What Is a Treasury Management System?

  • By AFP Staff
  • Published: 4/3/2024
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A treasury management system (TMS) is an enterprise-wide solution that can oversee a range of financial activities at a global scale, including global liquidity management, FX transactions, financial risk mitigation, derivatives and bank account access.

Although standalone TMS solutions exist, the landscape has seen a trend toward integration within enterprise resource planning (ERP) systems, where treasury modules are becoming integral components of service offerings.

What Does a Treasury Management System Do?

TMSs have many functionalities that are of value to treasury professionals; however, the seven listed below are considered the primary functions:

1. Cash Management

The TMS collects information for use in daily cash management functions — such as cash positioning, funding and investment — through direct bank connections. It gathers banking data through standards like SWIFT, BAI2 or BTRS, thereby streamlining connectivity. In this way, it handles bank communication and identifies issues like missing reports or incomplete files.

TMSs reconcile cash positions based on bank data and forecasts, offering real-time views across accounts and geographies. Cash flow forecasting, crucial for liquidity management, benefits significantly from TMS capabilities, including input integration, validation and consolidation.

In-house banking, a feature offered by many TMSs, allows companies to manage banking functions internally for their subsidiaries. These functions include payments, cash pooling, intra/intercompany transactions and FX. Technology-enabled IHBs offer these benefits without costly infrastructure, facilitating strategic cash management and centralizing operations, allowing treasury to function independently. Top of Form

2. Payments

TMSs streamline basic payment processes by connecting to multiple banks and offering payment origination functionality. Some companies extend TMS usage beyond treasury transactions, using it as a payment hub to collect and transmit payments across the organization, facilitated by special workflows within the TMS. Multilateral netting, a cost-effective tool for managing intercompany payments, is supported by most TMSs, allowing offsetting of receivables with payables to process payments efficiently. Even if netting is handled externally, TMSs provide access to transaction information for posting and reporting.

3. Foreign Exchange (FX)

TMSs provide FX modules for companies dealing in multiple currencies, offering spot and forward FX transactions and managing non-deliverable forwards, options and related products. These modules also track FX exposures, provide mark-to-market valuations for derivative contracts, handle derivatives accounting and reporting, and perform hedge effectiveness testing. Transactions can be imported from single or multiple bank portals, aiding reconciliation and reducing manual data entry.

4. Debt & Investment Transactions

Many TMSs offer features to manage debt and derivative transactions, covering short- and long-term borrowings, letters of credit, lease contracts and specialized functions like calls and puts. TMS base modules typically include a basic range of debt transactions, with additional capabilities available at an additional cost. TMS investment modules track and manage investment activity, allowing users to handle portfolios of short- and long-term investments, including various types of contracts and securities. Similar to debt management, base TMS packages include limited investment functionality, with additional features available as needed.

5. Accounting & G/L Interfaces

By and large, TMSs allow for automatic posting of transactions to the general ledger (G/L), generating dual and multisided entries by combining bank and internal transactions and enhancing straight-through processing potential. Certain systems enable independent reconciliation of bank transactions to accounting entries; each day, imported bank transactions are matched against G/L entries using user-defined rules, facilitating accurate bank-to-book reconciliation.

6. Bank Account Management

Best treasury practices involve secure management of bank account details and signatories. Many TMSs offer approval workflows for managing signature authorities and integrate electronic bank account management (eBAM) capabilities. Some TMS vendors also provide analysis and monitoring of bank fees, particularly for U.S. banks, to compare against internal benchmarks.

7. Reporting

Treasury management demands visibility into cash positions, bank activities, risk exposure, payments, forecasts, investments and debt. TMSs offer automated, tailored reports for specific areas, such as bank balances, payments and audit reports. Dashboards are also provided, consolidating multiple reports for a comprehensive overview of treasury operations on one screen.

Why Do You Need a Treasury Management System?

In today’s business environment, a TMS is essential for efficient treasury management. Treasury professionals depend on data to acquire insights into cash positions and risks, which are vital for informed decision-making. Integrating treasury operations with other critical functions, like accounting, A/P and A/R, ensures a cohesive flow of information across departments and enables a holistic approach to financial management.

Originally developed to streamline bank access, the TMS of today offers expanded functionalities covering debt, investments, FX, letters of credit and bank communications. In summary, a TMS is indispensable for efficiently managing treasury operations, integrating with other departments, and leveraging technology to drive strategic value for the company.

How to Choose the Right Treasury Management System for Your Business

Choosing the right TMS requires consideration of all associated costs, including initial, ongoing, fixed and variable.

  • The initial costs encompass system selection, software, hardware, installation, implementation and training. These expenses can be significant and should not be underestimated.
  • Ongoing costs include licensing, maintenance and software usage fees.
  • Fixed costs involve administration, overhead, software maintenance, licensing and upgrades.
  • Variable costs consist of transaction service charges and system security expenses.

Careful analysis of these factors is essential for selecting a TMS that aligns with your organization's budget and needs. In general, there are three types of TMS systems:

  • Installed systems typically entail higher initial costs and resource commitments during implementation. Although ongoing usage fees might be lower compared to alternative solutions, users are usually responsible for upgrading the system and managing interfaces with third parties.
  • SaaS solutions, for bank applications or TMSs, often come with low initial and upgrade costs; however, heavy users may face significant ongoing transaction costs. There are limitations to this type of solution, which users will have to accept, but it is providers who typically handle connectivity with third parties.
  • Treasury modules within ERP solutions can be effective, especially if the company already utilizes an ERP system. However, they may lack certain functionalities, necessitating the purchase of additional specialized software to address any deficiencies. Plus, due to their broad organizational scope, ERP systems can be challenging and expensive to implement initially, as well as to upgrade.

When choosing a TMS, it's important to consider more than just the financial costs and benefits. Many crucial benefits of a TMS are qualitative, such as process automation, user-friendliness, ongoing support availability, enhanced controls and security. Increased technology utilization should enable the organization to reduce the number of full-time employees dedicated to process management, freeing them for more strategic activities; therefore, it is essential to conduct a thorough evaluation that considers both quantitative and qualitative factors.

Ready to start the process of selecting a TMS?

  • Learn about the latest technologies and trends with AFP’s TMS Buyer’s Guide.
  • Discover and compare treasury technology providers on the AFP Marketplace.
  • AFP members can connect with other treasury professionals within the AFP community on AFP Collaborate to learn about their experiences with specific TMSs.

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