Chapter One

Role of Treasury in a Global Corporation

AS BUSINESSES GROW AND BECOME more complex and competitive, and markets become closer and more interrelated, the dimensions that need the attention of a transnational corporation’s board and management increase dramatically.

While the core business and operations themselves require direct attention, the money that needs to flow through the veins and arteries of the organisation as well as its various dimensions require detailed expertise and focus, a team that understands the working of money and markets, from both a tactical and a strategic standpoint.

That is where the Treasury team puts up its hand to support the chief executive officer (CEO), chief financial officer (CFO), the board, and the business units in ensuring that the business side of the company works unhindered, by setting a broad monetary platform for businesses to grow and outperform.

INTRODUCING TREASURY LEADERSHIP

We first introduce the concept of Treasury Leadership, wherein Treasury positively influences the performance of the firm and drives the organisation toward industry and segment leadership. Treasury Leadership creates an environment that fosters excellence of capital building, execution, and support across all aspects of Treasury and works with the business to produce outperformance.

Treasury Leadership is hence translated into being a path-breaking and cutting-edge Treasury comprised of:

• Best practices in Treasury management
• Most efficient turnaround times
• Highest degree of control
• Most motivated and skilled employees with a great work–life balance
• Zero defects or errors on processing
• Optimum cash and liquidity
• Highest visibility of firm-wide cash flows
• Ability of the business to set newer standards for industry performance
• Firm’s outperformance over competition through well-managed Treasury processes, funding, and risk management
• Most stable and environment-proof risk management
• Great partnership with other group functions to increase firm value
• Treasury seen as an attractive function to work in

The three components of Treasury Leadership (depicted in Figure 1.1) are:

FIGURE 1.1 Components of Treasury Leadership

We cover the concept of Treasury Design and Treasury Culture in Part One and introduce Treasury Fitness in the online content.

The world of Treasury deals with the flow of money—the flow of money through the balance sheet, from sources of capital to its financial uses. The idea that Treasury will be the storehouse of money or capital for the firm is extended here: Treasury flows work in tandem with the business of the firm, through the supply chain. Suppliers provide raw materials that are held as inventory, converted to finished products through the manufacturing and production process, and finally sold and delivered to the customer. The flow of money is in the opposite direction to the flow of goods or services, and forms the basis of the financial supply chain flows, or commercial flows, of the organisation. Money due to the supplier becomes an accounts payable, which finally gets paid out. Money owed to the firm by the customer becomes an accounts receivable, until it gets realised and money is paid into the firm’s account. Many of these terms will be further elucidated in later chapters.

The funding and movement of money associated with these commercial flows is done through Treasury. Figure 1.2 shows the essence of Treasury flows and their linkages with those of the financial supply chain.

FIGURE 1.2 Treasury and Financial Supply Chain Flows: A Context

The entire process requires capital in order to run. Until the customer pays the firm, the inventory, operations and supplies need to be funded. Proceeds from sales received across locations need to collected and deposited, so that payments can be made from those or other locations for purposes of running the business. Accounts need to be maintained in these locations, perhaps in different currencies, and these accounts need to be managed. Trade transactions need to be funded, and documents must be prepared and used. The entire aspect needs to be planned and executed, and this forms the basis of one of treasury’s key roles, which is to handle transactions as part of cash management, managing the cash and funds of the organisation.

It is preferable to use the firm’s own money to make these payments, and hence the monies need to be moved efficiently from one location to another, making them available where they are needed. Where it is not possible to use the firm’s own cash, alternative arrangements need to be made—for example, borrowing from a local bank. Even if access to these funds becomes difficult, the firm still has to keep running—ensuring that there is money available when required ensures liquidity for the firm. Excess cash needs to be invested securely to generate return for the firm until such time that the cash is needed. Long-term projects require capital—this needs to be arranged at the least possible cost and putting least pressure on the firm’s cash flows. The organisation needs to be creditworthy, and the financials of the firm have to be aligned to ensure that the performance is consistent with or better than expectations in order to sustain and improve the creditworthiness of the firm and hence its ability to generate liquidity and lower its cost of funding. This calls for managing the balance sheet efficiently, and with the right structure. This entire set of activities, the second of treasury’s key roles, covers managing the balance sheet and the firm’s liquidity (which is another aspect of cash management).

As the firm moves across borders, sells or buys from another country, or exposes itself to other counterparties and undertakes financial transactions, it exposes itself to risk or uncertainty that the business and financial objectives will not be met because of a change in some factors—perhaps market movements, defaults of trade partners or banks, or internal errors. The management of these risks forms the third of treasury’s primary roles.

