The corporate treasury department’s role has become more complex in recent years. However, digital advancements have enabled 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 corporate treasury functions can be supported and streamlined in large organizations using cash management solutions that are enhanced with Virtual Account Management (VAM) capabilities. We also explore how corporate banks can support their corporate clients by implementing these processes.
The role of the treasurer has changed
Moving from pure risk and cash management, and focusing on interest rates and FX risks, the corporate treasurer of today plays a far more strategic advisory role to the CFO, significantly influencing crucial financial decisions within the company.
Much of what the corporate treasury function 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.
How VAM can streamline treasurer’s 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 corporate 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 customized account structures
- Assign credit/debit interest conditions including inter-company lending
- Set up combined settlements for complex group structures
Innovative replication processes ensure that payments are automatically routed to the target virtual account instead of the traditional way of routing payments from different clients to the same physical account.
The benefits of Virtual Account Management for corporate 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.
Reduced costs
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.
Risk management
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.
Going beyond the standard to meet today’s challenging environment
Beyond the traditional benefits, this versatile solution can address other critical business needs. For instance, it allows the creation of multi-currency or investment accounts from a single physical account, simplifying account structures and reducing administrative burdens. Additionally, VAM is invaluable for segregating third-party funds in industries like real estate or asset managers, where regulatory compliance requires clear separation of client money.
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 mainly defined by complexity and business breadth rather than business size.
All companies worldwide aspire to optimize their collection processes, ensuring timely and efficient receivables management. The greater the number of clients or accounts a company manages, the more significant the advantages of Virtual Account Management (VAM).
Moreover, VAM becomes an indispensable tool for companies operating as in-house banks, managing accounts across their entire corporate group. It enables streamlined intercompany lending, efficient interest reallocation, and enhanced financial visibility, making it a critical component for organizations aiming to centralize and simplify their cash and treasury operations.
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 corporate treasury functions in the future
For treasurers the main benefits of Virtual Account Management are real-time clarity of cash, efficiency, speed and self-service. By having this on hand, treasurers can optimize their cash management strategies and utilize accurate forecasting to support their organization’s growth.
Banks should therefore ensure they are offering VAM to stay on top of their corporate clients’ needs, particularly as flexibility and visibility are increasingly in demand.
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.
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