L-1: Introduction to Treasury Management

Prof. C. Anand

Contents
This lesson deals with:1. Introduction to Treasury Management 2. Objectives of Treasury Management 3. Structure and Organization of Treasury Management 4. Functions of a Treasurer 5. Responsibilities of a Treasurer 6. Functions of a Controller

1. Introduction to Treasury Management

Meaning of Treasury Management (TM): The Treasury in the Finance Department deals with liquid assets. Treasurer is the Head of the Treasury. He has major responsibility of being a custodian of cash and other liquid assets. TM is the management of an organizations or a banks' liquidity to ensure that the right amount of cash resources are available in the right place in the right currency and at right time in such a way to maximize the return on surplus funds, minimize the financial costs of the business, and control interest rate risk and currency exposure to an acceptable level. In brief, TM is the efficient management of the financial risk and liquidity of a business. Treasurer: He is the financial officer concerned mainly with the task of financing and various activities related thereto. Finance Manager: He is generally responsible for significant investment and financing decisions.
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2. Objectives of Treasury Management

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Objectives of Treasury Management: These are:Management of cash and other liquid assets e.g. T-Bills, Commercial Papers (CPs), etc. Taking Investment Decisions. To retain Treasury as a Profit Center in Banks, Companies , etc. Effective Management of cost leading to liquidity and profitability of a Company or a Banks financing decisions. Funding long and short-time cash requirements of the business. To maintain better investment relations with individuals & institutional investors as also professional fund managers and foreign investors. To have good banking relationships. To utilize surplus cash in short-term beneficial investments. To formulate the best capital structure (debt and equity) policy. To ensure proper risk and forex management policy. Internal treasury control. 4 Insurance & tax planning.

3. Structure and Organization of Treasury Management

Treasurer
Tax Mgr (Corp Tax & Excise Duty)

Controller

Cash Mgr (Cash, Salaries, PF, Gratuity)

Data Proc. Mgr

Fin Mgr (Bank, Investments, Insurance)

Credit Manager (Credit & Collection & Securities)

Cost Accts Mgr Accts Mgr (Budget/Audit) (Fin. Control)

3. Structure and Organization of Treasury Management

Financial Managers in Small Companies: In the smaller firms a single person is generally responsible for all the financial decisions like mobilization and deployment of funds, investments, and control over the use of funds, besides balancing of the trade off between risk and return. Small companies will have the Finance Manager, Accounts Officer and Cashier. Financial Managers in Large Companies: Generally large firms usually appoint CFOs for organizing and supervising both the Treasurers and Controllers work. CFO is deeply involved in financial policy and corporate planning. Often he will have general managerial responsibilities beyond financial issues and may also be the member of the board of directors. The Controller or CFO: He is responsible for organizing and supervising the capital budgeting process. However, major capital investment projects are so closely tied to plans for product development, production and marketing, that managers from these 6 areas are drawn into planning and analyzing the projects.

3. Structure and Organization of Treasury Management

Treasurer is responsible for: - Cash management - Raising New Capital - Relationships with Banks, Stock holders & Investors

Controller is responsible for: - Preparation of Fin. Statements - Internal Accounting - Tax Management

4. Functions of a Treasurer
A. Functions of a Treasurer: Treasurer mainly deals with the liquid assets. He has a major responsibility of being a custodian of cash and other liquid assets. The other functions of a treasurer are:Funding: Selecting best source (cheap) of finance for long and short term cash requirements. Working Capital Management: Maintaining good balance between current assets and current liabilities so as to maximize the liquidity and profitability. Better Investor Relations: Establishing and maintaining good relations with individual and institutional investors, professional fund managers and foreign investors. Good Banking RelationshipsL This includes selection of appropriate banking services and maintaining good relationship with bank for managing bank accounts.
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4. Functions of a Treasurer

Short-term Investments: Idle cash may arise due to cyclical, seasonal or temporary business trends and since it has opportunity cost, it should be effectively utilized in short-term beneficial investments. Risk (Hedging) and Forex Management: International treasurer has to ensure liquidity in forex funds without compromising profitability. Risk Management or hedging involves utilization of financial instruments to cushion the company against interest rate, commodity and currency exposures. Establishing the Company Policy: Treasurers functions include establishing of company policy with respect to decision on trade discounts and vendor payment ageing. Capital Structure Formulation: Based on the business goals, the treasurer has to formulate the capital structure (debt: equity mix for financing decisions) and implement the same to achieve the goals.
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4. Functions of a Treasurer

Insurance and Tax Planning: Tax planning is required to reduce the liability of tax without violating tax laws. Selection of suitable insurance policy is also a part of the functions of the treasurer. Internal Treasury Control: The treasurer acts as a cashier and undertakes the role of an authorized signatory for payment of cheques, including the authority to approve such cheques. Even reconciliation of relevant accounts is an important function of the Treasurer. The Treasurer, with the co-operation of the cash manager, finance manager and the credit manager, implements all the above-mentioned functions. At the core of all the functions, the Treasurer has to make two key decisions: The Financing Decision and the Investment Decision.
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5. Responsibilities of a Treasurer
B. Main responsibility of the Treasurer: It is to obtain and manage the firms capital. C. Responsibilities of a Treasurer: Funds Management: It implies ensuring adequate funds for day-today requirements and for long-term needs of a firms operations. Treasurer generally tries to fund cash outflows from cash inflows; but this may not be possible some times due to timing and amount mismatches. Forex Management: Internationalization of business requires maintaining liquidity in forex funds without compromising profitability, which is a difficult function of a treasurer due to fluctuating exchange rates, international taxation problems, and demand-supply fluctuations in international markets. Risk Management: The firm is exposed to default, credit, country, political, exchange and liquidity risks, which have to be first identified and minimized using hedging techniques like options, 11 futures, swaps, etc.

6. Functions of a Controller

C. Functions of a Controller: A Controller, in combined and effective working with a Treasurer, has to record the transactions and give an effective system of internal controls. Some of his important functions are:Recording all transactions in the ledgers with respect to fixed and current assets. Keeping track of all short-term investments and reconciling the transactions with that of brokerage firms. Looking into regulatory aspects and company policy matters (like trade discounts, receivables ageing, etc.) Acting as a planning director Keeping details of attendance of employees to prepare payrolls. Reporting information to management. ***The End*** 12