Treasury?

What is Treasury?

Treasury is the management of cash flows within organisations.

To understand what this means, let’s first think about cash flows in an every-day context.

When you move money from your savings account to your current account, you are managing your cash flow.

• Perhaps you are preparing to pay a bill. In order to pay this bill, you make the cash available by moving it to your current account. This way, when payment occurs, you are covered.
• Perhaps you are travelling to a new country, so you expect more volatile or unpredicted spending. In order to avoid the risk of depleting your available funds, you move more cash to your current account. This way, if unpredicted expenses do occur, you are covered.

Like individuals, organisations also need to manage their cash flows. Corporations, governments, non-profit organisations, and small businesses all need to do this. Some large organisations manage thousands of transactions every day. Managing these cash flows becomes a full-time job, and at many organisations this requires an entire team of treasury professionals, each with their own area of responsibility and expertise.

What do treasurers do?

The work of treasury professionals can be divided into three primary disciplines:

• Cash Management
• Risk Management
• Corporate Finance

Above, we provided simple examples of how individuals engage in Cash Management as well as Risk Management. Every day, people and organisations move money between their current and savings accounts based on planned and potential expenditures. Large organisations do this as well, but their process for planned and potential expenditures is much more complex. This is the work of Cash Management and Risk Management.

Sometimes, for large expenditures that exceed the cash in both the current and the savings account, individuals and organisations need to finance these expenses by borrowing money. An individual might take out a loan in order to renovate his or her house. When launching a new product, a company might also borrow money, but in much larger quantities. As you can imagine, the debts and financial obligations of large corporations can take quite some effort to manage. This is the work of Corporate Finance.

Examples of Treasury activities

Let’s dive a bit deeper into each area of Treasury.

Cash Management

Cash Management is a practice devoted to planned expenditures. This discipline of Treasury is highly focused on operational efficiency and process optimisation. It requires managing cash flows coming into and out of your accounts, to ensure that the company has the right amount of cash on hand.

Here is a list of the main activities of Cash Management:

Operations

• Managing receipts and disbursements according to common standards and practices
• Calculating and managing the company’s overall cash position
• Reviewing transactions and cash balances to ensure the accuracy of the cash position calculation
• Developing and managing cash account structures, aka “cash concentration”
• Developing and generating cash management reports

Optimisation

• Evaluating receipt and disbursement methods in light of new payment technologies
• Developing and monitoring cash flow forecasts
• Analysing foreign exchange transactions
• Managing merchant services programs (e.g., fees, card security compliance, other requirements)
• Optimising the availability of short-term sources of cash, aka “liquidity”

Risk Management

Risk Management is a practice devoted to unexpected expenditures. This discipline of Treasury is highly focused on research and operational controls. It identifies and plans for the potential impact of changes in technology, company operations, and the financial environment in which a company operates. This requires financial research in each of these areas and involves the implementation of operational controls.

Here is a list of the main activities of Risk Management:

Financial Research

• Researching and evaluating risks posed by overseas operations and financial transactions, aka “foreign exchange risk”
• Researching and evaluating risks posed by fluctuations in borrowing costs, aka “interest rate risk”
• Researching and evaluating risks posed by changes in the prices of raw materials required by the business, aka “commodity risk”
• Researching and evaluating risks posed by customers who do not pay their bills, aka “credit risk”
• Researching and evaluating risks posed by a shortage of cash, aka “liquidity risk”
• Researching and evaluating risks posed by changes in technology and the potential for fraud, aka “operational risk”

Operational Controls

• Evaluating treasury management systems (e.g., treasury software, third-party products and services)
• Evaluating treasury management functions and strategies (e.g., internal workflows, outsourcing)
• Developing, maintaining, and testing business continuity plans (e.g., reporting processes, funds transfer capabilities)
• Implementing and monitoring operational risk prevention measures (e.g., fraud prevention tools, internal controls and procedures, cybersecurity, compliance)
• Preparing and maintaining documentation (e.g., bank accounts, service agreements, resolutions, archiving information)
• Monitoring compliance with internal controls, debt and investment policies, covenants, regulatory requirements, and other legal agreements
• Preparing and reporting treasury data to stakeholders (e.g., board of directors, financial services providers, accounting, operations, auditors)

Corporate Finance

Corporate Finance is a practice devoted to financing expenditures through borrowing and investment. This discipline of Treasury is highly focused on strategic planning. Based on the objectives set forth by the company’s leadership, it evaluates potential sources of funding and sets the overall financial strategy that the company will use to meet those objectives. The work of Corporate Finance involves strategic analysis and executive management.

