How Treasury Management Helps Protect Your Cash and Drive Yield
This article was updated June 23, 2023.
Protection of cash within your business is always critical, but it’s especially key in times of disruption, whether from market volatility or uncertainty in the banking sector.
It’s important for private businesses to consider cash flow and treasury management best practices that are commonly employed by large public companies, endowments, and government entities.
By definition, treasury management is the act of managing a company’s daily cash flows and larger scale decisions when it comes to finances to achieve strategic and operational objectives. And the way many companies implement a treasury management function is through the use of an investment policy statement, which is also known as an IPS.
Simply put, an investment policy statement is a comprehensive framework that outlines the strategy for your investments, roles of those involved, and expectations for monitoring and benchmarking the strategy. Within this treasury management function, it’s important for the company’s IPS to have depth and understanding within the cash asset class.
Following, you’ll find background and next steps to build your strategic investment policy statement:
- What is treasury management?
- Why is treasury management critical?
- Is treasury management the same as cash management?
- What is treasury management as it relates to banks?
- How to create a strategic investment policy statement in 6 steps
What Is Treasury Management?
A treasury management function includes strategic management of your cash, cash flow, and excess liquidity. Having this process in place enables you to take a long-term view that aids in strategic considerations about how you’re managing your liquidity.
This may include the management of your:
- Cash and cash flow in alignment with your organization’s goals and tax planning
- Liquidity through a defined decision-making process
- Controls and transparent reporting to keep the implementation of your strategy on track
For financial managers, it’s important to think about your decision-making and governance processes. Through those processes, the data you collect allows you to create an investment policy statement to utilize through marketplace disruption.
Large companies prioritize treasury management. This is one business approach that doesn’t discriminate based on size. For small to middle-market companies, you can implement similar best practices from those world-class organizations to manage your cash, cash flow, and excess liquidity.
The reality: Some organizations haven’t prioritized their treasury management function, and that could be a key contributor in the disruption affecting today’s banking industry.
Addressing treasury management going forward could help put controls in place geared toward keeping your liquid capital safe. But remember that it isn’t solely to provide an additional layer of safety. Organizations implement these strategies because they could pay off via higher yields on cash.
You can organize around your capital structure and work toward increasing your return on investment (ROI) with strategic reserves. Also, the yield curve materially adjusted in the past year when the Federal Reserve started raising interest rates. This allowed businesses to seek stronger ROI on their cash. That showcases a current marketplace disruption that could result in opportunity.