MONASH

BUSINESS

BFW3652 Corporate treasury

and credit management
Lecture 1
PART 1: CORPORATE TREASURY MANAGEMENT:
AN OVERVIEW OF THE TREASURY FUNCTION

12 March 2020

Accredited by: Advanced Signatory:

BFW3652- Unit Guide for S1 2020
Unit Administrative Announcements:
PART 1: CORPORATE TREASURY MANAGEMENT

1. Refer to the BFW3652 Unit Guide in the Moodle.

2. Also refer to my Availability Times (time-table) for the
lecturer and the tutor’s consultation hours in the Moodle.
3. Review the feedback for S1 2019 examination.
4. Group assignment on Corporate treasury management will
be posted in the Moodle. For group assignment (of 4 pax),
it will be partially assigned by the CE (you can team up
with another student but the other group pair will be
assigned that makes up four persons in one group.
5. Get hold of the prescribed textbook. Tutorial questions for
Corporate treasury management section are from this text.
Same textbook as BFW2140 Corporate finance’s text but
different coverage. MONASH
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 Adopted Textbook for Corporate Treasury Management:
Berk, J., DeMarzo, P., Harford, J. (2019). Fundamentals of
Corporate Finance (Fourth Edition - Global Edition) Pearson.

The book is available for purchase at emobooks.com via: MONASH

https://www.emobooks.com/9781292215075-fundamentals-of-corporate-finance,-global-edition?search=BFW3652 BUSINESS
Students can choose for free pick up @ POP Box Monash University Malaysia.
Week 1: An Overview of the Treasury Function
Learning objectives (Ch. 1)
1. Grasp the importance of financial information in both your personal and
business lives, and which are related to corporate treasury
2. Understand the important features of the main types of firms and see
why the advantages of the corporate form have led it to dominate
economic activity
3. Explain the goal of the finance manager and the reasoning behind that
goal, as well as understand the three main types of decisions a finance
manager makes
4. Know how a corporation is managed and controlled, the financial
manager’s place in it, and some of the ethical issues financial managers
face
5. Understand the main functions and role of treasury management in non-
banking/financial related corporations
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6. Explain the difference between bank’s treasury and corporate treasury BUSINESS
management and about the scope of corporate treasury management
Week 1: Lecture Outline
1.1 Why Study Finance? vs. Why Study Corporate
Treasury & Credit Management?
1.2 The Four Types of Firms in U.S. vs. Malaysia
1.3 The Finance Manager (a.k.a the Corporate Treasurer)
1.4 The Finance Manager’s (Corporate Treasurer) Place in
the Corporation
1.5 An Overview of the treasury function
1.6 Corporate versus bank treasuries
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1.7 The scope of corporate treasury management BUSINESS
1.1 Why Study Finance? Corporate Treasury & Credit Management?
• Individuals are taking charge• In your business career in finance,
of their personal finances you may face such questions such as:
with decisions such as:
 Should your firm launch a new
When to start saving and product?
how much to save for
retirement  Which supplier should your firm
choose?
Whether a car loan or  Should your firm produce a part or
lease is more outsource production?
advantageous  Should your firm issue new stock
or borrow money instead?*
Whether a particular stock  How can you raise money for
is a good investment your start-up firm?*
 The last two questions*above are
How to evaluate the terms related to corporate treasury,
of a home mortgage MONASH
is a part of corporate finance. BUSINESS
1.2 The Four (4) Types of Firms – U.S. vs Malaysia
U.S. Malaysia
1. Sole Proprietorships 1. Sole Proprietorships
2. Partnerships 2. Partnerships
3. Limited Liability 3. Limited Liability
Companies (LLC) Partnerships (LLP or PLT)
4. Corporations 4. Corporations – Private
- 2 types: “C” & “S” limited (Sdn Bhd) or
Public limited (Bhd)
Refer to Ch. 1 of Beck et al. (2019) Refer to: www.ssm.com.my
for features, characteristics, tax
implications, etc.
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 Figure 1.1 Types of U.S. Firms

There are four major types of firms in the United States. As (a) and (b) show, although the
majority of U.S. firms are sole proprietorships, they generate only a small fraction of total
revenue, in contrast to corporations.
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Source: www.irs.gov BUSINESS
 Number of Registered Companies and Businesses in Malaysia

Source: www.ssm.com.my (Online activity: Find the missing figures for 2019)

Total Business-
Foreign Limited Liability Total registered
Total Companies Sole Prop. &
Year Ending Local Companies in Partnerships establishments
(incorporated) Partnerships
Malaysia (PLT a.k.a. LLP) in Malaysia
(Unincorporated)
Until 31/12/15 1,155,384 4,680 1,160,064 5,998,331 - 7,158,395
16.1% 0.1% 16.2% 83.8% 0.0% 100%
Until 31/12/16 1,198,592 4,727 1,203,319 6,375,051 10,059 7,588,429
15.8% 0.1% 15.9% 84.0% 0.1% 100%
Until 31/12/17 1,246,423 4,727 1,251,190 6,859,080 14,367 8,124,637
15.3% 0.1% 15.4% 84.4% 0.2% 100%
Until 31/12/18 1,293,715 4,803 1,298,518 7,279,636 18,797 8,596,951
15.0% 0.1% 15.1% 84.7% 0.2% 100%
Until 31/12/19 9,041,524
100%

https://www.ssm.com.my/Pages/Publication/Statistics/Companies%20and%20Business%20Registered/Companies-and-Business-
Registered.aspxs://www.ssm.com.my/Pages/Publication/Statistic/

Questions: MONASH
1. What is your observations on this Malaysian data? BUSINESS
2. Which establishment registration is getting more popular? Why? What are the plausible reasons?
Characteristics of the Different
Types of Firms (1 of 2)
Table 1.1 Characteristics of the Different Types of Firms
Ownership
Owners
Number of Liability for Change
blank Manage the Taxation
Owners Firm’s Debts Dissolves
Firm
Firm
Sole One Yes Yes Yes Personal
Proprietorship
Partnership Unlimited Yes; each partner is Yes Yes Personal
liable for the entire
amount
Limited At least one GP-Yes GP-Yes GP-Yes Personal
Partnership general LP-No LP-No LP-No
partner (GP),
no limit on
limited
partners (LP)
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Characteristics of the Different
Types of Firms (2 of 2)
*However, most LLCs require the approval of the other
members to transfer your ownership. (Pre-emptive clause)
Table 1.1 [Continued]
Ownership
Owners
Number of Liability for Change
blank Manage the Taxation
Owners Firm’s Debts Dissolves
Firm
Firm
Limited Liability Unlimited No Yes No* Personal
Company (LLC)
S Corporation At most 100 No No (but they No Personal
legally may)
C Corporation Unlimited No No (but they No Double
legally may)

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1.3 The Finance Manager
The finance manager (UK terminology)/ financial manager
(US) has three main tasks:
(In Malaysia, we prefer to be called Finance Manager
than Corporate Treasurer)

a) Make investment decision

b) Make financing decisions
c) Manage cash flow from operating activities

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1.3 The Finance Manager
a) Making Investment Decisions

The financial manager must weigh the costs and benefits

of each investment or project

They must decide which investments or projects qualify as

good uses of the stockholders’ money

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1.3 The Finance Manager
b) Making Financing Decisions

The financial manager must decide whether:

-to raise more money from new and existing owners by

selling more shares of stock, or
-to borrow the money instead

This decision will affect the capital structure of the

company.

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1.3 The Finance Manager
c) Managing Short-Term Cash Needs

The finance manager must ensure that the firm has enough
cash on hand to meet its obligations at each point in time.
This job is also known as managing working capital

The Goal of the Finance Manager

The overriding goal of financial management is to maximize
the wealth of the owners, the stockholders

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1.4 The Finance Manager’s Place
in the Corporation
• Stockholders/shareholders own the corporation but rely on financial
managers to actively manage the corporation
- The board of directors and the management team headed by the
CEO possess direct control of the corporation
• The Corporate Management Team comprise of:
- Board of Directors (BOD)
• A group of people elected by shareholders who have the
ultimate decision-making authority in the corporation (but the
Board do not run the day-to-day management.)
- Chief Executive Officer (CEO)
• The person charged with running the corporation by instituting
the rules and policies set by the board of directors. MONASH
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Figure 1.2 The Financial Functions
Within a Corporation – Where is the
treasury and credit management
functions?

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1.4 The Finance Manager’s Place
in the Corporation
• Ethics and Incentives in Corporations
- Agency Problems
• When managers put their own self-interest ahead of
the interests of those shareholders
- The CEO’s Performance
• When the stock performs poorly:
-The board of directors might react by replacing the CEO
- A corporate raider may initiate a hostile takeover

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1.5 Overview of Corporate
treasury?
• What is treasury ? Go to https://www.treasurers.org/hub/careers/what-
is-treasury for an introduction to treasury and play the video on “What
is Treasury?”

• Treasury management is common in the banking sector (which is

covered in BFW3651 Treasury management) but corporate treasury
management refers the non-banking sector treasury management in the
corporate sector.

• Like the law of demand and supply, corporate treasury covers the
demand-side of treasury whereas BFW3651 covers the supply-side of
treasury. For a quick into into Corporate Treasury, go to
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https://www.barclaysimpson.com/introduction-treasury BUSINESS
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1.5.2 Functions & roles of
Corporate treasury
1. Policies 2. Structure
e.g. e.g.
 Risk  Performance measures
 Debt  Facilities – banking & funding
 Dividends payout Responsibilities/authorities
 Exposure management
3. Strategies 4. Tactics (Tactical)
e.g. e.g.
 Mergers & acquisitions (M&A)  Foreign exchange
 Project management  Money market
 Exposure management  Funding
 Operations, administration & controls

Source: CPA106 Treasury

Web reference:
https://www.treasury- MONASH
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management.com/article/4/121/1053/the-functions-of-a-
corporate-treasury.html
1.6 Ten Differences between
Financial Institutions Treasury
and Corporate Treasury
1. Opening exposures
2. Profit vs. Control centre
3. Price making and taking
4. Position Management
5. Main roles
6. ‘Economic’ exposures – competitors/markets
7. Main exposure to interest rate: fixed vs. floating
8. Performance measures
9. Exposure orientation: transaction and translation
10. Regulatory ‘watchdogs’
Is corporate treasury is profit or cost centre in an organisation? MONASH
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Why Manage Treasury?
• Corporate governance and transparency in the aftermath of
Enron Corporation to comply with the Sarbanes-Oxley (SoX)
Act in the U.S., the Malaysian Code of Corporate
Governance (MCCG) 2017.

• Globalization – not possible to control external factors.

• Financial market volatility – changes in exchange rates,

interest rates, and commodity prices.

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Why study corporate treasury
management?
1. Why Choose a Career in Treasury? | Why Become a Treasurer?
https://academy.treasurers.org/why-choose-career-treasury

2. The Corporate Treasurer Serves as a Financial Risk Manager

https://www.investopedia.com/articles/financial-careers/08/corporate-treasurer.asp

3. What is Treasury See https://www.treasurers.org/ under

https://www.treasurers.org/hub/careers/what-is-treasury and
https://www.treasurers.org/hub/careers/why-choose-treasury-a-recruiters-view

4. For Malaysia, the Malaysian Association of Corporate Treasurers (MACT) - established in 1996.
Go to http://actmy.org/ Founding members of MACT are MISC Berhad, Sime Darby Berhad,
Tenaga Nasional Berhad, Telekom Malaysia, Malaysia Airline System (MAS) and the Axiata Group
(erstwhile Celcom). Active members are Genting Group, Tan Chong Motor Group.

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Objectives of MACT
1. To act as a representative of corporate treasurers while
communicating with regulatory bodies in Malaysia.
2. To act as a forum for corporate treasurers and encourage
exchange of views, facilitate knowledge sharing, improve the
existing level of performance and enhance the image of corporate
treasurers within Malaysia.
3. To encourage and promote the education, knowhow and
management practises of corporate treasurers.
4. To conduct examinations, provide training and award certification
of recognition to those who have achieved relevant levels of
proficiency in treasury management.
5. To source relevant providers for imparting training skills in
treasury management and to advocate dissemination of best
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practises for treasury management in Malaysia. BUSINESS
1.7 THE SCOPE OF CORPORATE TREASURY
MANAGEMENT Source: MACT
A. FINANCIAL RISK MANAGEMENT
1. Foreign Exchange and Financial Markets
2. Exposures (hedging, forward purchases)
3. Interest Rate Risk
4. Credit Management (covered in Part 2 of this unit)
B. CASH AND LIQUIDITY MANAGEMENT
1.Cash forecasting and pooling
2.Cash handling and transmission
3.Cash Management & banking systems
4.Managing banking relationships
5.International cash management
C. CAPITAL MARKETS AND FUNDING
1.Funding policies and procedures
2.Types of funding (debt vs. equity)
3.Export and trade finance
4.Capital structure and investment returns
5.Risk return and the cost of capital
D. CORPORATE FINANCE
1.Investment decision making MONASH
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2.Shareholder value
3.Tax and its implications to Treasury
 Activities: Compare Association of Corporate Treasurers (ACT)
& Institute of Credit Management (ICM) between countries
ASSOCIATION OF CORPORATE TREASURERS
ACT: Go to https://www.igta.org/ and select 2 ACTs, e.g.
• Go to the Association of Corporate Treasurers (ACT) UK at https://www.treasurers.org/
and/or ACT Singapore at www.act.org.sg/
• compare the similarities and the differences with MACT at http://actmy.org/

INSTITUTE/ASSOCIATION OF CREDIT MANAGEMENT

ICM: To give an introductory idea of what is Credit Management that will be covered in the
second part of this unit, compare any two of the below ICMs:

1. Australian Institute of Credit Management https://aicm.com.au/

2. UK Chartered Insitute of Credit Management (CICM) – erstwhile ICM https://www.cicm.com/

3. USA National Association of Credit Management (NACM) - https://nacm.org/

4. Sri Lanka Institute of Credit Management https://www.aia.lk/slicm/ MONASH

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Malaysia: Association of Credit Management Malaysia (ACMM) http://acmm.org.my/ - no longer exist!!
End of Lecture Week 1
Summary: Quiz
1. What are the advantages and disadvantages of organizing a
business as an incorporated companies?
2. What do you think is the type of firm for professional
services? Why?
3. What are the main types of decisions that a financial
manager makes?
4. How do shareholders control a corporation?
5. What are the differences between financial institution’s
treasury and corporate treasury management?
6. What are the scope of corporate treasury management in
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the study of finance? BUSINESS
In next week lecture..
Topic Week 2: Procurement of funds
(Ch. 1, 14 & 15)
• Understand the importance of financial markets, such as
stock markets, to a corporation and the financial manager’s
role as liaison to those markets.
• Understand the Malaysian Capital Market regulatory
framework.
• Contrast the different ways to raise equity capital for a private
company.
• Understand the process of taking a company public.
• Explain how to raise additional equity capital once the
company is public.
• Identify some forms of international finance for corporate
debts and identify the advantages and disadvantages of
these sources of finance.
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THANK YOU

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