Midterm Exam Flashcards
• It is a management system that aims to
optimize a company’s liquidity, while also mitigating its financial,
operational, and reputational risk.
• This includes a firm’s collections, disbursements,
concentration, investment, and funding activities. In larger firms, it
may also include financial risk management.
Treasury Management
The treasury department occupies a central role in the finances of the
modern corporation. It takes responsibility for the company’s liquidity—ensures that a company always has enough cash available to meet the
needs of its primary business operations.
FUNCTIONS AND ROLES OF
TREASURY
This is the beginning of all other roles carried out in the
operation of a treasury department.
Treasury staff need to draw all those accounting records
(within the organization including its subsidiaries if any)
and compile them to generate a cash forecast (short and
long-range).
Cash Forecasting
It is a key component of cash forecasting.
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.
Working Capital Management
Combining information in the cash forecast and working
capital management activities.
Treasury staff can ensure that sufficient cash is available for
operational needs.
Cash Management
When the forecast shows some excess funds, the treasury
staff is responsible for the proper investment of it.
Three primary goals of the role are:
(a) maximum return on investment;
(b) matching the maturity dates of investments with a
company’s projected cash needs; and most importantly
(c) not putting funds at risk.
Investment Management
The treasury staff is also responsible for creating risk
management strategies and implementing hedging tactics
to mitigate the whole company’s risk—particularly in
anticipating:
(a) the market’s interest rates may rise and leave the
company paying on its debt obligations; and
(b) company’s foreign exchange positions that could also
be at risk if exchange rates suddenly worsen.
Treasury Risk Management
A company may issue marketable debt.
The treasury staff would need to show quick responds to
information requests from the credit agency’s review team.
Credit Rating Agency Relations
A long-term 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.
The treasurers should, therefore, often meet with the
representatives of any bank that the company uses to:
a. discuss the company’s financial condition,
b. the bank’s fee structure,
c. any debt granted to the company by the bank, and
d. foreign exchange transactions, hedges, wire transfers,
cash pooling, and so on.
Bank Relation
Maintaining an excellent relationship with the investment
community for fundraising purposes is important—from
the (a) brokers and investment bankers who sell the
company’s debt and equity offerings; to (b) the investors,
pension funds, and other sources of cash, who buy the
company’s debt and equity.
Fund Raising
Fundamentally the treasury staffs also monitor the market
conditions constantly, and therefore is an excellent 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.
Functions and Roles of Treasury
Treasury organizations have a critical role in maintaining funding and
liquidity; developing optimized capital structures; controlling receipts,
payments, and cash; supporting tax and repatriation strategies; and
managing interest rate risk, including hedging.
Every decade presents new challenges and opportunities for corporate
treasury. These include the 2008 global financial crisis, the Asian financial
crisis of 1997, the growth of China’s economy (and how companies
responded to meet that growth), and G7 economic and currency policies
Four Pillars of Treasury Management
What is the Pillar 1 of Treasury Management?
Developing a global treasury talent center and organization
What is the Pillar 2 of Treasury Management?
Creating an analytical hub and agent of change that supports business decisions
What is the Pillar 3 of Treasury Management?
Developing an “agile” treasury organization that can quickly react to the changing
business cycle and manage financial risks
What is the Pillar 4 of Treasury Management?
Enabling technology through implementation of an appropriate
treasury
management system (TMS)
• Talent development is essential, with strategies including rotations, critical
project involvement, and continuing education.
o Evaluating and developing individuals at all levels within the organization is
important for growth.
o Leading treasury departments review talent pools regularly to identify
strengths and gaps.
o The treasury department model has shifted from administrative to strategic,
with tasks increasingly delegated to shared service centers (SSCs) for cost-
effectiveness and efficiency.
Pillar 1: Developing a Global Treasury Talent Center and Organization
• Treasury organizations can create significant value through a focus on
analytic skills and technical capabilities.
o Effective management of financial markets risk can lead to lower volatility
and improved margins.
o Advanced analytic capabilities, including predictive analytics, are crucial for
managing financial risks effectively.
o Strong analytic capabilities are needed for derivative pricing and valuation to
avoid disadvantageous transactions and unexpected losses.
Pillar 2: Creating an Analytical Hub and Agent of Change that Supports Business Decisions
o Treasury organizations must respond quickly to internal and external events,
including economic cycles, commodity price declines, and structural changes
in currency rates.
o Monitoring cash flow forecasting and liquidity is crucial, especially in sectors
facing demand weaknesses or growth opportunities.
o Disruptive technology companies are impacting industries, affecting funding
plans and receivables risks for retail organizations.
o Agile treasury organizations leverage industry conditions to focus on
improving credit ratings and meeting new company requirements.
Pillar 3: Developing an “Agile” Treasury Organization that can Quickly React to the Changing Business Cycles and Managing Financial Risks
o Leading treasury departments utilize either third-party treasury
management systems (TMS) or enterprise resource planning (ERP) systems
like SAP Treasury to centralize, standardize, and automate treasury processes.
o SWIFT messaging is commonly used for secure communication, streamlining
banking platforms, reducing reliance on bank portals, and enhancing security
and controls over payments and bank accounts
Pillar 4: Enabling Technology Through the Implementation of an Appropriate Treasury Management System (TMS)
