Treasury Is The Most Underrated Team In Your Company

Working as a member of a bank’s treasury team for some time has provided me with the opportunity of learning about the basics of financial education, which has had a direct influence on my future as a financial expert in the industry. In fact, treasury management is pivotal for the success of any organisation out there. But it’s still an often misunderstood or underestimated concept. I have had to regularly but courteously explain the importance of corporate treasury to many people in the industry. In fact, corporate treasury jobs isn’t centred around wooden chests or whip-rounds for group holiday cash. This article provides information on some of the best practices of treasury management.

What Is Treasury Management?

The treasury is considered the custodian of cash in a business. The treasury team of your organisation controls cash through its liquidity as well as the amount held. In fact, the sheer size of the balance sheet and the relative liquidity of assets and liabilities of an organisation should be managed by the treasury team of your company. The effective management of the treasury helps with the basic fundamentals of an organisation including allowing the business to operate and conduct activities by making sure that there is enough cash on hand – whether it’s in the petty cash box or an opportunistic M&A raid.

On the other hand, treasuries also participate in the macro-financial direction of a business and oversee the execution of company strategies while enabling BAU or business-as-usual activities. For example, if the director board of a company decides to expand into new territories or acquire a new business, the treasury team will determine if it’s the right fit for the organisation – from a balance sheet perspective. They will also find the necessary cash or issue stock to purchase the new business.

The treasury team will help the business stay alive by actively managing liquidity. They will also save money for the company and respond quickly to any changes in strategies.

Areas that are covered by a Treasury

Treasury management involves five critical responsibilities such as:

Asset Liability Management (ALM)

ALM involves the blend of assets & liabilities that are on the balance sheet of the company. It also involves the subsequent mismatch between currency, tenor, and interest rate. A company has a wide range of instruments on a balance sheet, which behaves with varying characteristics. How these instruments interact with each other as well as represent the overall position of the company could be described as being similar to the concept of Beta in portfolio management.

ALM is more relevant to treasury management in banks since its fundamental purpose is usually based on the dynamics of lending and borrowing money. In fact, a bank is usually more leveraged through its increased use of liabilities relative to equity capital.

It is cheaper to borrow short-term liabilities & invest in long-term assets – in fact, there is always a natural tendency for businesses to stretch the funding mismatch to a limit. It can come crashing down during a market flashpoint when credit dries up as well as liabilities become much harder to roll. The function of ALM will help monitor this liquidity limit by prescribing limit buffers & advising the company on any changes to be observed in advance.

Optimising the assets and liabilities proactively helps increase profitability and business opportunities. It’s not only in the banking industry but in other businesses as well. Here are some examples of businesses using treasury management to assist in their growth:

. Consumer credit services
. Supermarkets, eCommerce
. Share repurchase schemes enacted at opportunistic periods
. Factoring receivables to gain a competitive advantage by winning new clients with attractive payment terms

Funds Transfer Pricing (FTP)

Treasuries act as mini-banks for companies or banks. They need to price up the liabilities on hand in order to use them in everyday asset-generating activities. FTP will reflect the cost of liabilities and charge it to the business unit when needing to originate a new asset. In fact, the FTP represents a fully-loaded cost unlike the widely-known cost of debt figure. What I mean is the overall weighted average cost of all liabilities plus shared costs of the business – minus the treasury profit.