I love the term treasury management. As a young accounting professional, I first heard the term while doing bank auditing. When I started my CFO practice, I adopted that term. John Orscheln was the third or fourth client I picked up during the first few weeks of my launch, and I still remember him saying of the term, “That’s so cool.” After that comment, treasury management stuck in my financial vernacular.
What Is Treasury Management?
Let’s start with a working definition. nearly every bank has its own definition, but here is one from Nomentia that I like:
Treasury management is the term for all the activities and processes involved in managing a company’s or organization’s money.
https://www.nomentia.com/blog/treasury-management
While this definition is short and presumably requires no interpretation, a shortened version could easily be treasury management is short-term cash management.
Additionally, the purpose of treasury management is to ensure 1) cash transactions are handled efficiently and effectively and 2) there are no liquidity disruptions on the horizon.
Three more questions need to be addressed before we tackle small business treasury management.
Treasury management starts with identifying every aspect and process involving incoming and outgoing cash. That includes but is not limited to AR, AP, LOC draws and pay downs, payroll, client down payments, and customer refunds.
Each process is carried out rigidly with simple checklists executed consistently by trained team members.
All treasury management processes are completed daily at the same time each day.
When this does not occur, symptoms include:
- leadership apathy and/or ambivalence
- lack of training
- wrong team members doing the work
- disregard for the treasury management discipline
One of the biggest mistakes that small businesses make is that they turn over all treasury management activities to the accounting manager. That’s problematic.
The field of forensic accounting teaches the need for cash segregation of duties. Accordingly, cash management activities are performed by a designated accountant and someone outside their department.
Small Business Treasury Management Activities
Small business treasury management includes a repetitive set of actions performed daily, generally in the morning. There are a few activities that are performed weekly but are deeply intertwined with the daily steps performed by designated team members.
Daily activities include the following:
- Reconciling cash and follow-up on dated in-transit items
- Merchant services payments tie-outs (for retailers)
- Credit card reconciliations
- Drawing on or paying down the line of credit
- Submitting vendor payments that are due upon receipt of invoice
- Recording all vendor invoices received
- Apply cash from customers in AR
- Updating the working capital dashboard
Weekly activities include the following:
- Drawing or paying down the line of credit if not done daily
- Accurately and completely processing payroll (I’m including this even if payroll is bi-weekly)
- Submitting vendor payments that have terms
- Completing the weekly cash flow forecast
For larger organizations, there will be more steps to be performed. For smaller businesses, this list of twelve items fulfills the most critical requirements to ensure cash is managed effectively and efficiently. The cash flow forecast addresses potential liquidity issues on the horizon.
The Biggest Obstacle to Implementing a Treasury Management System
I met Bob Stahl when I was doing detective work on inventory experts. I specifically needed such a specialist for a growing eCommerce brand. I found Bob through a reference of a reference.
About 10 years later, I looked him up because I wanted to interview him for my podcast at CFO Bookshelf. Our topic was S&OP.
One of the biggest insights I gained from that conversation was a discussion about the 60-30-10 rule. For any company embarking on a new initiative, critical success factors are determined by the following:
- data competency leads to 10% of the new initiative
- implementing a disciplined approach leads to 30% of success
- changed behaviors result in 60% of success in the new initiative
Creating the checklist is the easy part of setting up a treasury management process. That’s easy.
However, I had never considered Bob’s 60 percent comment before. Changed behaviors are needed. This applies to any new project or initiative.
In the past, I thought the issue of poor execution was based on the team being overworked with other projects. That’s one reason, but other behaviors that need to be overcome are apathy and ambivalence.
In short, the biggest obstacle to adopting a treasury management system is not a lack of cognitive capabilities. The biggest barrier is the behaviors that are resistant to implementing a treasury management system that continually leads to effective and efficient cash management.
Diane’s Resistance
Dan used to run an electrical contractor firm near Quincy, IL. Even though a prior CFO had helped him in the past, a daily treasury management system was never a priority. Diane was lucky to reconcile cash by the 10th of every month. Vendor invoices were entered into the AP system as time permitted.
When I got involved, all of that changed. Dan loved the process. Diane did not. She had a strong case of administrative myopia. Twenty-five years on the job made her an expert in her accounting office of two people.
Dan and I helped her to understand the importance of these daily chores. But old habits die hard.
Dan was out of the office when I arrived at the contractor’s office to check on the entire team. As I went through our cash flow reporting for the past week, I noticed a large $700,000 cash balance, but our LOC had remained untouched since a few large deposits.
“Diane, why didn’t we apply this cash to the LOC?”
