Module 16: Treasury Management

Question 1

Treasury Management

Answer 1

Management of money and financial risks in a business.
Ensure the business has the money it needs to manage the day-to-day business obligations, while also helping develop its LT financial strategy and policies.

Question 2

Treasury management covers a wide variety of operations:

Answer 2

• cash mgmt
• funding
• dividend policy
• investment appraisal
• currency mgmt
• maintenance of good relationships with bankers

Question 3

Organisation of treasury management depends on size and type of the organisation
What size is treasury management in a large organisation?

Answer 3

Small bank

Question 4

Four key areas of a treasury department

Answer 4

Liquidity mgmt
Risk mgmt
Funding
Corporate finance

Question 5

Liquidity management

Answer 5

ST mgmt of cash to ensure company has access to the cash it NEEDS in a COST EFFECTIVE MANNER

• ensuring that a company is not holding unnecessarily high levels of cash or incurring high costs from needing to organise unforeseen ST borrowing)

Question 6

Risk management

Answer 6

Understanding and quantifying the risks faced by a company

Most commonly involves currency risk, interest rate risk and commodity price risk management

Question 7

Corporate finance

Answer 7

examination of a company’s financial strategies

e.g. is the capital structure appropriate?
how are investments appraised?
how are potential acquisitions valued?

Question 8

Funding

Answer 8

Deciding on suitable forms of finance
Organising suitable bank and capital market debt

for example, if decision to use finance has been taken, how best to resource it in terms of its instrument, maturity, currency, interest basis, documentation and the day to day mgmt

Question 9

The nature of the business determines which function is key

For example

Answer 9

UK retail store - handles lots of cash and subject to big swings in revenue due to seasonality => liquidity management will be a key treasury function

UK comp with lots of subsidiaries worldwide will be subject to foreign exchange movements => currency management will be key treasury function

Question 10

Treasury organisation

Answer 10

Responsibility of the BOARD OF DIRECTORS to ensure department is organised appropriately to meet needs.

=> involves making decisions about the degree of centralisation of the treasury department, and the company’s attitude to risk

Question 11

Degree of centralisation: two types

Answer 11

Centralised

Decentralised

Question 12

Centralised treasury department

Answer 12

Treasury is based at head office

Question 13

Decentralised treasury department

Answer 13

Prime decision making takes place at subsidiary level

Question 14

Advantages of centralised treasury department

Answer 14

1. Economies of scale
   - borrowing can be arranged in bulk (lower admin costs, poss better rate)
   - combined cash surpluses can be invested in BULK
2. Matching
   - cash surpluses in one area can be used to MATCH cash needs in another => avoids mix of overdrafts and cash surpluses
   - possible to MATCH receipts and payments in a given currency across subs => time and cost of currency hedging = minimised
3. Control
   - better control through use of standardised procedures
4. Expertise
   - Experts can be employed with knowledge of the latest developments in treasury mgmt

Question 15

Advantages to decentralised treasury operations

Answer 15

1. Sub will have control over treasury operations e.g. hedging => greater control over their financial performance => enhancing controllability can make PERFORMANCE APPRAISAL EASIER + INCREASE MOTIVATION of local mgmt
2. local managers - GREATER knowledge of local financing opportunities (centralised treasury may not be aware of these)

Question 16

Treasury department must reflect the company’s…

Answer 16

attitude to risk

Question 17

Depending on a comp’s attitude to risk, treasury department set up as follows:

Answer 17

1. Cost centre
   - aims at operating as efficiently as possible and hedges 100% risk if possible
2. cost saving centre
   - partial hedges are used and residual risk is managed within limits
3. Profit centre
   - treasury department creates speculative positions by trading in financial instruments

Question 18

Controls required to ensure the EFFECTIVE and SECURE functioning of a treasury dept

Answer 18

1. unauthorised transactions leading to money misappropriated and unauthorised positions
   - detailed policies established by the board on LIMITS for each dealer, who may confirm transactions and who is authorised to sign cheques/confirmation letters
   - second person checks on transactions
   - independent check of bank confirmations of transactions
   - bankers monitoring bank mandates that outline company’s internal control
2. Cultural problems
   - culture where individuals are ENCOURAGED to RAPIDLY admit to having made mistakes = essential to effective treasury team (rather than individual trying to compensate for errors)
   - interviews undertaken and references taken up
   - training
3. systems design
   - electronic systems have inherent flaws
   - either because requirements not specified clearly or systems dept didn’t understand the business sufficiently well
4. Systems security
   - initial password to enter the system
   - various levels of access allowing people to perform different tasks
   - systems administrator = someone external to the treasury department
   - passwords for authorising payments electronically given to authorised signatory
5. Dealing by phone controls (relating to foreign exchange or interest rate products)
   - record dealers’ phonecall => can be replayed in event of disagreement
   - hard copy of deal confirmation produced by the treasury dept
   - confirmation checked with incoming bank confirmation
   - bank mandates detailing individual authorised to deal and to what levels
   - internal exposure limits treasury must operate within
6. Counterparty risk
   Risk entity to which money has been lent will not be able to repay at maturity
   - credit limit set by treasury not credit control
   - limits formally reviewed at least annually if not semi-annually as rating agencies amend their ratings
7. Derivatives
   The Futures and Options Association guidance on ‘Managing Derivatives Risks’:
   Board of directors = establish and approve effective policy for use of derivatives

senior mgmt

• establish clear written procedures for implementing policy
• ensure derivative activities are supervised & subject to a effective framework of internal controls and audit
• establish a sound risk mgmt function

Operations = report all risks to which organisation is exposed and establish credit limits