Treasury Management
Areas to be covered:
➢ INTRODUCTION
➢ BASIC TREASURY FUNCTION
➢ CASH HANDLIG PROCEDURE
➢ OUTLINE AND GUIDELINES AND LEGISLATION IN RELATION TO
MANAGEMENT OF CASH BALANCES IN PUBLIC SECTOR ORGANIZATION
➢ EFFECT OF ECONOMIC AND FINANCIAL ENVOIRMENT ON
MANAGEMENT OF CASH PLACES
TREASURY FUNCTIONS
Treasury function ensures that the organisation has sufficient capital
to fund its operations and place any excess money into viable
investment options. It includes managing the cash flow, arranging
working capital, arranging funds for the lowest possible cost,
identifying the optimum cash balance, investing surplus cash in the
most sensible manner. It deals with how to make best use of the
available funds to maximise the organisation’s wealth. If this
function is not carried out effectively it will cause losses to the
entity and may negate all the efforts made by the organisation to
make profit.
Roles Of The Treasury Function:
1. Corporate finance: The financial objective of a company is to
maximise its value to its shareholders.
2. Liaison with banks: The treasury department interacts with the
company’s bankers and ensures that the relationship the company
has with its bankers is favorable.
3. Cash management: The objective of the treasury department is to
ensure the company's financial stability and solvency.
4. Funding management: The treasury department tries to arrange
funds to fulfill the company’s requirements, from the cheapest
source of finance.
5. Foreign currency management: An exchange rate risk arises when
the cost or sale price of the good is likely to change because of a
change in exchange rates. It is the duty of the treasury
department to mitigate or minimize the foreign currency risk faced
by an organisation.
6. Risk management: An organisation avails opportunity to keep its
excess cash for a certain time period. At the end of period, the
organisation able to take back its cash and interest. Interest
represents an additional amount of money the organisation is paid
by the external party for keeping its cash for the stipulated time
period. The word should is used here because all investment
options come with a certain amount of risk (i.e. the possibility that
their funds will not be returned to them).
7. Insurance: A company facing interest and foreign currency risk
needs to insure itself against losses. The treasury department
devises various strategies to mitigate, minimize or eliminate the
various financial risks faced by an organisation.
CASH HANDLING PROCEDURES
Cash handling includes the receipt, storage, payment and banking of
an organisation’s cash. Organisation management is responsible to
establish sufficient and appropriate internal control system to
prevent the incorrect recording, misuse and loss or theft of the cash.
Businesses normally receive income from two main sources:
1. cash receipts from customers
2. cheque receipts from customers
1. Controlling cash received from cash sales: Regardless of the source
of cash receipts, every business must properly safeguard and record
its cash receipts. One of the most important controls to protect cash
received from over-the-counter sales is a cash register. When a clerk
(cashier) enters the details of sales like invoice number and name of
a customer, the cash register displays the amount.
2. Controlling cash received in the mail: Most companies’ invoices are
designed so that customers return a portion of the invoice, called
remittance advice, with their payment. The employee who opens the
incoming mail should initially compare the amount of cash received
with the amount shown in the remittance advice. All cash received
in the mail is sent to the Cashier’s Department.
The separation of the duties: The separation of the duties of the
Cashier’s Department, which handles cash, and the Accounting
Department, which records cash, is a preventive control. If an
employee of the Accounting Department both handles and records
cash, he could steal cash and change the accounting records to
conceal the theft.
Other security aspects of handling and storing money
1. General security measures:
• Encourage the use of cheques, credit / debit cards or tokens.
• Pay wages straight into staff bank accounts or by cheque.
• Empty tills, payphones and vending machines frequently.
• Bank money frequently.
• Use drop-in safes at offices and counters only for receipt of cash.
• Give staff advances for petty cash expenses, and pay them by
cheque when they make a claim, to avoid large amounts of
petty cash onsite.
2. Keeping cash onsite:
• Make sure cash is held as far away from exits as possible.
• Fit high-specification locks on doors to rooms where cash is held.
• Use a safe and fix an alarm.
• Avoid keeping cash overnight.
• Make cash handling as private as possible, and make sure staff
doesn’t handle cash alone.
• The person Keeping financial records should not handle cash.
3. Moving cash around:
• Vary the route to the bank and the days of bank visits.
• Use at least two people to carry cash.
• Restrict information about carrying cash to those directly involved.
People who deposit cash in the bank should be rotated and
information about this banking operation should be kept
confidential.
Important Terms:
• Portfolios
• Building Society
• Financial Securities
• Treasury bills
• Gilts
• Bank bills
• Corporate Bonds
• Commercial Papers
• Local Authority Bills and Bonds
• Certificates of Deposit
Interest rates: Firms that borrow funds are obliged to pay interest on their debts which would
fall due within one year. Firms which invest surplus cash in instruments like treasury bills, gilts,
commercial papers, etc. would earn interest from such short term investments. Thus, a
change in the interest rates of borrowing or investing will have a direct effect on the cash
management of a firm.
Exchange rates: Cash flows of organisations (anticipated future cash flows as well as currently
contracted ones) involved in export / import trade or operations in international arena would
be affected by movements in exchange rates of the domestic country or of the other
trading nation. To gauge the impact of exchange rate changes on an enterprise’s cash
situation, its operating managers need to foresee the firm’s exposure to exchange rate risks.
Accordingly, the firm would have to maintain appropriate cash balances (in case a
downward movement of the domestic currency).
Level of taxation: The taxation level of the economy would affect cash management
decisions of firms. A higher tax rate would mean that firms would have to maintain higher
cash balances to fund the same. When tax rates go down, firms can hold lower amount of
cash (and employ the surplus amount in short term investments).
Inflation: Periods of inflation reduces the real value of money held by an organisation. Thus, the
organisation has to hold more cash in times of rising inflation since more funds would be
required now to service the short term obligations.
