Treasury Management: Meaning and Role

1. Meaning of Treasury Management 2. Role and Functions of Treasurer 3. Advantages 4.

Disadvantages 5. Cash Management Vs. Treasury Management.

Meaning of Treasury Management:

Treasury management is defined as ‘the corporate handling of all financial matters, the
generation of external and internal funds for business, the management of currencies and cash
flows and the complex strategies, policies and procedures of corporate finance.’

Tight money, escalating interest rates and economic volatility have called for a specialized skills
called ‘treasury management’. Until recently, no major efforts were made to manage cash. In the
wake of the competitive business environment resulting from the liberalization of the economy,
there is a pressure to manage cash.

The demand for funds for expansions coupled with high interest rates, foreign exchange
volatility and the growing volume of financial transactions have necessitated efficient
management of money. The treasury management mainly deals with working capital
management and financial risk management.

The former constitutes cash management and decides the asset-liability mix. Financial risk
management includes forex and interest rate management, a part from managing equity and
commodity prices.

The key goal of treasury management is planning, organizing and controlling cash assets to
satisfy the financial objectives of the organization. The goal may be to maximize the return on
the available cash, or minimize interest cost or mobilize as much cash as possible for corporate
ventures.

Dealing in forex, money and commodity markets involves complex risks of fluctuating exchange
rates, interest rates and prices which can affect the profitability of the organization.

Treasury managers try to minimize losses by adopting risk transfer and hedging techniques that
suit the internal policies of the organization. Options, futures and swap are a few of the major
derivative instruments, the Treasury Managers use to hedge their risks.

Role and Functions of Treasurer:

The Treasurer will maintain the cordial relationship with the banks and involve in working
capital and money management. The Treasurer will ensure that the business has the liquid funds
it needs and invest surplus funds. The Treasurer should have thorough knowledge of funding
requirements of the organization, sources of finance available and the cost of those sources and
the risk attached to it.
The Treasurer would be responsible for providing the business with forecasts of exchange rate
movements, exposure to currency risk and interest rate risk. He should adopt appropriate
strategies for foreign exchange risk management. He should be able to advise effectively on
policies such as international transfer pricing, international tax policies and its impact on firm.

In small companies, the Finance Director or Chief Accountant will be responsible for all the
various accounting and financial activities of the firm. As companies increase in size however,
specialist personnel are employed to deal with financial and budgetary issues. Different firms
have different ways of organizing the finance function.

The important functions of a Treasurer of a multinational company are as follows:

1. Corporate Financial Planning:

(a) Setting up of financial objectives, plans and strategies.

(b) Setting up of financial and treasury policies.

(c) Setting up of financial and treasury systems.

(d) Establishment of credit policies and control procedures.

(e) Establishment of policies and procedures for receipt and disbursement of funds.

(f) Setting up centralized or decentralized treasury management procedures.

2. Cash Management:

(a) Forecasting of cash requirements and preparation of cash budgets.

(b) Estimation of working capital requirements and planning the levels of investment in current
assets.

(c) Establishment of banking relationships, arrangement of funds for working capital require-
ments, providing of security for working capital finance.

(d) Monitoring the credit collection.

(e) Monitoring the liquidity and funds position of different divisions of the firm.

(f) Investment of temporary surplus funds in short-term marketable securities and sale of it when
the need of cash arises.

(g) Ascertainment of collection and payment floats, efficient playing of the float etc.
(h) Transmission of funds to various divisions and receipt of funds from various collection
centres.

(i) Ensure that sufficient cash is available for meeting day to day financial obligations.

(j) Maintaining sufficient cushion for meeting contingencies and unexpected financial obliga-
tions.

(k) Identify surplus funds in certain divisions and transfer them to the divisions which are facing
deficit of cash.

3. Funding Management:

(a) Planning of short-term, medium-term and long-term cash needs.

(b) Setting of funding policies and procedures.

(c) Participation in financial decisions like, corporate structuring, dividend payment, buyback of
shares, redemption of debentures etc.

(d) Identification of sources of funds and cost-benefit analysis of different sources of funding.

(e) Procurement and raising of funds from various sources like issue of shares and debentures,
raising of term-loans from banks and financial institutions etc.

4. Currency Management:

(a) Setting up of policies and procedures relating to currency exposure.

(b) Hedging of currency rate risk and interest rate risk through various financial derivative
instruments and techniques.

(c) Monitoring of trends in international business, economic changes.

(d) Complying with exchange regulations of various countries.

(e) Settlement of intragroup indebtedness.

5. Corporate Finance:

(a) Advising on proposals relating business acquisition and disposal, mergers and takeover, buy
back of shares, diversification and divestment decisions.

(b) Advising on project finance, foreign collaborations and joint ventures.

(c) Advising on long-term funds management.

(d) Planning for redemption debentures and bonds, repayment of term loans, restructuring and
financial reorganization, financial re-engineering etc.

(e) Steps to reduce the cost of funds and weighted average cost of capital.

(f) Monitoring of trends in capital market, debt market, government policies and regulations,
inflationary tendency etc. and its impact on corporate finance.

6. Other Related Matters:

(a) Corporate tax planning.

(b) Risk management and insurance.

(c) Pension fund investment management.

Advantages of Centralized Treasury Management:

Under the centralized cash management, the treasury department is setup in head office which
will look after the management of funds of multi-locational centers of the organization.

The important advantages of centralized treasury department are as follows:

(a) It avoids a mix of cash surpluses and overdrafts at different centers of the firm.

(b) The bulk cashflows allows the company to negotiate with its bankers for lower rate of interest
and timely availability of funds.

(c) The surplus cash can be efficiently invested in short-term and marketable securities to earn
interest on it.

(d) Borrowings in bulk might necessitate to raise funds from international money and capital
markets at cheaper rates of interest.

(e) Foreign currency risk can be efficiently managed by adopting hedging techniques.

(f) It will use the services of experts with specialized knowledge of dealing in forward contracts,
futures, options, euro currency markets, swaps etc.

(g) The balance of funds to be maintained for entire organization, on precautionary measures.

(h) Efficient utilization of funds is ensured by centralized funds management.

Advantages of Decentralized Treasury Management:

The decentralized treasury management is advocated for the following reasons:

(i) Sources of finance can be diversified and can match local assets.

(ii) Greater autonomy can be given to subsidiaries and divisions because of the closer relation-
ships they will have with the decentralized cash management function.

(iii) The decentralized treasury function may be able to be more responsive to the needs of
individual operating units.

(iv) Since cash balances will not be aggregated at group level, there will be more limited
opportunities to invest such balances on a short-term basis.

Cash Management Vs. Treasury Management:

The cash management is very closely linked with the treasury operations of any business
organization.

The treasury operations of any organization can broadly be divided into two parts as
follows:

(a) Short-term investment of surplus funds in the money market to maximize the benefit arising
out of availability of surplus funds.

(b) Short-term borrowings of funds from banks or market for normal working capital require-
ments and for temporary shortage of funds at the lowest possible cost to the company.

The broad objective of cash management with regards to the treasury operations of the
organizations is to maximize the availability of funds at any point of time and at the desired
place for investment purposes and/or also to minimize the deficit or shortfall in the requirement
of funds at any point of time, i.e., what cash management seeks to do for treasury operations is to
convert its sales, whether on cash or credit into ‘available cash’ as fast as possible.