CU-BBA-SEM-IV-Treasury Management

Cash flow management is the process of tracking how much money is coming into and out of business. This helps to predict how much money will be available to the business in the future. It also helps to identify how much money the business needs to cover debts, like paying employees and suppliers. Different Types of Cash Management Tools  Short term instruments such as Money Market instruments and mutual funds, Treasury Bills, Certificate of deposit (CD), etc.  Checking account.  Savings account.  Long term low-risk savings instrument. Thus Good cash flow management will ensure always have money available for paying the expenses when they are due. Even profitable businesses can fail if cash flow is not managed properly. If enough money available to pay the lenders or suppliers, banks may foreclose and suppliers could cut supplies Controlling the Cash Flows. Here are five of the most effective payable management practices any business can employ for better results. Expense Management The most immediate solution to controlling the amount of money that flows out of your business is to more effectively manage your expenses. Every business strives to reduce expenses wherever possible, but it is in the management of expenses where long-term solutions are found. Control Employee Expenditures Employee expenditures can easily get out of control without a system for monitoring and managing the authorization of purchases. A business credit card with pre-authorized spending limits and real time account monitoring is the best control mechanism for employee spending. Stretch Payments Review vendors’ payment terms and determine when payment is due (30, 60 or 90 days). Then schedule the payments around the precise due dates rather than an internal payment schedule. The objective is to keep cash in your business as long as possible which can enhance your cash flow. Where possible, renegotiate terms to stretch out the payments. This is best achieved using an automated payables system linked to the Automated Clearing House (ACH) or Electronic Funds Transfer (EFT). Make Payments Electronically 201 CU IDOL SELF LEARNING MATERIAL (SLM)

There is nothing that drains business resources more than writing and mailing checks and then waiting for them to clear before reconciling the business checking account. Electronic payment solutions, such as Automated Clearing House (ACH), Electronic Funds Transfer and online banking enable businesses to streamline the payables process while increasing its reliability. Automate Payroll Automated payroll solutions can save time and money for small businesses that can better utilize staff resources for other, more critical business functions. Outsourced payroll solutions can reduce costly errors while increasing employee satisfactory by optimizing the Cash Level. Optimizing cash flows The way to optimize business cash flow is reduce inventory holding costs by managing inventory effectively. Effective inventory forecasting and management is key to keeping inventory holding costs as low as possible and freeing up cash to spend in other areas. Diversify the customer base. Investing Idle Cash. Idle funds refer to money that has not been invested and is, therefore, not earning interest or investment income. Idle funds are simply funds that are not deposited in an interest-bearing or investment tracking vehicle, that is, are not participating in the economic markets. Some of the other functions of cash management are following under: Forecasting While planning investments, the managers need to be very careful as they need to plan for future contingencies and also ensure profitability. For this, they must use efficient forecasting and management tools. When the cash inflows and outflows are efficiently managed it gives the firm good liquidity. Short-term investment Avoiding cash crunch, insolvency and ensuring financial stability are the main criteria of cash management. But it is equally important to invest the surplus cash in hand wisely. Despite being a liquid asset, idle cash does not generate any returns. While investing in short-term investments an organization must ensure liquidity and optimum returns. Therefore, this decision needs to be taken with prudence. Here, the quantum/amount of investment needs to be calculated and decided carefully. This caution is necessary because an organization cannot invest all the available funds. Businesses need to reserve cash for contingencies (cash in hand) too. Miscellaneous functions 202 CU IDOL SELF LEARNING MATERIAL (SLM)

