Page 260 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 11: Management of Cash

11.6 Treasury Management Notes

Treasury management once viewed as a peripheral activity conducted by back-office, today
plays a very vital role in corporate management. Treasury management can be defined in many
ways. The Association of Corporate Treasure defines "Treasury management as the efficient
management of liquidity and financial risk in business." All firms, to some degree, are involved
in treasury management, although in smaller companies, it may not be a separately defined job.

Notes Treasury management is responsible for:
1. Management of cash while obtaining the optimum return from any surplus funds.
2. Management of exchange rate risks in accordance with group policy.
3. Providing both long-term and short-term funds for the business at minimum cost.

4. Maintaining good relationships with banks and other providers of finance including
shareholders.
5. Advising on aspects of corporate finance including capital structure, mergers and
acquisitions.

Functions of Treasury Department

1. Cash management: The efficient collection and payment of cash both inside the group and
to third parties is the function of the treasury department. The involvement of the
department with the details of receivables and payables will be a matter of policy. There
may be complete centralization within a group treasury or the treasury may simply
advise subsidiaries and divisions on policy (collection/payment periods, discounts, etc.,).
Any position between these two extremes would be possible. Treasury will normally
manage surplus funds in an investment portfolio. Investment policy will consider future
heads for liquid funds and acceptable levels of risk as determined by company policy.
2. Currency management: The treasury department manages the foreign currency risk
exposure of the company. In a large Multinational Company (MNC), the first step will
usually be set off intragroup indebtedness. The use of matching receipts and payments in
the same currency will save transaction costs. Treasury might advise on the currency to be
used when invoicing overseas sales. The treasury will manage any net exchange exposures
in accordance with company policy. If risks are to be minimized, then forward contracts
can be used either to buy or sell currency forward.

3. Funding management: The treasury department is responsible for planning and sourcing
the company's short, medium and long-term cash needs. The treasury department will
also participate in the decision on capital structure and forecast future interest and foreign
currency rates.
4. Banking: It is important that a company maintains a good relationship with its bankers.
Treasury department carries out negotiations with bankers and acts as the initial point of
contact with them. Short-term finance can come in the form of bank loans or through the
sale of commercial paper in the money market.
5. Corporate finance: The treasury department is involved in both acquisition and divestment
activities within the group. In addition, it will often have responsibility for investor

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