot of cash management. Quite often, companies have a capital expenditure committee that meets regularly to consider new capital projects. The treasurer sits on this committee and determines how new projects will be funded, which is often with long-term debt. IT should build or acquire the capability to define new projects, and track their progress (including the go/no-go decision) and funding.

Cash forecasting. The treasury department must maintain a rolling forecast (perhaps 12 months out) of cash requirements and where the cash will come from. Cash forecasting can be complicated. For example, new capital expenditures may or may not get funded, yet treasury still must plan for them. In addition, from an inventory point of view, the company may buy forward in large quantities in anticipation of future sales.

Relationships with financial institutions

Naturally, the treasury department will maintain relationships with multiple banks. These banks may offer routine services -- such as cash collections -- but more importantly, they will hold a number of the corporation's cash, short-term and long-term investments. Here is what should be considered:

Data availability. Using banking interoperability software (e.g., Swift), IT must make financial data available to the treasury workstation on a real-time basis. This is imperative for accounting accuracy and compliance.

Due diligence. Living in a post-Lehman Brothers era, the treasury department must be able to audit the health of all financial institutions it deals with.

Liquidity. The treasury must balance investment potential with short-term liquidity. Liquidity is tied directly to the cash forecast and the corporate investment strategy. The treasury department must have ready access to cash as required. Long-term investments, although having a greater yield, are antithetical to liquidity, in that cash isn't readily available.

Managing risk

Hedging. Risk is an unavoidable aspect of any financial deal. To deal with uncertainty, the treasury department is expected to manage risk, and hedging is a common technique.

For example, an automotive company may need to source a large quantity of steel in three months' time. Rather than worry about what the price of steel will be in three months, the company can hedge its risk by buying a futures contract and locking in a steel price (obviously, paying for this privilege).

Rates can also be locked in. The automotive company may anticipate extraordinary sales in China, but worry about currency fluctuations. The treasury department can purchase a futures contract to lock in the exchange rate.

The treasury workstation

Because of the numerous procedures involved in treasury management, IT should consider the notion of a treasury workstation and deliver all relevant treasury functions from a single location. Ideally, the treasury workstation will be Web-based, be run in the cloud and be totally secure.

Software. The goal is to have a fully populated treasury management workstation (ideally a cloud-based application). IT and the treasury department should draw up a list of required functions, then examine what already exists in software suites (e.g., from SAP, Oracle, Reval and Sungard) and in single-function software (commercial or in-house).

Consulting. The large firms (e.g., Accenture, Deloitte, Ernst & Young and KPMG) offer comprehensive consulting services, focused on the area of treasury management overall, with a related specialty in software delivery. Consider using these firms or more-niche consulting firms to enhance your chances of success.

IT must develop a detailed understanding of cash management and forecasting, liquidity, risk, and hedging to make the best software choices for treasury management. Additionally, selecting software should be made with a clear understanding of the existing financial software portfolio, and with the development of a more sophisticated treasury workstation.