How do the Treasurer and his or her team at Treasury achieve these goals? What do they have to do to make sure that their job is done and the support provided to the firm and to business and other functions is robust? How do they fit into the global context of the organisation?

We answer some of these questions in the book.

ORGANISATION STRUCTURE AND RESPONSIBILITIES

Prior to describing the treasurer’s fit in the organisation, it would be useful to refresh our understanding of a common multinational organisation and its structure. Figure 1.3 provides a snapshot of the roles in typical in-country operations and the linkages with cash and goods/services flows. This is also explained in detail in the section on the financial supply chain in Chapter 14.

FIGURE 1.3 Roles and Organisational Flows

In the country or subsidiary operations, the procurement team would place the order and obtain the goods from the supplier. Credit terms, primarily credit period extended by the supplier at the agreed price, or a discounted price if the payment is made earlier, are agreed. On the balance sheet, if the payment is to be made later, a payable is booked. The raw material and components are then warehoused, and the production process creates the final product that is sold by the sales and front-end team to the customer, based on certain credit terms. If the payment is not being made immediately by the customer, a receivable is booked in the accounts. The payment is made to the supplier on or before the due date, removing the payable from the books. The collections team is responsible for obtaining the payment, which, when received in cash into the account, liquidates the receivable on the balance sheet. The cash received from the customers is used to pay the suppliers, pay off any loans taken, or procure fresh supplies.

Figure 1.4 presents a simple Treasury and control structure in a firm.

FIGURE 1.4 Treasurer in the Organisational Context

The Treasurer, along with the financial controller, typically reports to the chief financial officer or finance director. The controller looks after the accounts payable and receivable, managing collections and disbursements and focusing on the accounting and balance sheet aspects of the cash management. The responsibility of managing the days sales outstanding (DSO) and days payables outstanding (DPO) usually rests with the controller. The country and subsidiary operations continue to manage the procurement, sales, and collections processes at their end. The Treasurer then becomes responsible for the liquidity aspects of cash management, working with banks and other parties to provide funding, managing the balance sheet and financials, and managing risk. Increasingly, the Treasurer in many firms is playing a consultative role in the management of the accounts payable (AP) and accounts receivable (AR), monitoring the DSO and DPO (since they form a core part of the firm’s financial ratios and assessment), and providing inputs to various entities on the credit and financial impact of their decision making. The last section of this chapter provides a window to a day in the life of a Treasurer, while Chapter 3 sheds more light on each of treasury’s key themes and how they all fit in together.

The role requires the Treasurer to have varied skills and an approach that fosters teamwork with a solution-centric approach. The concept of a Treasury Culture is elucidated in Chapter 3.

The Treasurer and the Treasury team have to interface with, on a regular basis, entities from outside as well as in-company functions. Figure 1.5 illustrates some of these contact points for a corporate Treasury.

FIGURE 1.5 Treasury Linkages

Some of the external interfaces of the Treasury team are:

• Regulators. The regulatory aspect of capital and fund flow, apart from market operations, makes Treasury a critical contact point for regulators. Compliance with local regulations and law is paramount. Areas for which Treasury is directly responsible—the movement of money and the participation in local markets for various reasons, such as investment, risk management, foreign currency requirements, trade flows, collections and payments—are areas where such regulations and laws could be contravened, because of process lapses, operational error, fraud, or other reasons. Hence, central banks, securities and exchange commissions and regulators, registrars of companies, and ministries in relevant departments are some of the important regulators with whom an interface is required.
• Exchanges. If the entity is listed on the exchange, the Treasurer, as the key interface for execution of capital, would be in contact for compliance and reporting purposes
• Banks. The Treasurer is usually the key contact point for banking relationships for both the bank and the company. The Treasury puts together the various geographical, operational, funding-based, cash management, trade, hedging, markets, and account operations that are the key ingredients of the banking potpourri. Also, for longer-term capital market transactions, the Treasurer remains the key driver and hence the main contact point for the bank.
• Investors. As the company goes out to acquire diversified and alternative sources of capital, the Treasurer, being in charge of capital raising and also having the most visibility on the firm’s balance sheet, financials, and cash flows, would be the key resource for investors to have a discussion with to gain a broader understanding of the firm’s financial position and hence their return expectation. In many organisations, the Treasurer is also given the responsibility of managing investor relations. This is a logical additional responsibility given to the Treasurer but is not technically a Treasury function.
• Rating agencies. The Treasurer is responsible for the credit rating of the firm and for achieving the optimal credit rating. Hence the interface with the rating agencies (and sometimes analysts) is driven by the Treasurer.
• Financial institutions. In many countries, financial institutions (nonbanking finance companies, funds, money market players) remain a source of capital as well as originators of useful investment products and channels (funds, investment banks, etc.). In line with the duties of Treasury, the interaction with financial institutions for both origination and investment is driven by Treasury.
• Technology firms. Modern-day Treasury uses technology and systems as a critical tool to drive the function and day-to-day operations. Specialised Treasury systems and ancillary systems, such as market information systems (e.g., Thomson Reuters Extra), risk engines, and forecasting and reporting tools are playing leading roles in determining productivity and performance of treasuries. Regular interface with the technology service provider/vendor for maintenance, upgrades, and feature enhancement is an important access point for Treasury.
• Service providers. Many activities and functions of Treasury can be outsourced, and many service providers offer efficient, scalable, and highly controlled levels of service across different levels. Netting, collections, lockbox, and reconciliation are only some of the services that Treasurers choose to outsource.

