Target balancing optimized with a cash management system

Making every cent count 

Idle cash is costly, and target balancing offers a powerful solution to keep funds active and optimized. It’s no surprise that global companies are investing in cash management systems to enhance target balancing, and to make global cash management smoother and more effective.

By automating fund transfers to maintain optimal cash levels across accounts, target balancing minimizes unnecessary borrowing and maximizes liquidity where it’s needed most.

But how exactly does target balancing work in corporate treasury? What essential functions should a cash management system have to support this strategy effectively? And what best practices can help your team make the most of target balancing?  From real-time tracking to streamlined reconciliation, this article breaks down the core features of cash management systems that support target balancing and shows how they help reduce costs, boost efficiency, and ensure every dollar is working toward business growth.

No more idle cash—let’s make every cent count. 

Meet Jouni Kirjola

Jouni Kirjola is the Head of Solutions and Presales at Nomentia, bringing nearly 20 years of expertise to the role. Specializing in payments, cash forecasting, in-house banking, and reconciliation, his extensive experience and deep knowledge of financial solutions make him a key expert in delivering tailored solutions.

Making global cash management effective 

Imagine a multinational technology firm with subsidiaries in North America, Europe, and Asia. The company has been experiencing inefficiencies in its cash management process. Each regional subsidiary maintains separate bank accounts to handle local operations, but cash flow requirements vary significantly across regions.  

For example, the European subsidiary often has excess cash due to slower product cycles, while the North American subsidiary faces frequent cash shortages due to high operational expenses. This discrepancy leads to idle cash sitting in European accounts while the North American subsidiary needs to borrow short-term funds to cover its daily expenses, incurring unnecessary interest costs. The company’s treasury department struggles to manage these imbalances manually, and reconciliation across multiple accounts becomes a time-consuming task. 

"In a complex, decentralized operation, target balancing becomes even more crucial. It gives treasury teams real-time control over cash positions across multiple jurisdictions." - Jouni Kirjola, Head of Solutions & Presales 

To streamline cash management and reduce costs, the company decides to implement target balancing using a cash management system. The system allows the company to set target balances for each subsidiary’s account based on anticipated cash flows, operational needs, and historical patterns. For example, the European subsidiary’s target balance is set higher to account for slower cash cycles, while the North American subsidiary has a lower target balance to match its higher liquidity needs. 

By integrating the CMS with its bank accounts and ERP system, the company is able to automate fund transfers across its subsidiaries. Excess cash in the European accounts is automatically swept into a central treasury account, while the North American account is topped up when needed.  

How target balancing works in corporate treasury? 

In corporate treasury, target balancing is a cash management strategy used to maintain specific balances in bank accounts based on anticipated cash flow needs. The objective of target balancing is to ensure that funds are available where and when they are needed while minimizing idle cash across accounts. By setting a “target” amount for each account, companies can strategically allocate resources within their banking structures to optimize liquidity, reduce interest costs, and simplify cash flow management. 

Target balancing mechanisms 

Target balancing involves establishing a predefined cash balance (target) for each account, which aligns with a company’s projected cash flow requirements. This target can be fixed or adjusted dynamically, depending on operational needs and market conditions. If an account exceeds its target, excess funds can be moved to a central account, while accounts that fall short of their targets can be topped up from a central pool. This balancing process typically occurs at the end of each business day and is often automated through treasury management systems. 

"A key advantage of target balancing is its ability to reduce the need for costly external borrowing. If funds are already in-house and properly allocated, borrowing cost can drop significantly." - Jouni Kirjola, Head of Solutions & Presales 

Target balancing is especially useful for businesses with decentralized operations or those operating in multiple jurisdictions, where cash needs vary significantly across entities. It allows corporations to optimize liquidity without the need for constant manual transfers. 

Types of target balancing 

1. Fixed target balancing: Fixed target balancing involves setting a specific, unchanging amount for each account, regardless of daily fluctuations in cash flow. For example, a company may maintain a balance of £50,000 in each subsidiary’s account to cover anticipated expenses. This method is straightforward, as it does not require constant adjustments based on real-time cash flows, and is useful for accounts with stable and predictable outflows. However, it may lead to inefficiencies if cash flow requirements shift, as fixed targets lack flexibility. 
2. Dynamic target balancing: Dynamic target balancing is a more flexible approach that adjusts the target balance based on real-time cash flows, forecasts, and account activity. If an account’s needs fluctuate—say, due to seasonal business cycles or varying supplier payment terms—the target balance can be modified to reflect these changes. This approach requires more sophisticated cash flow forecasting and can be more costly to implement but provides greater efficiency and responsiveness to actual cash demands. 

