Treasury functions
/What are the Functions of a Corporate Treasury?
The general mission of the treasury department is to manage the liquidity of a business. This means that all current and projected cash inflows and outflows must be monitored to ensure that there is sufficient cash to fund company operations, as well as to ensure that excess cash is properly invested. While accomplishing this mission, the treasurer must engage in considerable prudence to ensure that existing assets are safeguarded through the use of safe forms of investment and hedging activities.
Types of Treasury Functions
In order to accomplish its mission, the treasury department must engage in the following activities noted below.
Cash Forecasting
A major treasury function is to compile information from around the company to create an ongoing cash forecast. This information may come from the accounting records, the budget, capital budget, board minutes (for dividend payments) and even the CEO (for expenditures related to acquisitions and divestitures). The resulting forecast is used to determine the short-term investment strategy, and also drives whether the firm needs to obtain outside funding.
Working Capital Monitoring
The treasury staff reviews the corporate policies related to working capital, and models their impact on cash flows. For example, looser credit results in a larger investment in accounts receivable, which consumes cash. This tends to result in periodic policy changes, such as a determination to alter the amount of credit granted to customers, or the amount of goods to keep on hand in anticipation of customer orders.
Cash Concentration
The treasury staff creates a system for funneling cash into a centralized investment account, from which cash can be most effectively invested. This may involve the use of notional pooling or cash sweeps. The intent is to maximize the return on investment on short-term funds, which is balanced against the need to minimize investment risk.
Investment Activities
Use the corporate investment policy for allocating excess cash to various types of investments, depending on their rates of return and how quickly they can be converted into cash.
Credit Granting Activities
Issue credit to customers, which involves management of the policy under which credit terms are granted.
Fund Raising Activities
Determine when additional cash is needed, and raise funds through the acquisition of debt, sale of stock, or changes in company policies that impact the amount of working capital required to run the business.
Risk Management
Use various hedging and netting strategies to reduce risk related to changes in asset values, interest rates, and foreign currency holdings.
Credit Rating Agency Relations
Keep any credit rating agencies informed of the company's financial results and condition, if these agencies are providing ratings on the company's marketable debt issuances.
Bank Relations
Keep the company's bankers apprised of the company's financial condition and projections, as well as any forthcoming changes in its need for borrowed funds. The discussion may extend to the various services provided by the banks to the company, such as lockboxes, wire transfers, ACH payments, and so forth.
IT Systems Management
The department maintains treasury workstations that provide it with information about cash holdings, projections, market conditions, and other information.
Reporting Activities
The treasurer provides the senior management team with reports concerning market conditions, funding issues, returns on investment, cash-related risks, and similar topics.
Mergers and Acquisitions
The department may advise on the company's acquisition activities, and may be called upon to integrate the treasury functions of an acquiree.
In essence, treasury functions revolve around the monitoring of cash, the use of cash, and the ability to raise more cash. All other tasks of the department support these functions.