Chapter 1 - Role of Treasury Management

Question 1

Major Objectives of Treasury Management (9)

Answer 1

Maintain liquidity
Optimize cash resources
Manage risk
Maintain access to short term financing
Manage investments
Maintain access to medium and long term financing
Manage information and technology
Collaborate with other departments and share financial information
Manage external parties

Question 2

Daily Treasury Activities (11)

Answer 2

Calculate cash position
Monitor cash balances
Collect, concentrate, and disburse cash
Initiate and approve transactions
Manage confirmations and reconciliations
Keep accurate records and create required reports
Develop cash flow forecasts
Invest and borrow funds on a short term basis when needed
Research and reconcile exception items (e.g. unexpected charges, missing deposits)
Coordinate with other finance areas (AR, AP, payroll, tax, legal accounting)
Manage bank and investment administration and relationships and procurement of services

Question 3

CFO

Answer 3

Reports to the CEO
Responsible for financial management of the firm
Plays important role in strategic planning, capital budgeting and financial planning process
Also responsible for accurate financial reporting (due to SOX)

Question 4

Treasurer

Answer 4

Reports to the CFO
Primarily responsible for:
- Implementing treasury policies and procedures
- Overseeing daily liquidity and cash mgmt
- Overseeing short and long term investing
- Arranging both short and long term external financing
- Managing financial risk
- Managing relationships with banks / FIs, credit rating agencies and other serice providers
- Managing domestic and international payments
- In some companies, treasurer may be responsible for insurance and/or the pension/retirement fund

Question 5

Assistant Treasurer or Director of Treasury Operations

Answer 5

Reports to the Treasurer
Responsible for daily treasury operations, to allow treasurer to focus on strategic issues

Question 6

Cash Manager

Answer 6

Reports to the Treasurer (or Asst Treasurer)
Responsible for directing daily cash mgmt operations including:
- execute global payments
- cash administration
- manage bank accounts
- manage bank relationships

Question 7

Foreign Exchange Manager

Answer 7

Reports to the Treasurer (Asst Treasurer or Cash Manager)
Responsible for executing daily FX transactions

Question 8

Controller

Answer 8

Reports to the CFO
Responsible for financial reporting and compliance
Often also responsible for A/P, accounting, budgeting, and coordinating with external auditors

Question 9

Financial Planning and Analysis (FP&A) Manager

Answer 9

May report directly to the CFO or reports to the Controller
Responsible for forecasting and interpreting financial info to provide insight to the board and management to help with decision making

Question 10

Risk Manager

Answer 10

Reports to the Treasurer
Responsible for evaluating and negotiating insurance policies and coverage levels as well as disaster recovery and business continuity planning

Question 11

Investment Manager

Answer 11

Reports to the Treasurer (or may report directly to CFO)
Responsible for investing longer-term retained cash and / or managing corporate pension fund

Question 12

Internal Auditor

Answer 12

Reports directly to Board of Directors to ensure auditor’s independence and objectivity.
Responsible for managing the internal audit function to ensure controls and procedures are established to protect the company from losses due to inefficiency, inaccuracy, or fraud.

Question 13

Credit Manager

Answer 13

May report to controller, treasurer, or sales manager
Responsible for:
- preserving and collecting A/R
- implementing corporate credit policies
- approving credit terms and limits to customers
- establishing info systems to monitor AR

Question 14

Accounts Receivable Manager

Answer 14

Usually reports to the Controller
Responsible for:
- monitoring and collecting AR that are created through credit sales
- accurate posting of all payments
- reconciling payments to invoices

Question 15

Accounts Payables Manager

Answer 15

Usually reports to the Controller
Responsible for:
- ensuring payments are made to vendors and suppliers per credit terms
- must maintain list of authorized vendors and suppliers
- review incoming invoices, match invoices to approved PO’s, review invoices for proper approval, and scheduling payment

Question 16

Investor Relations Manager/ Officer

Answer 16

Typically reports to the CFO
Responsible for:
- Ensuring shareholders and bondholders receive up to date info on the company, especially financial reporting
- Provides access to annual reports
- Manages regular investor briefings
- Fields questions from existing and potential investors

Question 17

Ways to Organize Treasury Structure

Answer 17

Cost center vs. profit center
Centralized vs. decentralized
Shared service center / global business services groups
In house bank

Question 18

Cost Center

Answer 18

Most common approach
CON: mgmt may focus on cost and not value provided which may lead to challenges obtaining adequate budget and staff

Question 19

Profit Center

Answer 19

Most appropriate for companies heavily involved in global finance, trade, risk management
Rationale for establishing treasury as a profit center is that it should generate income from its trading, hedging, or investment activities
CON: risk associated with the pressure to produce profits from these activities

