Treasury Management Overview PDF

TREASURY MANAGEMENT OVERVIEW ALEX M. TAGUENCA, JR. Instructor INTRODUCTION  Treasury management refers to the systematic process of overseeing an organization's financial resources, ensuring effective management of cash, liquidity, and financial risks.  It involves a range of activities...

TREASURY MANAGEMENT OVERVIEW ALEX M. TAGUENCA, JR. Instructor INTRODUCTION  Treasury management refers to the systematic process of overseeing an organization's financial resources, ensuring effective management of cash, liquidity, and financial risks.  It involves a range of activities that are designed to optimize the utilization of funds while minimizing risk exposure.  Treasury management is crucial for maintaining an organization's financial stability and supporting its strategic goals.  Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management.  Most banks have whole departments devoted to treasury management and supporting their clients' needs in this area.  Smaller banks are increasingly launching and/or expanding their treasury management functions and offerings, because of the market opportunity afforded by the recent economic environment (with banks of all sizes focusing on the clients they serve best), availability of highly seasoned treasury management professionals, access to industry standard, third-party technology providers' products and services tiered according to the needs of smaller clients, and investment in education and other best practices.  For non-banking entities, the terms Treasury Management and Cash Management are sometimes used interchangeably, while, in fact, the scope of treasury management is larger (and includes funding and investment activities mentioned above). In general, a company's treasury operations comes under the control of the CFO, Vice-President / Director of Finance or Treasurer, and is handled on a day-to-day basis by the organization's treasury staff, controller, or comptroller. FUNCTIONS 1. Cash and Liquidity Management Cash management involves  Cash and liquidity management is often the collection, handling, and described as treasury's 'primary duty.' usage of cash. It's about Essentially, a company needs to be able to meet its financial obligations as they ensuring that a company has fall due, i.e. to pay employees, suppliers, the right amount of cash lenders and shareholders. This can also available to meet its be described as the need to maintain obligations and optimize cash liquidity, or solvency of the company: a flow. company needs to have the funds available that will enable it to stay in Effective cash and liquidity business. In addition to dealing with management ensures that a payment transactions; cash management company can continue to operate also includes planning, account smoothly, meet its financial organization, cash flow monitoring, obligations, and take advantage of managing bank accounts, electronic growth opportunities without banking, pooling and netting as well as the functions of in-house banks. unnecessary financial strain. Objectives: Liquidity: Ensuring enough cash is available to meet day-to-day expenses. Profitability: Investing excess cash to generate returns while ensuring liquidity. Efficiency: Minimizing the cost of borrowing and maximizing returns on surplus funds. Key Activities: Cash Forecasting: Predicting future cash flows to manage liquidity effectively. Cash Concentration: Pooling cash from various accounts into a central account. Payment and Collection Management: Managing the timing and methods of payments and collections to optimize cash flow. LIQUIDITY MANAGEMENT  Liquidity management involves ensuring that a company can meet its short-term obligations without having to raise additional capital or take on debt. Objectives: Maintaining Optimal Liquidity Levels: Balancing having enough liquidity to meet obligations and not holding excess, idle cash. Cost Management: Reducing the costs associated with short-term financing. Key Strategies:  Liquidity Ratios: Monitoring ratios like the current ratio and quick ratio to assess liquidity levels. Short-term Investments: Investing in short-term, liquid assets to ensure that cash is available when needed. Credit Lines: Establishing lines of credit to provide quick access to cash if needed. 2. RISK MANAGEMENT  Risk management is the discipline of managing financial risks to allow the company to meet its financial obligations and ensure predictable business performance.  Risk management is the process of identifying, assessing, and prioritizing risks, followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events.  The aim of Risk Management is to identify, measure, and manage risks that could have a significant impact on the business. It is important to note that the objective is not to eliminate all risk. Taking risk is a critical part of any business – no risk no gain. It is important, however, to take risks only in areas that the business has competitive advantage. For example, an automotive company will want to take risks in design and engineering but will want to avoid risks in currencies and interest rates. On the other hand, a bank will be in a position to take risks in currencies and interest rates but will avoid operational and regulatory risks.  Risk Identification: The first step involves identifying potential risks that could affect the project or organization. This includes everything from financial risks to operational and strategic risks. Risk Assessment: Once risks are identified, they need to be assessed in terms of their potential impact and likelihood of occurrence. This often involves qualitative and quantitative analysis. Risk Prioritization: After assessing the risks, they are prioritized based on their potential impact and the likelihood of occurrence. This helps in focusing on the most significant risks first. Risk Mitigation: This involves developing strategies to manage and mitigate risks. Strategies can include avoiding the risk, reducing its impact or likelihood, transferring the risk (e.g., through insurance), or accepting it if it's within tolerance levels. Monitoring and Review: Risk management is an ongoing process. Regular monitoring and reviewing of risks and mitigation strategies are necessary to ensure they remain effective as conditions change. Communication and Reporting: Effective risk management requires clear communication and reporting mechanisms so that everyone involved is aware of the risks and the strategies in place to manage them. 3. WORKING CAPITAL MANAGEMENT  Efficient management of working capital, which includes the company's current assets (e.g., inventory, accounts receivable) and liabilities (e.g., accounts payable), is important for maintaining smooth operations. Treasury professionals work to optimize the balance between these components to minimize financing costs and maximize operational efficiency.  