Within the organisation, the Treasury team interacts with most functions on a regular basis. The nature and content of these interactions will become clearer in other chapters book. To summarise, these functions are:

• CEO and board of directors
• CFO
• Accounts receivable/accounts payable (AR/AP) teams
• Risk and control
• Controller
• Accounting
• Tax
• Legal
• Information technology/systems
• Human resources
• Country or subsidiary management teams
• Procurement
• Production and delivery
• Sales
• Collections

TREASURY FUNCTIONS AND RESPONSIBILITIES

Earlier we mentioned that the Treasurer is the provider of liquidity, responsible for the liquidity aspect of cash management and the manager of risk, funding, and investment for the firm. In this section, we delve deeper into the various activities and functions that make up the Treasury department. We also discuss the infrastructure required for the Treasury team members to outperform in their roles.

Treasury Functions

Treasury’s core functioning can be classified across the management of three main themes illustrated in Figure 1.6.

FIGURE 1.6 Treasury Functions and Responsibilities

Transactions

The transactional and operational element of cash management and the movement of money is the first of the three functions. This includes:

• Managing accounts
• Monitoring and enabling payments and managing the payment process and timing
• Monitoring the collections process and facilitating the concentration and movement of funds received
• Coordinating the process of consolidating and netting payments for increased efficiency
• Supporting financial control in the creation of a shared service centre to optimise the AR and AP processes
• Establishing an appropriate forecasting process for cash flows to enable better planning and management, and coordinating with various business units and functions
• Reconciliation of accounts and cash flows
• Execution of trade-related transactions, such as letters of credit and bank guarantees
• Settlement and execution of cash flow and cross-border transactions

Balance Sheet and Liquidity

The balance sheet and financials and liquidity element of the organisation’s money and assets and how it funds these assets is the second of the functions. This involves the management of:

• Balance sheet
• Ratios
• Working capital management (WCM)
• Operating and surplus cash
• Cost of capital
• Credit rating
• Supply chain finance (SCF)
• In-house banking
• Pooling and liquidity structures
• Intercompany financing and capital
• Dividends

I often get asked the difference between cash management and liquidity management. The following note articulates the same.

Risk

The element of managing the various financial risks because of market movements, credit deterioration, operational issues, market liquidity, and contingency situations is the third of the functions. This involves the management of:

• Market risk (such as foreign exchange, interest rates, commodity, etc.)
• Credit risk (includes counterparty and cross-border risk)
• Liquidity risk
• Operational risk
• Contingency risk

This management can be accomplished using many methods with various elements of rigour and flow. This book covers the use of Aktrea’s Set IMAGE© methodology, which involves a simple continuous five-stage process.

Treasury Infrastructure

Managing and working with the resources that the Treasury team needs to perform their functions and fulfill their responsibilities form a core part of the Treasury function’s activities. The various elements that make up the infrastructure for Treasury Functions are discussed next. Guidelines for some of these elements are included in the Toolkit in Part Five.

Policy

Policies are the core of a treasury’s functioning. It is important to have a thought-out but simple policy approved at the board level and reviewed periodically. The Treasury policy will set out all aspects of the treasury’s functioning, including transactions, balance sheet and liquidity, and risk management, and also the reporting and review methodology for these functions. A sample policy is provided in the online appendices.

Strategy and Objective

It is essential to define treasury’s objectives and strategies as well as how to measure its performance. Whether Treasury is a cost centre or a profit centre, whether it needs to be an active Treasury or a passive one, are all aspects that have to be identified up front and the objectives must be set accordingly. Chapter 27 has a detailed set of key performance indicators (KPIs) that can be a starting point for goal setting and performance measurement.