Note: Technically, the term Corporate Finance involves both short- and long-term financial planning, but it is generally associated with corporate strategy, which by nature is oriented towards the long-term. Most short-term financial planning is covered by a sub-discipline of Corporate Finance, known as Working Capital Management.

Here is a list of the main activities of Corporate Finance:

Strategic Analysis

• Evaluating current market conditions related to long-term borrowing and investment strategies (e.g., credit availability, spreads, interest rates, terms, risk) and the company’s long-range forecast (e.g., new products, acquisitions, divestitures, capital expenses)
• Developing long-term investment strategies, including capital and financial investment
• Developing long-term borrowing strategies, including arranging financing and capitalisation for operations and projects

Executive Management

• Implementing long-term investment and borrowing strategies
• Aligning treasury activities with the company’s overall financial strategy
• Managing the capital budgeting process
• Optimising sources of short-term and long-term funding
• Balancing sources of internal and external funding
• Managing shareholder expectations and relationships with banks and other lenders

Frequently asked questions about Treasury

1. What is the difference between Treasury and Accounting?

It is Treasury’s job to optimise cash flows based on business objectives, whereas it is the job of Accounting to prepare financial statements that present the clearest possible picture of the financial health of the company.

To understand the difference between Treasury and Accounting, you must understand the difference between cash flows, on the one hand, and income and expenses, on the other. In Accounting, revenue is booked when a sale is made. However, it might take some time before this revenue actually reaches the company in the form of cash. Until it does, booked revenue is generally irrelevant for Treasury. The same is true for expenses. An expense may be booked, but from a Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand.

2. What is the difference between Treasury and Corporate Finance?

In general, Corporate Finance refers to the borrowing and investment strategies used by corporations in order to finance operations and meet strategic objectives. Corporate Finance is a broad field, which is related not only to Treasury, but also to financial accounting and banking. From a financial accounting perspective, Corporate Finance is concerned not only with cash flows but also with the overall financial health of the company. From a Treasury perspective, Corporate Finance is the long-term strategy that determines the scope and objectives for Cash and Risk Management.

Note: Within banking, the term “corporate finance” is often used differently. When bankers speak of Corporate Finance, they are usually referring to a particular line of business for the bank, which involves raising money for corporations or acting as advisers on their behalf. From a banking perspective, Corporate Finance usually means brokering deals between corporations and potential investors.

3. Who is in charge of Treasury within a company?

In small organisations, Treasury work is mostly done by the Chief Financial Officer or finance department. Larger organisations often have their own treasury departments, which are headed by a treasurer who reports to the CFO. Ultimately, Treasury is controlled by the CFO.

4. How has the role of the Treasurer changed over time?

Although the basic role of the treasurer remains the same over time, the content of Treasury activity evolves over time. Due to external factors, such as technology, regulations, and new financial products, some tasks are less time consuming nowadays then they were in the past.

Traditionally, the job of the treasurer was filled primarily with tasks like bank selection, reconciling bank statements, and managing daily transactions.

These days, many of these tasks can be automated. A treasury management system (TMS) can handle much of this work for the treasurer. Instead, the modern treasurer works increasingly closely with colleagues in the finance and risk departments. The risk of cyber fraud, for example, is now an ever-present concern. In the past, a treasurer only went to the company’s bank for financing. These days, there are many other options for financing, or for reducing financial risk.

Increasingly complex banking and governmental regulations also take up more and more of the treasurer’s time.

It is the task of the treasurer to keep up to date with developments, and to be the consultant for the organisation on all treasury-related subjects.

Summary of what is treasury

The purpose of Treasury is to manage a company’s liquidity and to mitigate its financial and operational risk. Made up of three sub-disciplines, Treasury’s overall objective is to safeguard the company’s holdings and to follow the long-term strategy set forth by Corporate Finance. Cash Management, on the other hand, is primarily focused on operational efficiency and process optimisation, whereas Risk Management is oriented towards financial research and operational controls.