Treasury Management


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Treasury Management

Treasury Management can be understood as the planning, organizing and controlling holding, funds and working capital of the enterprise in order to make the best possible use of the funds, maintain firm’s liquidity, reduce the overall cost of funds, and mitigate operational and financial risk

The Treasury function in any corporate has always been important in making sure that the business has sufficient liquidity to meet its obligations, whilst managing payments, receipts and financial risks effectively.

Meaning of Treasury Management:

Treasury management refer to ‘the corporate handling of all financial matters, the generation of external and internal funds for business, the management of currencies and cash flows and the complex strategies, policies and procedures of corporate finance.’

Tight money, escalating interest rates and economic volatility have called for specialized skills called ‘treasury management’. Until recently, no major efforts were made to manage cash. In the wake of the competitive business environment resulting from the liberalization of the economy, there is a pressure to manage cash.

The demand for funds for expansions coupled with high-interest rates, foreign exchange volatility and the growing volume of financial transactions have necessitated efficient management of money. Treasury management mainly deals with working capital management and financial risk management.

The former constitutes cash management and decides the asset-liability mix. Financial risk management includes forex and interest rate management, apart from managing equity and commodity prices.

The key goal of treasury management is planning, organizing and controlling cash assets to satisfy the financial objectives of the organization. The goal may be to maximize the return on the available cash, or minimize interest cost or mobilize as much cash as possible for corporate ventures.

Dealing in forex, money and commodity markets involves complex risks of fluctuating exchange rates, interest rates and prices which can affect the profitability of the organization.

Treasury managers try to minimize losses by adopting risk transfer and hedging techniques that suit the internal policies of the organization. Options, futures and swap are a few of the major derivative instruments, the Treasury Managers use to hedge their risks.

The important functions of a Treasurer of a multinational company are as follows:

1. Corporate Financial Planning:

(a) Setting up of financial objectives, plans and strategies.

(b) Setting up of financial and treasury policies.

(c) Setting up of financial and treasury systems.

(d) Establishment of credit policies and control procedures.

(e) Establishment of policies and procedures for receipt and disbursement of funds.

(f) Setting up centralized or decentralized treasury management procedures.

2. Cash Management:

(a) Forecasting of cash requirements and preparation of cash budgets.

(b) Estimation of working capital requirements and planning the levels of investment in current assets.

(c) Establishment of banking relationships, arrangement of funds for working capital require­ments, providing of security for working capital finance.

(d) Monitoring the credit collection.

(e) Monitoring the liquidity and funds position of different divisions of the firm.

(f) Investment of temporary surplus funds in short-term marketable securities and sale of it when the need of cash arises.

(g) Ascertainment of collection and payment floats, efficient playing of the float etc.

(h) Transmission of funds to various divisions and receipt of funds from various collection centres.

(i) Ensure that sufficient cash is available for meeting day to day financial obligations.

(j) Maintaining sufficient cushion for meeting contingencies and unexpected financial obliga­tions.

(k) Identify surplus funds in certain divisions and transfer them to the divisions which are facing deficit of cash.

3. Funding Management:

(a) Planning of short-term, medium-term and long-term cash needs.

(b) Setting of funding policies and procedures.

(c) Participation in financial decisions like, corporate structuring, dividend payment, buyback of shares, redemption of debentures etc.

(d) Identification of sources of funds and cost-benefit analysis of different sources of funding.

(e) Procurement and raising of funds from various sources like issue of shares and debentures, raising of term-loans from banks and financial institutions etc.

4. Currency Management:

(a) Setting up of policies and procedures relating to currency exposure.

(b) Hedging of currency rate risk and interest rate risk through various financial derivative instruments and techniques.

(c) Monitoring of trends in international business, economic changes.

(d) Complying with exchange regulations of various countries.

(e) Settlement of intragroup indebtedness.

5. Corporate Finance:

(a) Advising on proposals relating business acquisition and disposal, mergers and takeover, buy back of shares, diversification and divestment decisions.

(b) Advising on project finance, foreign collaborations and joint ventures.

(c) Advising on long-term funds management.

(d) Planning for redemption debentures and bonds, repayment of term loans, restructuring and financial reorganization, financial re-engineering etc.

(e) Steps to reduce the cost of funds and weighted average cost of capital.

(f) Monitoring of trends in capital market, debt market, government policies and regulations, inflationary tendency etc. and its impact on corporate finance.

6. Other Related Matters:

(a) Corporate tax planning.

(b) Risk management and insurance.

(c) Pension fund investment management.

The treasury operations of any organization can broadly be divided into two parts as follows:

(a) Short-term investment of surplus funds in the money market to maximize the benefit arising out of availability of surplus funds.

(b) Short-term borrowings of funds from banks or market for normal working capital require­ments and for temporary shortage of funds at the lowest possible cost to the company.

The broad objective of cash management with regards to the treasury operations of the organizations is to maximize the availability of funds at any point of time and at the desired place for investment purposes and/or also to minimize the deficit or shortfall in the requirement of funds at any point of time, i.e., what cash management seeks to do for treasury operations is to convert its sales, whether on cash or credit into ‘available cash’ as fast as possible.