In a previous article, we talked about the liquidity ratio, in this case, we come to talk about the well-known treasury ratio. It is important to highlight from the beginning that in the financial field and cash management, both concepts refer to the same calculation. In other words, the liquidity ratio and the treasury ratio could be considered synonymous and therefore are the same ratio. But since we are at it, we will proceed to describe this new ratio again, and we will explain its calculation with a greater level of detail, the implications that one result or another of the calculation may have, as well as ways to improve it and we will also explain in detail what parts make up ratio calculation.

As we said in previous articles, the pandemic marked a before and after for the treasury sector. Since then, it has been possible to clearly notice a greater interest in the corporate treasury sector and it has also been possible to appreciate a higher level of specialization in the sector. Until a few years ago the sector was not that attractive, or at least it did not receive much attention, and besides, the term treasury used to sound rather boring. Now, however, many companies are beginning to review the operation of their treasury and cash control departments and practices to gain greater visibility and control over these areas. The technological revolution in the “Fintech” field is also allowing the appearance of pioneering software companies that, through the digitization of different areas such as payments (B2B), and through greater real-time access to balances and treasury movements, allow companies to have greater control and visibility of the cash situation, and also save thousands of hours in processes that generate little added value for companies, especially in financial departments that, to this day, continue to count with many manual processes. These times of change, and especially these new technologies, are changing how financial departments work and, above all, how they will work in the future.

To delve into the treasury sector, it is important to delve into its concepts and terminology. In this article, we proceed to explain one of the main metrics that are managed within these departments. The metric to which we refer is the treasury ratio or also known in English, the “current ratio”, because this ratio mainly refers to the short term.

As we said in a previous article, the liquidity ratio was equivalent to the treasury ratio, being its calculation formula; Current Assets / Current Liabilities. However, taking advantage of this new article, we proceed to break down the formula a little more, providing a greater level of detail and also a different terminology, which is widely accepted in the financial and accounting world. Using this new terminology, we would therefore define the treasury ratio as the division of available assets plus realizable assets divided by current assets. Next, we will proceed to explain what we mean by available assets and realizable assets, since we have not explained them so far.

The main purpose of the treasury ratio or “current ratio” is to provide an image of the situation of a company in the short term. The formula tries to compare the amount of available and realizable goods or assets that a company has against its short-term debts, which is generally understood as a period of 12 months, in order to determine the ability of a company to deal with your debts and short-term payments. From this period, or everything that exceeds 12 months is usually considered as long term, both for assets and liabilities.

But, first of all, what do we mean when we talk about short-term assets? As we described a little above in the formula, this is made up of the available assets and the realizable assets. First of all, the available assets refer to the box. This can be in physical format, that is, the amount of money in the form of bills that can be distributed among different areas of the company, and in electronic format, that is, we would now refer to the money existing in the different banks in which The company has open checking accounts. On the other hand, we have realizable assets. That is, those that without much effort and relatively quickly can be converted into available assets. Within this type of realizable assets we find short-term investments, which can be disinvested in a matter of hours or days and therefore allow these investments to be “made” quickly. As an example, an investment in shares of a publicly traded or publicly traded company would be considered realizable assets, because any business could sell those shares at any time and receive the cash. However, an investment in a property could not be considered realizable assets because it can most likely take months or even more than 1 year to proceed to sell the property.

If we go to the other side, that is to say to the liabilities side, the current liabilities would be made up of all those short-term payments including payments to suppliers, taxes, fees, etc. Also, and probably the most important, it would be necessary to include the maturity related to the company’s indebtedness, such as, for example, financial expenses, or the amortization of the principal of the bank debt, always considering the time horizon of 12 months.

The treasury ratio is a very important ratio in the financial field, since the repercussion that a higher or lower ratio can have is very important, especially if at any given time the company has liquidity problems. To guarantee a healthy treasury, the treasury ratio must provide a result of 1, and it is advisable to exceed a ratio of 1. A ratio of 1 means that for every Euro of assets available and realizable in the short term, we have one Euro of debt at short term. Therefore, the company has enough assets to meet its debts in the short term, but there would be no margin for error. In other words, unless an unforeseen event arises within the company or any other extraordinary event, the company could be in serious trouble if that ratio dropped below 1.

