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March 3, 2022

The treasury function and its role in cash management — with Kelly Hicks.

Written by
Darragh Collins
Darragh Collins
The treasury function and its role in cash management — with Kelly Hicks. The treasury function and its role in cash management — with Kelly Hicks.

Q1: The treasury function is often handled by the controller. Before we discuss the cash management aspect, can you tell us what is involved in treasury?

There are a couple of elements. 

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

Next is the critical area of cash management — ensuring that cash is in the right place at the right time.

Many companies employ people from all over the world. This trend has only grown with the rise of remote working. When you have hundreds of payments taking place around the world, it’s essential to ensure that funds are in the right place when you need them to make payroll or pay your vendors.

Another part of the 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. 

Q2: In a small to mid-market and even up to early enterprise company, the treasury function is handled by the controller. Tell me about how you approach the treasury function in general and specifically how you handle 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 payment flows in and out of other countries, the work to set up new bank accounts and to pave the way for smooth cross-border multi-currency cash flows can be extremely time consuming. 

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

  1. Ensuring that there is cash available to flow to the right place at the right time. That is the efficient deployment of working capital.
  2. Making sure that your systems are sufficient to support those payment flows by building the right infrastructure and implementing the right tools for your needs.
  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. This raises issues of the return on working capital.
  5. Ensure that 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. 

Question 3: The primary goal of cash management is to make sure cash is available to flow to the right place at the right time. How do you do that? 

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

The first two are the outflows: accounts payable and payroll.

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. 

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

Next are the Inflows: 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.

As a controller, guaranteeing you have the cadence and processes to ensure those three areas are adequately managed is a must. 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 visibility and ensures your transactions are being synced on a timely basis.

Understanding your customers and their payment cycles is also 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. 

As you grow, payroll becomes more predictable, so the cash management surrounding payroll sees increased stability. Occasionally, timing issues may arise, perhaps 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 that 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.

Q4: What are your most valued 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.

A5: What are the risks associated with cash management, and how do you operate control around them? 

One of the most important things I remember from my one-on-one 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 could be impacted, your vendors could be impacted, your website servers could go down, 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 US, we can estimate US 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. 

A6: Many companies shift from cash to accrual accounting as they grow. What are the reasons for this shift? Is cash management impacted by that change in accounting processes?

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 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.

A7: What role does credit play in cash management?

When you’re making decisions about how to manage your business, credit definitely provides a lever you can pull. 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, bringing in a partner to help is definitely useful, instead of attempting to operate independently from your own balance sheet and cash. 

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.

Q8: What about companies with excess cash? How does that fit into 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 higher risks. For example, US Treasuries are seen as the 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. 

A9: In terms of a time frame, how far into the future do cash management strategies aim to go?

That depends. 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 been successful in raising 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.

Darragh Collins
Darragh Collins
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About Airbase

Airbase offers a one platform solution to manage all non-payroll spend. It provides oversight and control over spending with real-time reporting and automatic syncing directly to your general ledger. Control all paymentsphysical cards, virtual cards, ACH, and checks – from one place. Close faster. Empower employees. Control spend.

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