Demystifying Treasury

A treasury strategy is a practical framework for managing cash, planning for the future, funding business ambitions and navigating financial risk. It is relevant to businesses of all sizes, not just large multinationals. This guide breaks treasury down into four core pillars: cash management, planning, funding and risk. Written by Ben Leadbetter ACA CTA FCT, Fellow of the Association of Corporate Treasurers and founder of The Lumen Collective.

The term ‘treasury strategy’ often conjures images of small specialist finance teams in large multinationals playing in the world of dark arts and obscure finance activity. For many business leaders, it can feel like something distant, overly technical and not obviously relevant. But treasury in its simplest form is about how a business manages its cash, plans for the future, funds its ambitions and navigates financial risk. This short explanation will hopefully provide a practical framework for businesses.

Far from being a luxury, a structured approach to treasury is a source of resilience and control. And for many businesses, it can become a key source of competitive advantage.

Here’s how to approach it across four core pillars, cash, planning, funding, and risk.

1. Cash is King

Cash is fundamental to business, it’s what keeps all aspects of operations moving. But managing cash is not just about knowing the balance, and having a high cash balance is not necessarily a good thing. It’s about understanding the levers, timing, the most effective utilisation and building an infrastructure that allows businesses to optimise it.

To manage cash effectively, there are a few essentials:

• Real-time visibility
  Implement systems to monitor cash daily and provide insights into the key drivers. This enables informed decisions and reduces firefighting.

• Operational efficiency
  Review internal processes to ensure cash is being utilised effectively. This includes invoicing, billing cycles and supplier terms. The goal is to shorten the time to get paid and reduce the holding period of inventory, whilst increasing the time for making payments. This will unlock liquidity without external funding, sometimes you’ll hear this labelled as ‘optimising working capital’. Using external funding will reduce profits due to fees and interest.

• Defined working capital needs
  Determine the level of cash required to operate the business comfortably. Excess idle cash may indicate inefficiency, the business could be generating more profit. Idle cash could be used to fund better terms with customers and suppliers, increasing demand or lowering costs.

Professional insight: Create visibility, understand the drivers of business cash, make simple operational changes before solving the problem with funding

2. Planning to Creating Headroom for Smarter Decisions

Planning within a treasury context is about being prepared, so the business can respond confidently to uncertainty, growth or disruption. Time for planning in any business feels short, but it must be seen as an evolving and iterative process. With consistent efforts and dedication it will develop over time to be a powerful tool.

Some practical steps to start the planning process and infrastructure:

• Align cash flow with business objectives
  Expansion, hiring, product development all require cash (capital). Planning ensures the business can meet these commitments without compromising day-to-day operations.

• Build scenario-based forecasts
  Build financial modelling for your expected performance, keep it simple and invest time in the fundamental business assumptions and drivers. And then tweak the key assumptions and drivers to create upside and downside cases. The planning process should not identify anything unknown, it allows the business to reflect its vision in financial numbers and importantly challenge key assumptions. This will help shape strategy and objectives.

• Prepare a contingency plan
  Once the business is aware of the downside possibilities, it is important to consider the contingencies, sometimes known as mitigating actions:

  • where are the sources of emergency liquidity;

  • what are the internal levers to preserve cash; and

  • what buffer would be required to remain operational in a downturn.

Professional insight: Planning is an iterative process which develops into a competitive advantage with consistent effort. It is a practical mechanism to implement a vision, challenge assumptions, evolve a strategy and plan for undesired events.

3. Funding to Meet Objectives

Access to funding is a common challenge for businesses. It is not just about availability, but it is also suitability. Suitability has a multitude of parameters, aligning availability and suitability is the key to unlocking successful funding.

Some of the key considerations are as follows:

• Establish relationships early (availability)
  Avoid seeking funding under pressure, as there will be negotiations. Being proactive will put the business on the front foot and avoid ceding leverage in the negotiation. Build rapport with lenders and investors, find the right communities and build a trusted network. Communicating plans to a strong network will ensure the right facilities are in place well in advance of need.

• Match funding to purpose (suitability)

  Funding is required for different time horizons, depending on the business objective or problem at hand. Short-term needs are best funded by banks and specialist industry finance providers. Whereas longer-term needs typically require a strategic partner that buys into the long-term vision of the business. Be aware of covenants, short and long term funding may impose financial and non-financial requirements or restrictions.

  • Short-term needs: such as working capital requirements from customers, suppliers and inventory.

  • Long-term needs: capital investment, R&D and business expansion.

• Debt vs equity (suitability)
  This is the age-old question in relation to business funding, sometimes known as ‘capital structure’. There is a trade-off between preserving ownership (equity) and cash flow obligations (debt). This should be considered part ‘art’ and part ‘science’, as each business is slightly unique and there is not necessarily one right answer. Debt adds financial risk to the business, but can generate greater returns for the equity owners. Much will depend on the risk appetite, ability to manage the risk and external risk factors.

