Republic of the Philippines

State Universities and Colleges

GUIMARAS STATE COLLEGE
McLain, Buenavista, Guimaras

Module in FM E 4 – Treasury Management

Module 1
Overview of Treasury Management

Learning Objectives:

1. Learn the evolution importance and an ideal treasury department.

2. Understand the objectives of treasury department.
3. Understand the role of treasury management.
4. Learn the significance of treasury management.
5. Understand the function and scope of treasury management.
6. Learn the tools of treasury management.
7. Learn the environment with treasury department.
8. Understand the treasury services.
9. Understand the role of treasury manager.

1.1-An Overview Treasury – Evolution Importance and an Ideal Treasury

Department

Treasury management is the processes of planning, controlling, and organizing

an enterprise’s holdings, like cash and working capital, to optimize its current and
medium-term liquidity and to mitigate its operational, financial, and reputational risks.
By actively implementing treasury management, your company can maximize returns,
save money, and respond quickly to changes. In the next section, we will take a deeper
look at various ways your business can benefit from an effective treasury function.

Why is treasury management important?

Benefits of implementing treasury management in your business

The treasury department’s primary roles are to reduce financial risks, monitor financial
flows, implementing strategies and lowering investment costs, ensuring there is no
excess working capital tied up in the business, measuring and managing cash flow to
protect solvency and so much more! By mindfully implementing treasury management,
your company will be able to maximize available cash and minimize shortfalls as soon
as possible. The right assessments of financial risks and current assets can ensure that
Treasury management can also help your company with making short, medium and
long-term financial as well as investment decisions to create the best value for your
customers. Finally, by identifying precisely your financial resources, you will be able to
better plan your financial decisions for the future. Nevertheless, without implementing
the management of your treasury, you might experience some downsides in your
company.

Treasury Management has long been an important aspect of many corporation’s

financial management. It ensures the business is accurately tracking its daily sales and
payments in an effective manner, while also having sufficient liquidity to meet both
expected and unexpected financial obligations. More companies are realizing the
importance of treasury management. A global survey by Accenture, the professional
services consultancy, found that the top performing companies considered their levels
of liquidity risk as either their primary or secondary concerns. After all-cash only has
value when it is easily accessed.

1.2-Treasury Management Objectives

 Availability of right quantity – It ensures that the funds have been arranged
in the required quantity. This quantity is available to the firm either as external
loans or as internal generation.
 Availability at right time – The requisite funds for day to day working of the
firm are available in time in addition to being available in quantity.
 Deployment of fund in right quantity – It ensures that right quantity of
funds is deployed. For developing the right amount of funds, the treasury
manager keeps track of all receipts of funds and time table of deployment of
funds is to be drawn up.
 Deployment of fund in right time – A logical corollary of sourcing funds at
the right time is that funds should be deployed at the right time. The treasury
manager has to honour the outstanding commitments on working capital account
within a short span of time.
 Profiting from availability and deployment – One of the prime objectives of
a treasury manager is to ensure timely procurement of right amount of funds
and timely deployment of right amount of funds. The objective results in
administrative smoothening and paves way for register achievement of
performance targets of the form. Modern day treasury manager has another
objective which is to profit from such sourcing and deployment.
CEOs, CFOs, presidents, vice presidents – what’s the difference? With the changing
corporate horizon, it has become increasingly difficult to keep track of what people do
and where they stand on the corporate ladder. Corporate performance is one of the
main reasons why these terms exist. The evolution of public ownership has created a
separation between ownership and management. Before the 20th century, many
companies were small, family-owned, and family run. Today, many are large
international conglomerates that trade publicly on one or many global challenges.

In an attempt to create a corporation in which stockholder’s interests are looked after,

many firms have implemented a *two-tier corporate hierarchy. On the first tier is the
board of governors or directors ( individuals who are elected by the shareholders of the
corporation). On the second tier is the upper management (individuals who are hired by
the board of directors).

*This is what’s common in the U.S., in other countries corporate structure may be
slightly different.

A. Board of Directors (BOD).

Elected by the shareholders, the board of directors is made up two types of

representatives.

