Treasury Management: An Overview

Treasury Management Introduction

• Treasury management is being introduced in Module 1

Topics Covered

• Treasury Department
• Treasurer Role
• Cash Transfer Methods
• Cash Forecasting
• Working Capital Management

Treasury Department Defined

• The treasury department's responsibility is for a company’s liquidity
• The department must also safeguard existing assets through prudent investment, while guarding against excessive losses from interest rates and foreign exchange positions.

Treasury Controls

• Large sums of cash are involved in many treasury transactions
• It is important to have controls that help to ensure the transactions are appropriate
• Critical duties should be segregated among treasury staff
• This ensures that one person cannot solely control the cash transactions
• Someone outside of the trading function should regularly compare brokerage fees and commissions to reported transactions
• This is to check if there are unauthorized or unrecorded transactions
• Treasury is also subject to audit to match actual transactions against company policies and procedures
• The treasurer must have these policies in place to avoid connivance and illegal transactions

Treasurer Roles

• Treasurer is responsible for monitoring current and projected cash flows and special funding needs
• The treasurer must use this info to correctly invest excess funds and must be prepared for additional borrowings or capital raises
• The treasurer is also responsible for monitoring the internal processes and decisions that cause changes in working capital and profitability
• Treasury needs to maintain key relationships with investors and lenders

Treasurer Job Description

• The treasurer reports to the CFO
• The treasurer is responsible for corporate liquidity, investments, and risk management related to the company's financial activities
• Main duties include:
  • Forecasting cash flow positions, related borrowing needs, and available funds for investment
  • Ensuring sufficient funds are available to meet ongoing operational and capital investment requirements
  • Using hedging to mitigate financial risks related to the interest rates on the company's borrowings, as well as on its foreign exchange positions
  • Maintaining banking relationships
  • Maintain credit rating agency relationships
  • Arranging for equity and debt financing
  • Investing funds and pension funds
  • Monitoring the activities of third parties handling outsourced treasury functions on behalf of the company
  • Advising management on the liquidity aspects of its short- and long-range planning
  • Overseeing the extension of credit to customers
  • Maintaining a system of policies and procedures that impose an adequate level of control over treasury activities

Treasury Responsibility

• Treasury Centralization makes handling transactions in higher volumes by fewer staff easier
• Management of a company’s banking relationships is a key part of treasury’s responsibilities
• Large companies may deal with dozens of banks
• It is important for the treasurer to gradually reduce the total
• Bank Account Management includes understanding who is authorized to release funds from bank accounts
• Some banks have multiple accounts, so treasury staff should follow a review and update quarterly and a procedure to update authorized signatories
• Several levels of outsourcing can be applied to the treasury department including minimal technology outsourcing

Treasury Department Role

• The treasury department ensures that a company has sufficient cash available at all times to meet the needs of its primary business operations
• The treasury department also has significant responsibilities in cash forecasting, working capital management, and cash management

Other Treasury Department Roles

• Investment Management
• Treasury Risk Management
• Management Advice
• Credit Rating Agency Relations
• Bank Relationship
• Fund Raising
• Credit Granting

Cash Transfer Method

• The treasurer should understand the implications of different methods of transferring cash, as well as the different levels of processing (manual/automated)
• Cash transfer methods impact on finance and accounting functions

Types of Cash Transfer Methods

• Check Payment are made on paper documents which has traditionally been physically routed from the payer to payee, to payee's bank
• Wire Transfer sends funds to recipient’s bank account more rapidly than any other form of payment
• Procurement Cards allow companies to make smaller scale supplier payments with a procurement card program from a debit card directly to companys bank account
• Cash Payments are usually inbound/outbound cash payments for very small transactions mainly for retail
• Business-to-business cash payments are not common

Cash Forecasting

• Cash forecasting is crucial to the operation of every organization
• A cash shortfall could lead to the following negative consequences for a company:
  • Payroll cannot be met
  • Suppliers are not paid
  • Scheduled loan payments will not be made
  • Investors cannot receive dividends
• Any one of these factors can bring down a business or ensure a change in management
• To improve forecasting accuracy, the treasury staff should regularly compare the forecast to actual results in order to locate and root out problems

Cash Forecasting Method

• An imperative for the management team is to be informed of any cash problems with as much lead time as possible
• Methods of forecasting cash:
  • Receipts and Disbursement Method are cash receipts and cash disbursements
    • A cash receipt is money received by the firm
    • A cash disbursement is money paid by the firm
    • Receipts result in a debit that increases the cash balance
    • Disbursements result in a credit that decreases the cash balance
  • Cash Modeling is a long-term forecast
    • Uses historical data to extrapolate relationships between certain elements, the loss statement, and the balance sheet.
  • Regression Analysis estimates relationships between a dependent variable and one or more independent variables
    • It can be used for forecasting revenues and expenses
    • A correlation between number of salespeople employed by a company, the number of stores they operate, and the revenue the business generates

Working Capital Defined

• Working capital is the amount of cash and other current assets a business has available after all its current liabilities are accounted for
• Understanding how much working capital an organization has on hand to pay bills is critical
• Working capital is the difference between a company's assets and its current liabilities

Working Capital Management

• The treasurer must be aware of high or low components of working capital
• This can be caused by improper management practices or decisions
• High accounts receivables may be caused by special deals or illegal acts concealed in the accounts receivable account

Practices Affecting Working Capital

• Cash Management is a key component of working Capital
• Credit Management occurs when a company extends credit to its customers through a credit policy
• Credit Management affects the amount of funds that company must invest in its accounts receivable.
  • Loose and tight credit policy are examples
• A treasurer should control credit policy, as any change in credit policy may have an effect in funding requirements
• Responsibilities for billing and collecting from customer pass to accounting department once credit has been granted to a customer
• The treasury does not have direct control on receivables
• Inventory Management refers to ordering, storing, using, and selling a company's inventory
  • Includes managing raw materials, components, and finished products, as well as warehousing and processing of such items
• Head office treasury and finance teams often find themselves in a frustrating position when it comes to managing working capital across their organization
• They may have limited ability to influence the efficiency of the working capital process they fund
• Working Capital Metrics can be:
  • Days Sales Outstanding (DSO) shows how long it takes to collect cash from customers
    • Days sales outstanding is calculated as Accounts Receivable/Trailing 12 Month Credit Sales x 365
  • Days Payable Outstanding (DPO) shows how long it takes to pay suppliers
    • Days payables outstanding (DPO) is calculated as Accounts Payable/Trailing 12 Month Cost of Revenue x 365
  • Days of Inventory Outstanding (DIO) shows how quickly inventory is sold
    • Days of Inventory Outstanding (DIO) is calculated as Inventory/Trailing 12 Months Cost of Revenue x 365
• Cash Conversion Cycle (CCC) is a short cash conversion cycle indicating a company managing its working capital cycle in an efficient manner
• CCC is calculated as DSO + DIO − DPO