Treasury management
Management of money and financial risks in a business
Four key areas of treasury management
- Liquidity management
- Risk management
- Funding
- Corporate finance
Liquidity management
Short term management of cash to ensure company has access to cash it needs in cost efficient manner
Risk management
Understanding and quantifying the risks faced by a company eg currency risk, interest rate risk and commodity price risk management
Corporate finance
Examination of a company’s financial strategies eg is capital structure appropriate
Funding
Deciding on suitable forms of finance and organising suitable bank and capital market debt
Importance, mix and volume of acitivities within each of the four functions depends on
Nature of the business
Responsibility to ensure treasury department is organised appropriately to meet needs of organisation and whether centralised or decentralised
Board of directors
Centralised/ decentralised =
Centralised = treasury based at head office effectively in house bank serving interests of group Decentralised = prime decision making takes place at subsidiary level
Advantages of centralised treasury department (4)
- Economies of scale (borrowing for lots of subsids can be arranged in bulk)
- Matching - cash surpluses in one area can be used to match cash needs in another and currency matching minimises hedging costs
- Control - standardised procedures
- Expertise - experts can be employed with knowledge of latest developments in treasury management
Advantages of decentralised treasury department (3)
- Faster decision making
- Understanding of specific entity needs/ local financing opportunities
- Greater control, more motivated management
Important that the organisation of a treasury department reflects a company’s
Attitude to risk
Depending on company’s attitude to risk, treasury department can be set up in three ways
- Cost centre > aim to operate as efficiently as possible and hedges 100% of risk if possible
- Cost saving centre > partial hedges used and residual risk is managed within limits
- Profit centre > treasury department creates speculative positions by trading in financial instruments
Due to increase difficulty in managing treasury functions, and to ensure effective and secure functioning..
Controls are required
Unauthorised transactions risk
Money being misappropriated and risk of unauthorised positions
Unauthorised transactions controls (7)
- Types of risks that can be accepted
- Instruments that may be used
- Level of positions allowed
- Limits for each dealer
- Must have individual to confirm/ sign off transaction
- Transactions are recorded
- Banks who are being traded with should also carry out independent checks > monitor bank mandates
Key culture for treasury team
Where individuals are encouraged to rapidly admit to having made mistakes > essential
Cultural problems controls (2)
- Selection process > thorough interviews and references taken up
- Appropriate training
Systems risk
Risk that the manual and electronic systems for implementing transactions have inherent flaws
Systems risk controls (6)
- Ensure that requirements are clearly specified
- Ensure systems department understands business sufficiently
- Initial password to enter system
- Various levels of access for different tasks
- System administrator must be external to treasury department
- Passwords for authorising payments electronically only given to authorised signatory
Dealing by phone
Typically foreign exchange or interest rate products done over the telephone to take advantage of prices which may change from second to second
Dealing by phone controls (5)
- Record dealers’ telephone calls
- Hard copy of deal confirmation should be produced
- Confirmation should be agreed to bank confirmation
- Bank mandates must be in place detailing who can authorise and what level
- Internal exposure limits within which the treasury team must operated
Counterparty risk
The possibility that the entity to which money has been lent or to whom company is otherwise exposed will not be able to repay at maturity
Counterparty risk controls (2)
- Credit limit set (responsibility of treasury not credit control)
- Limits should be reviewed annually (or preferably semi-annually as rating agencies amend ratings)