Question 20

Centralized Treasury

Answer 20

Used by companies with multiple legal entities, geographically dispersed sales offices, and/or limited personnel
PRO: stronger control, economies of scale, lower aggregate operating costs
- could be significant tax advantages for MNC’s based on location of treasury
CON: local subs have reduced autonomy

Question 21

Decentralized Treasury

Answer 21

Used by companies with autonomous subs and multiple operational entities
PRO: local personnel are familiar with local business/banking practices, regulations, language, customs, culture
CON: duplication of effort across units, greater burden for compliance; increased need for coordination

Question 22

Which of the following identifies who must certify that their firm is compliant with NYSE basic standards regarding independent directors?

Answer 22

The CEO

As part of the requirements for listing, many exchanges have established basic standards for the role of independent directors. CEOs must certify to the listing exchange(s) that their companies comply with these standards.

While the specific rules and regulations regarding independent directors may vary by country and stock exchange, many global companies look to NYSE regulations for guidance, especially if they could potentially trade on the NYSE.

Question 23

Which of the following are typical responsibilities of a treasurer?

I. Financial institution relationship management
II. Internal audit
III. Short-term borrowing
IV. Liquidity management

Answer 23

I, III and IV only

The treasurer is primarily responsible for:

Developing strategy and implementing treasury policies and procedures
Overseeing daily liquidity and cash management
Overseeing short- and long-term investing
Arranging both short- and long-term external financing
Managing financial risks
Managing relationships with banks/financial institutions, credit rating agencies, and other service providers
Managing domestic and international payment

Question 24

A key objective of successful treasury management is _____________.

Answer 24

Ensuring liquidity

The primary goal of treasury management is to effectively and efficiently manage an organization’s cash and related financial assets (and liabilities) to support the achievement of the organization’s business objectives and strategy. This goal is critical because all firms, no matter how successful, have a finite amount of liquid assets on hand during a given period of time.

Question 25

Group the following corporate positions along the usual reporting hierarchy:

1. Treasurer
2. Controller
3. Accounts payable manager
4. Cash manager

Answer 25

4 reports to 1, and 3 reports to 2

The cash manager directs daily cash management operations. Depending upon the size of the company, the cash manager may report to the treasurer or the assistant treasurer.

The controller’s primary function is financial reporting and compliance, but the controller is often also responsible for accounts payable, accounting, budgeting, and coordinating with external auditors.

Question 26

Which of the following is an advantage for multinationals of using centralized control in treasury operations?

Answer 26

Multinationals can operate treasury in a tax advantaged location

A centralized treasury offers the advantages of stronger control, economies of scale, and lower aggregate operating costs. The advantages can be even greater for multinationals as there may be significant tax advantages based on the location of treasury. A disadvantage of a centralized treasury is that local subsidiaries have reduced autonomy.

In a decentralized structure, field personnel are responsible for some daily treasury functions, but there is often a duplication of effort—and resources—across units. Decentralized or foreign offices may also have a heavier burden in regards to compliance efforts, due to span-of-control issues and the increased need for coordination.

Question 27

Daily treasury operations (e.g., cash management) involves which of the following?

Answer 27

Procurement of bank investment administration services

A cash management team’s daily activities typically include:
Calculating the cash position
Monitoring cash balances on deposit at financial institutions
Collecting, concentrating and disbursing cash
Initiating and approving transactions
Managing confirmations and reconciliations
Keeping accurate records and creating required reports
Developing cash flow forecasts
Investing and borrowing funds on a short-term basis when needed
Researching and reconciling exception items, such as unexpected charges on bank accounts, missing deposits, and outstanding checks
Coordinating efforts with other finance areas, such as accounts receivable (A/R), accounts payable (A/P), payroll, tax, legal, and accounting
Managing bank and investment administration and relationships, including the procurement of related services

Question 28

Main Objectives of Treasury Management (9)

Answer 28

Maintain liquidity
Optimize cash resources
Manage risk
Maintain access to short-term financing
Manage investments
Maintain access to medium and long term financing
Manage information and technology
Collaborate with other departments and share financial info
Manage external parties

Question 29

Daily Treasury Operations (11)

Answer 29

Calculate cash position
Monitor cash balance
Collect, concentrate, disburse cash
Initiate and approve transactions
Manage confirms and reconciliations
Keep accurate records and create required reports
Develop cash flow forecast
Invest and borrow funds on a short term basis
Research and reconcile exception items
Coordinate with other finance areas (AR, AP, legal, tax)
Manage external relationships (banks, investment, procurement)

