Chapter I

TREASURY MANAGEMENT OVERVIEW

I. INTRODUCTION

TREASURE – Gold, silver, jewelry, money

TREASURY - Storage place of treasure

Treasure, generally refers to the FUNDS AND REVENUE OF THE BANK.

Treasury Management can be understood as the planning, organizing and

controlling holding funds and working capital of the enterprise in order to make the
best possible use of the funds, maintain firm’s liquidity, reduce the overall costs of
funds, and lessen operational and financial risk.

- The association of corporate treasures defines Treasury Management as

“the corporate function handling of all financial matters, the generation of
external and internal funds for business, the management of currencies
and cash flows, and complex strategies policies and procedures.
- Treasury management is the process that concerns the managing of
cash, investments, and any other financial assets that a company has.
- Treasury generally refers to the funds and revenue at the disposal of the
bank and day to day management of the same.
- The treasury acts as the custodian of cash and other liquid assets.
- The art of managing, within the acceptable level of risk, the consolidated
fund of the bank optimally and profitably is called Treasury Management.
- It is the window through which banks raise funds or place funds for its
operations.

II. LEARNING OUTCOMES (Week 2 – 3 )

 Discuss treasury management

 Identify the scope and importance of treasury management and its function
 Describe the structure of treasury
 Identify the objectives of treasury management , its principles and role of the
dept.
 Differentiate treasury management between financial management
 Explain treasury controls
 Identify the treasurer job description and the position of treasury within the
corporate structure

III. CONTENT

- Treasury Management – managing the daily cash flow and liquidity of

funds within the bank.
 - Handing the bank’s investments in securities, foreign exchange,
asset/liability management.
- The corporate handling of all financial matters.

Scope of Treasury Management

Treasury management is the management of an enterprises’ holdings, with

the ultimate goal of managing the firm’s liquidity and reducing its operational,
financial and reputational risk.

Treasury management includes a firm’s collection, disbursements,

concentration, investment and funding activities.

Importance of Treasury Management

Why is money important?

The end-goal of any company, at least a for-profit company, is to make as

much money as possible. It is treasury management that helps to do this through
the driving of value creation through the maximization of cash liquidity.

This is achieved through enforcing a tried, tested and quality treasury strategy
that helps cash flow management and short-to-medium term financing. By ensuring
that a company always has the cash it needs, treasury management alongside a
good treasury strategy keeps your organization running with the money it needs to
do day-to-day 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.

Why Management of money is needed?

 Until recently, no major efforts were made to manage

cash.
 Competitive business environment resulting from the
liberalization of the economy, there is a pressure to
manage cash.
 The demand for funds for expansion coupled with high
interest rates, foreign exchange unpredictability, and the
growing volume of financial transactions have
necessitated efficient management of money.
Function of Treasury

The general mission of the treasury department is to manage the liquidity of

a business. This means that all current and projected cash inflows and outflows
must be monitored to ensure that there is sufficient cash to fund company
operations, as well as to ensure that excess cash is properly invested.

Organizational Structure

 It should facilitate the handling of all market operations from dealing to

settlement, custody and accounting, in both the domestic and foreign
exchange markets.
 As follows:
Front-Office : Dealing Risk-Taking
Mid-Office : Risk Management and Management Information
Back-Office : Confirmations, Settlements, Accounting and Reconciliation

Structure of an Integrated Treasury

 The Treasury department is manned by the front office, mid office, back
office and the audit group. In some cases, the audit group forms a part of the
middle office only.

 The dealers and traders constitute the front office. In the course of their
buying and selling transactions, they are the first point of boundary with the
other participants in the market (dealers of other banks, brothers, and
customers).
 They report to their department heads. They also interact among themselves
to market activity opportunities.
 A mid office set up, independent of the treasury unit, responsible for risk
monitoring, measurement analysis and reports directly to the Top
management for control.
 The unit provides risk assessment to Asset Liability Committee (ALCO) and is
responsible for daily tracking of risk exposures, individually as well as
collectively.
 The back office undertakes accounting, settlement and reconciliation
operations.
 The audit group independently inspects/audits daily operations in the
treasury department to ensure adherence to internal/regulatory systems and
procedures.

Objectives of Treasury Management

Key goal of Treasury Management is planning, organizing and controlling

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

1. Funds management is estimating the liquidity requirement of a bank and

meeting those in a cost effective manner.
2. Liquidity management is the ability of fund the asset and meet the financial
obligations.
3. Profit center includes all the activities directed towards increasing the
profitability of the bank with laid down risk framework.
4. Asset liability and risk management (ALM) is monitoring the institutions
liquidity profile.

- The end goal of Treasury Management is to increase short-to-medium

term liquidity and help directors make good financial decisions
involving their most important assets.

Principles of Treasury Management

1. Principle of Liquidity
- Maintain adequate level of liquidity to meet borrower and depositor’s
demand.
2. Principles of Security
- Banks should invest the investable funds in safe and secure areas in
which default risk will be minimum.
3. Principle of Profitability
- Investment made by banks should provide the maximum returns possible.
4. Principle of Portfolio
- Invest in the portfolio of various assets with the objectives of risk mitigation
(alleviation, easing)

Role of the Treasury Department

The general mission of the Treasury Department is to manage the liquidity of

a business. This means that all current and projected cash inflows and outflows
must be monitored to ensure that there is sufficient cash to fund company operations
as well as to ensure that excess cash is properly invested.

