The treasury department’s role has become more complex in recent years, due to increasing regulations, spiraling costs and burgeoning responsibilities.
Fortunately, recent advances in technology have emerged to mitigate these complexities. Through digital advancements, treasurers now have greater visibility and control over their cash position – meaning they are in a better position to put cash to work.
In this blog, we’ll explain how treasury functions can be supported and streamlined in large organizations using technology such as Virtual Account Management (VAM). We will explore how banks can support their corporate customers by implementing these processes.
The role of the treasurer is changing
The role of the corporate treasurer has evolved significantly in recent years. In the past, the role centered around pure risk and cash management. It had a significant emphasis on shielding an organization from interest rate and FX risks.
However, the corporate treasurer of today has a far more strategic decision-making role and often even has a prime role on a company’s board. They are likely to collaborate with various business units, advise senior management and be heavily involved in making capital allocation decisions.
Much of what treasury does affects every part of the company, from sales and supply chain management to accounting and auditing. These skill sets are increasingly in demand to provide analytical rigor and advise corporate leaders and boards of directors on how to best optimize corporate liquidity and ensure holistic risk management.
Without the right technology providing support, this can be a real challenge.
How technology can streamline operations
Companies with comprehensive operations and complex organizational structures may have thousands of bank accounts. A treasurer’s priority should be to manage the company’s cash position across their account structures in the most impactful way.
Virtual Account Management (VAM) systems can contribute significantly to improving the efficiency of corporate treasurers.
Virtual accounts are user-defined off-balance ‘sub-accounts’ underlying one real bank account. The aim of VAM is to provide treasurers with the tools that unlock more visibility, flexibility and control over even complex business cash positions through a central platform.
With VAM, a client can significantly reduce the number of real accounts while at the same time can reflect and manage complex virtual account structures via modern self-service features.
These features allow treasurers to:
- Create and maintain virtual account structures
- Assign credit/debit interest conditions including inter company lendings
- Set up combined settlements for complex group structures
Innovative replication processes ensure that payments are automatically routed to the target virtual account. This is usually done via reference number in the payment or virtual IBAN. Enrichment with data analytics and AI is also possible.
VAM therefore gives treasurers clear information about different parts of the business while also introducing additional efficiency, flexibility and visibility.
The benefits of Virtual Account Management for treasurers
Virtual Account Management can help treasurers be more efficient in a number of ways.
Enhanced liquidity management:
VAM offers real-time visibility into all cash positions across the organization, enabling the treasurer to optimize liquidity. By clearly segregating specific activities in virtual accounts, treasurers can quickly identify excess cash that they might otherwise overlook in a physical account structure. They can utilize this excess cash more efficiently. For instance, they can use it to pay down expensive loans, reduce interest costs, or place it in overnight markets or short-term investments to generate additional revenue.
Strategic planning and decision-making:
VAM supports better strategic decision-making by providing a clear, real-time picture of the organization’s financial position. This aids in more accurate cash forecasting, which in turn can inform investment strategies, funding decisions and risk management plans.
Operating multiple bank accounts can incur substantial costs, such as minimum balance requirements, account maintenance fees and transaction fees. By reducing the number of real accounts, these costs can be significantly reduced. Furthermore, as physical cash and real transactions reside in only a few master accounts, corporates can significantly rationalize the need for physical sweeps and complex pooling agreement
Centralization and efficiency:
VAM is a key enabler of centralization in cash management. By reducing the number of physical accounts and moving towards a virtual structure, treasurers can achieve a higher level of control and oversight. With virtual segregation of balances, real-time cash consolidation becomes a continuous process, rather than a periodic one. This leads to a reduced reliance on intraday credit and more efficient management of transaction flows and liquidity positions. Overall, VAM supports the drive towards centralization, making treasury functions more streamlined and effective.
By consolidating multiple physical bank accounts into a streamlined structure of virtual accounts, treasurers gain a more accurate, real-time overview of the organization’s entire financial position. This granular visibility plays a crucial role in effective risk management. For instance, with VAM treasurers can easily track cash movements and identify unusual activity patterns. This could be indicative of potential financial risks such as market volatility or liquidity risks. They can monitor these risk factors more proactively, allowing for early detection and mitigation.
During economic crises, efficiency becomes even more critical as companies look for ways to reduce costs, streamline operations, and make the best use of their available resources.
By enhancing visibility, control, cost-efficiency, and risk management, VAM systems can play a key role in helping corporate treasury departments navigate these challenging times.
Which organizations would benefit most from VAM?
VAM can be an effective solution for corporations from many industries and for a wide range of use cases. Organizations that benefit from VAM are not defined by their size, but by complexity and business breadth.
An example of a traditional company that would benefit from VAM is an asset manager using virtual accounts for client money management. The client segregates funds via virtual accounts while all the cash is aggregated through the same master account. Real estate companies can also use virtual accounts to create separate accounts for different properties or individual contracts.
Newer examples might include an organization dealing with payments and collections or managing funds for new-economy platforms for gig workers and service providers. Likewise, demand is increasing among e-commerce or online marketplaces, where virtual accounts can be created for different sellers.
How VAM will enhance treasury functions in future
For treasurers the main benefits of Virtual Account Management are real-time clarity of cash, efficiency, speed and self-service. By utilizing virtual accounts, treasurers can optimize their cash management strategies to support their organization’s growth.
Banks should therefore ensure they are offering VAM to stay on top of their customers’ needs.
At SAP Fioneer, our virtual accounts solution gives financial institutions a ready-made core-agnostic platform that can be tailored to their individual customer needs.
Find out more about Virtual Account Management and how your bank could benefit by attending our upcoming webinar: The Technology Treasurers Need: Transforming Cash Management with Virtual Accounts. Register here.
You might also be interested in our blog post: Virtual Accounts: The future of corporate banking cash management