Deep Dive

What is corporate treasury and why is it important?

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Risk management is top of mind for many companies this year, and effective corporate treasury management is essential to maintain liquidity, optimize cash flow, and manage financial risks. The corporate treasury function is crucial in ensuring a company has the necessary resources to meet its financial obligations, support growth, and achieve its objectives. 

What type of company benefits from corporate treasury?

Generally, larger companies with more complex financial operations and greater exposure to financial risks are more likely to have a dedicated corporate treasury team. This may include large multinational corporations, financial institutions, and other companies with significant financial operations. 

Smaller companies typically don’t have a formal treasury department and instead this work is often done by accounting, finance, payroll, and legal teams. As companies grow, they may consider establishing a dedicated corporate treasury team to manage their financial risks and optimize their use of cash.

What does the corporate treasury function do?

The corporate treasury department is primarily responsible for preservation of capital and risk managementl: managing the company's financial resources and ensuring adequate liquidity to meet the company's obligations. This means the department is responsible for activities such as cash management, forecasting and budgeting, debt and financing, investment management, foreign exchange risk management, and insurance management. 

Effective treasury management involves a range of skills and expertise, including financial analysis, market knowledge, and a deep understanding of the company's operations and financial goals. 

Cash management activities involve monitoring and optimizing cash flows to ensure the company has sufficient cash to meet its financial obligations. This includes forecasting cash inflows and outflows, managing bank accounts, and optimizing the use of cash through techniques such as cash pooling and netting.

Managing debt and financing includes arranging and negotiating credit facilities, managing debt issuance, and ensuring compliance with debt covenants.

Investment management involves investing surplus cash in short-term and long-term investments to generate returns while minimizing risks. This requires a deep understanding of financial markets, investment products, and risk management techniques.

The threshold for pursuing investment depends on the company. Consider the resources needed to manage the investment alongside the potential return, as well as the cash needs of the company when deciding whether to pursue short-term investments or longer-term investments that yield a higher return but over a longer period of time.

Foreign exchange risk management involves managing exposure to foreign currency risks from international trade or investments. 

Insurance management involves managing risks associated with insurable events such as property damage, liability claims, and employee injuries.

The importance of liquidity management

Effective liquidity management ensures a company's financial stability and sustainability, meaning that the company has sufficient liquidity to meet its short-term obligations, even in times of stress. This may include establishing lines of credit or other financing arrangements to provide access to liquidity when needed and developing contingency plans to address potential liquidity challenges. Liquidity management involves several key activities, including cash forecasting, cash pooling, and cash concentration. 

  • Cash forecasting involves predicting the company's future cash inflows and outflows to determine its cash needs over a specific period. 
  • Cash pooling is a technique that allows the company to consolidate its cash balances across different accounts and entities to optimize the use of cash and reduce the costs of managing multiple accounts. 
  • Cash concentration is a process that involves moving cash from accounts with excess balances to accounts with deficits to ensure that the company has sufficient cash to meet its obligations.

While many smaller companies don’t have dedicated treasury functions, cash management is critical. Make sure that you’re measuring cash flow on a regular basis and transferring funds as needed. It’s especially important to have a real-time view of today’s cash position and forecasts for the future with up-to-date data in order to make the right decisions.

Corporate treasury and overall risk management

An important function of the corporate treasury team is proactively identifying and managing financial risks. Corporate treasury teams also ensure compliance with regulatory requirements and internal financial transaction and reporting policies. They do this in several ways, including:

Developing and implementing risk management policies and procedures 

Treasury professionals are responsible for developing and implementing policies and procedures to manage financial risks. These may include policies related to cash management, debt management, investment management, foreign exchange risk management, and insurance management.

Monitoring and analyzing market conditions

Treasury professionals closely monitor market conditions and trends, including interest rates, foreign exchange rates, and commodity prices, to identify potential risks and opportunities. They use this information to inform decision-making and manage risk exposure.

Hedging strategies

The treasury function may use hedging strategies, such as forward contracts, options, and swaps, to manage exposure to financial risks. For example, they may use hedging to manage foreign exchange, interest rate, or commodity price risks.

Diversification of investments

Treasury professionals may diversify the company's investments across asset classes and investment products to manage risk exposure, including investing in stocks, bonds, real estate, and alternative investments.

Compliance with regulatory requirements

The treasury function ensures that the company complies with regulatory requirements related to financial transactions and reporting, including compliance with accounting standards, tax regulations, and banking regulations.

Managing banking risk 

The corporate treasury function is essential in bank risk management, which involves identifying, assessing, and managing risks associated with banking relationships. Treasury professionals are responsible for managing bank relationships, negotiating credit facilities, and ensuring compliance with regulatory requirements related to banking and financial transactions. Corporate treasury teams make sure that internal controls and processes related to banking transactions are robust, monitoring transactional activities for potential fraud or errors, and ensuring compliance with regulatory requirements related to banking and financial transactions.

For companies without a treasury function, prioritize managing user permissions and placing the appropriate controls on bank accounts in order to limit the risk of fraud. If multiple people need access to the account, make sure that their permissions are aligned with their needs without giving them too much control. A good relationship with your bank is also important. Make sure that you have the ability to quickly get in contact with the right person to help you if needed.

Sustainable companies manage risks

The stability of a company — and even an industry ecosystem — can change swiftly. The corporate treasury function plays a critical role in managing a company's financial risks and ensuring its financial stability and sustainability even in unexpected circumstances. With the growing complexity of financial operations and the importance of financial risk management, the role of the corporate treasury function has become increasingly important in ensuring the long-term success of organizations.

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