Liquidity Management vs Treasury Management

With the passage of time, the business environment has dramatically changed. Rapid changes have been observed in the regulations and abrupt variations have been observed in business models. Moreover, technological advancement has played a vital role in remodeling the current business situation. Entrepreneurs and Strategic Management Executives, who were reluctant to adapt to the new technological environment, have no choice but to accept this challenging environment in order to be competitive and bring innovation in the market. The impact of the prevailing scenario has made the business operations more complex. This is the reason why demand for treasury management and liquidity management has increased so that businesses can successfully sustain in the market.

Although, the term treasury management and liquidity management are used interchangeably by financial institutions, yet, they are not the same. Being an executive or an entrepreneur in the ever growing financial market, you should be able to know what is meant by treasury management and liquidity management and what is the difference between these two terms?

Treasury Management is a process of managing and administering currency, funds, cash, bank, and financial risk in order to improve the liquidity position of companies and to make profitable financial investments in the future. Entering into a hedging agreement to manage the financial risk is also a part of treasury management. There are many organizations that have a separate treasury department, which assesses the financial risk, keep track of the funds and investment policies, and manage the foreign currency risk. Liquidity Management, on the other hand, is one of the key elements of well-established treasury management. It is a process of ensuring that you have a reasonable amount of cash available so that you can cover the current liabilities of your business, both expected and unexpected. It takes into account your liquidity requirements and make sure that cash is readily available at the right time.
Treasury management consists of providing instant finance to companies, minimizing the overall currency risk exposure and maintaining the liquidity position of a business. Liquidity management involves, understanding the cash needs, establishing appropriate guidelines for investments, selecting the right investment opportunities, and enhancing the efficiency and transparency of the cash position.

Liquidity management deals with a lot of procedures and processes, such as, collecting receivables, executing payments, managing the actual cash. This is usually undertaken by the banks because they seek new and innovative ways to fulfill the requirements of their clients. Although, treasury management is correlated with the liquidity management, but there is one main difference between the two. Treasury management includes the management of foreign exchange risk. Being an individual in the financial sector, you must be aware of the fact that the forex market is highly volatile and the rates in the market keep changing from time to time. There is a great amount of risk associated with the treasury management. For example, a business can suffer a loss of millions if a treasury manager delays his decision even by a few seconds.

However, it is not possible to talk about treasury management and not discuss the liquidity management, because foreign currency involves cash, which is managed by the liquidity management. The cash is received in terms of payments and management of exchange rates is included in the treasury functions.

Treasury management majorly deals with the foreign currency and exchange risk, while liquidity management involves managing the liquidity position of the company. One of the most challenging parts of liquidity management is to have a clear visibility of cash that is needed today and required in the short, medium and long term, so that reasonable decisions can be made.

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