Professional insight: The best time to arrange funding is before you need it. A pro-active approach to build a network will ensure availability. The planning process will help a business identify the most suitable options. It is always worthwhile engaging your business network and advisers to determine the most suitable funding structure, as it can be unique to all businesses.

4. Risk Management Allows Focus on What Matters

Risk and return are commonly seen as inextricably linked for businesses. Financial risk is an unavoidable part of running a business. The skill to set a risk appetite and manage financial risk effectively will create a competitive advantage, increasing cash, profits and return.

Risk management should not be an after-thought. Like the planning process, risk management will develop with consistent effort into a very powerful business tool. It can enable businesses to consider new horizons and possibilities, as well as improving the management of day-to-day operations. Good financial risk management will optimise current operations and help glean insights into the future.

A simple approach to start the risk management process:

• Define a concise risk register
  Focus only on the handful of financial risks that could materially impact the business. Avoid long, unmanageable lists. The list should name the risk, the mitigation plans and triggers for action. Examples might include:

  • Customer concentration. Diversification target in the sales plan, credit limits per customer, tiered payment terms for larger accounts. Trigger action: if the top customer moves above 25% of revenue, or the top three above 60%, the diversification plan goes to the board and further volume discounts to that account are paused.

  • Late payment. Credit checks at onboarding, credit insurance on the largest exposures, direct debit as default, a clear escalation ladder. Trigger action: if debtor days exceed 55, or any single invoice moves more than 30 days overdue, escalation goes to the finance team and the credit insurer is notified within policy deadlines.

  • FX exposure. Match currency of costs to revenues where possible, forward cover known transactional exposures, never speculate on the balance sheet. Trigger action: if unhedged net exposure exceeds 10% of forecast quarterly gross profit, or a committed foreign-currency contract exceeds an agreed pound threshold, a forward is put in place within five working days.

  • Loss of funding. Maintain a relationship with at least two lenders, monitor covenant headroom monthly, keep a 13-week rolling cash forecast current. Trigger action: if covenant headroom drops below 15%, cash runway below four months, or a facility moves within six months of renewal, refinancing conversations start with the backup lender and working capital actions tighten.

  • Payment fraud. Dual authorisation above a set threshold, no changes to supplier bank details without a callback on a pre-verified number. Trigger action: any request to change supplier bank details, or any payment instruction outside the normal pattern, halts the payment and forces verification through a second channel before release.

• Set tolerances and mitigation plans
  For each risk try to quantify the impact and likelihood on a scale. Monetary value (£) and probability (%), this enables quantification of the risk. There will be estimates, they will become more refined as the business and the process matures. Create practical mitigation actions. Consider cash buffers, contractual protection, insurance or hedging to reduce the score (£ & %).

• Expansion and change events
  If a business is going through a significant change or period of growth, its risks and ways of managing will likely need to change. This should be a trigger for considering planning but also very importantly in the near-term risk management. Take international expansion as an example, there are numerous financial risks that need to be considered such as FX volatility, local banking constraints and tax rules.

Professional insight: Businesses will not be able to eliminate risk. The skill of managing risks can create significant competitive advantages and therefore value. Identify the risks and have a practical plan when things go wrong.

Treasury is Strategic Finance

Treasury is about optimising the present, both operations and financial risk to support fundamental business objectives. Also importantly, treasury a forward-thinking mindset, where consistent effort in processes and approach will develop into a competitive advantage.

Treasury objectives are fundamentally aligned to the strategy of any business.

• Improve financial visibility and optimise cash flow

• Support planning and decision-making

• Build a funding structure with a strong network and the right type of facilities

• Reduce operational issues in times of volatility or changes in the business

FAQ Section

What is a treasury strategy?

A treasury strategy is a structured approach to managing four core areas of business finance: cash (optimising liquidity and working capital), planning (scenario-based forecasting and contingency), funding (matching the right type of capital to business needs) and risk (identifying, quantifying and mitigating financial risks such as FX exposure and counterparty risk). It provides the framework for informed financial decision-making.

Do SMEs need a treasury strategy?

Yes. Any business that manages cash, has borrowings, holds surplus funds or trades in foreign currencies is managing treasury risk whether it has a formal strategy or not. A structured approach ensures these risks are identified and managed proactively rather than reactively. The complexity of the strategy should match the complexity of the business.

What is the difference between treasury and accounting?

Accounting records and reports on financial transactions that have already happened. Treasury manages the financial resources and risks that affect the future: cash flow, funding, investment and financial risk. The two functions are closely related but serve different purposes. In many SMEs both are handled by the same person, which is why a fractional finance professional with treasury qualifications can add significant value.

How do I start implementing a treasury strategy?

Start with visibility. Implement daily cash monitoring, understand your key cash flow drivers and map your financial risks. Build a simple cash flow forecast and identify your funding sources. From there, develop a risk register covering the handful of financial risks that could materially impact your business. The framework develops over time with consistent effort.

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