Keys to controlling the health of your treasury (and avoiding nasty surprises)

4 min reading
Treasury / 20 October 2020
Keys to controlling the health of your treasury (and avoiding nasty surprises)
Keys to controlling the health of your treasury (and avoiding nasty surprises)


Treasury management is a critical accounting element for companies, especially small ones. Having a good balance in cash flow transactions – so that they are as well controlled as possible – is crucial for good accounting health. That is why the accounting area is always balancing accounts.

The company’s treasury is responsible for ensuring that funds are available to pay employees and suppliers, either through cash from positive cash flows or from available sources of financial liquidity. Automating this process with tools such as Business Accounts is useful for successfully balancing the books.

Why is it crucial to manage cash flow well?

The main objective of a company’s cash flow is to avoid defaulting on payments while minimizing accounting risk (for example, avoiding running out of funds when paying in a timely fashion) or avoiding losses due to opportunity cost (not investing due to lack of funds).

If the treasury area represents the traffic lights for the company’s finances, shortages of funds are the crashes it is trying to avoid. That is why this part of the company is responsible for balancing inflows and outflows, making decisions such as reducing costs and cutting back when cash flow shrinks, or allocating some monthly funds to projects.

The balance is delicate: it is as dangerous for the net cash position to be positive for several months as it is for it to be negative. An SME that slowly runs out of money is in poor accounting health, but so is one that only accumulates capital without investing or finding other uses for it.

The former leads to accounting collapse if it continues, ending in a scenario where the company can no longer pay its debts and becomes insolvent. But the latter leads to a lack of development by not adapting to new market conditions (e.g. investing in more efficient equipment) while other companies that do allocate funds to innovation will eventually overtake it.

The optimal scenario is one in which inflows and outflows of funds are balanced, with no ‘droughts’ or ‘flooding’, to use a visual metaphor. But it is perfectly normal and natural for cash flows to be negative at particular times (particularly for startups and at times of investment and expansion) and for there to be months with positive flows that aren’t reinvested.

The complexity of coordinating flows

Claves para gestionar tu tesorería

All this requires precious time, to coordinate all the payments and collections, negotiate loan terms suitable for the company’s position, understand when we can relax payment terms for a customer or when we need to be more aggressive, and to know when it is a good time to invest some of our surplus capital, and even to invest when there isn’t any.

The cases and situations are endless, but all of the variables and possible scenarios involving treasury management are based on managing the balance between payments and collections. In other words, balancing average monthly inflows with average monthly outflows.

For example, if a small SME’s income is around €200,000 give or take €10,000, it is highly advisable that indirect costs — those that have to be paid for existing, not what it owes (debts) or its operating costs (direct costs) — should be nowhere near that figure, mainly as a way of anticipating scenarios where there is no revenue or financial capacity.

Many SMEs are swamped with information and put off addressing this until problems appear. Clearly, they risk running out of liquidity due to a lack of foresight or being overtaken by market disruptions that they didn’t see coming. Tools such as BBVA API_Market’s APIs can help reduce these issues.

Business Accounts for banking reconciliation

BBVA API_Market offers all kinds of tools that can be integrated into a company’s business. Business Accounts was created to automate treasury management, manage collections and payments and ensure that ledger 43 (known as AEB 43 because of its position in the Spanish Banking Association rulebook) is updated.

At the technical level, ledger 43 is a specific format for accounting fields. It is crucial for managing companies seeking access to banking products such as loans and credit facilities, as well as changing their conditions, extending them and repayments. It provides an X-ray of the banking situation for internal and external purposes.

The Business Accounts tool can be integrated into your management systems, with the main objective of detecting accounting errors by being able to perform banking reconciliation whenever you want, not just once a day, as is traditional without such resources.

Detecting accounting errors through automation of ledger 43

Automatic accounting reconciliations whenever we need them make it much easier to identify and resolve accounting errors in our bank accounts and our own records. Some of the most common errors identified through this format include duplicated entries, entries that were not made and entries where decimal points moved or the numbers were entered incorrectly, posting €234.00 euros when it should be €324.00, for example.

Being able to analyze accounts and detect these errors is the first step in adjusting the balance of our payments and collections to healthy accounting. If you can’t measure it you can’t improve it. When you have done this homework, you can make decisions about withholding payments until you have sufficient liquidity or repaying debts as soon as inflows permit.

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