1. Inside directors (chosen from within the company). It can be a Chief Executive
Officer (CEO), Chief Financial Officer(CFO), manager, or any other person who
works for the company daily.

2. Outside directors (chosen externally and considered independent of the

company.

B. Management Team

Directly responsible for the corporation’s entire operations and reports directly
responsible for the company’s day-to-day operations and profitability. Includes the
following:
1.Chief Executive Officer (CEO): As the top manager, the CEO is typically responsible
for the corporation’s operations and reports directly to the chairman and the board of
directors. It is the CEO’s responsibility to implement board decisions and initiatives, as
well as to maintain the smooth operation of the firm with senior management’s
assistance.

2.Chief Operations Officer (COO): Responsible for the corporation’s operations, the COO
looks after issues related to marketing, sales, production, and personnel. Often more
hands-on than the CEO, the COO looks after day-to-day activities while providing
feedback to the CEO. The COO is often referred to as senior vice president.

3.Chief Financial Officer (CFO): Also reporting directly to the CEO, the CFO is
responsible for analyzing and reviewing financial data, reporting financial performance,
preparing budgets, and monitoring expenditures and cost. The CFO is required to
present this information to the BOD at regular intervals and provide it to shareholders
and regulatory bodies such as the Securities and Exchange Commission (SEC). Also
usually referred to as a senior vice president, the CFO routinely checks the corporation’s
financial health and integrity.

It is relatively easy to identify the Human Resource (HR) Department and define its
roles and responsibilities to matters related to HR, and usually the definition does not
change much from organization to organization. However, for the Corporate Treasury,
sometimes it might not be that straightforward-the roles and responsibilities of one
Treasury department might differ from another setup in a different organization.

In general, the Corporate Treasury manages the organization’s liquidity risks, financial
risks, banking relationships, working capital and supporting management and business
units.

Treasury Department

The treasury department is responsible for a company’s liquidity. The treasure must
monitor current and projected cash flows and special funding needs, and use this
information to correctly invest excess funds, as well as be prepared for additional
borrowings or capital raises. The department must also safeguard existing assets, which
calls for the prudent investment of funds, while guarding against excessive losses on
interest rates and foreign exchange positions. The treasurer needs to monitor the
internal processes and decisions that cause changes in working capital and profitability,
while also maintaining key relationships with investors and lenders.

1.3-Role of the Treasury Department

Ultimately, the treasury department ensures that a company has sufficient cash
available at all times to meet the needs of its primary business operations. However, its
responsibilities range well beyond that single goal. It also has significant responsibilities
in the following areas:

Cash forecasting: The accounting staff generally handles the receipt and
disbursement of cash, but the treasury staff needs to compile this information from all
subsidiaries into short range and long-range cash forecasts. These forecasts are needed
for investment purposes, so the treasury staff can plan to use investment vehicles that
are of the correct duration to match scheduled cash outflows. The staff also uses the
forecasts to determine when more cash is needed, so that it can plan to acquire funds
either through the use of debt or equity. Cash forecasting is also needed at the
individual currency level, which the treasury staff uses to plan its hedging operations.

Working capital management: A key component of cash forecasting and cash

availability is working capital, which involves changes in the levels of current assets and
current liabilities in response to a company’s general level of sales and various internal
policies. The treasurer should be aware of working capital levels and trends, and advise
management on the impact of proposed policy changes on working capital levels.

Cash management: The treasury staff uses the information it obtained from its cash
forecasting and working capital management activities to ensure that sufficient cash is
available for operational needs. The efficiency of this area is significantly improved by
the use of cash pooling systems.

Investment management: The treasury staff is responsible for the proper

investment of excess funds. The maximum return on investment of these funds is rarely
the primary goal. Instead, it is investments with a company’s projected cash needs.
Treasury risk management: The interest rates that a company pays on its debt
obligations may vary directly with market rates, which present a problem if market rates
are rising. A company’s foreign exchange positions could also be at risk if exchange
rates suddenly worsen. In both cases, the treasury staff can create risk management
strategies and implement hedging tactics to mitigate the company’s risk.

