How does treasury management work in a company

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The question of "What is treasury?" can be framed in very general terms.

The question of "What is treasury?" can be framed in very general terms. Depending on the context in which "treasury" appears, it can mean different things. However, it is often used in relation to financial management in a company, which is the focus of this article. However, we also want to tell you where else the term "treasury" is used.

What is treasury management in a company?

Let's start by answering the question "What is treasury management in a company?” First and foremost, it is the management of cash flows and risk management with regard to a company's finances.

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Cash flow management

A cash flow activity occurs every time money is moved from one account to another. In very large companies or corporations, there may be several thousand such cash flow activities per day.

To ensure that the company's finances are balanced and no liquidity bottlenecks arise, such companies often have an entire treasury management department in charge of controlling and managing these cash flows.

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Risk management

The task of treasury management also includes risk management. It must be monitored and planned when which sums of money can or must be transferred.

This also includes assessing whether loans need to be taken out, for example to make a large investment. The preparation of a financing plan and the conclusion of loan agreements with lenders also fall within the scope of treasury management.

What is treasury in accounting and how does it work?

Let's take a closer look at the tasks of treasury management. As we already know, his tasks include cash flow management and risk management. In cash flow management, the treasurer takes care of the following processes:

  • Manage and post receipts and invoices
  • Checking transactions for accuracy
  • Manage and plan cash flows and prepare cash flow forecasts
  • Prepare reports on the company's cash flow for senior management
  • Creating concepts that make cash flow management more efficient and cost-saving (e.g. evaluation of new payment methods)
  • Analysing transactions in foreign currencies and taking measures to hedge them (e.g. hedging)

In the area of risk management, the treasury department has the following tasks:

  • Risk analysis for transactions abroad with regard to foreign currency risks
  • Analysis of interest rates and risks that arise when taking out loans
  • Cost analysis for raw materials and supplies, and assessment of how price fluctuations will affect the company's cash situation
  • Risk analysis of customers regarding the risk of default (e.g. if invoices are paid late or not at all)
  • Creating scenarios that could lead to liquidity shortages and analysing how the company is prepared for certain events

What is treasury in banking?

In banks and other financial companies, treasury management, as defined above, also plays an important role. In the banking sector, it mainly takes care of investment activities.

Real-time information systems are used to monitor and analyse the markets, which is central to pricing the financial products and interest rates offered by the bank. A bank's treasury management designs products for different risk categories that are offered to clients for investment. In all these activities, the focus is always on cash flow management and risk management for the bank. Treasury management is therefore no different from that in industrial companies.

What is a treasury bond?

As mentioned at the beginning, the term "treasury" appears in many contexts. This also applies to treasury bonds and treasury bills. These have nothing to do with treasury management in a company or a bank. They are securities issued by the state that have a fixed interest rate.

Treasury bills are short-term securities that can have a maturity of several days to one year. Treasury bonds, on the other hand, have a longer maturity, usually several years or even decades. Due to their longer maturity, treasury bonds bear higher interest rates than treasury bills.

Since in both cases the state guarantees these securities, it is a very safe form of investment. It is therefore very popular with investors, especially in times of economic weakness, as they guarantee a fixed interest rate and can thus be used to preserve capital.

What is the treasury yield?

For both treasury bonds and treasury bills, the treasury yield is the return generated on the investment. The interest rate for treasury bills is less than 1%, while for treasury bonds it is 3% to 4%. The interest rate is based on the base rate and also depends on the economic situation of the respective country.

In the case of treasury bills, the invested capital plus interest is repaid at the end of the term, while in the case of treasury bonds, interest is usually paid out to investors twice a year.

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