Question 30

Types of Treasury Org Structures (4)

Answer 30

(1) Cost center vs profit center
(2) Centralized vs decentralized
(3) Shared services center / global business service groups
(4) In house bank

Question 31

Treasury as a cost center

Answer 31

Most common
- treasury is usually regarded as support function; not expected to generate profit for the firm
- CON: mgmt may focus on cost vs value which may make it challenging to obtain adequate resources (budget, staff)

Question 32

Treasury as a profit center

Answer 32

More appropriate for companies heavily involved in global finance, trade, or risk mgmt e.g. trading operations, hedging / investment activities
- CON: risk associated with the pressure to produce profits from these activities

Question 33

Centralized treasury

Answer 33

Good for organizations with multiple legal entities, geographically dispersed sales offices
- PRO: stronger controls, economies of scale, lower aggregate operating costs; tax advantages for MNCs based on location of treasury function
- CON: local subs have reduced autonomy

Question 34

Decentralized treasury

Answer 34

Used by companies with autonomous subs or multiple operating entities (mfg, distribution, mkting, sales)
- PRO: local team has familiarity with local business / banking practices and regulations, language, customs, cultures
- CON: duplication of efforts across units, heavier burden for compliance and control; will require increased need for coordination

Question 35

Combined Treasury Org (Hybrid)

Answer 35

Regional treasury centers
Often used by MNCs
Decentralized overall, but centralized at region level

Question 36

Shared Service Center (SSC)

Answer 36

Dept that supplies multiple business units with specialized services
When services are combined in an SSC, funding and mgmt can be shared across the enterprise: costs are usually charged back to the operating units using transfer pricing
PRO: reduce costs of duplicate operations; standardize processes; improve quality and timeliness of services, strategic flexibility, and stronger internal controls

Question 37

Global Business Services (GBS) Group

Answer 37

Provide similar services as an SSC but incorporate business advisory services (e.g. consulting) to improve operational efficiency

Question 38

In House Bank

Answer 38

Extension of the centralized and SCC concepts
- provides banking services to group / subs
- group entities transaction with the IHB instead of external banks
- IHB have historically been to cost prohibitive but with new tech such as virtual accounts, IHB’s are more feasible for more organizations

Question 39

Key Challenge of Corporate Governance

Answer 39

Separation of ownership and control
Shareholders own the company but exec officers control the firm - causing agency dilemma

Question 40

Board of Directors’ responsibility to shareholders?

Answer 40

BoD has a responsibility to act in the best interest of shareholders which is interpreted as maximizing shareholder wealth (aka company stock price) over the long term

Question 41

Agency Dilemma of Corporate Governance

Answer 41

Managers may take actions to beneif themselves at the shareholders expense
- e.g. Manage short term profits to maximize bonuses which lowers firm’s long term value
- e.g. Managers may ignore a profitable merger that would eliminate exec positions

Question 42

What authority does the BoD typically delegate to treasury?

Answer 42

BoD typically grants treasury the authority to do the following via a board resolution:
- open / close accounts
- establish credit facilities
- oversee investments
- issue debt, equity securities and oversee repurchase programs
- devise, implement, execute risk mgmt strategies

Question 43

UK Corporate Governance Code

Answer 43

• chair of the board must be independent
• governance code also distinguishes between the role of board leadership vs. executive leadership

Question 44

German Corporate Governance Code

Answer 44

requires a dual board mgmt system
(1) management board - responsible for executive mgmt
(2) supervisory board - oversees company business strategy and appoints the mgmt board
- supervisory board is elected by shareholders and must include appropriate # of independent members
- if company has more than 500 German employees, supervisory board must include employee representatives as well

Question 45

Japanese Governance Structures (3)

Answer 45

(1) board + kansayaku board (Kansayaku = audit/supervisory board; must have majority independent members
(2) board + 3 committees (audit, nomination, renumeration) - committees must have majority independent members
(3) board + supervisory committee (supervisory committee must ahve majority independent members

Question 46

Tokyo Stock Exchange

Answer 46

• if company has a prime market listing, 1/3 of board must be independent
• if company has other listing type, need minimum of 2 independent directors

Question 47

NYSE Standards for Corporate Governance

Answer 47

• independent directors must: (1) not have a material relationship with the company and (2) must meet in regular exec sessions w/o mgmt present
  -independent directors must make up majority of the board
• must have (1) nominating (2) compensation and (3) audit committes and each committee must be comprised of only independent directors
• to be considered independent, directors: (1) must not have been an employee or independent auditor for 3 continuous years (cooling off period) and (2) must not have had an immediate family member as an exec level employee at the company

Question 48

Sarbanes Oxley Act of 2002