Introduction Treasury Management

Chapter 1: The Role and Organization of Treasury

Management

Outline:
• Introduction to the Study of Treasury Management
• The Role of Treasury Management
• Finance and Treasury Organization
• Treasury/Finance Organizational Structure
• Corporate Governance
• Ethics and Accountability
• AFP Standards of Ethical Conduct
 Treasury and Its Relationship to the
Corporate Finance Function

Treasury professionals:

Short-term Long-term
• Perform critical • Perform critical
liquidity management finance functions that
tasks daily to ensure ensure availability of
availability of cash funds and information
resources for to sustain initiatives
operational activities. to support the
financial objectives.
 Discussion Question
What are the principal roles of the corporate finance function?

Answer:
Corporate finance functions:
– Short-term funding (credit lines, revolving credit agreements,
issuance of commercial paper)
– Long-term funding (issuance of stocks, bonds, term loans and
long-term lease agreements)
– Acquiring strategic assets with long lives
– Assessing when and how to divest assets
– Advising on declaration and payment of dividends
 Discussion Question
What are eight major objectives of treasury management?

Answer:
– Maintain liquidity.
– Optimize cash resources.
– Manage risk.
– Maintain access to short-term financing.
– Maintain investments.
– Maintain access to medium- and long-term financing to support
investments in capital assets.
– Coordinate financial functions and share financial information.
– Enhance global and cross-border focus.
 Discussion Question
What are some actions that can be taken to mitigate
counterparty risk?
Answer:
– Add to the number of counterparties to increase diversification.
– Eliminate specific counterparties.
– Implement or adjust single counterparty balance limits.
– Rebalance liquidity allocations among counterparties.
– Adopt third-party custodians for
investments.
Financial Function Organization
 Discussion Question
What are six primary responsibilities of the treasurer?

Answer:
Managing overall financial risk
Arranging external financing
Managing relationships with banks and
other financial institutions
Overseeing day-to-day liquidity and cash management
Investing for the short- and long-term
Developing and implementing treasury
policies and procedures
 Daily Funds Management
• Daily funds management • Other responsibilities
– Prepare cash position worksheet. – Banking relationship
– Monitor cash balances.
administration
– Collect, concentrate and disburse
cash.
– Liquidity management
– Invest and borrow on short-term – Cash forecasting
basis. – Systems design
– Research and reconcile exception
items.
– Financial risk
– Coordinate finance functions management
with A/R, A/P and accounting. – Daily reporting
Bank Account Management
Treasury responsibilities:
• Opening, maintaining and closing
all organization bank accounts
– Organization’s articles of incorporation
and bylaws
– Corporate resolution
– Certificate of incumbency
• Managing all bank and service
provider relationships
– Company policies
Internal and External Collaboration
Internal collaboration
Internal and External Collaboration
External collaboration
 Efficient Treasury Operations
Benchmarking Reengineering Outsourcing
• Examining and • Radical redesign • Utilizing a third
comparing core of a particular party to perform
activities business process all or part of a
within/across an with the goal of core function
industry or continuous
functional area improvement • Example: Payroll
for the purpose processing
of identifying • Example:
best practices Application of
Six-Sigma
• Example: Basic concepts to
staffing levels treasury area
 Discussion Question
Why is treasury sometimes set up as a cost center and other
times as a profit center? Which is more common, and why?

Answer:
A cost center is the most common approach because
treasury is seen as a support function.

A profit center is used in companies specializing in global

finance, trade or risk management; they require use of
derivatives and should be able to generate income from
hedging and/or speculation.
 Discussion Question
What are the advantages and disadvantages of centralized and
decentralized control of the global treasury management
organization?
Answer:
Centralized control Decentralized control
– Advantages—Control,  Advantages—In-country
economies of personnel
scale and lower operating familiar with local business
costs and banking practices,
– Disadvantages—Little language and customs
autonomy for field office  Disadvantages—May
personnel
have heavier compliance
burden; field offices
generally submit periodic
reports and the home office
must conduct audits
 Discussion Question
Describe some of the reasons for the popularity of SSCs.

Answer:
– Web-based technology has enabled developments in
treasury and may provide cost reduction benefits over
outsourcing.
– Some global treasury back-office operations do not require
local management.
– Development of global TMS standardizes
information and enhances SSC benefits.
 Discussion Question
What are the benefits of utilizing in-house banks in international
treasury management?
Answer:
The primary benefit is a reduction in overall banking costs
by aggregating many small transactions into fewer larger
ones. An in-house bank can also
manage five principal international treasury management
solutions—investments/debts, netting, pooling,
re-invoicing and centralization of FX exposures.
 Corporate Governance
• Major concern for large, publicly traded companies; regulations
vary widely between countries.
• Challenges include:
– Separation of ownership and control in large companies (stockholders
vs. executive officers)
– Not-for-profit organizations: board serves as oversight for the public
(public vs. internal management)
• Think of stockholders as investors rather than owners (agency
problem).
• Establish procedures for checks and balances, board of directors.
 Discussion Question
Who are the five key parties in corporate governance of publicly
traded companies in the U.S.?

Answer:
– Securities and Exchange Commission (SEC)
– Public Company Accounting Oversight Board (PCAOB)
– New York Stock Exchange (NYSE)
– Large institutional investors (e.g., labor unions, mutual funds,
pension funds)
– States’ attorneys general offices (especially New York and
California)
 Investor Relations
• Company function that deals with the disclosure or release of
information to bond- and stockholders in a timely manner;
activities mandated to support market regulatory
requirements.
• Responsibilities include earnings releases and forecasts,
annual/quarterly reports, press releases, legal disclosures.
• Investor relations department is a company’s only interaction
with the stock market, over which it has full control.