Management advice: The treasury staff monitors market conditions constantly, and
therefore is an excellent in – house resource for the management team should they
want to know about interest rates that the company is likely to pay on new debt
offerings, the availability of debt, and probable terms that equity investors will want in
exchange for their investment in the company.

Credit rating agency relations: When a company issues marketable debt, it is likely
that a credit rating agency will review the company’s financial condition and assign a
credit rating to the debt. The treasury staff responds to information requests from the
credit agency’s review team and provides it with additional information over time.

Bank relationships: The treasurer meets with the representatives of any bank that
the company uses to discuss the company’s financial condition, the bank’s fee structure,
any debt granted to the company by the bank, and other services such as foreign
exchange transactions, hedges, wire transfers, custodial services, cash pooling, and so
forth. A long-term and open relationship can lead to some degree of bank cooperation
if a company is having financial difficulties, and may sometimes lead to modest
reductions in bank fees.

Fund raising: A key function is for the treasurer to maintain excellent relations with
the investment community for fund-raising purposes. This community is composed of
the sell side, which are those brokers and investment bankers who sell the company’s
debt and equity offerings to the buy side, which are the investors, pension funds, and
other sources of cash, who buy the company’s debt and equity. While all funds
ultimately come from the buy side, the sell side is invaluable for its contacts with the
buy side, and therefore is frequently worth the cost of its substantial fees associated
with fund raising.
Credit granting: The granting of credit to customers can lie to customers can lie
within the purview of the treasury department, or may be handed off to the accounting
staff. This task is useful for the treasury staff to manage, since it allows the treasurer
some control over the amount of working capital locked up in accounts receivable.

1.4-Significance of Treasury Management

The end goal of any for-profit enterprise is to maximize owner's wealth. For
corporations, this translates into maximizing shareholder wealth. Treasury
management drives value creation through maximizing cash liquidity for companies
that often have fluctuating cash flow and needs. It achieves this through cash flow
management, short-term financing and medium-term financing. Treasury
management plays a critical role by ensuring that a company has the cash it needs at
all times to run its business.
Treasury management involves the process of managing the cash, investments and
other financial assets of the business. The goal of these activities is to optimize
current and medium-term liquidity and make solid financial decisions involving
invested and investable assets. Treasury management also includes hedging where
needed to reduce financial risk exposure.
Cash Flow Management
Cash is critically important for small businesses. Profitable companies can fail due
to insufficient cash on hand to pay bills. The treasury management function monitors
the timing and amounts of cash inflows and outflows, a critical component of cash
flow management. Cash inflows include accounts receivable conversions to cash,
short-term and medium-term borrowing, asset sales or dispositions, and accounts
payable conversions to actual bill payments. Treasury management also includes
monitoring and tracking those activities that require the largest use of cash.
Float
Treasury management's role also involves lengthening the amount of time a
company retains the money needed to pay its bills while shortening the time period it
forgoes money due from its customers. Treasury management processes therefore
include setting accounts payable and receivable policies, setting credit approval
policies and defining collection terms. These activities provide a company with float,
or extra short-term cash on which it can earn interest. Larger companies may
establish savings and money market accounts to use as sweep accounts to earn short-
term interest on incoming funds that the firm will soon use to pay its bills.
Relationships and Risks
 In larger corporations, treasury management also includes managing shareholder
relations, managing financial risk and ensuring adequate and appropriate sharing of
financial information. The shareholder relations piece has significance, because strong
relations and a belief in the company’s strategy allow corporations that need
additional funds to raise those funds from existing shareholders. Financial risk
management may range from hedging against commodity or currency risk to
establishing alternative financing plans for upcoming projects.
Information Sharing
Treasury managers need information from internal departments and groups to
make suitable decisions. They must also share information to adequately support
those groups and assist with their decision-making. In addition, treasury management
plays an important communication role with lenders as part of the financing duties.
This function provides lenders and other financial institutions with the financial
information required to show compliance with loan terms.
1.5-Function and Scope of Treasury Management

Scope of Treasury Management:

Treasury management is concerned with both macro and micro facets of the economy.
At the macro level, the inflows and outflows of cash, credit and other financial
instruments are the functions of the government and the business sectors. These
inflows are arranged by them as borrowing from the public. The micro units utilize
these inflows and build up their capacities for production of output.