Comparing target balancing with other cash pooling techniques 

Compared to zero-balancing and notional pooling, target balancing offers distinct advantages and limitations. 

• Zero-balancing: In zero-balancing, funds are swept to or from a central account to leave subsidiary accounts with a zero balance at the end of each day. While effective for consolidating cash, zero-balancing may not suit companies with specific balance needs in various accounts, as it lacks flexibility for anticipated daily cash outflows. 
• Notional pooling: Notional pooling allows companies to offset positive and negative balances across accounts without physically moving funds. While this technique enables liquidity management without incurring transfer fees, it is often more complex to set up and may face regulatory restrictions in certain jurisdictions. Target balancing, by contrast, involves actual cash transfers and is more straightforward to manage for firms needing specific balances across accounts. 

Optimal use cases for target balancing 

Target balancing is particularly effective for companies with complex multinational structures or operations that experience fluctuating cash needs. For example, our example multinational corporation with subsidiaries operating in different time zones and regulatory environments might use target balancing to ensure that each subsidiary has sufficient cash for local obligations without relying on central funds constantly. Additionally, businesses with seasonal cash flow patterns, such as retailers with peak seasons, can benefit from dynamic target balancing to meet shifting operational demands. 

Role of a cash management system in target balancing 

A cash management system, or a CMS, plays a pivotal role in supporting target balancing for corporate treasury functions by providing automated tools to manage intercompany and inter-account transfers, monitor real-time balances, and forecast cash needs. Target balancing requires a sophisticated CMS that can seamlessly integrate with enterprise resource planning (ERP) systems and banks to provide efficient, accurate, and real-time oversight of cash positions. 

"Target balancing is about precision. With the right technology, you can automate the process of moving funds across accounts, maintaining balance with minimal human intervention." - Jouni Kirjola, Head of Solutions & Presales 

Core functions of a cash management system for target balancing 

The primary functions of a CMS that support target balancing include automated transfers, real-time balance tracking, and cash flow forecasting. These tools work together to ensure that accounts are maintained at optimal levels according to the target balance criteria. 

1. Automated transfers: A cash management system can be set up to execute automatic transfers between accounts to maintain target balances, based on predefined criteria set by the treasury team. When accounts fall below or exceed their target balances, the CMS initiates transfers from a central or pooling account to balance them. This automation reduces the need for manual intervention, streamlines operations, and ensures accurate and timely funds distribution across accounts. 
2. Real-time balance tracking: For target balancing to function effectively, treasury managers need up-to-date information on all account balances. A CMS enables real-time tracking of cash positions across multiple accounts and entities, providing visibility into account levels as they change throughout the day. This feature is essential for treasury teams managing complex, multinational structures where cash flows fluctuate based on local requirements, business activity, or market conditions. 
3. Cash flow forecasting tools: Effective target balancing requires anticipating cash needs across various accounts. A CMS typically includes forecasting tools that analyze historical transaction data, seasonal trends, and current business activity to predict future cash flows. By forecasting anticipated inflows and outflows, the cash management system helps treasurers determine the appropriate target balance for each account, minimizing the risk of shortfalls or excess balances. 

Automation in target balancing 

One of the primary benefits of a CMS in target balancing is automation. A CMS can be programmed to automatically initiate intercompany or inter-account transfers, minimizing human intervention and reducing processing times. For example, if a subsidiary’s account dips below its target balance, the CMS can automatically pull funds from a designated source, such as a central treasury account, to restore the balance. This level of automation is critical for large corporations with high transaction volumes or decentralized structures, as it prevents delays and ensures accounts are adequately funded without manual oversight. 