Working capital management involves managing a company's short-term assets and liabilities to ensure that it has sufficient cash flow to meet its short-term obligations and operate efficiently.  Inventory Management: Balancing the amount of inventory a company holds to ensure that it can meet customer demand without overstocking, which ties up cash. Accounts Receivable Management: Ensuring that the company collects payments from customers in a timely manner. This includes setting credit terms, monitoring accounts receivable, and following up on overdue accounts. Accounts Payable Management: Managing the timing of payments to suppliers to ensure that the company retains cash as long as possible without damaging supplier relationships. Cash Management: Ensuring that the company has enough cash on hand to meet its short-term obligations while also investing any excess cash to earn a return. Short-term Financing: Using short-term financing options, such as lines of credit or short- term loans, to bridge any gaps between cash inflows and outflows. 4. INVESTMENT MANAGEMENT  Surplus funds that are not immediately needed for operational purposes can be invested to generate returns. Treasury managers assess various investment options, taking into account risk tolerance and investment objectives, to maximize returns while ensuring the safety of the invested funds.  Investment management involves the professional handling of various securities (such as stocks, bonds, and real estate) and assets (like real estate) to meet specific investment goals for the benefit of investors. These investors may be individuals or institutions like pension funds, insurance companies, and corporations. KEY ASPECTS OF INVESTMENT MANAGEMENT INCLUDE: Asset Allocation: Determining how to distribute investments among different asset categories, such as stocks, bonds, and cash. Portfolio Management: The ongoing process of selecting and overseeing a collection of investments that align with an investor's goals and risk tolerance. Risk Management: Identifying, assessing, and mitigating risks to minimize the potential for loss in an investment portfolio. Performance Measurement: Regularly evaluating the returns on investment and comparing them to benchmarks or predefined objectives. 5. DEBT MANAGEMENT  Organizations often need to raise capital through borrowing. Treasury management involves making decisions about the appropriate level of debt, the types of debt instruments to issue, and the timing of debt issuance to optimize financing costs.  Debt management refers to strategies and services aimed at helping individuals or businesses manage and reduce their debts. This can include budgeting, financial counseling, consolidating debts into a single payment, negotiating with creditors for lower interest rates or payment plans, and in some cases, filing for bankruptcy. KEY COMPONENTS OF DEBT MANAGEMENT: Budgeting: Creating a realistic plan to manage income and expenses, ensuring that debts are paid on time while maintaining necessary living expenses. Debt Consolidation: Combining multiple debts into a single loan or payment, often with a lower interest rate, making it easier to manage and pay off debts. Debt Counseling: Seeking advice from a certified credit counselor who can help create a personalized debt management plan. Negotiating with Creditors: Working directly with creditors to lower interest rates, extend payment terms, or settle debts for less than the full amount owed. Debt Settlement: A strategy where a debtor negotiates with creditors to reduce the total amount of debt owed, often used when debts are in collections or severely delinquent. Bankruptcy: A legal process that provides relief to individuals or businesses who are unable to repay their debts, either through reorganization or liquidation. 7. REGULATORY COMPLIANCE  Treasury management must adhere to various financial regulations and reporting requirements. This includes compliance with accounting standards, tax regulations, and other financial reporting obligations.  Regulatory compliance refers to an organization's adherence to laws, regulations, guidelines, and specifications relevant to its business processes. Compliance is critical in industries like finance, healthcare, and energy, where failing to meet regulatory requirements can result in legal penalties, financial loss, and damage to reputation. COMPLIANCE ACTIVITIES OFTEN INCLUDE: Identifying Applicable Regulations: Understanding which laws and regulations apply to the organization. Implementing Policies and Procedures: Establishing internal policies to ensure that the organization adheres to these regulations. Training and Education: Ensuring that employees are aware of and understand the regulations that affect their job roles. Monitoring and Auditing: Regularly reviewing operations and controls to ensure compliance with regulations. Reporting and Documentation: Keeping accurate records and documentation to prove compliance during audits or investigations. Responding to Non-Compliance: Taking corrective action when non-compliance is identified, including revising policies, training, and addressing any issues that arise. 6. BANK RELATIONSHIP MANAGEMENT  Organizations maintain relationships with banks and financial institutions for various services such as banking, cash management solutions, and investment opportunities. Treasury managers negotiate terms, fees, and services with these institutions. 7. TECHNOLOGY AND AUTOMATION  Many aspects of treasury management have been streamlined through technological advancements. Treasury professionals use financial software and systems to monitor cash flows, manage investments, and analyze financial data. TREASURERS ARE TYPICALLY RESPONSIBLE FOR MANAGING:  Liquidity Risk is the risk that the company is unable to fund itself or is unable to meet its obligations;  Market Risk (or price risk) is the risk that changes in market prices (typically foreign exchange, interest rates, commodities) cause losses to the business;  Credit Risk is the risk that a counter party default causes loss to the business;  Operational Risk is the risk that fraud or error cause losses to the business.  Effective treasury management requires a deep understanding of financial markets, economic conditions, and risk management techniques. It plays a critical role in ensuring an organization's financial stability, optimizing cash utilization, and supporting strategic decision-making.