INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
WEEK 2
INTRODUCTION TO TREASURY MANAGEMENT
Learning Objectives:
Define treasury management;
Discuss the treasury functions;
Explain the four pillars of treasury management; and
Understand the scope of corporate Treasury responsibilities and its role within the
broader corporation, and how Treasury can support the business and add value to
the corporation
TREASURY MANAGEMENT, DEFINITION
Treasury Management is a management system that aims to optimize a company’s
liquidity, while also mitigating its financial, operational, and reputational risk.
Treasury Management includes a firm's collections, disbursements, concentration,
investment and funding activities. In larger firms, it may also include financial risk management.
Overview of Treasury Management
One of the main functions of treasury management is to determine the proper levels of
cash or cash equivalents to allow businesses the ability to meet their financial obligations. Having
a treasury management system (TMS) in place is crucial to ensure that a business successfully
manages their financial risk. Treasury management systems involve the creation and governance
of various procedures and policies designed to help companies better manage their cash flow
and all the aspects that go with it, such as payables, receivables, interest rates, and foreign
exchange rates.
Managing cash well is crucial for businesses of all sizes. Even the most profitable of
businesses can fail if there is insufficient cash on hand to cover bills and other financial
obligations. Through treasury management, companies are better equipped to monitor the
amounts and timing of cash inflows and outflows. It is also the role of treasury management to
extend the time needed for a company to retain the money needed for bills and to reduce the time
it takes to receive money from customers.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
FUNCTIONS AND ROLES OF TREASURY
The treasury department occupies a central role in the finances of the modern corporation.
It takes responsible for the company’s liquidity—ensures that a company always has enough cash
available to meet the needs of its primary business operations.
1. Cash Forecasting - This is the beginning of all other roles carried on the operation of a
treasury department. Dislike the accounting staffs who handle the cash receipt and
disbursement activities on daily basis, treasury staffs need to draw all those accounting
staff’s records (within the organization including its subsidiaries if any), and compile it to
generate a cash forecast (short and long-range). The forecast and all its components are
needed to:
determine if more cash is needed. If that is the case, then they can go on to plan
for fund inquiry either through the use of debt or equity.
plan for investment purposes, if the forecast results in surplus and cash excess
shows up.
plan its hedging operations by using the information at the individual currency level.
2. Working Capital Management - Major usage of company’s cash is in the working capital
area. Working capital is a key component of cash forecasting. It involves changes in the
levels of current assets and current liabilities in response to a company’s general level of
sales. The treasurer should be aware of working capital levels and trends and advise
management on the impact of proposed policy changes on working capital levels.
3. Cash Management - Combining information in the cash forecast and working capital
management activities, Treasury staff can ensure that sufficient cash is available for
operational needs.
4. Investment Management - When the forecast shows some excess funds at, the treasury
staffs are responsible for the proper investment of it. Three primary goals of the role are:
(a) maximum return on investment; (b) matching the maturity dates of investments with a
company’s projected cash needs; and most importantly is (c) not putting funds at risk.
5. Treasury Risk Management - The treasury staffs are also responsible to create risk
management strategies and implement hedging tactics to mitigate the whole company’s
risk—particularly in anticipating (a) market’s interest rates may rise and leave the company
pays on its debt obligations; and (b) company’s foreign exchange positions that could also
be at risk if exchange rates suddenly worsen.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
6. Credit Rating Agency Relations - A company may issue marketable debt. In this case, a
credit rating agency will review the company’s financial condition and assign a credit rating
to the debt. The treasury staff would need to show quick responds to information requests
from the credit agency’s review team.
7. Bank Relation - A long-term relationship can lead to some degree of bank cooperation if
a company is having financial difficulties and may sometimes lead to modest reductions
in bank fees. The treasurers should, therefore, often meets with the representatives of any
bank that the company uses to: discuss the company’s financial condition, the bank ’s fee
structure, any debt granted to the company by the bank, and foreign exchange
transactions, hedges, wire transfers, cash pooling, and so on.
8. Fund Raising - Maintaining an excellent relation with the investment community for fund
raising purposes, is important—from the (a) brokers and investment bankers who sell the
company’s debt and equity offerings; to the (b) the investors, pension funds, and other
sources of cash, who buy the company’s debt and equity.
Other than those main roles, fundamentally the treasury staffs also monitor market
conditions constantly, and therefore is an excellent resource for the management team
should they want to know about interest rates that the company is likely to pay on new
debt offerings, the availability of debt, and probable terms that equity investors will want
in exchange for their investment in the company.
FOUR PILLARS OF TREASURY MANAGEMENT
Treasury organizations have a critical role in maintaining funding and liquidity; developing
optimized capital structures; controlling receipts, payments and cash; supporting tax and
repatriation strategies; and managing interest rate risk, including hedging.
