Treasury function must focus its efforts to support the business model of the specific company and ensure that Treasury strengthens and protects the ability of that company to move forward.
By Ganesh Jha
In the current dynamics role of treasury operations have become lot more crucial and wasn’t required this much ever. Against the backdrop of the challenges and uncertainty of the current business environment, the picture that emerges is of level-headed stewardship of company funds and the preservation of capital. The role of Treasury, which primarily focuses on the planning for, and management of, cash needs of a business, includes the internal processes and external banking relationships that facilitate that cash management. The responsibility for these financial processes includes the management of the financial risks a company is exposed to, from counter party risk to market risk.
Although small companies don’t typically have a formal treasury department, VC-backed firms in particular require effective cash management for rapid paced growth. These functions still occur but are often taken on by accounting and payroll teams. How relevant and crucial is treasury management for these VC funded, high growth startups ?
Treasury function and Organization
Treasury function must focus its efforts to support the business model of the specific company and ensure that Treasury strengthens and protects the ability of that company to move forward. Every company has a different level of requirements, branching out from its business model.
A very small team probably one or two member has very crucial to play in the rapid expansion at the company. The group’s responsibility includes the:
- Forecasting of cash needs, and
- Taking the friction out of payments by managing the banking portal.
- Ensuring reasonable yield from deposits.
- The primary goal of the treasury function is risk management and the preservation of capital.
I remember one of the treasury guys saying this to me “As a treasurer, you don’t get promoted for increasing yield, but you do get fired if you lose capital”.
The advantage of having a more formal treasury function is the ability to assess best practices through the treasury lens, understanding what can be done to strengthen, preserve and protect a company’s capital.
As a high growth startup, you’re probably going to have more money in the bank, and investing the money is important. The more access you have to capital, the more ways you have to grow the balance sheet and grow the company.
Cash Management and Banking Relationships
As economy becomes challenging, cash management becomes critical. I believe this is especially important at small companies. You need to manage cash flow on a day-to-day basis, moving money around as needed. It’s not just a matter of today’s cash position but also the forecast for cash. Now may be the time to start using tools like real-time payment systems for accounting automation and payroll.
In terms of maximizing yield on deposits, explore beyond Current accounts and Bank FDs. There are products available which invest money in Govt Securities and Money market funds and are fully liquid. Your funds are available in a day or two max. Focus on getting the maximum yield on your money.
Liquidity is king and you need to have access to capital when you’re running a business. Preserving capital ranks higher than increasing yield, as said “Return of capital is important than Return on capital”. Bottom line is that Treasury is there to support, not to be an asset manager.
For a large company, earning an extra few hundred thousand Rupees might not be worth the extra work and potential risk, while for a smaller company, that amount could cover the salary of a critical resource or their marketing budget for the whole month.
Having a formal treasury team in an organization is a luxury enjoyed by larger companies. Smaller companies must still perform many of the same functions of a treasury department using both internal and external resources who will have other competing responsibilities. Adopting a “treasury lens” can help a company think differently about the processes, risks, and opportunities associated with ensuring that a company’s cash needs are met and that investments fit a company’s overall objectives.
(The author is CEO & Co Founder – FINOFII. Views expressed are personal and not necessarily that of financialexpress.com)
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