READING MATERIALS
READING
1.1
Introduction to treasury
1 INTRODUCTION
In this introductory reading you will begin to learn about the role of corporate treasury within an organisation. Whilst most people will have an idea of the role of an accountant or a lawyer within an organisation, few will understand, or even be aware of, the role of the treasurer.
Treasury involves the management of money and financial risks in a business. Its priority is to ensure the business has the money it needs to manage its day-to-day business obligations, while also helping develop its long-term financial strategy and risk management policies.
The Award in International Cash Management (AwardICM) qualification examines a specific aspect of treasury responsibility, managing an organisation’s cash and liquidity. This involves ensuring that funds are available to meet liabilities in a timely and efficient manner, and that any surplus funds are managed optimally. Before studying ICM in detail, this reading covers the role and responsibilities of treasury within an organisation.
- The role of treasury.
- Core tasks performed by treasury.
- The principle of corporate governance.
- The distinction between cash and liquidity management.
- How cash, debt and working capital management can be used to manage liquidity.
- Principles of sound investing.
Throughout these readings industry specific technical terms will be introduced. If they are not sufficiently defined within the reading, please refer to the online treasury wiki for further explanation https://wiki.treasurers.org/wiki/Main_Page.
Reading 1.1 learning outcome:
the ability to explain the role of treasury.
2 THE SPORTS CLUB TREASURER
In almost every organisation you can think of there will be an individual with responsibility for managing the cash and the organisation’s bank account, often with the title of “the treasurer”. In the community association, the youth group and the sports club, the treasurer will be responsible for collecting and banking income and paying out the expenses necessary to keep the organisation running, whilst hopefully building up some reserves, just in case something unexpected happens.
The sports club committee thought it would be a good idea to create a cafe, selling food and drinks so that members could socialise after a game, and it would hopefully provide an additional source of income. The treasurer was all for that, but asked if it would be possible to open a separate bank account for the cafe, as it would be much easier to keep track of the income and expenses from the cafe separately from those relating to the membership, as it was really two different types of business operating within the same organisation.
The committee agreed and a new bank account was opened with the same bank. Now the treasurer had to work out how to fund the purchase of food and drinks to be sold to the members. Would the bank provide a small loan? That might be expensive, as the club would not have anything to offer the bank as security.
Instead of borrowing and incurring interest, the treasurer though about using the funds the club already had. The membership account had a small surplus that earned a nominal rate of interest. Maybe, the bank could provide some sort of offset arrangement whereby the surplus funds on the membership account could fund borrowing for the cafe account, a sort of cash pool? The bank advised that this type of arrangement was available but there would be quite a lot of documentation to sign and some fees to be paid.
The treasurer was keen to avoid incurring unnecessary expense and wondered if there was a way to fund this internally. How about if the membership account transferred funds to the cafe account, an internal loan, but would it be necessary to charge interest, and at what rate? At least it would all be within the club with minimal documentation and no external costs.
Alternatively, would it be possible for the club to get a credit card and pay the balance off before any interest became due? Maybe the treasurer could use their own credit card and then pay themselves back when the bill comes in? No. That does not sound like good governance!
What about asking the supplier to fund it by agreeing 60 days payment terms? The treasurer was sure the cafe would be a great success and it would be advantageous for the supplier to become involved at an early stage. Then the surplus funds could be left earning interest in the bank. Or, as the club has surplus funds, and the interest earned is minimal, maybe it would be better to ask for a discount for prompt payment?
The treasurer sat down overlooking the cricket pitch. Phew, this was complicated stuff, so many things to consider. This was much more than managing cash, it’s more about cash management. If there are this many things for a sports club treasurer to consider, with just two sterling accounts, in the same entity, with just one bank, how complicated must it be for a multinational organisation with numerous legal entities, buying and selling in foreign currencies, across many jurisdictions, probably needing multiple banks?
How many similarities can you spot between the role of the sports club treasurer and the role of treasury in your own (or your client’s) organisation?
How many factors can you identify that are influencing the treasurer’s decision-making process? The factors the sports club treasurer needs to consider are summarised at the end of this reading.
There is no single correct answer
In this relatively simple and light-hearted example, the question the treasurer is asking is how to finance working capital. The treasurer has identified several external and internal methods to achieve this objective. We would refer to these methods collectively as cash management solutions. A key lesson to learn from this discussion is that there are frequently many ways to solve an individual problem and that there is rarely an absolutely right solution.
During your study for the AwardICM you will learn about the different solutions available, and the internal and external factors that you need to consider when selecting the solution for your business. And, once you have put it in place, your organisation, your banks, or technology will change providing an opportunity for yet further improvement. It is this constantly changing environment which makes working in international cash management so fascinating and fun.
3 CORE TASKS PERFORMED BY TREASURY
Before looking at ICM in more detail it would be helpful to have a general understanding of the role of treasury within an organisation. If you were asked “what are the top three things that treasury does?” you might well respond:
- manage financial risks - foreign exchange and interest rates
- arrange loan facilities with the banks so that the group does not run out of money
- move cash around the group to reduce the amount of interest paid.
So, in summary risk management, debt management and cash management. There are other responsibilities, but the majority of treasury’s time is spent managing these three core activities both for Group Treasury itself and the organisation’ worldwide operating subsidiaries.
4 THE ROLE OF TREASURY IN AN ORGANISATION
As a treasury professional you are essentially a trusted advisor to the business on financial matters, always looking forward and considering how you can add value and drive success. In treasury, the decisions you make will have a direct impact on performance and profits.
Managing and growing a business involves taking risks. Strategic business decisions will be made by a small group of senior executives and the board. As treasurer it is your role to advise on managing the financial implications of such business decisions. This involves ensuring that the organisation has the capital required to meets is strategic objectives and the liquidity required to fund its day-to-day operations. You will also be required to advise on ways to mitigate financial risks arising from changes in foreign exchange rates, interest rates and, depending on the business, commodity prices.
Technology is an increasingly important element of cash and liquidity management and as the primary contact with an organisation’s banks, you will be well placed to advise group companies of payables and receivables management solutions that would drive efficiencies in their operations whilst maintaining appropriate controls.
THE ACT COMPETENCY FRAMEWORK
The ACT Competency Framework is the result of consultation with senior treasurers, banks, and learning and development teams.
- The framework defines the competencies that treasurers need to operate successfully in global business today: technical, behavioural and business skills.
- The competencies have been mapped to four job levels: tactical, operational, managerial and strategic.
International cash management (ICM) is represented across all areas of the framework. Take a look at the framework to identify where ICM fits in.
https://www.treasurers.org/learning/competency-framework/overview
The skills a treasury professional needs over their career varies according to seniority. In studying for this award, you are most likely to be performing a technical or operational role. It is likely that your organisation will have already identified the managerial and strategic factors that will define its ICM objectives. However, your involvement in the successful implementation of these ICM objectives will develop your proficiency in behavioural and business skills.