This leads to establishment of a production system which logically leads us to the

natural consequence, i.e. the establishment of distribution and consumption systems.
Once the production, distribution and consumption systems are in place at the micro
level, the generation of surpluses at the units begins. These surpluses are channeled
back into the macro system as outflows from the micro system.

Functions of Treasury Management:

 Cash Management: The Treasury Manager controls the cash assets and

liabilities of the organization.
 Liquidity & Funds Management: Analysis of cash flow arising out of asset
liability transaction and funding various asset of balance sheet is the function of
treasury management. It also involves policy inputs to strategic planning and
yielding expected returns in credit and investment.
  Risk Management: Treasury management plays an active role in risk
management by managing the impact of the changes in interest rates, credit risk
due to increasing NPA’s. It includes customer credit management,
vendor/contractor financial analysis, liability claims management, business
disaster recovery, and employee benefits program risk.
 Reserve Management & Investment: It includes selection of investment
products investment brokers and methods of borrowing. The treasury manager
develops cash management information system and investment policy and
processes.
 Maintaining good relations with supplier of funds, particularly the investors and
shareholders.
 Looking after the financial implications of strategic and policy decisions.
 Interaction with financial market in general and with capital market in particular.

1.6-Tools of Treasury Management

Treasury and cash management tools can help improve your company in various ways.

Learn about what tools can help you manage your cash and treasury.
For a business to be successful, it must break through many barriers with its innovation
or exceptional service. Very few companies are able to see this solid growth without a
well thought out market strategy and execution. It is also equally important to manage
your finances to see success. One of the ways to accomplish this is by monitoring the
many avenues of a business, whether it may be payables or receivables. These tools
can help you accelerate your receivables and help you increase your cash flow. This
way, you can worry less knowing that your investors and lenders feel confident in
investing in your company. Here are some cash and treasury management tools that
you can use to improve your financial system.

Liquidity Manager

One of the CFO’s most important tasks is to ensure the financial security of the
company. TO achieve this, they must have a 360 overview of the cash available.
Luckily, there are tools available that allows the CFO to determine the company’s net
liquidity situation. The biggest obstacle for this, however, lies in connecting all of the
data sources and consistently handling the information that flows from them. If this
information isn’t managed correctly, your company can face many problems such as
experience overdraft. Overall, these liquidity management tools can help your business
in many ways, such as secure better terms, optimizations through cash pooling, and
avoiding bank charges.

Foreign Exchange and Interest Rates

Acting on liquidity isn’t the only tool you can use to optimize your cash management.
Many businesses operate on an international environment through the use of various
currencies, meaning that they are exposed to foreign exchange risks. In these
situations, companies can leverage software solutions which accounts for cash receipts
and currency fluctuations. Though foreign exchange and interest rates, companies can
optimize their debts by leveraging management tools to hedge against the constantly
changing interest rates.

Cloud Computing

Cloud computing solutions are one of the biggest trends in this digital world. Cash and
treasury management has many tools that can help you optimize your finances and
work within the cloud. This approach makes it easier for businesses to deploy, manage,
and update their data in a more seamless manner. Through the use of configurations,
cloud-based solutions can be customized to better meet the user’s needs and
circumstances. With a cloud-based solution, businesses also reap the benefit of not
needing to invest in servers to host these tools.

Monitoring Other Financial Entities

In today’s business world, everything is connected. Companies are highly dependent on

their partners, meaning that assessing their reliability is a huge concern for financial
departments. For example, banks are now being monitored by companies, especially
after the Great Recession. There are software tools available that take into account the
changes of a financial institution’s health status. These tools, known as supply chain
finance, allow businesses to check the financial credibility of their customers as well, to
ensure that they are not at any risk doing business with them.

1.7-Environment With Treasury Management