Many of us associate treasury management with large businesses. However, globalization of the economy and accelerated competition in the marketplace calls for the need for management of financial system for small and medium enterprises (SMEs), which continue to rely on spreadsheets for core treasury functions such as cash flow, forecasting, and bank account management. This requires creating a treasury that can effectively and efficiently manage, control, and organize financial operations, mitigating its operational, reputational, and financial risks.
Treasury plays a key role in the financial system of an enterprise as it aims to evaluate the management of cash and ensure there is always enough liquidity to operate. It also plays an important role in various other activities such as project budgeting, pricing, strategic planning, hedging of risks, data collection, maintaining, shareholder relationships, managing risks, capital allocation, and so on.
Considering the factors that are driving the need for SME treasury services, the management model should be such that it can handle the distribution of appropriate objects which include capital, financial resources, and other assets. That alone doesn’t justify the existence of treasury management services. They also help simplify all the things you hate – fraud, payroll, etc., and help you do what you do the best – running your business. That’s why it is important to have well-structured treasury management as it leads to the success of an enterprise.
While treasury departments for banks and non-banks might differ a bit, some of the common entities of a typical treasury include a fixed income desk to buy or sell interest-bearing securities, a foreign exchange ‘FX’ desk to buy and sell currencies, a capital market desk that takes care of shares listed on the stock market and a commodity desk to deal in commodities like gold and metal.
FX Management and Treasury
One of the key tenets of the international financial system is foreign exchange, which facilitates trade and commercial transactions between different countries involving the conversion of one currency to the other. Integrating foreign exchange (FX) with treasury is key to finding the balance sheet and deployment of funds across global as well as domestic money and forex markets, enabling banks to optimize their asset-liability and capitalize on arbitrage opportunities.
The need for integration has also arisen on account of the development of the forex market, liberalization of exchange control, interest rate deregulations, and advancement in the dealing ecosystem. The integrated FX treasury management is meant to not only perform traditional forex dealings but also various other functions such as capital adequacy, derivative products, risk management, and so on.
As foreign exchange rates and commodity prices continue to see unexpected changes and movements, it becomes increasingly important for enterprises exposed to these risks, be equipped with the right tools to manage them efficiently. Such price fluctuations make it difficult for businesses to estimate their future revenue and costs. This is where FX treasury services come into the picture – they control the price volatility and help increase the flow of capital between countries, offering better opportunities to diversify the associated risks. However, globalization of investment has led to newer risks arising from exchange rates, the interdependence of financial conditions, and political actions in various countries.
How to know when your business is in need of a good treasuring management system?
According to the latest surveys and studies, small businesses are increasingly realizing the benefits of having a cash management system. When you see liquidity management is getting more complex and there is a strong need to optimize payment flows, it is time your business needs a treasury management system. Some of the challenges most of the small and medium enterprises are facing today include:
- SMEs generally operate with greater uncertainty when it comes to cash flow, leading to otherwise profitable enterprise going bust due to cash flow issues
- SMEs chose excel sheets over treasury management systems as they are expensive and require upfront investment in terms of both time and money
- Susceptible timing of cash flow
However, as treasury departments are doing more with less, process and technology advancements are needed to provide better data and remove reliance on excel sheets. Implementing a treasury management system can help small and medium enterprises to focus on increasing control, deeper analysis, and adding more value to the business, offering the ability to overcome the mentioned challenges through-
- Resource management
- Equipment investment
- Funding requirements
- Making informed decisions
- Project management timing
The organization of what needs to be included in the treasury system depends on the volume of activities your business is handling currently. Mainly there are three distinct functions – front, back, and mid office, which work as watertight compartments. The front office takes care of dealing and investment – risk-taking; the mid-office is responsible for risk management and management information, and the back-office deals with settlements, reconciliation, confirmations, and accounting.
Opting for in-house or external treasury management services
The industry is facing a period of transformation where the enterprises can choose the way they wish to employ treasury management. Cloud technology is opening up opportunities for outsourcing at reduced costs than having an in-house treasury management system. Businesses can even opt for ever-more customizable systems that particularly suit their business models and needs.
Outsourced services allow businesses to reduce operating expenses while providing access to the latest treasury applications for managing the functions. One of the often-overlooked benefits of these SME treasury services is the expertise of the service providers who understand the goals and roles of the financial system.
The benefits of a treasury management system over traditional spreadsheets are undisputed, but so far these have been the province of only large companies. This means SMEs have not been able to reap the benefits of solutions built in this space, missing out on the tailor-made, technology-based treasury solutions. The time to embrace these cutting-edge solutions has arrived and SMEs shouldn’t miss out as they play a key role in improving global economy.
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