Cash management also includes monitoring the bank accounts, managing electronic banking, pooling and netting of assets, etc. So the cash management for treasury can also be a core function. Although for large corporates this function is managed by software’s, small businesses have to monitor it manually and ensure liquidity at all times. To add, large businesses have access to credit facilities at competitive rates. For small businesses that access is not available. Therefore cash management is vital for them. However, even large corporations need to monitor their systems time and again to avoid a situation of bankruptcy. 11.6 ACCOUNTS RECEIVABLES MANAGEMENT Accounts receivable refers to the debtors arising on account of selling goods on credit to customers. A business needs to sell goods on credit in order to expand its sales and attract customers. However, there is an element of risk involved in undertaking credit sales. This risk refers to the risk of bad debts. Hence, a business needs to manage its accounts receivable in order to improve its overall return on such receivables. This means investment in accounts receivable need to be of an optimum level. It is achieved by comparing benefits with costs in maintaining such receivables. Thus, excessive investment in accounts receivable increases sales. But leads to high risk of bad debts. Whereas, inadequate amount of investment in accounts receivable reduces sales as well as the risk of bad debts. Hence, a business must compare costs with benefits of maintaining accounts receivable in order to manage receivables effectively. Laying out credit policy clearly to extend credit to customers. This includes setting credit standards, credit terms, offering discounts and analyzing credit risk of customers. Following a credit collection policy that helps a business to collect payments that become due. Monitoring the accounts receivable on a constant basis to determine whether the customers are paying according to the credit terms. 11.6.1 Objectives of accounts receivables management Accounts Receivable (A/R) is the money owed to a business by its clients. to minimize the Days Sales Outstanding (DSO) and processing costs are important for the accounts receivable management. 11.6.2 Key areas of accounts receivables management There are three key areas of accounts receivable management. Assessing Credit worthiness Before a company grants credit to a customer it should ensure, as far as possible, that the customer is worthy of that credit and that bad debts will not result. Checks should continue to be carried out on existing customers as a company would like to have early warning of any 203 CU IDOL SELF LEARNING MATERIAL (SLM)

problems which may be developing. This is especially true for key customers of the company. The methods a company could use to assess the creditworthiness of a customer or a potential customer include:  Bank reference – while a bank reference can be fairly easily obtained, it must be remembered that the other company is the bank’s customer and so a bank reference will stick to the facts. It is most unlikely to raise any fears the bank may have about the company  Trade reference – this is obtained from another company who has dealings with your potential customer/customer. Due to the litigious nature of society these days, it may not be so easy to obtain a written reference.  Credit rating/reference agency – these agencies’ professional business is to sell information about companies and individuals.  Financial statements – financial statements of a company are publicly available information and can be quickly and easily obtained. While an analysis of the financial statements may indicate whether or not a company should be granted credit, it must be remembered that the financial statements available could be out of date and may have suffered from manipulation. For larger companies, an analysis of their accounting information can generally be found through various sources on the internet  Information from the financial media – information in the national and local press, and in suitable trade journals and on the internet, may give an indication of the current situation of a company. For example, if it has been reported that a large contract has been lost or that one or more directors has left recently, then this may indicate that the company has problems  Visit – visiting a potential new customer to discuss their exact needs is likely to impress the customer with regard to your desire to provide a good service. At the same time, it gives you the opportunity to get a feel for whether or not the business is one which you are happy to give credit to. While it is not a very scientific approach, it can often work quite well, as anyone who runs their own successful business is likely to know what a good business looks, feels and smells like. Setting credit terms and monitoring accounts receivable Once the decision has been taken to grant credit, then suitable credit terms must be set and the receivables that arise must be monitored efficiently if the costs of giving credit are to be kept under control. As soon as a customer is given credit, the credit terms of the company should be explained to them. For instance, the normal credit period granted and any discount for prompt payment, or 204 CU IDOL SELF LEARNING MATERIAL (SLM)

