Author: Nidhi Sarin, Linkedin Profile

Author: Mehmet Arslan, Linkedin Profile



A vital cog of larger corporations, which the average person may not even be aware is part of a company, is the treasury management department. Those involved with treasury management are more than likely to be part of a larger finance department. However, unlike their other financial counterparts, whose work is mainly backwards looking (e.g. financial reporting), the treasury management department is chiefly concerned with the future. Their work is comparable to an internal bank for a large corporation. They move money around between the different divisions and or different companies of the group. The treasury management department won’t be particularly large, even for larger corporations with several subsidiaries. In most cases there will only be one team per group of companies. The rest of this article will illustrate the objectives of a treasury department and the way in which they achieve their objectives using a fictional multination agricultural equipment company, named AgriGrow.


What are the objectives of a treasury department?


There are three main objective which a treasury department will strive to exceed at. The first of which is meeting obligations.  A key test as to whether or not a treasury department has failed at being able to meet their obligations, is if they have insufficient funds which are needed for the business to operate. If we take the position of AgriGrow, for them to meet their obligations, they would need to make sure they have the capability to pay instalments on leased equipment and monthly salaries. A simple way of achieving this, would be to just have a large amount of liquid cash available in current accounts to assure that any and all costs, be it expected or unexpected, are able to be paid. However, as we will soon realise, this easy fix, actually contradicts our next objective optimisation. To effectively achieve this second objective, what treasury needs is to ensure that they can accurately predict what will be needed in the near future so that they can reduce the amount of cash in current accounts to the lowest amount needed. This will then enable them to effectively use the surplus.


This then bring us to our second objective, Optimisation. Optimisation is chiefly concerned with getting the best value back on money going in and out of the company. If we were to characterize optimization, we would see 5 major characteristics. Optimizing future cash flows, minimizing bank charges, minimizing interest cost, maximizing interest of surplus funds and minimizing risks associated with market movements.


Taking AgriGrow again as an example, we can assume that the farmers will be short on cash for large portion of the year, as their revenue is tied to the harvest. What treasury for AgriGrow can do is help fund leasing arrangements for half the year, which would allow for the farmers to use the equipment for free, but come harvest pay, when the farmer’s funds are readily available. We can see that there is a substantial amount of money and investments that now needs to be managed. The treasury department needs to be able to position itself to be able to effectively handle the vast amount of money moving in and out of the company.


The ability to successfully optimize a company as treasury management is made significantly more difficult, when the company has multiple subsidiaries in multiple countries. Treasury will need to be able manage obligations in different currencies, in the fewest transactions possible.


The Last key objective of the treasury department is to manage Market Risk. Managing market risks, is the process where in treasury needs to aware of potential variations to the price of goods and services which affect the business (e.g. commodity prices, interest rates and FX rates). If we look at AgriGrow again, let’s say that the company’s manufacturing and labour costs are all based in China, but the vast majority of its sales comes from Europe and the US. The company is then exposed to the Chinese market and the value of the Yuan. If the value of Chinese yuan rises drastically, it means that costs have gone up across board, however income has remained the same. Treasury needs to be able to manage market fluctuations that will affect the business in this way. In order to counteract the type of market risk, treasury would need to predict the fluctuation to the value of the yuan and would need to take means to meet their Chinese subsidiaries obligations whilst also keeping their costs as low as possible.


Ultimately, in order for treasury to deal with shortages, surpluses and market risk, Treasury will have to enter into a contract with a third party outside the group, this will normally be a bank. The contract will involve everything from, dealing with surplus funds, borrowing, currency exchange to providing options and future contracts to manage market risks.


In the following article we breakdown the tool, a Treasury Managment System (TMS), which Treasury Departments would use in their day to day activities.