What are Treasury Functions?

Treasury Functions

Treasury functions refer to the set of activities and responsibilities carried out by the treasury department within an organization. The primary goal of the treasury function is to manage the company’s liquidity and ensure that it has the right amount of money available at the right time to meet its obligations, while also optimizing its financial structure and mitigating various financial risks.

Here’s a breakdown of typical treasury functions:

• Cash Management:
  • Forecasting cash flow positions to ensure the company has enough liquidity to meet its obligations.
  • Managing company bank accounts and optimizing account structures to ensure efficient use of funds.
  • Investing short-term excess liquidity.
• Funding and Capital Management:
  • Raising capital by issuing bonds, taking on bank loans, or using other financing tools.
  • Making decisions about capital structure (debt vs. equity) and dividend policy.
  • Managing relationships with credit rating agencies.
• Risk Management:
  • Hedging against interest rate risks, foreign exchange risks, and other financial market risks using derivatives and other financial instruments.
  • Establishing policies to determine risk tolerance and setting hedging strategies accordingly.
• Bank Relationship Management:
  • Building and maintaining relationships with banks and other financial institutions.
  • Negotiating banking services, fees, and loan terms.
• Investment Management:
  • Managing the company’s portfolio of investments, ensuring an optimal balance of risk and return.
  • Setting and following investment policies.
• Financial Planning and Analysis:
  • Developing financial forecasts and budgets.
  • Analyzing financial performance against forecasts and budgets.
• Credit Management:
  • Setting credit policies and terms for customers.
  • Monitoring outstanding receivables and taking action on overdue accounts.
• Payment Processing and Controls:
  • Overseeing company-wide payment processes and ensuring transactions are made in a timely and secure manner.
  • Implementing controls to prevent fraud and unauthorized transactions.
• Foreign Exchange Management:
  • Managing exposures to currency fluctuations.
  • Engaging in currency trades and hedging as required.
• Pensions and Benefits Management:
  • Managing company pension funds and other post-employment benefits.
  • Ensuring sufficient funding and compliance with regulatory requirements.
• Internal Controls and Compliance:
  • Implementing internal controls over financial transactions to ensure accuracy and integrity.
  • Ensuring compliance with financial regulations, standards, and reporting requirements.

The specific scope and importance of each function can vary depending on the size and nature of the company, the industry in which it operates, and its geographic presence. Nonetheless, the treasury’s overarching goal remains the same: to ensure the company’s financial stability, optimize its financial operations, and manage financial risks.

Example of Treasury Functions

Let’s walk through a hypothetical example of a large multinational corporation and see how its treasury functions are applied in practice.

Scenario:
TechGlobal Inc., a leading tech firm with operations in 30 countries, has recently expanded its business. Its treasury department is headquartered in New York, with regional treasury centers in London, Singapore, and Sao Paulo.

Treasury Functions at TechGlobal Inc.:

• Cash Management:
  • TechGlobal has daily cash position reports generated from each of its global operations, consolidated in its New York headquarters. This helps the treasury team anticipate short-term borrowing needs or identify excess cash that can be invested overnight or on a short-term basis.
• Funding and Capital Management:
  • Given its recent expansion, TechGlobal plans to issue bonds to raise capital. The treasury team liaises with investment banks, oversees the bond issuance, and manages the relationship with credit rating agencies.
• Risk Management:
  • With operations in 30 countries, TechGlobal faces significant foreign exchange risk. The treasury uses forward contracts and options to hedge key currency exposures.
• Bank Relationship Management:
  • The treasury has a centralized banking structure, working closely with four major global banks to ensure seamless transactions across different geographies.
• Investment Management:
  • Excess funds are invested in low-risk market securities, following a strict investment policy set by the treasury.
• Financial Planning and Analysis:
  • The treasury collaborates with the finance department to analyze potential financial impacts of business decisions, such as entering a new market or launching a major product.
• Credit Management:
  • With a range of corporate clients, the treasury sets credit terms and limits, ensuring the company’s receivables remain healthy.
• Payment Processing and Controls:
  • TechGlobal has a centralized payment system. All payments exceeding $1 million require approval from the regional treasury center and the New York headquarters, ensuring checks and balances.
• Foreign Exchange Management:
  • Regional treasury centers manage day-to-day currency needs of their respective regions, while major hedging decisions are made in New York.
• Pensions and Benefits Management:
  • TechGlobal has a company-wide pension scheme. The treasury ensures it’s adequately funded and compliant with regulations in all countries they operate in.
• Internal Controls and Compliance:
  • With the help of the internal audit team, the treasury ensures all financial operations adhere to internal guidelines and external regulations.

An Issue Arises:
TechGlobal’s operations in Brazil face sudden regulatory changes, with potential impacts on currency repatriation.

Action:
The Sao Paulo treasury center collaborates with the New York headquarters to develop a strategy. They decide to keep more funds in Brazil for potential local investments, while hedging against the Brazilian Real’s potential depreciation.

This example showcases how a treasury department operates in a multifaceted environment, juggling various responsibilities and addressing issues as they arise.