interest charged on late payment, should be explicitly detailed to the customer. Very often, the credit terms a company adopts are the terms that are most common in its trade. To use something different can cause problems as customers will be expecting, and are likely to take, what is normal in the trade. Having said that, variations within a trade do occur and, indeed, a company may well offer different terms to different customers, depending on the credit rating of each customer and their relationship with each customer. Collecting cash A key area of the management of accounts receivable is the final collection of cash from customers. Any company must have a rigorous system to ensure that all customers pay in a timely fashion as, without this, the level of receivables and the cost of financing these receivables will inevitably rise, as will the risk and cost of bad debts.Having sent out the invoice quickly and accurately, the methods a company could use to ensure customers pay in a timely fashion include:  Monthly statements – these can be produced quickly and easily by any computerized sales ledger system and sent to customers. Exactly how much impact they have is however debatable  Chasing letters – these should be directed to a specific person preferably at a reasonably senior level. However, preparing and sending these letters has a cost and, like the monthly statements, their impact is often limited  Chasing phone calls – these can often have a great impact as all businesses have to answer the telephone and, hence, they have a nuisance value which can generate results. A credit controller who regularly contacts a suitably senior person at their customers with overdue amounts and politely, but firmly, demands payment can often achieve good results  Personal approach – a personal approach from a senior person in the company to a senior person at the customer can often yield results. This is quite common in trades where the personal relationship with clients is important. For instance, this often occurs in professional accountancy and legal firms  Stopping supplies – this is a cash collection tool that must be used with care. If the product being sold is built specifically to the customers design, and you are the only supplier who currently makes the product, then it is a powerful tool as, in the short term, you are the only supplier and, hence, payment is likely to be forthcoming. However, in the longer term it is always possible for the customer to train up an alternative supplier to make the product. If the product is a generic product that could be purchased from many suppliers, then quite obviously this is a weak tool that is simply likely to lead to the loss of the customer  Legal action – this is costly and is likely to lead to the customer being lost 205 CU IDOL SELF LEARNING MATERIAL (SLM)

 External debt collection agency – as with legal action this is costly and is likely to lead to the loss of the customer. Figure 11.11 Inventory Control Below are the five steps to managing accounts receivable:  Determine to whom to extend credit.  Establish a payment period.  Monitor collections.  Evaluate the liquidity of receivables.  Accelerate cash receipts from receivables when necessary 11.6.3 Receivables management function Accounts receivable management incorporates is all about ensuring that customers pay their invoices. Good receivables management helps prevent overdue payment or non-payment. It is therefore a quick and effective way to strengthen the company's financial or liquidity position. 11.6.4 Role of a manager The key role of an employee who works as an Accounts Receivable is to ensure their company receives payments for goods and services, and records these transactions accordingly. An Accounts Receivable job description will include securing revenue by verifying and posting receipts, and resolving any discrepancies. 206 CU IDOL SELF LEARNING MATERIAL (SLM)

Accounts Receivable Manager is an intermediate level job. It is the role responsible for collecting all payments on behalf of the company, supervising the accounts receivable department and staff in the organization. It also includes tasks like ensuring company policy is adhered to and payment deadlines are met. 11.7 SUMMARY  Working capital management is a business tool that helps companies effectively make use of current assets, helping companies to maintain sufficient cash flow to meet short term goals and obligations. This is achieved by the effective management of accounts payable, accounts receivable, inventory and cash.  Inventory management refers to the process of ordering, storing and using a company's inventory. This includes the management of raw materials, components and finished products, as well as warehousing and processing such items.  Cash management is the process of collecting and managing cash flows. Cash management can be important for both individuals and companies. In business, it is a key component of a company's financial stability.  Accounts receivable management is the process of ensuring that customers pay their dues on time. It helps the businesses to prevent themselves from running out of working capital at any point of time. It also prevents overdue payment or non- payment of the pending amounts of the customers. 11.8 KEYWORDS  Accounts Payable are amounts due to vendors or suppliers for goods or services received that have not yet been paid for.  Asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets  Balance Sheet. is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure  Cash Flow is the net amount of cash and cash equivalents being transferred into and out of a business.  Inventory refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit  Cash management is the process of collecting and managing cash flows 207 CU IDOL SELF LEARNING MATERIAL (SLM)

 Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers  Creditworthiness is a lender's willingness to trust you to pay your debts.  Idle funds refer to money that has not been invested and is, therefore, not earning interest or investment income. 11.9 LEARNING ACTIVITY 1. How will you manage your inventory in the organization? Discuss. ___________________________________________________________________________ ___________________________________________________________________________ 2. Identify the cash management activities. ___________________________________________________________________________ ___________________________________________________________________________ 11.10 UNIT END QUESTIONS A. Descriptive Questions 208 Short Questions 1. What do you mean by working capital financing policy? 2. List out the strategies of working capital 3. Outline the meaning for inventory. 4. State the objectives of cash management. 5. Point out the key areas in cash management. 6. Mention the role of the manager in accounts receivable management Long Questions 1. Illustrate and explain the conservative approach strategy. 2. Discuss the strategies of cash management in detail. 3. Bring out the importance of EOQ in management. 4. Describe the cash flow management strategies. 5. How will you assess the credit worthiness of a customer? 6. Enumerate the techniques used in receivable management. B. Multiple Choice Questions 1. Which of the following is not an inventory? CU IDOL SELF LEARNING MATERIAL (SLM)

a.Machines b. Raw material c. Finished products d. Consumable tools 2. The following classes of costs are usually involved in inventory decisions except a. Cost of ordering b. Carrying cost c. Cost of shortages d. Machining cost 3. The time period between placing an order its receipt in stock is known as a. Lead time b. Carrying time c. Shortage time d. Over time 4. A ----------- Strategy suggests not to take any risk in working capital management and to carry high levels of current assets in relation to sales. a. Conservative b. Aggressive c. Hedging d. None of the above 5. Closing stock is an -------- a. Fixed asset b. Tangible asset c. Current asset d. Current liability 209 CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-a, 2-d, 3-a. 4-a, 5-c 11.11 REFERENCES References books  Rajiv Srivastava and Anil Misra, Financial Management, Oxford university press.  S.N.Maheswari Financial Management, Sultan Chand, New Delhi Textbooks  Punidavathi pandiyan. Financial Management. Mumbai: Himalaya Publishing House.  I.M.Pandey, Financial Management, Pearson  Essentials of financial management, Pearson Websites  https://keydifferences.com/ddifference-between-treasury-management-and-financial- management.html  https://yourbusiness.azcentral.com/importance-treasury-management-26921.html  https://www.accountingtools.com/articles/2017/5/15/treasury-functions  https://www.coupa.com/blog/treasury/cash-management-and-role-treasury  https://www.google.com/search?q=function+s+of+tresury&oq=function+s+of+tresury +&aqs=chrome..69i57.8486j0j7&sourceid=chrome&ie=UTF-8  google.com/search?q=perspectives+of+treasury+management&biw=1536&bih=754& sxsrf=ALeKk01QDYA2KSBQcbNM3YlfQUbyy_fbYw%3A1625395058894&ei=co _hYOuMNpuprtoP1rW50Ag&oq 210 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 12: PERSPECTIVES OF TREASURY 211 FUNCTION STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 Meaning for Treasury 12.3 Treasury Management 12.3.1 Importance of Treasury management 12.4 Treasury Functions 12.4.1 Types of treasury function 12.5 Perspectives of treasury function 12.5.1 Cash management 12.5.2 Risk management 12.5.3 Corporate Finance 12.6 Difference between Treasury Management and Financial Management 12.7 Difference between Treasury Management and Financial Accounting 12.8 Difference between Treasury Management and Corporate Finance 12.9 Role of treasurer 12.10 Summary 12.11 Keywords 12.12Learning Activity 12.13 Unit End Questions 12.14 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the meaning for treasury management  Discuss the importance of treasury management  Analyse the types of treasury functions CU IDOL SELF LEARNING MATERIAL (SLM)

