Chapter 1 Treasury Department Flashcards
t ensures that a company has sufficient
cash available at all times to meet the needs of its primary business operations
Treasury Department
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
Cash forecasting
A key component of cash forecasting
and cash availability, 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.
Working capital management
The treasury staff uses the information it obtained
from its cash forecasting and working ______ 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.
Cash 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
Investment 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.
Treasury risk management
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.
Management advice
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
Credit rating agency relations
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.
Bank relationships
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,
Fund raising
The granting of credit to customers can lie within
the purview of the treasury department, or may be handed off to the accounting staff.
Credit granting
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.
TREASURY CONTROLS
Within the organizational hierarchy, the treasurer usually reports to the chief financial officer (CFO). The treasurer ’ s job description, , essentially establishes responsibility for the tasks noted in the preceding sections.
TREASURER JOB DESCRIPTION
The treasury department deals with a number of highly regimented processes. Given the very large amounts of funds that the treasury incorporates into its transactions, it is critical that all procedures be performed
precisely as planned and incorporating all controls.
TREASURY CENTRALIZATION
An _____ system processes all of the transactions
used to run all key operations of a company, so all of the information needed to derive cash forecasts and foreign exchange positions can be derived from
a single system.
enterprise resources planning (ERP) system
Individual locations manage their own
bank accounts, foreign exchange
transactions, customer credit, payables,
borrowings, and investments.
Stage 1: Complete decentralization
A central staff nets payments between
subsidiaries and hedges major foreign
exchange and interest rate risks. Local
locations still manage their own bank
accounts, customer credit, payables,
borrowings, and investments.
Stage 2: Centralized netting and
hedging
In addition to prior centralization, a
central treasury staff consolidates and
manages all bank accounts, including
pooling of funds and investment of
those funds. Local locations still manage
customer credit and payables.
Stage 3: Centralized investments
In addition to prior centralization, the
central treasury staff centralizes credit
granting and uses a payment factory for
centralized payables management.
stage 4: Centralized working capital
management
The treasury staff should not operate under a bonus plan that issues compensation based on unusually high rates of return on investment, nor for gains from active speculation in other currencies.
TREASURY COMPENSATION
This is a company ’ s designated long -term partner, with whom the company does the bulk of its business.
Bank Relations
The statement contains a summarization of the bank ’ s fees for services rendered and the company ’ s usage volume for each of those fees.
Bank Account Analysis
Monthly account fees for checking, zero - balance, and
concentration accounts, as well as the account analysis
statement fee.
General account
services
Fees on an individual basis for domestic deposits, international deposits, scanned checks, electronic payment direct sends, and fees for the electronic clearing agent. If a check scanner is used, there is also a monthly fee for that service.
Depository services
Fees on an individual basis for paper checks paid.
Paper disbursement services
Fees on an individual basis for ACH debit and credit
transactions.
General ACH services
Fees on an individual basis for both incoming and outbound
wire transfers. There may also be a monthly fee to maintain
an on - line wire transfer capability.
Wire and other funds transfer services
Monthly fee to provide reporting services, to which may be
added line item fees for each transaction listed in the
reports.
Information services
Monthly investment sweep fee.
Investment/custody services
One of the most inefficient activities in bank relations is maintaining up - to - date lists of bank account signatories — that is, authorized check signers.
Bank Account Management
The treasurer should have an excellent knowledge of the ____ imposed on the company by its banks, and be in frequent communication with them regarding any approaching covenant violations.
Loan Covenants
When dealing with lenders, the treasurer should use great caution in allowing company assets to be used as ____ on various loans.
Collateral
It is possible to shift a company ’ s treasury management system (TMS) to a third party under an application service provider (ASP) arrangement. Not only does this allow a company to eliminate the capital cost of acquiring
the software and hardware needed for a TMS, but it also eliminates the need for in - house maintenance staff to operate the system.
TREASURY OUTSOURCING
Many treasury departments fi nd that their performance falls outside of a company ’ s normal set of performance metrics. The standard of performance is earnings before interest, taxes, depreciation and amortization (EBITDA),
which essentially focuses on operational results. However, since the treasury department ’ s primary impact is on interest expense, foreign exchange exposure, and liquidity, it does not fall within the EBITDA metric.
Treasury Metrics
is a good measurement for tracking investment performance.
To calculate it, summarize the interest earned on investments, as well as the change in market
value of securities held, and divide by the total amount of funds invested.
earnings rate on invested funds
an excellent measure for keeping track of
the amount of debt that a company can potentially borrow, based on that portion of its accounts receivable, inventory, and fixed assets that are not currently being used as collateral for an existing loan
Borrowing Base Usage Percentage
