Chapter 1 - The Role of Treasury Management

Shared service center

A department or operation within a multi unit org tasked with supplying multiple business units and their respective divisions and department with specialized services. Typically deployed to: 1. Reduce costs of multiple or duplicate operations 2. Standardize processes 3. Increase the quality and timeliness of services 4. Create a higher degree of strategic flexibility

Cooling off period

A director cannot be considered independent unless they have not been an employee or independent auditor of the company for a continuous five year period.

Financial Functions

An objective of treasury management; Coordinate __ __ and share financial information means to collaborate with other internal divisions and departments to coordinate financial functions and share financial information. Effective communication with other divisions and functions is essential to ensure the achievement of treasury's goal to utilize cash as efficiently as possible.

Liquidity

An objective of treasury management; Maintain __ means to ensure the company's ability to meet current and future financial obligations Ina cost effective manner.

Investments

An objective of treasury management; Maintain __ means to invest excess finds in a prudent manner for both short and long term needs. The preservation of principle is the primary objective, followed by ensuring liquidity and maximizing overall return. Investment activities should also be conducted in accordance with a board-approved investment policy.

Agency problem

Because most investors are passive shareholders, and management is the legal agent of the shareholder, members of management my be induced to take actions that benefit themselves at shareholders expense

Cash manager

Directs daily cash management operations to include daily cash administration, management of current acccounts, and bank relations.

Internal Auditor

Ensures that controls and operating procedures are established to protect the company from losses caused by inefficiency, inaccuracy, or fraud. Reports to BOD to maintain independence and objectivity. Often followed by BOD audit committee.

Board of Directors

Grant authority to treasury to perform the following functions: -Open close and modify bank accounts -Establish credit facilities -Oversee investments -Issue debt and equity securities -Devise, implement, and execute risk management strategies *subject to specific limitations and regular review

Independent directors

Having these as a part of the BOD lowers ownership risk; to be considered, a nominee must have no material relationship with the listed company, either directly or as a shareholder or officer of the org.

Cash Management

Includes collections, disbursements, banking, and short term borrowing and investing

SOX Act of 2002

Makes the CFO of a publicly traded company listed on a U.S. Stock exchange personally responsible for the accuracy and completeness of financial statements and for the development and implementation of adequate financial controls.

Accounts Receivable manager

Responsible for monitoring and collecting AR created through credit sales. Responsible for the accurate posting of all payments made on accounts and the reconcilement of the payments to invoices.

Board of Directors

Serves as the general authority for all operations, approve business policies, major initiatives and contracts; delegates authority for specific functions to treasury, generally via board resolution.

Short Term

The __ __ goal of Treasury is to perform crucial daily liquidity Managemen tasks that help ensure the availability of adequate cash resources needed to sustain ongoing operations.

Long Term

The __ __ goal of treasury is to perform critical finance functions that ensure the availability of funds and information necessary to sustain senior managements initiatives that support the organizations overall financial objectives.

Corporate Governance

The principles and processes by which any organization is governed. Provides the guidelines for managing a company so that the company can fulfill its stated goals and objectives in a manner that adds to the value of the company and is also beneficial for stakeholders in the long term. Challenges include: 1. Separation of ownership and control 2. Most investors are passive shareholders which leads to the agency problem 3. Ensuring Checks and Balances are in place

Profit center

This approach in accounting for treasury is for companies heavily involved in global finance, trade, or risk management and expect treasury to generate income from either its trading operations for from hedging and or speculative activities.

Application of payments

Accurate posting of all payments made on accounts and the reconcilement of payments to the invoices

Short Term

An objective of treasury management; Maintain access to __ __ financing means to establish and maintain reliable access to short term borrowing facilities at the lowest cost possible. Use short term borrowing facilities to finance company's working capital gap created when the operating cycle produced cash outflows that precede cash inflows.

Medium

An objective of treasury management; Maintain access to __ and long term debt and equity financing to support planned asset expansion as well as the firms existing asset base. Provide the financial flexibility necessary to exert strategic action when investment opportunities arise.

Financial Risk

An objective of treasury management; Manage __ __ means to identify, measure, analyze, and mitigate or remediate a company's exposure to many types of financial risk (e.g., interest rate, foreign exchange, counterparty, and operational). Includes protecting overall financial assets from loss or theft.

Vendors

An objective of treasury management; Manage relationships with __, including but not limited to banks and other financial institutions, to make the most effective use of financial assets while minimizing risk and expense.

