Detail of Treasury Functions

Ultimately, the treasury department ensures that a company has sufficient cash available at all times to meet the needs of its primary business operations.  However, its responsibilities range well beyond that single goal.  It also has significant responsibilities in the following areas:

• Cash forecasting.  The accounting staff generally handles the receipt and disbursement of cash, but the treasury staff needs to compile this information from all subsidiaries into short-range and long-range cash forecasts.  These forecasts are needed for investment purposes, so the treasury staff can plan to use investment vehicles that are of the correct duration to match scheduled cash outflows.  The staff also uses the forecasts to determine when more cash is needed, so that it can plan to acquire funds either through the use of debt or equity.  Cash forecasting is also needed at the individual currency level, which the treasury staff uses to plan its hedging operations.
• Working capital management.  A key component of cash forecasting and cash availability is working capital, which involves changes in the levels of current assets and current liabilities in response to a company’s general level of sales and various internal policies.  The treasurer should be aware of working capital levels and trends, and advise management on the impact of proposed policy changes on working capital levels.
• Cash management.  The treasury staff uses the information it obtained from its cash forecasting and working capital management activities to ensure that sufficient cash is available for operational needs.  The efficiency of this area is significantly improved by the use of cash pooling systems.
• Investment management.  The treasury staff is responsible for the proper investment of excess funds.  The maximum return on investment of these funds is rarely the primary goal; instead, it is much more important to not put funds at risk, and also to match the maturity dates of investments with a company’s projected cash needs.
• Treasury risk management.  The interest rates that a company pays on its debt obligations may vary directly with market rates, which present a problem if market rates are rising.  A company’s foreign exchange positions could also be at risk if exchange rates suddenly worsen.  In both cases, the treasury staff can create risk management strategies and implement hedging tactics to mitigate the company’s risk.
• Management advice.  The treasury staff monitors market conditions constantly, and so is an excellent in-house resource for the management team, should they want to know about interest rates that the company is likely to pay on new debt offerings, the availability of debt, and probable terms that equity investors will want in exchange for their investment in the company.
• Credit rating agency relations.  When a company issues marketable debt, it is likely that a credit rating agency will review the company’s financial condition, and assign a credit rating to the debt.  The treasury staff responds to information requests from the credit agency’s review team, and provides it with additional information over time.
• Bank relationships.  The treasurer meets with the representatives of any banks that the company uses, to discuss the company’s financial condition, the bank’s fee structure, any debt granted to the company by the bank, and such other services as foreign exchange transactions, hedges, wire transfers, custodial services, cash pooling, and so on.  A long-term and open relationship can lead to some degree of bank cooperation if a company is having financial difficulties, and may sometimes lead to modest reductions in bank fees.
• Fund raising.  A key function is for the treasurer to maintain excellent relations with the investment community for fund raising purposes.  This community is comprised of the sell side, which are those brokers and investment bankers who sell the company’s debt and equity offerings to the buy side, which are the investors, pension funds, and other sources of cash who buy the company’s debt and equity.  While all funds ultimately come from the buy side, the sell side is invaluable for its contacts with the buy side, and so is frequently worth the cost of its substantial fees associated with fund raising.
• Credit granting.  The granting of credit to customers can lie within the purview of the treasury department, or may be handed off to the accounting staff.  This task is useful for the treasury staff to manage, since it allows the treasurer some control over the amount of working capital locked up in accounts receivable.
• Other activities.  If a company engages in mergers and acquisitions on a regular basis, then the treasury staff should have expertise in integrating the treasury systems of acquirees into those of the company.  For larger organizations, this may require a core team of acquisition integration experts.  Another activity is the maintenance of all types of insurance on behalf of the company.  This chore may be given to the treasury staff on the grounds that it already handles a considerable amount of risk management through its hedging activities, so this represents a further centralization of risk management activities.

Clearly, the original goal of maintaining cash availability has been expanded by the preceding points to encompass some types of asset management, risk management, working capital management, and the lead role in dealing with banks and credit rating agencies.  Thus, the treasury department occupies a central role in the finances of the modern corporation.

Related Topics

Bank overlay structure
Cash sweeping
Foreign currency netting
Interest rate swaps
Investment strategies