Contingency Planning

For treasuries that work across countries, regions, and continents, having a continuity-of-operations plan in place is critical. The more centralised the operations, the more important the need for a well-planned, tested, and robust contingency plan.

Processes

Processes and their management can differentiate treasuries. Smooth and efficient processes result in quick turnaround and service levels, which in turn reduce operating and financial costs and increase employee motivation. The importance of operations is discussed in Chapter 5 and in the Toolkit (Part Five).

Control

Given the linkages with money flows of the firm, Treasury needs the highest standard of control to prevent losses owing to operational, compliance, regulatory, and fraud reasons. Part Five covers the importance of some aspects of operations and control and contains an operations and control checklist that can be built on to create a robust control environment for an organisation.

Compliance

For a multinational organisation with a presence and operations across countries, local regulations and laws have to be complied with at all costs, and processes, systems, reporting, and other statutory aspects have to be aligned accordingly. In some cases, the local regulations could determine the course of operations as well.

Documentation

With the background of cash and money flows, watertight and properly executed documentation becomes one of the backbones of a robust Treasury.

Accounting

Different accounting norms across locations make it imperative for Treasury to be aligned with the accounting process. Since the Treasurer is responsible for the balance sheet and the capital structure, the accounting methods, translation, and recognition of revenues and expenses make a difference to the firm’s profitability and financial position. Some transactions may have an economic benefit but could be unfriendly from an accounting standpoint. Mark-to-market values on hedges and investments could also create volatility in the financials. Market moves could change the values of assets, liabilities, and cash flows. Given the Treasurer’s responsibility to manage uncertainty, which includes the variability of the balance sheet, the Treasurer’s linkages with the accounting systems and the financial controller become paramount in the smooth functioning and performance parameters of Treasury.

Systems and Technology

Always enablers, systems have become an integral part of the modern Treasury, linking every part of the globe to increase visibility of cash flows, managing risks, and deploying cash where and when it is needed. The advent of great banking platforms and outsourced solutions has also dramatically increased the ability to leverage systems and technology.

Service Providers

The use of various service providers for activities such as such as systems, integration, netting, reconciliation, system maintenance, and the like is becoming more and more popular, to ensure greater degree of specialisation, scalability, and control. Outsourced treasuries, covered in more detail in Chapter 30, are also returning in popularity.

Banks

Banks form the infrastructure of treasury’s architecture. No Treasury is complete without a banking partner. Whether the Treasury is a simple one with operations only in one country or a complex group-wide, in-house bank acting as a bank for all group companies, an efficient suite of banking services and solutions is paramount to delivering value to the business. Throughout our discussions, the roles and offerings of banks will be discussed. In the Toolkit, we also provide a note on how to go about picking the right banking partner.

People

Systems and process define a Treasury, but the people run it. Having the right people at the right places with the right approach and motivation is a necessity for a great Treasury. The roles in Treasury offer empowerment, opportunity, learning, and perspective and are a great breeding ground for finance and business leaders of tomorrow. In Chapter 3, we introduce the concept of a Treasury Culture, an empowering approach for a stronger dynamic in building a cutting-edge Treasury.

Treasury infrastructure, while being the nonglamorous part that does not hit the headlines when times are good, plays one of the most pivotal roles in the successful functioning of a Treasury.

KPIs AND DELIVERABLES

Now that we have explored the role that Treasury plays in the organisation and the context of its operation, it is important to explore the value that Treasury creates, its objectives and goals defined adequately and transparently.

Given the linkages that Treasury has with other functions, and the interdependence of other functions and extraneous factors, such as markets, regulations, liquidity, and the banking system, quantifying and measuring treasury’s direct contribution to the organisation becomes a complex task. It is compounded by the nature of the Treasury desk, which is also a service unit in many firms, intended to provide robust support to business and operations around the world to ensure smooth running of the company globally. A disruption to operations or the financial supply chain because of an absence of funding, or high volatility in the markets, will impact the organisation as a whole adversely.

Thus we make an effort to identify specific parameters of treasury’s performance—its contribution to the financial indicators of the firm—and to directly link the output of Treasury with the overall organisational performance. A detailed set of sample metrics is provided in Chapter 27.

Figure 1.7 summarises the performance indicators of Treasury. If we define the core objective of Treasury as supporting the business to increase enterprise value, we can identify four distinct but related objectives with which Treasury can contribute:

FIGURE 1.7 Treasury Performance Indicators

Lowering the Cost of Funding and the Cost of Capital

This is achieved by looking for the right capital sources and achieving an appropriate capital structure, targeting and achieving an appropriate credit rating and maintaining or improving it, and looking for opportunities to lower the existing cost of capital through the use of lesser external capital and other means.