Every decade presents new challenges and opportunities for corporate treasury. These
include the 2008 global financial crisis, the Asian financial crisis of 1997, the growth of China’s
economy (and how companies responded to meet that growth) and G7 economic and currency
policies. Today’s treasury departments must prepare for a new set of challenges, including:
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
• Sharply lower oil and commodity prices.
• Slowdown in China.
• Potential US Federal Reserve interest rate hikes.
• Continued negative interest rates in key economies.
• Potential political change in Brazil.
• Prospect of “Brexit” In Europe.
• Escalating fraud, cyber breaches and crime.
• Regulatory changes, including Base Erosion and Profit Shifting (BEPS), Proposition 385
and banking regulations impacting their funding practices.
Successfully anticipating, responding to and heading off these challenges will be critical
to success and highly effective treasury organizations use the four pillars of leading practice
treasury management to address them. A focused treasury organization that uses these pillars
will evolve to be more impactful on company operations and results, while mitigating financial risk
and facilitating effective and efficient cash operations on a global scale.
Pillar 1: Developing a global treasury talent center and organization
Technology, talent and company structures have changed the traditional model of
corporate treasury, which historically was part of the corporate headquarters and often had limited
involvement in business operations. Today, the design of an effective treasury organization must
consider global capabilities and maximize use of existing structures, analytic capabilities and
markets.
When developing a leading treasury department, the first step is to create updated policies
and practices that identify key areas of responsibility, including funding and liquidity; financial
markets risk (currency, interest rates and commodities); cash management; and bank relationship
and account management. These policies create alignment with the organization’s board,
management and treasury department. This structure allows treasury leadership to develop an
appropriate model to meet stated objectives and fiduciary requirements.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
By evaluating and proactively developing individuals at all levels within the organization,
treasury departments can grow team members through rotations, involvement in critical projects
and continuing education. Leading treasury departments review their talent pool at least semi-
annually, identify strengths and gaps in the organization, and use these forums as an enabler of
talent development. Key questions to consider include:
How many individuals are certified treasury professionals, and what are the group
objectives for certification?
How many team members have MBAs, or other advanced degrees?
Who in the group is skilled at cash management, capital markets, investments and
emerging markets?
The treasury department model has evolved from being an administrative group at corporate
headquarters. Leading treasury departments are moving administrative and operational tasks to
shared service centres (SSCs), which are possibly offshored or outsourced, to lower costs and
increase the effectiveness of key processes.
For example, a leading consumer products company has centralised its global payments
process through a highly effective in-house service centre and payments factory in Costa Rica.
Similarly, a major retailer with thousands of locations is using an outsourced service centre model
in India to manage bank accounts and perform bank reconciliations. Other companies are locating
key functions in international treasury centres, increasing responsiveness to multiple time zones,
business requirements and operating cash pools.
Pillar 2: Creating an analytical hub and agent of change that supports business decisions
Through a focus on analytic skills and technical capabilities, today’s treasury organizations
can create significant value. For example, improvements in managing financial markets risk can
result in lower volatility and improve margins. Too often, companies identify financial risks in their
cost structure after market volatility has exposed previously unknown risk levels – risks that could
have been identified through an effective risk and impact analysis. Advanced analytic capabilities,
including predictive analytics, are a leading practice to effectively manage financial risks.
Treasurers also require strong analytic capabilities for derivative pricing and valuation. Far
too often, companies enter into transactions at disadvantageous pricing; the instrument used
doesn’t effectively match the underlying exposure; or the company’s inability to value the
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
instrument leads to an unanticipated loss. In addition, they may be reluctant to implement hedges,
which can lead to a critical cost, competitive or business event for the company.
Economic events also have significant consequences to an organization. Treasury
departments should have key insights and information on economic events – such as recent ones
in Russia, China, Venezuela and Puerto Rico – and political events in Brazil and the UK. Through
preparation and scenario planning, the treasury group can be prepared for the impact of events
for which it has direct responsibility, such as funding and intercompany loans. In addition, it can
inform operational areas of the company about the findings, enabling them to develop
contingencies in sourcing or respond to changes in prices in key inputs such as oil.
Treasury teams need strong relationship management skills to manage interactions with
banks and key service providers. Companies rely on banks for funding, cash management,
investments, capital markets and other services. For many companies, annual bank fees can be
significant and may exceed US$10m-US$20m. A key to getting these services priced
appropriately is a bank relationship strategy that incorporates fair, competitive pricing and returns,
as well as sponsorship within the bank.
