How to make cash management work for your company

June 16, 2021 by Mark Davis

Managing a company’s treasury can be a headache for many business owners, and for very good reason. Juggling numbers, analyzing spreadsheets and calculating forecasts are not everyone’s cup of tea.

Yet cash flow management is a subject that’s simply too important to be ignored. A company’s treasury - the amount of cash it has at its disposal - is directly linked to its success and even its survival. Slipping ‘into the red’ can have potentially disastrous knock-on effects: inability to pay suppliers, failure to meet tax obligations, staff redundancies and, in the worst case scenario, bankruptcy. Cash, as they say, is king.

So what exactly is treasury and what can you do to manage it efficiently?

Step this way for help on how to better manage your company’s cash.

I. What is a company's treasury?

Defining “treasury”

To understand how to optimize a company’s cash management, let’s begin with the basics.

The treasury brings together the entirety of the funds available to a business in the short term. These funds can be:

  • Cash held in the company’s current account
  • Cash kept in savings or investment accounts
  • Marketable securities

💡 Useful tip: marketable securities are assets or financial instruments that can be liquidated, i.e. turned into cash, at short notice. For example, a company can invest in another business by buying shares and then selling those shares if it needs the liquidity. It’s a useful way of making profit out of excess cash.

A company can turn to its treasury when it has a short-term need (current expenses, non-forecast costs related to higher sales, increased staff costs during seasonal peaks and so on).

🔔 Careful! Don’t confuse treasury with turnover or profit. 

👉 Turnover is the total amount generated by sales of a product or service.
👉 Profit is what remains once total costs have been subtracted from the turnover. Unlike treasury, it does not take into account the entirety of funds available to a company (think of your marketable securities for example).

How to calculate the net treasury of a company

To determine a company’s financial health, we need to think in terms of net treasury, or net cash, rather than available treasury.

Net treasury is the total value of available funds in a company’s accounts once short-term costs and expenses have been settled. It can be calculated with the following equation:

Net treasury = Available funds - short-term debt

If these terms seem complex, don’t worry. All will be explained!

A company’s available funds are the sum total of all the financial resources that it can access or mobilise to maintain its activity. In other words, it’s a company’s treasury: cash held in savings or current accounts as well as the marketable securities mentioned above.

Short-term debt is the sum total of all the payments a company needs to make in order to finance its continued activity. They include:

  • Staff salaries
  • Purchases ordered from suppliers
  • Rental costs
  • Social costs and taxes (VAT, income or corporate taxes, real-estate contributions etc.)
  • All other short-term costs needed to keep business running (maintenance costs, raw material costs, software, hardware, stationary etc.)

There are three possible scenarios when it comes to net treasury:

  • When the funds available to a company are greater than the short-term debt, the net treasury is positive. It has a positive cash flow and is ‘in the black’; its financial situation is, on the face of it, healthy. It is able to pay all its costs without having to resort to financial assistance from elsewhere. 
  • When the funds available to a company are equal to the short-term debt, the net treasury is zero. Its financial situation is said to be balanced. It doesn’t require any external financial assistance but it remains vulnerable and will be unable to pay any unforeseen or ‘extraordinary’ costs.
  • When the funds available to a company amount to less than the short-term debt, the net treasury is negative. It is in deficit or ‘in the red’. The company lacks financial resources and will need outside financial support to be able to continue to operate.

To better understand, let’s take a concrete example:

Max owns a business specializing in car rentals. His company’s treasury, or the cash available to it (in bank accounts and in marketable securities), amounts to 100,000 Euros.

His short-term debts include social charges and tax, employee salaries and vehicle maintenance and they all add up to 50,000 Euros.

To calculate his net treasury, Max makes the following calculation:

Available funds - short-term debt = Net treasury

  100,000 - 50,000 = 50,000

His small car rental business has a net treasury of 50,000 Euros. His treasury is positive. Max’s company is ‘in the black’ and ready for business.

II. Why is it so important to optimize treasury management?

To many people, treasury management can seem rather dull and time-consuming. However, this effort in the short term is crucial if a business is going to prosper in the long term.

Meeting your commitments

Good treasury management allows businesses to honor their financial obligations on time. It ensures that business owners can pay all their costs, such as staff salaries, supplier invoices and corporate taxes.

Efficient cash management also requires clear visibility of a company’s cash flow. By identifying where and when cash comes in or goes out, businesses can make more informed decisions and financial savings.

Protecting your business from a suspension of payments

Poor treasury management can lead to a highly damaging domino effect.

When a company does not have enough cash in its treasury, it is unable to honor its short-term debts (loan repayments, rent, salaries, supplier costs etc). It finds itself in a suspension of payments and what are known as its ‘current liabilities’ (its debts) are greater than its ‘assets available’ (its treasury).

This suspension of payments must be declared to a commercial court within 45 days of the failure to make payment. The court may then decide to initiate a collective proceeding: either legal redress or judicial liquidation.

  • In the case of a legal redress procedure, a judicial proxy is appointed to help the business owner to find solutions that will allow activity to recover. If the business is judged to be capable of recovery, a redress plan is put in place.
  • In instances of judicial liquidation, activity is stopped for good, the company is liquidated and the proceeds go towards paying outstanding creditors.

III. Tips for improving your company’s treasury

As you’ll have seen, optimizing your cash management is not a subject that ought to be taken lightly.

Sure, not everyone is an expert with numbers and the task requires focus and a solid knowledge of both the company and the industry concerned. But there are steps you can take to make the process perfectly manageable.