Providing Liquidity to the Firm

This is achieved by identifying the right sources of liquidity, preferably internal, and reducing dependence on market and external sources, providing the firm with the ability to move cash, increasing visibility of the firm’s money, and finally providing money where it is required, when it is required, and for the amount and currency in which it is required and the time period for which it is required.

Enhancing Operating Cash Flows

This is done through prudent and active management of resources including managing and improving the top line through investing surplus cash (without compromising liquidity or increasing levels of risk), optimising the use of capital investments and balance sheet, and extracting maximum value on those investments and balance sheet. Bottom-line improvements will come by reducing costs through process efficiencies and use of technology and appropriate models, relevant banking and account structures, and available and customised products and services to improve efficiency and reduce resources required internally. Higher productivity per employee will also result in a smaller human resource requirement.

Increasing the Stability of Cash Flows and the Balance Sheet

This can be achieved through optimal hedging and risk management, and cash management to reduce volatility and increase visibility.

We now visit a Treasurer’s office and take a sneak peek at what a typical day looks like.

A DAY AT THE OFFICE—WHAT DOES THE TREASURER DO?

A typical Treasurer’s day is depicted pictorially in Figure 1.8. We have assumed in this example a reasonably centralised Treasury with a fair degree of automation.

FIGURE 1.8 A Day in the Treasurer’s Hot Seat

The day gets off to a start with an overview of the previous day’s bank balances, pooled and concentrated, through bank statements. The cash position is analysed and reconciled with the expected numbers from the previous day’s forecasts. Large exceptions that result in a significant shortfall (urgent alternative funding sources could be required) or surplus (funds from another day’s expected numbers could have come in, or funds expected to have been debited have not gone out, and hence need to be utilised accordingly) are examined and confirmation of the same is received. Short or excess payments made or received are also identified, and the new cash position is obtained after the relevant corrections and expectations. The next day’s forecast is also factored in to the expected liquidity and cash position. Overnight moves in markets are looked at, and risk limits and positions are reviewed. Clarifications are sought on any large amounts or variances.

Foreign exchange transactions for the day’s payments are made, and any maturing forwards, swaps, and options factored in before executing the trades with the bank.

Interruptions to the schedule on urgent queries or transactional follow-up are to be expected; the Treasury team does well to prioritise the time critical queries for resolution immediately.

Based on the revised cash position, the balance sheet and liquidity position is reviewed, and any arrangements for the day’s funding requirements are planned for through incremental borrowing, drawdown, or deposit cancellation. Sometimes risk management transactions with positive mark-to-market values may also be delivered early or unwound if the risk management objectives for the trade have been achieved.

Payments are made and executed. These include trade-related payments and documentation and netting payments, if applicable. Post-payment reconciliation is done to ensure that all proposed payments have gone through.

If there are payments still pending, these are referred back and resolved.

Meanwhile, incremental borrowings are executed, and the money inflows are recognised.

After a well-earned lunch, the Treasurer is back at his or her desk reviewing the risk management aspect, looking at the overall risk positions and taking stock of any incremental hedges that need to be put out. Corrective actions on any limit excesses are also planned at this time. Discussions with bankers and economists on general market views reinforce some of the views and decisions to be made.

On the balance sheet side, investment decisions are made. Intercompany loans and money movements are identified and executed.

Risk management and investment transactions are then executed with banks and professional counterparties, and the deals are booked in the system.

On the transactions side, the Treasury ensures that the handoff entries to the general ledger system or enterprise resource planning are posted and accounting entries are passed into the back end. Any reconciliation issues with the books of the firm and Treasury systems are also reconciled, and reverse handoffs are posted.

Queries coming in from the field are resolved after this. (Very critical queries are likely to have been resolved earlier in the day.)

All reporting activities are also finalised and circulated before the day ends.

The final piece of the daily puzzle is filled in when the Treasurer reviews the financials of the firm. Any large material changes or expectation of changes based on forecasts are also explored. Results of stress and scenario analyses may also be examined at this time, and discussions may take place on possible resolutions.

SUMMARY

In this chapter, we went through the context of the Treasurer’s role in the organisation, along with key responsibilities and functions in Treasury. We discussed the important aspects of Treasury infrastructure that help make a Treasury more robust. We concluded with a look at some of the KPIs for a Treasury and went through a typical Treasurer’s day, across various themes of transactions management, balance sheet and liquidity management, and risk management, starting off with time-critical morning activities and ending with reviews and matters of strategic importance.