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.

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.

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 much more important to not put funds at risk,
and also to match the maturity dates of 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 particularly in anticipating: markets’ interest rates may rise and leave the
company pays on its debt obligations, company’s foreign exchange positions that
could also be at risk if exchange rates suddenly worsen.

• 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 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.

• Other activities. If a company engages in mergers and acquisitions on a regular

basis, then the treasury staff should have expertise in integrating the treasury
systems of acquirees into those of the company. For larger organizations, this may
require a core team of acquisition integration experts. Another activity is the
maintenance of all types of insurance on behalf of the company. This chore may be
given to the treasury staff on the grounds that it already handles a considerable
amount of risk management through its hedging activities, so this represents a
further centralization of risk management activities. Clearly, the original goal of
maintaining cash availability has been expanded by the preceding points to
encompass some types of asset management, risk management, working capital
management, and the lead role in dealing with banks and credit rating agencies.
Thus, the treasury department occupies a central role in the finances of the modern
corporation.

Treasury Management plays a vital role when it comes to communicating with

lenders for financing. Treasury Management helps to provide all of the information
that lenders and financial institutions need.
 Treasury Department

The financial center of the organization

 Safeguarding and stewardship of financial assets and the

management of financial liabilities
 Responsible for a company’s liquidity. Monitor current cash flow,
monitor projected cash flow, monitor special funding needs, use this
information to correctly invest excess funds and prepare for additional
borrowings or capital raises

Difference Between Treasury Management and Financial Management

Treasury Management – focus is on short-term and day to day monitoring of

investments

- lies in their level of activity

Financial Management - focus on the long-term and strategic investments

Treasury Controls

Treasury Controls – A process affected by an entity’s Board of

Directors, management or other personnel (including treasury team), designed to
provide reasonable assurance regarding the achievement of (treasury and corporate
finance) objectives in the following categories: effectiveness and efficiency of
(treasury) operations; reliability of financial (and treasury) reporting; compliance with
applicable laws and regulation.

Given the large sums of cash involved in many treasury transactions, it is

important to have a broad set of controls that help to ensure that transactions are
appropriate. The following chapters contain sections on controls related to those
chapter topics. At a more general level, it is critical that duties be properly
segregated among the treasury staff, so that anyone concluding a deal never
controls or accounts for the resulting cash flows. For example, trading activities
should be separated from confirmation activities, so that someone fraudulently
conducting illicit trades cannot waylay the confirmation arriving from the
counterparty. In addition, a senior - level treasury manager should approve all
trades, yet another person (possibly in the accounting department, in order to be
positioned out of the departmental chain of command) should reconcile and account
for all transactions. It is also useful for someone outside of the trading function to
regularly compare brokerage fees or commissions to reported transactions, to see if
there are any unauthorized and unrecorded trades for which the company is paying
fees. Treasury is also an excellent place to schedule internal audits, with the intent
of matching actual transactions against company policies and procedures. Though
these audits locate problems only after they have occurred, an adverse audit report
frequently leads to procedural changes that keep similar problems from arising in the
future. In addition to segregation controls and internal auditing, the treasurer should
impose limit controls on a variety of transactions. These limits can prohibit or
severely restrict the treasury staff from investing in certain types of financial
instruments (such as some types of financial derivatives) that present an unduly high
risk of capital loss. Another limitation is on the amount of business a company
chooses to do with a specific counterparty, which is designed to reduce company
losses in the event of a counterparty failure. Limitations can also apply to certain
currencies if there appears to be some risk that a country ’ s leaders may impose
currency controls in the near future. Finally, there should be monetary caps on the
transaction totals to which anyone in the treasury department can commit the
company. Even the treasurer should have such a limitation, with some major
transactions requiring the approval of the company president or board of directors.
The controls noted here are only general concepts.

POSITION OF TREASURY WITHIN THE CORPORATE STRUCTURE

In a small company, there is no treasury department at all, nor is there a

treasurer. Instead, treasury responsibilities are handled by the accounting.

Treasurer Job Description

Reports to: Chief Finance Officer (CFO)

Basic function: This position is responsible for corporate liquidity, investments, and
risk management related to the company’s financial activities.

Principal accountabilities:
1. Forecast cash flow positions, related borrowing needs, and available funds for
investment.
2. Ensure that sufficient funds are available to meet ongoing operational and capital
investment requirements.
3. Use hedging to mitigate financial risks related to the interest rates on the
company’s borrowings, as well as on its foreign exchange positions.
4. Maintain banking relationships.
5. Maintain credit rating agency relationships.
6. Arrange for equity and debt financing.
7. Invest funds.
8. Invest pension funds.
9. Monitor the activities of third parties handling outsourced treasury functions on
behalf of the company.
10. Advise management on the liquidity aspects of its short - and long – range
planning.
11. Oversee the extension of credit to customers.
12. Maintain a system of policies and procedures that impose an adequate level of
control over treasury activities.
IV. QUIZ

1. Differentiate treasury management between financial management.

2. Identify the scope and importance of treasury management and its function.
Explain each.
3. Give the objectives of treasury management , its principles and role of the
dept. Do you agree or disagree? Justify your answer.
4. Explain treasury controls.