Treasury Management Midterm Reviewer PDF

Treasury Management - Stakeholders Enhancing Returns on Equity LESSON 1: CORPORATE STRATEGY AND THE...

Treasury Management - Stakeholders Enhancing Returns on Equity LESSON 1: CORPORATE STRATEGY AND THE Optimized Dividend and Buy-back TREASURER Programs Corporate Strategy Managing Cost Capital Focuses on the customers needs, market Corporate Value expansion, production and operation Shorten Working Capital Cycle - ensuring Controls the margin of errors in the liquidity across business value chain. business Optimizing Cost of Borrowing - Issuance of Corporate Treasurer corporate bonds to public investors Improve Risk Mgt - risk management and Manage Market Volatility mitigation through hedging Providing Liquidity Unlock liquidity - Unlock liquidity from idle Monitor Margin of errors in business cash, reduce cost of financing across value strategy execution chain, i.e. channels and vendors, structuring Keeping counter measures within Merger & M&A transactions Acquisition acceptable limits Enhance shareholder value - Enhance shareholder value through dividend and share Strategic Corporate Treasurer buy backs, manage cost of capital through - Considered as the backbone of the banking and credit rating relationships Organization THE ROLE OF TREASURY AND TREASURER - It handles Liquidity Cash and Liquidity Management Strategic Risk Financial Risks Management Strategic Business Partnership Banking Relationship Management Stakeholders Funding and Debt Management Proprietary Trading Limits Strategic Corporate Treasurer Treasury policies should: - Liquidity Re-engineering Finance Process to Reflect the Corporate Treasury’s mandate unlock liquidity and shorten working Show the reporting and responsibility capital cycle structure Optimizing safety and Return on surplus Explain the Treasury’s definition on different liquidity Treasury risks Optimizing Cost Outline the risk management methodologies - Strategic Risk and risk monitoring processes (i.e FX Improve Business Margins through exposures, Cashflow reports, Counterparty availability and structuring of risk limits, Debt monitoring) management solutions Specify clearly the different risk management Reduce cost of Liquidity and Risk limits (i.e FX limits, Interest Rate coverage, Management Debt ratios, Trading limits, Cash end of day Mitigate Profit/Loss Volatility balances, Settlement cut-offs) - Strategic Business Partner Include standard operating procedures Delivering structuring premium on global guidelines on different risk management treasury setup Merges and Acquisition processes transaction Enhancing Structural Margins by reduction in cost of financing across the value chain (i.e channels and vendors) Reducing idle Cash LESSON 2: Treasury Organization and Structure Treasury Policies Required Board Level Approval Treasury Function Financial policy Funding policy Liquidity (working capital) - measuring, Banking monitoring and managing cash flow to protect Liquidity solvency. Foreign exchange Funding (long-term finance) - creating an Interest rate hedging policy optimal mix of equity and debt to meet capital Instruments and techniques expenditure and investment requirements. Financial Risk Management - identifying Financial Policy potential risks and their impact and taking action to mitigate these. Financial policy should address gearing and maturity issues, fixed and variable interest Treasury rate obligations, foreign exchange risk management, dividend policy and covenants. The stability of the company’s cash flows to achieve the The company requires as much operational company’s profit and solvency objectives is the key aim and financial flexibility as possible. of treasury. The board should have regular, informed Treasury activities discussions about funding possibilities to put currency, maturity, cost and equity/debt Treasury tends to concentrate on the physical character into a wider context. flow of funds, cash and financial risk as This lets the board delegate fund raising compared to accounting and corporate decisions and actions to treasury. Treasury, finance, which deal predominantly with the however, must still have final board approval recording or evaluation of transactions. for: In general, treasury usually adopts a more o the types of instruments that may be used active role in the organization than other in debt, investment and risk management sections of the finance function. o their use, and under what conditions they Originally the activities were carried out within may be used. the general finance function, but today are often separated into a treasury department, Banking particularly in large international companies. Banks chosen by the treasurer must be able to meet the Reasons for the change include: needs of the organisation, both domestically and internationally. The board should approve the Increase in size and global coverage organisation's list of bankers annually while resisting the of the companies temptation to interfere in the relationships. Increasingly international markets Increase sophistication of business Liquidity practices The board must approve of commercial paper programmes. The board should also approve treasury's policy on the investment of surplus funds, the choice of instruments, the list of institutions used, the maximum amount and maturity that can be placed with one counterparty, any hedging, swaps and other financial instrument arrangements entered into. Foreign exchange Treasury policies in this area must be clearly explained to and understood by the board. Treasury must alert the board to external changes and internal strategic developments, which may have long-term implications for the organisation and to make proposals for managing them. The board must approve the hedging policy, the company's foreign exchange management philosophy and its attitude to risk. Interest rate hedging policy Managing interest rate exposure requires a forward projection to be taken of the prospective future movements in interest rates. The board should fully consider the risks involved in the company's activities and develop a level of awareness among senior management of possible unexpected losses that may result from adverse movements in interest rates. An explicit board policy is ideal. From the board's viewpoint, staff are made aware of its philosophy and objectives and are provided with the working guidelines to achieve those objectives. Instruments and techniques In all areas of funding and liquidity, foreign exchange, interest and commodity price risk, the board must understand and approve the strategies and instruments used, setting appropriate limits for their use. The board needs to ensure that treasury has not sacrificed long-term flexibility or survival for short-term gain, especially in view of the current financial markets situation. The board must examine the company's activities and structure to determine the types of risks to which it is exposed. It should estimate the size of these exposure risks, providing an indicator as to their importance to the overall operations and financial performance of the company. Other policy areas Other common areas that need to be made or happening only for a approved by the board on an ad hoc basis particular purpose or need, not planned before it happens. include: a) financing major projects (domestic and international) b) performance bonds and guarantees c) off-balance-sheet financing d) acquisitions and sales of assets and liabilities e) controls and performance measurement