Many financial institutions, like Capital Credit Union, provide tools and services to support businesses in their treasury management so business owners can better focus on growing and strengthening their businesses and meeting strategic goals. Below, we explore the core functions of treasury management and some of the financial strategies and services that businesses can use to their benefit.
Liquidity Management
One of the most important aspects of treasury management is managing your business’s liquidity—maintaining the right balance between cash inflow and outflow. Poor liquidity management can lead to cash shortages during which you don’t have enough money to pay your operational costs and debts. These shortages not only disrupt operations but can also damage your creditworthiness or customer trust. On the flipside, poor liquidity management can also result in an excess of cash that remains idle rather than being invested and earning additional returns (see “Investment Management” below).To manage liquidity effectively, businesses have several strategies at their disposal, including:
Cash Flow Forecasting As the name suggests, cash flow forecasting predicts future inflow and outflow of cash to help with planning budgets, investments, large expenses, and debt reduction. Credit unions that offer virtual accounts and treasury management systems make it easier for businesses to track and project available cash in real time.
Rolling forecasts can be helpful. This is where the cash flow projections are updated often—typically daily, weekly, or monthly. Other cash flow forecasting involves modeling different outcomes based on best-case, worst-case, and most-likely scenarios.
Cash Concentration When businesses close unnecessary accounts and consolidate funds from several different accounts into one central account, it makes it easier to keep track of funds and optimize the use of available cash.
Cash Management Services Many businesses find it useful to work with a credit union to help them handle daily transactions, collection of payments, and disbursements of funds more efficiently. This means they always have a clear picture of the current, real-time financial state of their business, and there is less lag time between when business is conducted and when it is reflected in their financial statement. Financial institutions commonly offer:
- Lockbox services, where they collect payments directly on your behalf to optimize receivables
- An automated clearing house (ACH) to enable the most efficient electronic payments and direct debits
- Wire transfers for payments that are time-sensitive or of high value
- Remote deposit capture that allows your business to deposit checks from anywhere
- Line of credit or business loans that can help cover short-term needs
- Money market accounts or share certificates that allow you to earn more interest
Investment Management
Once you understand how much surplus cash you have available, it’s time to develop your investment management strategies. Short-term investments are a great, low-risk way to keep your business’s money working for you. Some of the most popular short-term investments are money market funds and share certificates. With a money market account, your business can earn higher interest than you would if put in a regular savings account. Plus, money market accounts typically offer check-writing privileges so you’ll still have access to your funds, though, withdrawals might be more limited than with a traditional checking account.
Certificates offer a guaranteed interest rate on your deposit for a set period of time (anywhere from three months to five years). This interest rate is generally higher than with a regular savings or even money market accounts. However, you won’t be able to withdraw funds during the set term without paying a penalty, so certificates are best if you know you won’t need immediate access to the money.
Other investment strategies might include allocating funds toward Research and Development (R&D) or innovation projects that support your business’s long-term goals. You might also consider making strategic acquisitions or focusing on debt reduction.
Risk Management
Every healthy business needs to protect company funds, especially from internal or external theft, cyber threats, unauthorized access, and fraud. To manage and prevent these types of risks, businesses often rely on financial institutions to have fraud prevention controls in place. For instance, credit unions might require dual authorization through Check Positive Pay and ACH Positive Pay before they approve high-value transactions. Financial institutions also commonly use encryption, secure logins, and multi-factor authentication for online transactions to offer greater cybersecurity. Companies might also request user access controls where only a limited number of users can initiate or approve payments from the accounts.
Besides mitigating against theft and fraud that might affect your business, risk management also involves protecting your clients and customers. Merchant services enable businesses to securely accept multiple payment methods, including credit cards and electronic wallet payments. Allow customers to pay how they prefer while ensuring the security of their transactions.