Bank relationship management

An objective of treasury management; Opening, maintaining, and closing all bank accounts within the authority granted by the BOD or owners, as well as managing the ongoing relationship with various banks that house those accounts.

Cash Resources

An objective of treasury management; Optimize __ __ means to establish policies and procedures and implement strategies that manage holdings of nonearning cash balances while providing adequate liquidity. Invest excess cash balances to generate interest income or pay down debt to reduce interest expenses.

Daily cash management

An objective of treasury management; tasks include: -Preparing cash position worksheet -Monitoring cash balances on deposit -Collecting concentrating and disbursing cash -Investing and borrowing funds on a short term basis -Researching and reconciling exception items (banks fees, missing deposits, uncleared checks), -Coordinating efforts with other areas (AR, AP, tax, accounting)

Separation of ownership and control

Arises when stockholders own the company, but executive officers control the company's operations. Management may be able to make decisions with little or no oversight by the owners.

Accounts Payable Manager

Ensures that payments are made to vendors and suppliers in a manner that is consistent with credit terms. Maintains a list of authorized vendors and suppliers, reviews incoming invoices, matches invoices to approved POs, reviews invoices for proper approval, and schedules payments.

Checks and balances

Insurance against corporate governance challenges; places limits on executive prerogatives and monitors management performance. Examples include BOD, IA, shareholder meetings, independent external auditors and regulatory agencies.

Capital Budgeting

Involves assessing the economic significance of proposed investments in new assets to determine whether they will increase the firm's value. This is accomplished by applying financial and statistical tools to measure the benefits and risks associated with a proposed investment.

Investor Relations Officer

Makes sure that both stock investors and bond holders receive up to date information on the company, especially any reporting required by regulatory authorities. Typically provides access to annual reports, a manages regular investor briefings, and answers questions that current or potential investors may have regarding the company.

CFO

Plays an important role in strategic planning and is pivotal to the capital budgeting and financial planning process; responsible for accurate financial reporting.

Credit manager

Preserves and collects AR, sets corporate policies, approves the extension of credit terms and exposure limits to customers, and establishes information systems to monitor AR. Should have controls of reporting to the sales manager to prevent influence in order to meet sales goals.

Controller

Primarily responsible for financial reporting, but also AP, accounting, budgeting, and coordinating with external auditors. In some companies AR, FP&A, and MIS will report here.

Treasurer

Primarily responsible for: managing overall financial risk, arranging external financing (ST and LT), managing relationships with banks and other service providers, overseeing daily liquidity and cash management, investing for ST and LT, developing and implementing treasury policies and procedures, managing domestic and international payments. Also, dividend disbursements, insurance, pension or retirement fund assets, and general risk management. Mau delegate to assistant treasurer or cash manager

Independent directors

Required for all companies listed on the NYSE, must constitute the majority of the BOD. Must lead each of the required committees: nominating, compensation, and audit. Must meet in regular executive sessions without management present.

Assistant Treasurer

Responsible for daily operational aspects of treasury so the Treasurer can focus on more strategic issues.

Risk Manager

Responsible for enterprise risk management, insurance, business continuity planning, and disaster recovery. May evaluate and negotiate all insurance policies and coverage levels.

Treasury Mangement

The broader topic that goes beyond simple cash management to deal with longer term borrowing and investing, capital management, and operational, financial, and reputations risk. The safeguarding and efficient use of financial assets for the benefit of a company and its various stakeholders.

Cost Center

The downside to this approach in accounting for treasury is that management may focus on the cost of treasury operations and not the value provided by the function, leading to difficulties in obtaining appropriate budget and staff

Treasury Management

The major objectives of __ __ include: 1. Maintain liquidity 2. Optimize cash resources 3. Maintain access to short term financing 4. Manage investments 5. Maintain access to medium- long-term financing 6. Manage financial risk 7. Coordinate financial functions and share financial information 9. Manage external vendors

Working Capital Management

The objectives below make up __ __ __, and together focus on the effective management of the cash conversion cycle: 1. Maintain Liquidity 2. Optimize Cash Resources 3. Maintain access to short term financing 4. Manage investments

Treasury Management

The primary goal of __ is to manage the cash and related financial assets of an organization as efficiently as possible to provide the financial flexibility needed to achieve the orgs objectives in a manner consistent with the orgs overall strategic plan.