These sponsorships are critical when a company undertakes market expansion, requires
liquidity or faces changes in the business and economic cycle. For example, a global consumer
durable goods manufacturer is currently developing a bank relationship management strategy to
promote depth and quality with its banks at a fair return.
Relationship development is also essential as treasury groups work across organizations
with operations, marketing and supply chain. These internal relationships enable treasury
departments to identify financial costs and risks, such as hedging foreign exchange (FX) on
imported items to protect a key consumer price point.
For example, a leading food production company used outside advisors to help it
restructure its risk management programme. A key element was the development of a risk
committee that included the corporate treasurer, commodities group and division presidents. The
change in structure created organizational alignment, improving operating plan achievement.
Today, the company chief executive officer (CEO) regularly refers to the risk management
dashboard that was created in planning meetings.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
Pillar 3: Developing an “agile” treasury organization that can quickly react to the changing
business cycle and manage financial risks
Treasury organizations need to respond quickly to key internal and external events. Every
company faces the business cycle. Current issues include the global economy post the 2008
crisis; declines in commodity prices – particularly oil; and structural changes in FX rates, including
the Canadian dollar.
Sectors as divergent as steel and consumer fashion face weaknesses in demand, creating
a need for treasury departments to monitor cash flow forecasting and liquidity. Other sectors,
including automotive and housing, show significant growth in output. Disruptive technology
companies like Amazon, Google, Uber and Facebook, are impacting entire industries, creating
changes to funding plans and risks related to receivables from retail organizations. Monitoring
credit risk for customers and counterparty risks for cash balances and derivatives is an essential
function; particularly when economic or industry events cause rapid changes in conditions.
An example of an agile treasury organization is a leading automotive supplier that uses
current improved conditions in the industry to focus on its cash flow forecasting as part of a
strategy to improve its credit rating to investment grade.
Treasury departments also need to be responsive to internally driven events. Record
activity in corporate mergers, acquisitions and divestitures is being recorded. These events create
significant treasury events in funding and developing an organization that meets the requirements
of the new company.
They also need to monitor and swiftly respond to financial risks such as external fraud
threats, which are growing exponentially. Organised crime is targeting corporate treasury
organizations, using hacking and social engineering to develop fraud schemes. Major fraud losses
at companies can exceed US$50m in a single scam; “smaller” losses may still be US$1m-plus.
Given these risks, company treasury departments must transform governance and
controls, test risk areas, and improve systems and training for key employees. Every fraud event
can be linked to weaknesses in one or more of these areas, and the credibility of the treasurer
and chief financial officer (CFO) is linked to performance in the financial control area.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
A final area that requires a flexible treasury organization is ever-changing regulations.
Current regulatory changes in Proposition 385, BEPS and Basel III will potentially require changes
in intercompany loan documentation and processes, cash pooling, international treasury centres
and bank relations. These regulatory changes create additional financial risk for companies,
require close coordination with groups such as tax, and necessitate working closely with bank
providers.
Pillar 4: Enabling technology through implementation of an appropriate treasury
management system (TMS)
Leading treasury departments use one of the following two types of TMS: (i) a system
through a major third-party TMS vendor or (ii) an enterprise resource planning (ERP) system such
as SAP Treasury. The benefits of a TMS are the centralisation, standardisation and automation
of treasury processes.
An additional leading practice is the use of SWIFT for secure messaging. These
technology solutions streamline banking platforms, reduce reliance on bank portals, and provide
security and controls of payments, bank accounts and global visibility into cash.
In lieu of these options, some treasury departments use shortcut processes often based
on Excel spreadsheets. These spreadsheets create false economies, as their development time
and effort may well exceed the cost of a TMS. More importantly, spreadsheets are more prone to
errors and create control risks. A mistake in one cell or a training issue can lead to a missed
payment or miscalculation of the company’s daily cash position. Errors in fraud and payments are
often traced to email instructions and other insecure forms of communication.
A well-designed TMS selection and implementation process enables a company to have
leading practices in cash management, cash flow forecasting, derivative valuation and hedge
position tracking, bank account management and cash balance visibility. These enablers reduce
both cost and risk for treasury organizations.
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)
Activity:
Form five (5) groups and conduct a case study for the following topics:
1. The 2017 Scandal of Gupta Family from South Africa
2. The Libor Scandal of 2014
3. The Panic (The First Insider Trading Scandal) of 1792
4. The Fraud Scandal of US Treasury Department of 2009
5. The Khemlani Affair of 1975
Format of the Case Studies
Introduction/Abstract of the Case
Statement of the Problem
Discussion
Point of View
Areas of Consideration (e.g. SWOT, PESTEL, etc.)
Alternative Courses of Action
Decision Matrix
Action Plan
Recommendation and Conclusion
References
Daren D. Cortez, CFMP, CATP, MBA
Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
