Cash management and treasury management are not precisely the same things, but they are related functions. Together, they form the foundation of sound corporate finance and are critical to any organization's financial health. This is true for businesses, nonprofit enterprises and government entities.
Cash Management Defined
Cash management entails closely monitoring cash positions and managing the daily ebb and flow of cash according to an organization's needs, plans and values. Cash management is a subset of treasury management, which has some of the same goals but a somewhat larger scope.
Cash and treasury best practices should include a predictive element. Good cash management anticipates cash depletions and is always ready with a plan to replenish funds quickly if needed. By the same token, an efficient cash management system recognizes when cash positions are becoming too large and will channel idle cash toward a higher yield or better use. In short, cash management is about efficiently using liquid funds to suit operational needs.
Cash management is also concerned with costs. Specifically, a company's cash and treasury tools should help minimize operational, logistical and other costs to optimize overall financial performance. Some managers and corporate executives believe cost control should be the primary function of all cash and treasury procedures.
Under most cash and treasury standards, cash management covers the following key areas.
- Vendor and payroll payment processing: The goal should be to minimize complaints; discourage legal actions; and avoid unnecessary fines, interest or late fees.
- Third-party relationship management: This involves managing banks, brokers, consultants and advisors to promote efficiency and avoid animosity.
- Accurate cash flow forecasting: As mentioned above, a quality cash management system anticipates cash balances and meets cash needs.
- Law, compliance and mandatory reporting: All government regulations, company policies and accounting standards—GASB, FASB, etc.—must be followed. All reporting requirements must be met.
The Importance of Cash Management
A business has many moving parts. Adherence to cash management best practices allows cooperation and collaboration between all interested parties. Executives, managers, financial officers, and all employees can only do their jobs properly when they know that necessary cash is available for them to use to reach their goals.
It's difficult to imagine any company, regardless of its size or objectives, to function without appropriate cash management tools and a transparent cash management system, especially in our digital age when funds move at the speed of light and accounts can be drained or filled at the click of a mouse.
Treasury Management Defined
Treasury management has a wider scope and a bigger, more strategic function than cash management does. An enterprise's treasury division refers to all of its financial assets, including short-, mid- and long-term investments and nontraditional financial assets.
Dealing with daily cash needs falls under the umbrella of treasury management, but it's only one aspect of this important function. Treasury procedures are concerned with optimizing the whole of an organization's capital structure. Treasury management tools and procedures must take the "big picture" into account regarding finance.
The underlying theme behind treasury management is risk management. All treasury best practices are anticipatory. They demand creative thinking and accurate forecasting so the organization can meet all of its obligations.
The following are some, but not all, key areas of treasury management.
- Investment Management: Funds must be allocated appropriately according to need time horizons.
- Financial Risk Management: To the extent possible, risks should be identified, measured and mitigated. Examples include interest rate risk, foreign exchange risk and credit risk.
- Capital Structure: The proper balance of liquid funds, equity and debt should be ascertained and maintained.
- Debt Management and Servicing: The treasury department has the ultimate responsibility for taking on and repaying loans on a cost-effective basis.
- Supervision of Financial Divisions: All financial systems, such as cash management and others, should report to Treasury.
Using professionally designed, high-quality cash and treasury templates is an excellent way for accounting professionals to make sure all bases are covered.
The Key Differences Between Cash and Treasury Functions
As mentioned above, treasury and cash functions are closely related, but there are key differences. The main differences are found in the general scope and overall focus of each function over varying time horizons.
Cash management has a limited scope. Its primary function is maintaining short-term liquidity to cover day-to-day operations. Treasury management, on the other hand, must take a much broader view. The treasury division is involved with long-term financial planning and is tasked with developing detailed investment strategies and robust risk management practices.
Cash management procedures cover deposit accounts, bill payments, short-term receivables and liquidity modeling (forecasting).
Treasury procedures, on the other hand, include capital investment management, formulating and managing long-term debt strategies, and meeting the entire organization's wide-ranging capital needs.
Integrating Cash and Treasury Best Practices
We've seen that cash and treasury functions are related functions. It's important to realize, however, that they are also dependent on one another. The proper integration of these critical procedures is key to building and maintaining a sound corporate financial foundation.
When these two elements are working in harmony, the enterprise will:
- Maintain a high level of operational and financial stability. The company's short-term, long-term and intermediate financial needs will be met with efficiency and cost-effectiveness.
- Enjoy financial health over a long time horizon. Investment risks will be anticipated and mitigated.
- Use cash, equity, debt and other company assets to maximum efficiency to reach corporate goals.
Auditing Cash Management Systems
The best way to evaluate a cash management system is to have robust audit procedures in place. The baseline objectives of a cash audit are to verify balances, ensure the accuracy of transactions, and find any misused or off-ledger accounts.
Among many other things, an in-depth audit will involve reviewing copies of all bank statements, reconciling book balances to the general ledger, comparing (verifying) balances with statements, checking for calculation errors, demanding explanations for inaccuracies, and searching for unpaid or outstanding checks.
As an audit progresses, it will become necessary to review all cash receipts and disbursement records for the time period being checked and to look for any delays between book and bank deposit times.
A proper audit is a detailed audit. Everything related to cash management should be examined. These other items can include the petty cash box (if any), check acceptance procedures, receipt, collection and storage procedures, and reconciliation procedures.
Most organizations find it helpful to have professional audit tools and step-by-step templates available to ensure a proper and comprehensive audit.
Auditing Treasury Systems
Treasury systems can be audited in conjunction with cash systems audits or separately. However, a complete treasury system audit will necessarily include a close look at the cash management system.
In principle, a cash accounts audit works the same as a treasury audit. However, a treasury audit is much more involved and examines many more systems.
A comprehensive treasury audit will necessitate reviewing all corporate financial policies and procedures— including foreign exchange and foreign banking policies, if they apply. Auditors will need to interview key personnel who work in any aspect of financial operations, most importantly, the corporate treasurer and the management team of the accounting department.
All wire transfers–in and out–will need to be scrutinized and brokerage account statements will need to be reconciled and tested for accuracy.
When actionable items are identified, follow-up reviews should be scheduled as soon as possible. Inaccuracies should be reported up the chain of command.
Professional Tools, Audits, Templates and Questionnaires
Building, maintaining and auditing a high-quality cash and treasury management system and adhering to cash and treasury best practices can seem daunting even for experienced accounting and financial professionals.
Learn more about cash and treasury best practices by exploring these related tools on KnowledgeLeader: