Treasury Management for UK SMEs: Optimising Cash and Financial Operations

Treasury management isn't just for large corporations with dedicated finance teams. For UK small and medium-sized enterprises (SMEs), effective treasury management is fundamental to maintaining healthy cash flow, managing financial risk, and supporting sustainable growth. As businesses expand, handle multiple currencies, or navigate economic uncertainty, robust treasury practices become essential to financial stability.

This comprehensive guide explains what treasury management involves, why it matters for SMEs, and how to build treasury capability that protects and enhances your business's financial position.

What Is Treasury Management?

Treasury management encompasses the strategic oversight and day-to-day administration of a company's financial assets and liabilities. It involves managing cash flow, liquidity, banking relationships, foreign exchange exposure, and financial risk to ensure the business has sufficient funds to meet its obligations whilst optimising returns on surplus cash.

For SMEs, treasury management typically includes:

- **Cash management**: Monitoring cash positions, optimising collections and payments
- **Liquidity management**: Ensuring sufficient working capital to meet operational needs
- **Foreign exchange management**: Managing currency exposure from international trade
- **Banking relationships**: Maintaining effective relationships with financial institutions
- **Risk management**: Identifying and mitigating financial risks
- **Financial controls**: Implementing policies and procedures to safeguard assets

Whilst large corporations employ specialist treasury teams, SMEs often integrate treasury responsibilities within existing finance functions. The principles remain the same: visibility, control, and optimisation of financial resources.

The Importance of Cash Flow Forecasting

Accurate cash flow forecasting forms the foundation of effective treasury management. Understanding when cash will enter and leave your business enables proactive decision-making rather than reactive crisis management.

Building Effective Cash Forecasts

A robust cash flow forecast should:

- Project cash inflows from sales, considering payment terms and historical collection patterns
- Account for all outflows including supplier payments, payroll, tax obligations, and loan repayments
- Extend at least 13 weeks forward, with monthly projections for 12 months ahead
- Include scenario planning for optimistic, realistic, and pessimistic outcomes
- Update weekly or fortnightly based on actual performance

Many UK SMEs experience cash flow challenges not because they're unprofitable, but because they lack visibility of future cash positions. A manufacturing business might secure a large order but fail to account for the working capital required to fulfil it before payment arrives. Accurate forecasting prevents these situations.

Key Metrics to Monitor

Track these essential indicators:

- **Cash conversion cycle**: Time taken to convert inventory and receivables into cash
- **Days sales outstanding (DSO)**: Average time to collect payment from customers
- **Days payable outstanding (DPO)**: Average time taken to pay suppliers
- **Current ratio**: Current assets divided by current liabilities, indicating short-term liquidity
- **Quick ratio**: Liquid assets divided by current liabilities, excluding inventory

According to the Federation of Small Businesses, late payments cost UK small businesses £22 billion annually. Monitoring DSO and implementing effective credit control directly impacts treasury health.

Liquidity Management and Working Capital Optimisation

Liquidity management ensures your business maintains sufficient liquid assets to meet short-term obligations whilst avoiding excess idle cash that could be deployed more productively.

Working Capital Strategies

**Optimise receivables**: Implement clear payment terms, invoice promptly, and establish robust credit control processes. Consider early payment discounts or invoice finance for larger receivables.

**Manage inventory efficiently**: Excess stock ties up working capital. Use inventory management systems to optimise stock levels based on demand forecasting.

**Extend payables strategically**: Take full advantage of supplier payment terms without damaging relationships or incurring late payment charges. Early payment discounts should be evaluated against your cost of capital.

**Establish appropriate facilities**: Maintain access to working capital facilities such as overdrafts or revolving credit facilities to manage seasonal fluctuations or unexpected shortfalls.

Cash Pooling and Sweeping

Businesses operating multiple bank accounts can implement cash pooling or sweeping arrangements. These automatically transfer funds between accounts to consolidate cash, reduce idle balances, and minimise overdraft fees. Physical sweeping moves actual funds, whilst notional pooling calculates interest on a net balance across accounts.

Managing Foreign Exchange Risk

For SMEs engaged in international trade, foreign exchange volatility represents a significant treasury challenge. Currency movements can erode profit margins or create unexpected losses if not properly managed.

Understanding FX Exposure

Three types of currency exposure affect businesses:

- **Transaction exposure**: Risk from specific foreign currency transactions (imports/exports)
- **Translation exposure**: Impact of currency movements on foreign assets or subsidiaries when consolidated
- **Economic exposure**: Longer-term competitive impact of exchange rate changes

For most SMEs, transaction exposure is the primary concern. A UK exporter invoicing in euros faces the risk that sterling strengthens before payment arrives, reducing the pound value received.

FX Risk Management Strategies

**Natural hedging**: Match foreign currency revenues with costs in the same currency where possible, reducing net exposure.

**Forward contracts**: Lock in exchange rates for future transactions, providing certainty over costs or revenues. Particularly valuable for businesses with regular international transactions.

**Currency options**: Provide protection against adverse movements whilst allowing participation in favourable moves, though at a premium cost.

**Invoice in sterling**: Where market position allows, invoicing in your home currency transfers exchange rate risk to the customer.

Payment service providers like [Stable Payments](https://www.stablepayments.co.uk) offer competitive foreign exchange services with transparent pricing, enabling SMEs to manage cross-border payments efficiently whilst minimising FX costs.

Optimising Banking Relationships and Account Structures

Strong banking relationships provide access to facilities, preferential terms, and expert advice during both growth and challenging periods.

Banking Partner Strategy

**Consolidate strategically**: Whilst multiple banking relationships provide resilience, excessive fragmentation creates complexity. Most SMEs benefit from one primary banking partner with one or two secondary relationships.

**Communicate proactively**: Keep banks informed about business performance, plans, and challenges. Banks prefer early warnings to surprises.

**Review terms regularly**: Banking fees, interest rates, and facility terms should be benchmarked periodically. Loyalty doesn't always deliver best value.

**Consider specialist providers**: Traditional banks aren't always optimal for every function. Modern payment platforms often offer better foreign exchange rates, faster international transfers, and multi-currency capabilities.

Account Structure

Design your account structure to support operational needs and provide control:

- Operating accounts for day-to-day transactions
- Payroll accounts segregating salary funds
- Tax reserve accounts accumulating funds for VAT and corporation tax
- Savings or treasury accounts for surplus cash

Separating functions improves cash visibility, supports forecasting, and reduces the risk of inadvertently spending funds earmarked for specific purposes.

Treasury Technology and Automation

Technology transforms treasury management from spreadsheet-intensive manual processes into automated, real-time operations.

Essential Treasury Systems

**Accounting software integration**: Cloud-based accounting platforms like Xero, QuickBooks, or Sage provide real-time visibility of cash positions and automate reconciliation.

**Payment automation**: Automated payment platforms reduce manual processing, improve efficiency, and provide better controls through approval workflows.

**Cash flow forecasting tools**: Specialist forecasting software uses historical data and machine learning to generate accurate projections with scenario modelling.

**Bank connectivity**: API-based connections to banks provide real-time balance information across multiple accounts and institutions without manual logins.

**Treasury management systems (TMS)**: Whilst traditionally enterprise-focused, cloud-based TMS solutions are increasingly accessible to larger SMEs, centralising cash visibility, forecasting, and risk management.

Benefits of Automation

Automating treasury processes delivers:

- Reduced manual errors and processing time
- Real-time visibility of cash positions
- Faster, more accurate forecasting
- Improved fraud prevention through systematic controls
- Better data for strategic decision-making
- Scalability as the business grows

A 2024 PwC survey found that businesses automating treasury functions reduced processing costs by an average of 30% whilst improving forecast accuracy by 25%.

Financial Controls and Governance

Robust controls protect against fraud, errors, and unauthorised transactions whilst ensuring compliance with regulations.

Essential Treasury Controls

**Segregation of duties**: Separate initiation, approval, and reconciliation of transactions across different individuals.

**Approval hierarchies**: Define transaction limits requiring single, dual, or board-level approval based on value.

**Bank mandate management**: Maintain current records of authorised signatories and regularly review access rights.

**Reconciliation procedures**: Daily reconciliation of bank accounts identifies discrepancies promptly.

**Fraud prevention**: Implement verification procedures for payment changes, particularly email requests to modify supplier bank details.

**Documentation and audit trails**: Maintain comprehensive records of treasury decisions, transactions, and approvals.

Treasury Policies

Formalise treasury management through written policies covering:

- Cash management procedures and responsibilities
- Banking relationship management
- Investment of surplus cash
- Foreign exchange risk management and hedging authority
- Acceptable counterparties and credit limits
- Compliance requirements

Policies provide consistency, support delegation, and demonstrate governance to stakeholders including banks, investors, and auditors.

Building Treasury Capability in Your Business

Developing effective treasury management capability requires investment in people, processes, and systems.

Implementation Roadmap

**1. Assess current state**: Evaluate existing treasury practices, identifying strengths and gaps.

**2. Define objectives**: Determine what you need from treasury management based on business model, growth plans, and risk appetite.

**3. Implement forecasting**: Begin with simple 13-week cash flow forecasting, refining over time.

**4. Establish controls**: Document and implement basic treasury controls and approval processes.

**5. Optimise working capital**: Focus on receivables, payables, and inventory management.

**6. Leverage technology**: Adopt appropriate systems to automate and improve visibility.

**7. Develop expertise**: Invest in training for finance team members or engage treasury advisors.

**8. Review and refine**: Regularly evaluate treasury performance and processes.

When to Seek External Support

Consider engaging specialist support when:

- Expanding internationally with significant FX exposure
- Navigating complex refinancing or restructuring
- Implementing treasury technology
- Lacking internal treasury expertise during growth phases
- Managing acquisition or merger integration

Many businesses benefit from fractional treasury support, accessing experienced professionals without the cost of full-time specialists.

Conclusion: Treasury Management as Strategic Advantage

Effective treasury management provides UK SMEs with a significant competitive advantage. Businesses with visibility and control over their financial position make better strategic decisions, negotiate from positions of strength, and navigate challenges with confidence.

Whilst treasury management requires investment in processes, systems, and expertise, the returns—improved cash flow, reduced financial costs, mitigated risks, and enhanced stakeholder confidence—far outweigh the investment.

For SMEs handling international payments or managing foreign exchange exposure, partnering with specialist payment providers offers access to competitive rates, efficient processes, and expert support without the complexity of traditional banking channels.

Start with the fundamentals: accurate cash flow forecasting, robust controls, and optimised working capital management. Build capability progressively, leveraging technology to scale treasury operations alongside business growth. The result is a financially resilient business positioned for sustainable success.

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