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The Challenging Role of Treasury

Treasury serve as financial risk manager that seeks to protect a company's value from the
financial risks it faces from its business activities. Because these risks can arise from many
sources, the role requires an understanding of many areas of business and the ability to
communicate with a variety of financial professionals. Treasury Management has evolved into
companys specialized department and a professional body. Traditionally, many Treasuries
were trained as accountants and undertook treasury activities as an offshoot to their accounting
roles. However, with the development and proliferation of financial instruments and the
globalization of financial markets and companies, treasury management has become more
specialized, complex and time-consuming function. Large and multinational companies
establish treasury departments as autonomous risk management units, and corporate treasury
management is now recognized as a profession distinct from accountancy. Many countries
have specialized education programs and professional bodies, such as the Association of
Corporate Treasury in the U.K. and Fund Managers Association (FMA) in Pakistan.
Managing Risk
Treasury manages several key risks related to changes in interest rates, credit, currencies,
commodities and liquidity risk. Companies face some or all of these risks to varying degrees.
Below is a brief description of some of the financial risks that companies - and their Treasury
- must address.
Liquidity Risk
Perhaps the most important risk a treasurer must manage is liquidity risk, or the risk that the
company will run out of cash either from insufficient revenue, excessive expenditure, or the
inability to access funds from banks and other external sources. The inability to meet payment
obligations as they are due can mark the end of a company.
Credit Risk
Surplus cash can be invested to earn interest, and the treasurer must be sure that those issuing
or insuring securities are financially sound and credit-worthy. One way to do this is by
checking an issuer's credit rating, which provides an independent assessment of the likelihood
that a third-party will pay on time and in full as expected. The treasurer must also be confident
that counterparties to financial instruments used to manage risks.
Currency Risks
In addition to credit risk, exporting and importing companies face currency transaction risk
when they convert proceeds / payments from / to foreign currencies into their home currencies.
Multinational companies also face translation risk in financial reporting when the values of
their foreign subsidiaries' assets and liabilities fluctuate upon conversion to a single home
currency. Investors and analysts may view currency moves that cause a drop in the value of
consolidated foreign assets and in profits as a problem, potentially causing the share price to
Another type of currency risk, which Treasury may find more difficult to manage, occurs when
a competing company from another country experiences a more favorable currency value. For

example, the sales of two exporters from different countries, both selling goods to a Japanese
importer, will depend in part on how their respective currencies move against the Japanese yen.
Tactical moves to remain competitive, such as relocation of manufacturing plants to match the
competitor's currency cost base, can have major ramifications. Senior management, with input
from the treasurer, would only implement such a move after extensive discussion.
Interest Rate Risk
Most companies need to borrow to finance operations, such as buying raw materials,
machinery, or premises. Borrowing at variable interest rates allows companies to pay less if
market interest rates fall, but raises their costs if rates go up. If a company does not pay interest
because of insufficient cash, it may run into a liquidity crisis that could undermine its ability to
raise debt in future, or to raise it only at higher interest rates that reflect its heightened credit
risk to lenders.
Operational Risk
The financial risks discussed above are external risks. Operational risk is an internal treasury
risk that reflects inadequate operational controls that could lead to a loss of company value. An
example of inadequate controls might be if a treasury dealer borrows money under a company
loan agreement, apparently for a business purpose, but transfers the proceeds to his or her own
bank account because the treasurer is able to undertake both dealing and funds transfer
activities. In a well-controlled treasury, such functions would be segregated and attempts to
undertake both by the same individual would be immediately detected.
Risk Policies
A treasurer will formulate a set of board-approved policies that define the methods allowed to
manage the above risks and the discretionary powers of the treasurer and other authorized
personnel. These policies will vary from company to company. Not all companies, for
example, allow Treasury to use derivatives or to leave risks unprotected, or they may only
allow such practices within defined limits and terms.
The treasury department's actions and its compliance with treasury policies must be assessed
independently and regularly by the internal audit department and by a treasury committee
comprised of senior management, including the treasurer. This committee, or an asset and
liability committee (ALCO), will also regularly review and discuss financial risks across the
company's assets and liabilities, and agree on appropriate actions to manage or transfer them.
ALCOs will usually delegate the task of executing agreed-upon actions to the treasurer and his
or her team.
When there is no single obvious solution to managing a financial risk, a treasurer must be able
to weigh the pros and cons of a course of action. Decisions may involve consulting relevant
internal and external specialists and undertaking data analysis and possibly scenario analysis in
order to recommend a course of action.

Specialist and Generalist

Although a treasurer is essentially a risk management specialist, his or her performance is
enhanced by having a practical knowledge of various associated corporate support functions
such as law, tax, insurance, accounting, economics and banking. In these areas, the corporate
treasurer is also a generalist.
Because financial risks come from various sources within a company (such as interest rate risk
in loans, credit risk in investments, or currency risk in debtor invoices), a treasurer must
understand the nature and financial dynamics of each of a company's assets and liabilities
across many different departments, underscoring the benefit of a broad financial education.
Interpersonal Skills
In addition to consulting relevant internal colleagues, a treasurer will often execute the actions
to manage financial risks only after consulting with external specialists such as bankers,
lawyers, credit rating agencies, tax and accounting consultants, and auditors. For example a
wide range of specialists involved in raising debt or equity. Strong interpersonal and
communication skills are therefore an important personal attribute for a treasurer.
Senior Manager
The impact of financial risks on company value and survival can be catastrophic and sudden.
The treasurer, along with perhaps a small team consisting of a treasury accountant, cash
manager, treasury analyst and dealer, are entrusted with a great deal of responsibility. As such,
a treasurer is often a member of a company's senior management team, usually reporting
directly to the CFO or even commanding a seat on the board of directors.
Treasuries are increasingly assuming more strategic roles in companies. They have moved
beyond managing working capital to becoming increasingly involved with working with a
company's senior management to manage risk and boost the bottom line.