"When you apply target balancing through a CMS, you automate intercompany transfers, making it easier to maintain the right balance without constantly having to manually adjust accounts." - Jouni Kirjola, Head of Solutions & Presales 

Integration with financial and ERP systems 

A cash management system integrates with ERP systems, financial reporting tools, and banking platforms to streamline cash management processes, providing a seamless flow of financial data between systems. Integration with an ERP system allows the CMS to access real-time transactional data, ensuring accurate cash forecasting and enabling treasury teams to monitor cash flows within the broader financial context. Additionally, connectivity with banking systems facilitates seamless fund transfers, account reconciliation, and up-to-date balance information, making target balancing efficient and synchronized across all systems. 

"For companies with multinational operations, cross-currency transfers can be a challenge. A CMS integrates these transfers seamlessly, ensuring target balances are maintained regardless of location." - Jouni Kirjola, Head of Solutions & Presales 

Real-time visibility and reporting 

Real-time visibility is essential for treasury managers making day-to-day cash management decisions. A CMS offers dashboards and reporting tools that allow for real-time monitoring of cash positions, account balances, and overall liquidity requirements across multiple entities and jurisdictions. With such visibility, treasurers can make informed decisions about whether to adjust target balances, redistribute funds, or hold cash based on current market conditions and operational needs. Detailed reporting enables treasury teams to track and analyze cash flow trends and helps to refine target balancing strategies over time. 

Benefits of target balancing with a cash management system 

Implementing target balancing within a cash management system provides treasury teams with numerous benefits, that include minimized idle cash, cost savings, improved cash flow forecasting, and reduced liquidity risks. By using a CMS to automate and optimize target balancing, corporations can achieve a more efficient and strategic approach to managing cash across accounts and entities. 

• Minimizing idle cash: One of the primary advantages of target balancing is the reduction of idle cash, which can significantly enhance liquidity availability. Through target balancing, funds are allocated based on anticipated cash needs, leaving only the necessary amount in each account. Excess cash from overfunded accounts is automatically swept to a central treasury account or investment pool, where it can generate returns or be allocated for other strategic uses. This approach ensures that cash isn’t sitting idle across various accounts, allowing treasurers to make better use of available funds and improve the overall liquidity position. 
• Cost savings: Target balancing facilitated by a cash management system helps to reduce costs in two key areas: borrowing costs and bank fees. With more efficient cash utilization, companies can rely less on external borrowing, as funds are already allocated optimally across accounts. This reduction in borrowing not only lowers interest expenses but also lessens the need for short-term credit lines, thereby cutting related bank fees. Furthermore, reduced reliance on overdrafts and other emergency funding sources minimizes unnecessary costs, directly contributing to a more efficient treasury operation. 
• Improved forecasting and planning: A CMS enables enhanced cash flow forecasting, making target balancing more accurate and adaptable. By integrating with ERP systems, the CMS has access to up-to-date transactional data, allowing for more precise predictions of cash inflows and outflows. This improved forecasting capability means that target balances can be adjusted proactively, reflecting real business needs and enhancing the treasury team’s ability to plan for periods of cash surplus or shortage.  
• Risk mitigation: Real-time monitoring within a CMS reduces the risk of overdrafts or liquidity shortfalls by providing treasury teams with continuous visibility into account balances and cash positions. This risk mitigation feature is especially valuable for multinational organizations with decentralized operations, as it ensures that accounts remain adequately funded and helps avoid costly penalties or disruptions in operations. 

Challenges of implementing target balancing with a cash management system 

Implementing target balancing within a cash management system offers significant benefits, yet it also presents several challenges that treasury teams must carefully address to optimize performance and ensure compliance: 

