In the European Economic Area, the most significant volume of deposits is held in a reasonably small number of commercial bank accounts belonging to large corporations. These companies typically have over €10-20 million in assets. For businesses that operate such sizeable balances, it is critical to protect their funds. For that, entire teams, known as Corporate Treasury, are often hired to administrate them.
What is Corporate Treasury?
Corporate Treasury is a department within a company that is responsible for managing deposits and finances.
The core tasks of Corporate Treasury include:
- Minimizing liquidity risks.
- Securing deposits.
- Maintaining the company's credibility.
- Managing cash flows and financial transactions.
- Optimizing financing strategies for investments.
During the Silicon Valley Bank collapse, the best Corporate Treasury departments immediately identified the imminent default risk and moved deposits to safer custody accounts early on.
Why Do Large Companies Often Have Hundreds of Business Accounts
It is common for large companies to have hundreds of business accounts in different banks. The reason for this is risk management control mechanisms.
Risk management: companies that spread their deposits across different banks reduce the risk of total loss if one gets into trouble.
Geographical diversification: Companies that diversify their deposits geographically can make payments in different currencies in different countries.
Liquidity management: With multiple business accounts, companies can access liquidity quickly without relying on a single bank. This is especially valid when quick cash movements are needed, such as a short-term investment opportunity, a necessary purchase, a late payment request, or, as was recently the case with Silicon Valley Bank, a bank failure.
Funding local operations: As companies grow, business operations become more complex and diverse. Separate accounts per office or manufacturing location are often necessary to ensure the effective movement of cash.
Expansion: When companies initiate expansion into new markets, new bank accounts are usually opened in the target country. With that, payments can be processed in the local currency to provide a smooth service to local customers. Moreover, the offers of regional banks are usually more attractive.
Number of Accounts to Manage According to Company Size
The number of bank accounts to manage depends on company size and assets and can vary greatly but is directly proportional to the complexity of a business.
Small businesses with limited assets can get by with one master account or two bank accounts - master plus operating payment account. Larger companies, however, often maintain many accounts at different banks to minimize risks and optimize their liquidity positions.
In principle, however, some guideline values can be established:
- Small companies with an annual turnover of up to €6 million and assets of up to €1-3 million usually get by with two to three banks.
- Medium-sized companies with an annual turnover of around €60 million and a cash balance of about €30 million need something from 6 to 12 banks.
- Large companies with an annual turnover of over €600 million and over €300 million in assets usually manage 60 banks or more.
These are, of course, rough estimates that may vary depending on the company and the sector. Other influencing factors are the organization of the companies' liquidity and risk management and the relationships with their banks.
The Bank Selection Process for Large Companies
Bank selection is a core process in Corporate Treasury. The criteria for selecting banks include the following:
- Quality of products and services: Quality of lending, fees and options in payment processing, advisory services or technological solutions and data security concerns.
- The bank's geographic presence: Banks operating in the countries and regions where the company is active enable it to bundle financial transactions and increase efficiency and control. In addition, the bank can cover currencies from different countries and adapt to the various regulatory requirements in each country.
- The bank's financial strength and regulatory requirements: This includes an assessment of financial ratios and credit ratings by rating agencies. The bank's capital ratio, liquidity position, lending practices and business model are considered. Corporate Treasurers obtain information on the bank's regulation and check compliance with regulatory requirements, such as capital and liquidity conditions and reporting obligations.
- Portfolio diversification: Even though consolidation effects into payment flows with one bank bring benefits, treasurers must balance the benefits with the risk to not make the company dependent on a single bank.
How treasury systems enable bank management
Another essential task in Corporate Treasury is the investment of assets as part of optimizing financial strategies.
In simple terms: beyond cash, there are investment opportunities that pay returns. In exchange for a bit of risk-taking, companies can earn more money by parking parts of their assets in other asset classes. These include money market funds.
Money market funds are investment funds that invest in short-term, liquid securities. These include, for example, overnight money, bonds or money market instruments. In Corporate Treasury, these funds are used to invest surplus cash in accounts to generate returns.
Money market funds are vital in this context: they offer a simple and safe way to invest surplus liquidity in short-term, highly liquid and very safe securities such as government bonds, short-term public-sector debt securities with a maturity of fewer than six months, or bank certificates. This gives them a lower risk than other asset classes, such as equities or corporate bonds.
Money market funds are also characterized by the fact that they usually do not experience strong price fluctuations and, thus, tend to cause less volatility in the portfolio.
Friday Finance as the Corporate Treasure for SMBs
Friday Finance's financial software offers smaller, modern entrepreneurs the benefits of Corporate Treasury from large corporations. The finance management platform integrates the essential features of treasury management software, including multi-banking, liquidity planning, proprietary business accounts for transaction processing, virtual cards for expense management, borrowing through lending partners and internal controls with authorizations and payment approvals.
Through the PSD2 payment services regulated by the European Central Bank, Friday Finance offers multibanking to manage numerous bank accounts on a single platform. This is complemented by semi-automated liquidity planning, which intuitively informs entrepreneurs whether enough money is available to administrate the business and pay invoices.
In addition to multibanking, the Friday Finance business accounts and virtual cards from Mastercard are a core element of the platform. The integrated financing options via credit partners give small businesses control over their finances, more flexibility and quick reactivity to changing market conditions.
With internal controls, authorizations and payment approvals, Friday Finance allows modern businesses to easily manage their financial transactions securely and effectively in the same way that Corporate Treasurers do in large corporations with sophisticated software.
As a result, Friday Finance offers a cost-effective and efficient way to open business accounts, manage finances and use all the features of a Corporate Treasury to drive growth.