Treasury Management

Treasury Management can be understood as the planning, organizing and controlling holding, funds and working capital of the enterprise in order to make the best possible use of the funds, maintain firm’s liquidity, reduce the overall cost of funds, and mitigate operational and financial risk.

It covers working capital management, currency management, corporate finance and financial risk management.

Simply put, treasury management is the management of all financial affairs of the business such as raising funds for the business from various sources, currency management, cash flows and various strategies and procedures of corporate finance.

Functions of Treasury Management

Treasury Management aims to ensure that adequate cash is available with the organization, during the outflow of funds. Further, it also contributes to optimum utilization of funds and makes sure that there are no unutilized funds kept in the firm for a very long term. The functions of treasury management are discussed below:

1. Cash Management

Treasury Management includes cash management, and so it ensures that there are an effective collection and payment system in the organization.

2. Liquidity Management

An optimum level of liquidity should be maintained in the business, for the better and smooth functioning of the business, i.e. the company must be able to fulfil its financial obligation when they become due for payment, such as payment to suppliers, employees, creditors, etc. And to do so, cash flow analysis and working capital management act as the most important tool for treasury management, to achieve its strategic goals.

3. Availability of funds in adequate quantity and at the right time

The treasury manager has to ensure that the funds are available with the organization in sufficient quantity, i.e. neither be more nor less, to fulfil the day to day cash requirement for the smooth functioning of the enterprise. Further, timely availability of funds also smoothens the firm’s operations, resulting in the certainty as to the amount of inflows available with the company at a particular point in time.

4. Deployment of funds in adequate quantity and at the right time

The deployment of funds has to be done in right quantity such as the acquisition of fixed assets, purchase of raw material, payment of expenses like rent, salary, bills, interest and so forth. For this purpose, the treasury manager has to keep an eye on all receipts of funds and the application thereof. Further, the funds must be available at the time of need, which may be different for different firms and also for the purpose for which they are used. The period may differ from a week to month when it comes to acquisition of the fixed assets and two to three days in case of working capital requirement.

5. Optimum utilization of resources

Treasury Management also aims at ensuring the effective utilization of the firm’s resources, to reduce the operating costs and also prevent liquidity shortage in the coming time.

6. Risk Management

One of the primary objectives of the treasury management is to manage financial risk to allow the enterprise to meet its financial obligations, as they fall due and also ensure predictable performance of the business. It tends to identify, measure, analyse and manage risk in order to mitigate losses, that has the potential to affect the company’s profitability and growth in any way. Hence, treasury management is accountable for all types of risk that can influence the business entity.

Further, the treasury management intends to maximise return on the funds available with the company, by making such investments which have higher return and low risk.

Advantages of Centralized Treasury Management

Under the centralized cash management, the treasury department is setup in head office which will look after the management of funds of multi-locational centers of the organization.

The important advantages of centralized treasury department are as follows:

(a) It avoids a mix of cash surpluses and overdrafts at different centers of the firm.

(b) The bulk cashflows allows the company to negotiate with its bankers for lower rate of interest and timely availability of funds.

(c) The surplus cash can be efficiently invested in short-term and marketable securities to earn interest on it.

(d) Borrowings in bulk might necessitate to raise funds from international money and capital markets at cheaper rates of interest.

(e) Foreign currency risk can be efficiently managed by adopting hedging techniques.

(f) It will use the services of experts with specialized knowledge of dealing in forward contracts, futures, options, euro currency markets, swaps etc.

(g) The balance of funds to be maintained for entire organization, on precautionary measures.

(h) Efficient utilization of funds is ensured by centralized funds management.

Advantages of Decentralized Treasury Management:

The decentralized treasury management is advocated for the following reasons:

(i) Sources of finance can be diversified and can match local assets.

(ii) Greater autonomy can be given to subsidiaries and divisions because of the closer relation­ships they will have with the decentralized cash management function.

(iii) The decentralized treasury function may be able to be more responsive to the needs of individual operating units.

(iv) Since cash balances will not be aggregated at group level, there will be more limited opportunities to invest such balances on a short-term basis.

Cash Management Vs. Treasury Management

The cash management is very closely linked with the treasury operations of any business organization.

The treasury operations of any organization can broadly be divided into two parts as follows:

(a) Short-term investment of surplus funds in the money market to maximize the benefit arising out of availability of surplus funds.

(b) Short-term borrowings of funds from banks or market for normal working capital require­ments and for temporary shortage of funds at the lowest possible cost to the company.

The broad objective of cash management with regards to the treasury operations of the organizations is to maximize the availability of funds at any point of time and at the desired place for investment purposes and/or also to minimize the deficit or shortfall in the requirement of funds at any point of time, i.e., what cash management seeks to do for treasury operations is to convert its sales, whether on cash or credit into ‘available cash’ as fast as possible.