Her response did not surprise me. When she said she needed it for a payroll tax deposit, payroll, and two large vendor payments the following week, I was not surprised.
Was Diane being lazy? Did she not understand the big picture of the business? Was she too busy? Dan didn’t care about any of those questions. Instead, he hit the roof when I discussed it with him.
I suppose his conversation with her worked because we started seeing him moving on the LOC about two times a week thereafter.
As I stated earlier, treasury management is not hard. Changing behaviors is the hardest obstacle to cross with these new habits. By the way, Diane was the accounting manager in this firm. And she’s not alone. I find the greatest resistance to daily treasury management procedures among accounting team members.
Setting Up the Treasury Management Checklist
There is one input and two outputs for setting up a small business treasury management system.
For the input, I highly recommend finding an outsider who has set these up for numerous businesses that don’t necessarily follow a cookie-cutter approach to treasury management.
This skilled financial expert will ask many questions, observe existing critical cash flow workflows, and then start tailoring a system that works for the organization.
Next, the financial expert will create a master checklist for the daily and weekly projects that need to be performed by selected team members. That’s output number one. The second is documenting simple checklists and workflows for each task to be performed.
Performing due diligence on a company’s cash practices and developing checklists mean nothing unless education and ongoing coaching occur. Once the treasury management process goes live, the financial expert needs to stay in place for about thirty days, where they can provide accountability, guidance, and improvements to the checklists if needed.
Incidentally, if you are curious about what a checklist looks like, here is one of mine:
Scorecard History
The goal of any daily activity is mastery. If that’s the goal, what’s the primary aim of the company’s controller or accounting manager? To have a simple tool for coaching and developing team members in these tasks. And that’s where maintaining history is useful, as I show in the following video.
Overcoming Excuses
You have already read about Diane. Let’s see if any of the excuses for not implementing a daily treasury management function apply to my shortlist below:
- Not enough time – if that’s the case, that’s merely a symptom of a bigger problem which could include but is not limited to a lack of staff members, too many manual processes in the back office, or poor processes that need to be overhauled.
- I don’t have a full-time accountant – that needs to be nipped in the bud right now. I taught Brandy how to perform the treasury management function at her husband’s $8 million landscaping organization. Brandy has a degree in marketing, but she was good at following checklists. I’ve mentioned Penny in several blog posts, and she is possibly the queen of treasury management. She is not an accountant.
- It’s too complicated; only big companies do this. Hopefully, I’ve demystified this function which is nothing more than adhering to a daily checklist that can be set up and taught in less than a few hours. Even startups should be doing this.
- For office managers and accountants only, “The boss controls the accounting system.” This occurrence is not unusual, but it’s rare within my client base going back twenty-plus years. My response is the one Dan Sullivan would make, “That boss is a rugged individualist.” I agree, and then I’d add that we need to address what’s driving that behavior for the boss/owner wanting to control the accounting and banking system. This is a no-growth scenario for that business owner who badly needs to let go.
The Benefits of a Treasury Management System
I don’t like hyperbole, and I don’t like overselling tools and concepts, either. However, treasury management systems and processes deserve some worthy praise because of the outcomes they provide.
A few years ago, I worked with a staffing firm that was owed over $340,000 from a large manufacturing vendor. The accounting manager’s excuse for not performing the daily treasury management function was that she was overworked, which means she didn’t care about this critical process. Additionally, her boss never prioritized this process.
Right before the COVID shutdown, I became aware of this balance, with invoices past due ranging from one week to six months. Three people could not figure out the cause when I brought this to their attention, and they were having difficulty connecting with the corporate office to resolve these invoices.
After some additional investigation and some luck, we discovered that all invoices had to be submitted to an online vendor portal. Once we entered the necessary information on their portal, we got our cash about 48 hours later.
Treasury management systems catch issues such as the above immediately, not six months later. Are you expecting an ACH from H.B. Fuller that should have hit your account yesterday? The treasury management procedures ensure these problems are dealt with immediately.
In short, the primary benefit of treasury management is more efficient and improved cash flow. The ultimate outcome for the owner is immeasurable–peace of mind.
The Power of Greenie Boards
Slightly off-topic, but since I mentioned and showed you my greenie board, in the earlier video, here’s what these pilots think of their greenie board.
If greenie boards seem intriguing, be creative as you set them up in your business. These were designed to measure pilot performance on landings. In my example, I applied the concept to a weekly habit tracker. Your mind is your own limit as you set these up in your organization.
Let’s Rank Your Current Treasury Management Process
How would you grade your treasury management function in your small business? I’m happy to connect if you need help.
Still Looking For Help?
If treasury management is something you are interested in, here are some additional articles that address some of the concepts mentioned earlier: