Treasury Management

Week 3
1. What are the
Functions of Treasury?
Functions of Treasury

▪ Major Functions
1. Cash and Liquidity Management
2. Financial Risk Management
▪ Traditional Treasury Functions
1. Cash forecasting
2. Hedging of financial market exposures
3. Investing
4. Debt issuance
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 Cash Management

Cash Management Risk Management

▪ Cash management plays an Financial risk management is the
important role in an organization,
process of dealing with the
and it is the central role for treasury.
uncertainties that arise from
▪ Cash management includes: financial markets.
1. Cash flow forecasting
2. Control of cash receipt
3. Disbursements

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 Risk Management

▪ Financial risk management is the process of dealing with the uncertainties

that arise from financial markets.
▪ Some universal components of Financial risk management:
1. Identification of key risks, including risks that arise from financial
markets, extension of credit, and the ability to obtain financing
2. Procedures for risk measurement
3. Development of alternative risk management strategies
4. Determination of risk appetite or tolerance
5. Formation of, and contribution to, financial risk management policy
6. Implementation of risk management strategies
7. Development of infrastructure to monitor risks and report on
compliance with policies and performance
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reporting
 Financial Institutions

▪ Financial institutions function as financial intermediaries, delivering various financial

services and facilitating nonfinancial activities.
▪ Financial institutions may act as principals, buying or selling currencies, debt, or
investments for or from their own account.
▪ They may also act as brokers, in which case a commission for buying or selling may be
payable.
▪ Services provided by financial institutions include:
▫ Processing receipts and disbursements
▫ Debt issuance
▫ Investments
▫ Foreign exchange products and services
▫ Hedging products, including derivatives
▫ Custodial and trustee services 6
Investment Community

▪ The external investment community is an important one for many

treasuries, particularly if the organization issues marketable debt
to investors, either through an investment dealer or directly to the
marketplace.
▪ he investment community includes rating agencies, which are
important components of the investment mechanism.
▪ Credit rating agencies provide credit assessments of borrowers,
financial institutions, governments, and debt issuers.

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Service Providers

▪ Other participants that provide key or important

products and services to treasury include consultants,
who may work on specific projects or provide on-going
advisory services, real-time information providers,
payment facilitators, and vendors and developers of
treasury and related software.

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CASH MANAGEMENT
What is Cash Management?

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 Cash Management is…

▪ Cash management is the forecasting, control, and stewardship of an organization’s

financial assets, protecting them from fraud, error, or loss.
▪ Cash management is a critical component of liquidity management, without which
most organizations have serious difficulty operating.
▪ Treasury plays an important role in the cash management function, including:
▫ Accurately forecasting timing and amount of cash flows
▫ Controlling disbursements and speeding collections of cash
▫ Protecting cash from fraud, error, or loss
▫ Arranging funding to cover temporary and longer-term cash shortfalls
▫ Investing excess cash with a focus on minimizing risk, maximizing return, and
ensuring liquidity

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Cash Forecasting

▪ Cash forecasting is a key service provided by treasury.

▪ Cash management starts with an accurate forecast of
present and future cash flows.
▪ Forecasting accuracy is important because numerous
financial decisions are based on the forecast.

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Forecasting Methods

1. Scheduling - The simplest, and usually the first, approach to forecasting

is scheduling large-value or discrete cash inflows or outflows.
-These are cash flows that either will occur or will not occur, but they
typically do not partially occur.
2. Distribution- is often used for check clearings or trade receivables, where
an amount is likely to occur but the amount is not known with certainty.
-Distribution is used for forecasted amounts that consist of a number of
items.
-Once major cash flows have been scheduled, the distribution method
can be used to forecast the approximate amounts of cash flows.
3. Statistical Analysis – Statistical analysis can be also used for forecasting
cash flows.
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-Simple regression analysis attempts to create a formula that explains
the causal relationship between a particular occurrence (an
independent variable) and the resultant cash flows, which are
considered to be dependent variables.
-Regression analysis creates a formula that describes the relationship
between the two (using a “line of best fit”).
-It can appear to demonstrate a cause-and-effect relationship even
when there is no such relationship.
-The R-squared statistic provides an indication of the strength of the
relationship between the occurrence (independent variable) and
resultant cash flows.

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Reconciliation

▪ Although cash flow forecasts provide a view of expected cash flows,

reconciliations permit treasury to compare transactions that were expected
with transactions that actually occurred.
▪ A reconciliation adjusts for those items that differ from the forecast,
both those that have unexpectedly cleared the account and those that
unexpectedly have not cleared the account.
▪ Reconciliation is done on both cash flow amount and cash flow date.
▪ Reconciling should be done on a daily basis.
▪ Variations on cash flow reporting can occur where items can be backdated,
but these are normally exceptions.
-Backdating is a process by a financial institution to date a transaction as
though it had occurred at a previous date, typically used to rectify errors.
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 The process of determining the opening balance in a bank account with daily
balance and transaction reporting is similar to these seven steps:

1. Start with the expected closing position previous day from the cash flow
forecast.
2. Add previous day’s bank data for prior day balances and float values (if
provided).
3. If automated reconciliation or matching is used, reconcile for
unmatched transactions; otherwise, reconcile actual to forecasted
transactions:
a) Adjust current-day forecast for cash inflows or cash outflows that
occurred but were not expected to occur (on the previous day).
b) Adjust current-day forecast for cash inflows or outflows that did not
occur but were expected to occur (on the previous day).
c) Investigate any items that require further analysis.
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The process of determining the opening balance in a bank account with daily
balance and transaction reporting is similar to these seven steps:

4. This should now have resulted in a cash position that is reconciled with the
closing cash position reported by the bank.
5. For accounts that provide availability float, update float to determine opening
available cash position for the current day.
6. Ensure any items that did not occur are placed back into the forecast if they
are still likely to occur.
7. Repeat for each account being reconciled.
▪ The result of these steps is an expected balance prior to adding any of the
current-day transactions, such as new investments or foreign exchange
transactions.
▪ Reconciliation is one of the most commonly automated procedures if
organizations use treasury software and electronic bank and transaction
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services.
Thanks!

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