TOPICS IN BANKING AND TREASURY MANAGEMENT TOPIC 4 – TREASURY MANGEMENT
What is Treasury Management? • Treasury management is the practice of managing the cash and liquidity requirements of a business to ensure its efficient functioning. As such, it focuses on a firm’s cash in - and outflows, funding activities and investments (i.e. traditional corporate finance activities). • In larger firms, this may also include securities trading such as bonds, currencies, derivatives as well as the management of all associated risks. • We can classify treasury functions across three broad categories – core functions which are typical for most companies, marginal functions which tend to be company or industry-specific, and ancillary functions which are critical to the function of treasury but are not part of the treasurer’s role.
Core Treasury Functions • A JPMorgan survey conducted in 2008 on the core functions of treasury identified the following key tasks: • Cash Management (95% indicated this was core) • Liquidity planning and control (91% indicated this was core) • Management of interest, currency and commodity risks (89% indicated this was core) • Procurement of finance and financial instruments (93% indicated this was core) • Contacts with banks and ratings agencies (93% indicated this was core) • Corporate Finance (78% indicated this was core) Source: Verband Deutscher Treasurer, 2008 “Cash and Liquidity Man”
Cash Management • Cash management is probably the most fundamental function of treasury and involves the efficient use of current assets and liabilities, systematic planning, monitoring and management of collections, disbursements and account balances, as well as the collection and management of information needed to use available funds most effectively. • i.e. It is active management of a company’s short -term cash resources to sustain its ongoing activities and optimize liquidity. • “Cash” in this context refers to cash in the form of currency but also cheques, deposits, short-term liquid securities, etc.
Cash Management • Cash management is critical for 3 reasons: • Transacting: ready cash balances are vital for routine transactions such as purchases, operating expenses, wages, etc. • Precaution: having cash reserves is critical for sudden unexpected changes in cash flow requirements, e.g. if receivables are delayed, the company should have ready access to cash reserves (or sufficiently liquid short-term assets) to ensure that this does not impact on its ability to satisfy its obligations • Speculation: access to ready cash reserves also allows the business to take advantage of opportunities such as early settlement discounts, anticipate declines in the prices of raw materials, etc.