Whether it’s making or spending money, businesses of all sizes are looking abroad for new opportunities to maximize their profitability.
It might start with hiring an overseas contractor or getting raw materials from a resource-rich country at a discount. Then maybe it’s making a sale or opening up a new location and the next thing you know, the finances have become incredibly complicated.
Save yourself the potential of a headache down the line by knowing the ins and outs of global treasury management before you start operating abroad. Getting familiar with its core tenets and establishing them within your business guarantees you’ll start expanding on the right foot.
What is global treasury management?
Global treasury management refers to a wide array of practices surrounding the financial management and activity of a business abroad. This includes monitoring a business’s investments, cash flow, cash balances, and other financial activity in other currencies, in other countries.
The purpose of global treasury management is to account for foreign exchange rates and understand their impact on the business’s financial position.
By understanding the impacts of foreign exchange rates and global regulatory compliance, the business can optimize its practices such that it minimizes risk, maximizes cash held, and abides by necessary rules.
Key aspects of global treasury management
To better understand global treasury management, it’s best to look at its seven key components.
Cash management
When cash is spread across countries and foreign currencies, the business needs to optimize the balances held. Hold too much money, and you may lose cash from exchange rate fluctuations. Hold too little, and you may face a cash shortage and be unable to cover bills.
Knowing how much money is needed and when keeps business on top of outgoing payments without bringing on the risk of a change in exchange rate costing them money.
Risk management
All aspects of running a business come with their risks, but there’s more risk when that business is international. Foreign regulations are stricter, and payment systems are more complicated and costly.
Most importantly, exchange rate fluctuations could make foreign payments more expensive than accounted for. By managing the risk the business is exposed to, you limit the potential impact on the bottom line.
Funding and capital management
It’s common to take on a loan or line of credit to fund business operations or access capital that leads to growth. Funding and capital abroad come with additional complications as that debt needs to be tended to from foreign cash accounts and has different interest rates.
Banking and payments
Banking abroad means establishing new relationships with global banking partners. You’ll need to find new banking solutions and hold cash in those accounts, some of which may have minimum account balances.
This includes understanding new payment solutions, such as international wire transfers or payments that are unique to that country.
Foreign exchange management
Foreign exchange rates are constantly moving and vary across different financial institutions. This means the exchange rate offered by one bank will differ from another bank.
Knowing both when and how to exchange funds across currencies will have a real impact on the cash you hold and the net income you report.
Financial reporting
There are two aspects of financial reporting to consider with global treasury management:
- Internal reporting: Financial reporting that is used within the business for understanding its financial position
- External reporting: Financial reporting that is used for reporting to external stakeholders like regulatory bodies, creditors, and investors.
The key difference between the two is that external reporting must adhere to certain standards, such as Generally Accepted Accounting Principles (GAAP). While internal reporting is completely customizable, external reporting must follow rules when used outside of the business.
Technology integration
Technology plays a valuable role in global treasury management as it simplifies and streamlines every aspect of the practice. Knowing which tech to invest in and the purposes it serves, you’ll be able to focus on the international operations, not international money management.
Benefits of global treasury management
Implement effective global treasury management strategies, and you’ll enjoy these benefits.
Improved Cash Flow
Every dollar held unnecessarily in a foreign account is a dollar that can’t be reinvested in the business. Similarly, lacking the funds in a foreign account to cover payments puts the business in a cash constraint, potentially taking a hit on fees to expedite payments or transfers.
Reduced Financial Risk
Minimize the risk of holding and using foreign currencies by understanding the impact of exchange rates. Part of global treasury management involves effectively managing account balances and payment amounts to prevent an exchange rate swing from impacting the bottom line.
Cost Savings
Businesses need to maximize profits by managing their costs. Mismanaging foreign transactions and accounts leads to losses with transaction fees, account fees, and subprime exchange rates.
Strategic Decision Making
Strategic decision-making relies on accurate information to be effective. Without global treasury management, you lack information on the true value of foreign assets held and the true cost of foreign transactions.
Compliance
Understanding the financial rules and regulations of operating abroad is essential to remaining compliant, avoiding potential fines or penalties. If you want to conduct business abroad, you need global treasury management to ensure you’re following the rules.
Domestic vs. global treasury management
Domestic and global treasury management are both focused on understanding a business’s financials with depth and precision. Where they differ is the scope.
Global treasury management centralizes information and decision-making across all countries of operation. Meanwhile, domestic treasury management is purely focused on the local operations.
If an American business also had a base of operations in Ireland, domestic treasury management would only consider American assets, liabilities, revenues, expenses, and cash flows. Global treasury management would look at the same across America and Ireland.
Challenges in global treasury management
There are three main challenges businesses face with their global treasury management practices.
Managing exchange rates
Exchange rates are constantly fluctuating. Knowing when to take advantage of a favorable exchange rate is crucial in maximizing the returns on your operations.
Standardize a process and cadence for updating foreign exchange rates based on the volume of activity being done abroad and the volatility of the currency.
Making international payments
You have a full suite of options for domestic payments, but less so when sending or receiving money abroad. You should know what options are available to you and whether it’s best to operate a local bank account for foreign transactions. For example, wire transfers can cost up to $50 per transaction, a tough pill to swallow on repeated payments.
Understanding the rules and regulations
Make one misstep with international activity, and you could face unfortunate fines and penalties. Always do your research before sending or receiving money abroad, and check whether you have additional tax and reporting responsibilities based on that.
Ways to improve global treasury management
For businesses dipping their toes in global operations or looking to better their processes, start by looking at these four strategies for improvement.
Keep all treasury management centralized
To reduce any noise or miscommunication, global treasury management should be centralized in a single location. Keep all treasury functions, from risk management to strategy and execution, in a central hub.
As benefits, your decision-making becomes streamlined, your strategy is more adaptable, and your visibility over every aspect of your global treasury management is improved.
Adapt forecasts and budgets with exchange rates
Foreign exchange volatility can seriously hamper your profitability if not managed properly. Financial forecasts and budgets should be updated with the most up-to-date exchange rates on a regular basis.
When the forecasts and budgets are updated, decision-makers should analyze the changes and see whether a pivot in strategy is necessary to maintain efficiency.
Regularly update your reporting
Global treasury management needs to be adaptable to the ever-changing information that’s available. This means regularly updating reports on cash balances, foreign exchange risk, and investment performance.
The more a business integrates real-time data and automation in its practices, the more it can depend on making impactful decisions on the latest information.
Minimize new accounts at new institutions
Each new account opened at a new financial institution is another account to manage and centralize. This quickly becomes inefficient for your workflows and costly with account fees.
Instead, look into your current bank’s offerings or consider virtual accounts that allow you to manage many different currencies under a single account. This keeps fees in check, improves visibility, and streamlines reporting.
Using automation to streamline global treasury management
With so many moving pieces in global treasury management, leveraging automation is key in keeping workflows smooth and streamlined.
Manual processes like reconciling accounts or tracking foreign exchange rates are time-consuming and error-prone. Plus, if they’re a headache at a small scale, they’ll only get worse as you grow.
Modern treasury management systems (TMS) are tailored for this exact situation. But if the costs or technical aspects of a change are holding you back, there are smaller changes you can make with big returns.
Look to use an accounts receivable platform that converts multiple currencies, accounts payable software that offers international payment options for ease of access, and expense management tools that keep reporting clean and updated in real-time.
For each of those problems, BILL has a solution. And if you want to see how, simply request a live demo to see how one small change can make a world of difference when doing business abroad.
