UNIT 1.

INTRODUCTION TO TREASURY MANAGEMENT

This unit includes four lessons: meaning and importance of treasury

management; the treasurer’s functions; treasury management – functions; and
financial department organization chart.

Learning Outcomes

1. Understand the meaning and importance of Treasury Management;

2. Identify the treasurer’s functions and treasury management’s functions;
3. Appreciate and introduce the concept of Financial Department’s organizational chart;
4. Impart the knowledge learned from this lesson.

What is Treasury Management and Its Importance?

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 includes a firm's collections, disbursements,

concentration, investment and funding activities. In larger firms, it may also include
trading in bonds, currencies, financial derivatives and the associated financial
risk management.

History. As far as its definition is concerned, the treasurer’s professional profile

is of Anglo-Saxon origin. An evaluation of the survey indicates, among the core
functions, a wide overlap with the Anglo-Saxon treasury model, although, some clear
divergences were also found within the marginal and other functions.

Importance of Treasury Management

The key goal of treasury management is planning, organizing and controlling

cash assets to satisfy the financial objectives of the organization. The goal may be to
maximize the return on the available cash, or minimize interest cost or mobilize as much
cash as possible for corporate ventures.

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.

Lesson 2: The Treasurer’s Functions

If you were to ask what a corporate treasurer was back in 1970s, most people
would not have an answer. Fast forward today, the corporate Treasury has evolved
and has taken on a life of its own.

From banks to institutions to corporations, it is almost quintessential to find a

Treasury department in these setups now as compared to during the 1990s. Post the
Great Financial Crisis in 2008, today Corporate Treasurers are gaining more
importance and visibility in the Boardrooms.

The Treasurer’s functions can in principle be classified as follows:

 Core functions (functions which can be found in every company)

 Marginal functions (activities which are extremely company-specific and/or only
form part of the treasury in selected cases), as well as
 Functions, marginal sectors and interfaces to other organizational units or tasks
which, whilst being important to the treasury, do not normally form part of the
treasurer’s role.
 Treasury Management in a financial entity is a principal determinant in the
entity’s financial strategy and financial policy enabling the entity to determine what
businesses to invest in organising the appropriate funding for the varying business segments,
and controlling the risk in the organisation. Dependent on the inherent risks prevailing in the
current environment in which the entity is operating in, treasury management seeks to create
an appropriate capital structure of debt and equity in order to fund the entity, getting the
optimum balance between expenses and risk . This translates into the need to ensure that at
all times the entity has the liquidity and cash to meet its financial obligations as they become
due, taking in funding from equity or debt capital markets activities, bank borrowings, through
to day-to-day cash management and investment.
 In essence treasury management is all about handling the banking requirements, the funding
for the entity and managing financial risk . It therefore incorporates raising and managing
 money, currency, commodity and interest rate risk management and dealing, and, in some
entities the related areas of insurance, pensions, property and taxation.

Corporate Treasurers Should Have Mandates from Senior Management on

Treasury Matters

In most setups, the Corporate Treasury falls under the Finance Group in the
organization with the Treasurer reporting to the CFO. The organizational structure
does vary in some setups but usually the Corporate Treasury is closely related to the
Finance arm.

Most Treasurers have mandates from their senior management and for
treasury specific matters:

 Cash and Liquidity Management

 Financial Risks Management

 Banking Relationship Management

 Funding and Debt Management

 Proprietary Trading Limits

With the mandates, Treasurers will be required to present and report to senior
management on a regular basis. The reports can range from a macro overview to
detailed metrics in several key Treasury areas.

In some Treasury setups with proprietary trading mandates, daily reports with
live trading positions and up to date performances are delivered to their respective
management.

Lesson 3: Treasury Management – Functions

 What are the Main Functions of the Treasury Department?
Most Treasury setups will cover the following functions:

 Cash and Liquidity Management

 Financial Risks Management (FX, Interest Rates, Commodities, etc)
 Working Capital Management
 Long Term Funding
 Bank Relationship
 Management and Business Units Support
 Tax and Treasury Accounting
 Company Credit Rating Management
 Company Capital Structure
Based on a 2014 survey done by PWC, the functions of financial risk management,
cash and liquidity management and funding rank as the most important roles of a
corporate treasury in large organisations.
For small organisations, supporting management and business units, maintaining
bank relationships and financial risk management rank as the most important for a
corporate treasury. 
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 Lesson 4: Financial Department Organization Chart
Financial Department Organization Chart

Treasury departments are structured in different ways to best meet the needs
of an organization. They vary in size and structure according to the complexity of a
business. In smaller companies, treasury operations are sometimes carried out by just
one person or may be a role conducted by a finance department.

In a large, complex, international business, however, it is likely to involve a

number of staff, who might be either professional managers, such as a regional
treasurer, or specialists in particular treasury activities, such as foreign exchange
dealers or investment managers. Because treasury activities involve transactions with
large sums of money, processes are often set up so that no one single person carries
out an end-to-end transaction. This is to prevent errors and also fraud!

Most commonly a treasury department will be set up into three different

departments:

1. Front office

Responsible for carrying out day-to-day analysis and transactions relating to the
management of funding, risk, cash and liquidity.

2. Middle office
Only larger treasuries will have a middle office often picking up some of the roles under
‘back office’, commonly the reporting and analysis type roles, but it varies enormously
by organization.

3. Back office

Administers and supports the front office and its main functions are to validate (confirm
and verify), settle, and account for deals.

Depending on the size of a company, treasury departments can be centralized,

decentralized or a combination of both.

Companies that are geographically dispersed can benefit from decentralization,

particularly where local knowledge can be beneficial. Centralization on the other hand is
often more cost effective for an organization.

In a decentralized set up, there will often be a small group of specialists located
at the head office who act as advisors. In a more centralized operation, treasury may
undertake an agency role where the day-to-day treasury decisions are still made at local
level by operational management but the execution is centralized to obtain efficiencies
and economies of scale. An in-house banking role is where the central treasury acts as
an internal bank with which all the subsidiaries deal.

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department