Role of Treasury Management

A BIUSAA
Title 2
CHAPTER 2
1.3-Role of the Treasury Department
Ultimately, the treasury department ensures that a company has sufficient cash available at all
times to meet the needs of its primary business operations. However, its responsibilities range
well beyond that single goal. It also has significant responsibilities in the following areas:
Cash forecasting: The accounting staff generally handles the receipt and disbursement of cash,
but the treasury staff needs to compile this information from all subsidiaries into short range and
long-range cash forecasts. 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. The staff also uses the forecasts to determine when more cash is
needed, so that it can plan to acquire funds either through the use of debt or equity. Cash
forecasting is also needed at the individual currency level, which the treasury staff uses to
edging operations.
Working capital management: A key compov cash forecasting and cash availability is working
capital, 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. 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.
Cash management: The treasury staff uses the information it obtained from its cash forecasting
and working capital management 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.
Investment 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
investments with a company's projected cash needs.
Treasury risk 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. A company's
foreign exchange positions could also be at risk if exchange rates suddenly worsen. In both
cases, the treasury
Bank relationships: 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. A long-term and open 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.
Fund raising: 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, pension funds, and other sources of cash,
who buy the company's debt and equity. While all funds ultimately come from the buy side, the
sell side is invaluable for its contacts with the buy side, and therefore is frequently worth the cost
of its substantial fees associated with fund raising.
Credit granting: The granting of credit to customers can lie to customers can lie within the
purview of the treasury department, or may be handed off to the
accounting staff. This task is useful for the treasury
staff to manage, since it allows the treasurer some control over the amount of working capital
locked up in accounts receivable.
1.4-Significance of Treasury Management

The end goal of any for-profit enterprise is to maximize owner's wealth. For corporations, this
translates into maximizing shareholder wealth. Treasury management drives value creation
through maximizing cash liquidity for companies that often have fluctuating cash flow and
needs. It achieves this through cash flow management, short-term financing and medium-term
financing. Treasury management plays a critical role by ensuring that a company has the cash it
needs at all times to run its business.
Treasury management involves the process of managing the cash, investments and other
financial assets of the business. The goal of these activities is to optimize current and
medium-term liquidity and make solid financial decisions involving invested and investable
assets. Treasury management also includes hedging where needed to reduce financial risk
exposure.
Cash Flow Management

Cash is critically important for small businesses. Profitable companies can fail due to insufficient
cash on hand to pay bills. The treasury management function monitors the timing and amounts
of cash inflows and outflows, a critical component of cash flow management. Cash inflows
include accounts receivable conversions to cash, short-term and medium-term borrowing, asset
sales or dispositions, and accounts payable conversions to actual bill payments. Treasury
management also includes monitoring and tracking those activities that require the largest use
of cash.
Float
Treasury management's role also involves
lengthening the amount of time a company retains the money needed to pay its bills while
shortening the time period it forgoes money due from its customers. Treasury management
processes therefore include setting accounts payable and receivable policies, setting credit
approval policies and defining collection terms. These activities provide a company with float, or
extra short-term cash on which it can earn interest. Larger companies may establish savings
and money market accounts to use as sweep accounts to earn short-term interest on incoming
funds that the firm will soon use to pay its bills
Relationships and Risks
In larger corporations, treasury management also includes managing shareholder relations,
managing financial risk and ensuring adequate and appropriate sharing of financial information.
The shareholder relations piece has significance, because strong relations and a belief in the
company's strategy allow corporations that need additional funds to raise those funds from
existing shareholders. Financial risk management may range from hedging against commodity
or currency risk to establishing alternative financing plans for upcoming projects.
Information Sharing
Treasury managers need information from internal departments and groups to make suitable
decisions. They must also share information to adequately support those groups and assist with
their
decision-making. In addition, treasury management plays an important communication role with
lenders as part of the financing duties. This function provides lenders and other financial
institutions with the financial information required to show compliance with loan terms.

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A BIUSAA

1.4-Significance of Treasury Management

Cash Flow Management

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