For example, let’s analyze a hypothetical case of a company that has 2,000 euros of available and realizable assets and has 20,000 euros of current liabilities. The ratio resulting from a company in this situation would be 0.1. The result of this extreme scenario clearly shows that the company is not in a very adequate situation.

On the other hand, let’s consider an opposite scenario. Now imagine a company that has 20,000 euros of available and realizable assets and only 2,000 euros of current liabilities. Would this scenario be the ideal? At first glance, it seems so. This company is in very healthy shape. In other words, it has a lot of cash to be able to meet its short-term obligations. However, is this situation really optimal? No. A situation with a ratio of 10 like the one we are analyzing indicates that resources are not being used adequately or in the most efficient way. It is possible that the company could carry out investments to increase long-term performance, instead of having so much cash lying around.

The treasury ratio is one of the most important ratios of a company. As we described previously, this measures the ability of a company to meet its debt maturities and payments to suppliers, among others in the short term. To improve this ratio, we can go through several ways. Next, we will describe a series of actions or good practices that make it possible to substantially improve the ratio.

Review of the collection period and payment periods to customers and suppliers respectively:

It is usually advisable to periodically review the collection and payment periods. Always, as a general rule, you should try to improve the collection period. How do you do this? Getting paid faster, that is, as soon as possible. Nowadays, through technology, payment methods can be installed that accelerate this conversion period. In this way the payment of the clients is guaranteed and possibly the user experience is also improved since the payment is increasingly important. On the other hand, agreeing to a longer payment period allows many companies to have a greater cash margin, since it brings the collection period closer to the payment period, thus improving the treasury situation.

Review of other payments and extraordinary events:

One of the ways to verify that the ratio is being calculated correctly is through a complete review of extraordinary events that involve significant cash outflows. In other words, for example, it would be convenient to carry out an exhaustive review of different payments such as social security, taxes and fees, among others. Mainly to make sure we haven’t missed any important payments outside of the formula described above. If there is the possibility of renegotiating the terms, it is usually a good idea to renegotiate a change in the payment terms in order to be able to defer a little of the outstanding payments in the short term.

Review of debt terms:

The most typical way to improve the treasury ratio is through the renegotiation of the bank debt and its main terms, in particular, the repayment terms of the debt that matures in the short term. When companies find themselves in a delicate cash situation in the short term, debt renegotiation is usually the main way to clean up the company. What usually occurs in these cases is that the main terms of the debt are renegotiated. In this way, short-term debt is converted into long-term debt.

Access to different sources of financing:

Finally, a very common way to improve the treasury ratio is through new financing channels. In the case of obtaining new bank financing, the logical thing to improve the treasury ratio would be for this new bank debt to be long-term. Another way to improve the ratio is by raising other forms of capital such as public subsidies or money from private investors through investment rounds, which do not have maturities and therefore improve the short-term cash situation without creating any long-term debt.

Snab is a new cloud treasury platform in Europe that helps finance teams precisely in each and every one of the functions and tasks related to treasury management and monitoring of the company’s cash situation. Snab helps, therefore, by allowing greater visibility and control of the treasury to improve financial cash ratios, and facilitate their calculation. Snab serves as a banking aggregation platform, allowing companies to access all their bank accounts in different banks and in different countries from a single place and with absolute independence, so that the financial team can access their situation in a few clicks of cash and thus obtain the necessary information to calculate the available and realizable assets of the company. Snab also serves as a billing tool, that is, it automates the entire invoice receipt, scanning, and automatic recording process, and also serves as a payment and collection management tool, providing full control and visibility to the functions of accounts payable and receivable. The platform has pioneering technology in Europe that allows you to pay and collect invoices in one click, from Snab, without having to leave the platform. This makes it possible to monitor the status in real time of all payments and collections of the company, when calculating the treasury ratio.