Rest assured, good treasury management is really not as complicated as it might seem. 😉

Set up an efficient cash forecast plan

It’s much harder to manage your treasury if you don’t have a plan.

The treasury plan, or cash flow plan, is a table of all monthly revenues and outgoings. Together, these figures allow you to clearly identify your spending points and to know in advance when your treasury might come under pressure.

What needs to go in my treasury forecast plan?

In terms of what money comes into your treasury, you’ll need to include:

  • Turnover (the total amount of money generated by sales of your goods or services)
  • Capital contributions (for example, when an associate injects cash or assets into the share capital of the company)
  • Current account contributions (money transferred by an associate into the company bank account)

When it comes to what comes out of your treasury, include the following:

  • Staff salaries
  • Rental costs
  • Supplier invoices
  • Social charges
  • Taxes (VAT, income or corporate taxes etc.)
  • Other expenses (maintenance costs, equipment, IT costs, stationary etc.)

This is a template of what a treasury forecast plan could look like and you can personalise it according to the needs of your business. Some income sources and outgoings are specific to certain industries and sectors of activity and, if they apply to yours, don’t forget to include them in your plan. Be thorough and update your forecast regularly with new data. Don’t ignore the small amounts as, added together, they may prove significant. 

How can I create my own treasury forecast?

You can create your own forecast using tools such as Excel or Google Sheet, which are suitable for limited monthly cash flow amounts. 

Owners of small- or medium-sized businesses may opt for accounting software that’s more suited to their needs in order to generate their treasury plan.

💡Good to know: once you’ve chosen your accounting tool, you can integrate it into your business account. This will make your accountant’s job easier by providing real-time access to your company’s expenditure. It will also minimize any risks associated with loss of data.

Make monitoring your cash part of your routine with a Qonto dashboard

Keeping a close eye on your cash flow will help you protect the health of your company in much the same way as regular check-ups with a doctor can protect your physical health. Monitoring your cash position should be part of a steady routine that is simple and sustainable in the long term. This can involve:

  • Categorizing your transactions, both for revenue and expenditure, as you go along on a day-to-day basis.
  • Checking your balance every day.
  • Taking a few minutes each week to examine your cash flow to make sure that the incomings and outgoings you expect to see are actually confirmed in your account and that you’ve not forgotten anything.

You might want a quick check of your spending in a given period of time, or may need to see just how dependent you are on any given customer. Filtering your cash flow items can allow you to get into the detail very quickly. The dashboard on your Qonto app allows you to do this, so you have an ‘at-a-glance’ visibility over what is coming in and going out of your account. The filters are intuitive so you don’t need a finance degree to navigate it.

Manage unpaid invoices

You may have come across a situation where one of your customers paid you late, or even not at all. Pay attention to such cases, as unpaid bills can have a considerable, negative impact on a company’s treasury. If they start to add up, it may become difficult for you to honor your financial commitments.

Take care to ensure these types of situations don’t occur too regularly. To be proactive in this respect, there are a few concrete steps you can take:

  • Find out information about your customer before completing a transaction
  • Take out an insurance plan that covers you against the risks of non-payment
  • Use a debt-collection software
  • Reduce the payment-due time and/or ask for a down-payment

As soon as you become aware of a late payment, don’t hesitate to send a reminder. Very often, a quick call or an e-mail is sufficient to resolve the issue. If that’s not the case, you can send a formal notice. This letter carries more weight than a simple reminder and is the final amiable measure you can take before resorting to legal action. A formal notice signals your intention to go to court if the situation is not remedied.

Negotiate contracts and payment deadlines with your suppliers

It’s important to review your supplier contracts regularly. You might want to ask yourself the following questions:

  • Do I still need this contract to grow my business?
  • Have I properly compared this offer with those of other suppliers?
  • Am I satisfied with the service provided?

This exercise might take time but it’s a good chance to re-assess your current situation. Some of your contracts may have been signed several years ago and could no longer be what your company needs. It might be the right time to bring competitors into play and earn yourself a reduction in the price you pay.

Similarly, payment deadlines are another issue that you can re-negotiate with your suppliers.

Optimize your stock management

Another useful way of getting the most out of your treasury is through efficient management of your stock. 

Some companies struggle to liquidize all their merchandise and find themselves selling unsold stock at reduced prices, or even at a loss. That’s not to mention warehouse costs, which can often be considerable. The result is that the company’s growth is stunted and, in turn, the treasury can take a hit.

To avoid, or at least alleviate this problem, it’s important to be in full control of your stock. You can do this by identifying the top sellers as well as those products that perform less well. This is a good way of staying smart when it comes to stock control.

You may also want to choose alternative stock management methods such as what’s known as the “lean” or “just-in-time” principle. This approach allows you to keep inventory costs down and minimize unsold stock. It’s not a solution made for all sectors, however, and can entail risks like running out of stock so it’s an option you may want to think over thoroughly before selecting. 

Spread you expenditure across multiple accounts

Being in control of the treasury is something that we take very seriously at Qonto, which is why we’ve developed a feature specifically for that purpose: the multiple account option.

Splitting your items of expenditure across multiple accounts is a cunning way of driving down costs and protecting your treasury. It allows you to:

  • Categorize your items of expenditure (travel expenses, social charges and taxes and so on) and put cash aside
  • Allocate separate budgets to your various teams and gain better visibility over the expenses of each team
  • Separate your activities if your company operates across different sectors

You can create up to 5 different current accounts, each with its own payment card and dedicated IBAN. It’s a very simple, two-click operation.

And there you have it! Your treasury, your cash, is the lifeblood of your business and you have all you need to stay fully in control of it.

You may also like...