• Setting accurate target balances: Determining and adjusting target balances is a complex task, especially in dynamic environments where cash needs fluctuate. Treasury teams must forecast cash flows accurately to prevent underfunding or excessive idle cash across accounts. This requires ongoing adjustments to target balances, which can be challenging due to unpredictable market conditions, seasonal shifts, or changes in business operations. Without precise forecasting and flexible systems, setting static target balances may lead to inefficiencies, while overly frequent adjustments can increase administrative complexity. 
• Intercompany and cross-currency transfers: In multinational corporations, target balancing involves intercompany and cross-currency transfers, each of which adds layers of complexity. Differences in exchange rates, local banking practices, and currency volatility can impact the accuracy and efficiency of target balancing. For example, transferring funds between accounts in different currencies may expose the company to foreign exchange (FX) risks, which require careful management through hedging or currency risk mitigation strategies. Additionally, time zone differences may impact the timing of fund availability, necessitating coordination across global treasury operations to maintain optimal balances. 
• Regulatory and compliance issues: Implementing target balancing across jurisdictions introduces regulatory considerations, as cash pooling and transfer activities are subject to local banking laws and tax regulations. Some countries restrict intercompany lending or impose specific reporting requirements on cash movements.  
• Technology and integration barriers: Integrating a CMS with existing ERP systems and other treasury platforms can be challenging, especially in organizations with legacy systems. Ensuring data flows seamlessly between systems requires robust technical integration and may necessitate customizations or software upgrades. Inconsistent data formats or incompatibility with certain banking platforms can delay implementation and reduce the efficiency of target balancing.  
• Data security and cybersecurity: Managing cash balances across multiple accounts and subsidiaries involves handling highly sensitive financial data, making data security a top priority. A CMS must have strong cybersecurity protocols to protect against unauthorized access, fraud, and data breaches..Given the rise of cyber threats, investing in a secure CMS and establishing rigorous cybersecurity practices are essential to safeguard corporate finances. 

"The primary challenge in implementing target balancing is setting accurate target balances. These need to reflect real-time cash flow demands, and that requires a deep understanding of both historical data and future forecasts." - Jouni Kirjola, Head of Solutions & Presales 

Best practices for target balancing with a cash management system 

Effective target balancing with a cash management system involves establishing clear guidelines, utilizing automation and real-time data, maintaining regular monitoring, and collaborating across departments: 

1. Establishing clear guidelines for target balances: Setting precise target balance parameters is essential for effective cash management. Start by assessing each account’s cash flow patterns, transaction volumes, and liquidity requirements to determine optimal target balances. This initial assessment should consider factors such as operational costs, payment cycles, and anticipated cash inflows. Once set, these target balances should be reviewed periodically—typically quarterly or semi-annually—to account for changes in business needs, market conditions, or strategic goals. Establishing clear guidelines also helps prevent frequent, ad-hoc adjustments, which can be administratively burdensome and lead to inefficiencies. 
2. Leveraging automation and real-time data: Automation and real-time data are critical for adjusting target balances dynamically. By using a CMS to monitor cash flows in real time, treasury teams can set up automated rules that transfer funds between accounts to meet target balance requirements without manual intervention. For example, if a particular account’s balance falls below its target due to unexpected outflows, the CMS can automatically top it up from a central account. This level of responsiveness allows for proactive cash management and ensures funds are available as needed, reducing the risk of overdrafts or liquidity shortages. Real-time data is especially valuable in volatile markets or during periods of rapid business change, as it allows treasurers to adapt target balances to the current environment. 
3. Regular monitoring and reporting: Regular monitoring and reporting are essential to ensure target balances remain aligned with operational needs. Treasury teams should monitor balances daily or weekly, depending on cash flow volatility, to identify any discrepancies and adjust as necessary. In addition to daily tracking, monthly or quarterly reports help identify trends, enabling more strategic decisions regarding target balance settings. Consistent monitoring allows treasury managers to spot and respond to emerging patterns in cash needs or opportunities for cost savings. 
4. Continuous collaboration with other departments: Close collaboration with finance, accounting, and operations is crucial to accurately gauge cash requirements and avoid idle balances. By engaging with these departments, treasury teams can better understand payment cycles, upcoming expenses, and revenue forecasts, ensuring that target balances reflect real cash flow needs. For instance, insights from the operations team about seasonal business demands can help the treasury team adjust target balances accordingly, while input from finance and accounting ensures alignment with broader corporate financial strategies. 

"To truly optimize cash management, you need to regularly review and adjust your target balances. A CMS makes this process easier, providing the flexibility to adapt to changing business conditions." - Jouni Kirjola, Head of Solutions & Presales 

No more idle cash: target balancing optimized with a cash management system - Conclusion 

Target balancing keeps corporate cash exactly where it’s needed—no excess, no shortfalls, no missed opportunities. A well-tuned cash management system makes this process seamless, ensuring funds flow efficiently across accounts, reducing borrowing costs, and maximizing liquidity. Without it, companies risk inefficiencies that quietly drain value. With it, treasury teams gain full control, turning static balances into active financial assets.