 Describe out the three perspectives of treasury function  Examine the role of treasurer. 12.1 INTRODUCTION Treasury is multi-disciplinary. Treasury functions span across Cash and Liquidity Management, Payments Management, Risk Management and next generation payments/ emerging etc. Treasury involves the management of money and financial risks in a business. The money needed for the day to day activities of the business will be through treasury management. 12.2 MEANING OF TREASURY Treasury is the management of cash flows within organizations. It involves the management of money and financial risks in a business. Its priority is to ensure the business has the money it needs to manage its day-to-day business obligations, while also helping develop its long term financial strategy and policies. 12.3 TREASURY MANAGEMENT Treasury management involves the process of managing the cash, investments and other financial assets of the business. The goal of these activities is to optimize current and medium-term liquidity and make solid financial decisions involving invested and investable assets. Treasury management also includes hedging where needed to reduce financial risk exposure. 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. The areas of treasure management are divided into financial efficiency and institutional efficiency. The treasury management focuses areas on International funding, banking relationships, optimum utilization of fund, cash, risk, debt and liquidity management etc. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 12.1 Areas of treasury management Some of the Treasury Services are  Forex. Get forex remittance, risk management solutions, streaming quotes and other forex services in 16 currencies.  Derivatives.  Bullion  EX Connect  Money Market Services.  Constituent SGL Facilities.  Retailing of Government Securities.  Interest Rates and Derivatives. 12.3.1 Importance of treasury function The importances of treasury functions are:  Without the treasury management is to not able to determine the proper levels of cash or cash equivalents to allow businesses the ability to meet their financial obligations. With the help of Treasury management the manager can manage the business efficiently and successfully. 213 CU IDOL SELF LEARNING MATERIAL (SLM)

 Treasury management drives value creation through maximizing cash liquidity for companies that often have fluctuating cash flow and needs.  Treasury management plays a critical role by ensuring that a company has the cash it needs at all times to run its business.  The treasury department has performing the following functions for the smooth running of organisation.  Managing Federal finances;  Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.;  Currency and coinage;  Managing Government accounts and the public debt;  Supervising national banks and thrift institutions 12.4 TREASURY FUNCTIONS The main functions of the Treasury management is to operates and maintains systems such as the production of coin and currency, the disbursement of payments to the public, revenue collection, and the borrowing of funds necessary to run the Government. Also responsible for balancing and managing the daily cash flow and liquidity of funds within the bank and responsible for the investments in securities, foreign exchange and cash instruments. Figure 12.2 Areas of treasury management 214 CU IDOL SELF LEARNING MATERIAL (SLM)

12.4.1 Types of treasury functions In order to accomplish its mission, the treasury department must engage in the following activities: Cash forecasting. Compile information from around the company to create an ongoing cash forecast. This information may come from the accounting records, the budget, capital budget, board minutes (for dividend payments) and even the CEO (for expenditures related to acquisitions and divestitures). Working capital monitoring. Review the corporate policies related to working capital, and model their impact on cash flows. For example, looser credit results in a larger investment in accounts receivable, which consumes cash. Cash concentration. Create a system for funneling cash into a centralized investment account, from which cash can be most effectively invested. This may involve the use of notional pooling or cash sweeps. Investments. Use the corporate investment policy for allocating excess cash to various types of investments, depending on their rates of return and how quickly they can be converted into cash. Grant credit. Issue credit to customers, which involves management of the policy under which credit terms are granted. Fund raising. Determine when additional cash is needed, and raise funds through the acquisition of debt, sale of stock, or changes in company policies that impact the amount of working capital required to run the business. Risk management. Use various hedging and netting strategies to reduce risk related to changes in asset values, interest rates, and foreign currency holdings. Credit rating agency relations. Keep any credit rating agencies informed of the company's financial results and condition, if these agencies are providing ratings on the company's marketable debt issuances. Bank relations. Keep the company's bankers apprised of the company's financial condition and projections, as well as any forthcoming changes in its need for borrowed funds. The discussion may extend to the various services provided by the banks to the company, such as lockboxes, wire transfers, ACH payments, and so forth. IT system. It provides it with information about cash holdings, projections, market conditions, and other information. Reporting. The treasurer provides the senior management team with reports concerning market conditions, funding issues, returns on investment, cash-related risks, and similar topics. 215 CU IDOL SELF LEARNING MATERIAL (SLM)

Mergers and acquisitions. The department may advise on the company's acquisition activities, and may be called upon to integrate the treasury functions of an acquire. 12.5 PERSPECTIVES OF TREASURY FUNCTION Treasury management is based on payment and collection management, liquidity management and banking management which has now taken on a broader perspective that includes the planning of disposable treasury assets and their subsequent monitoring, a strategy for investing surpluses to obtain maximum profits. There are three perspectives of treasure functions are following under  Cash Management  Risk Management  Corporate Finance 12.5.1 Cash management Cash management, also known as treasury management, is the process that involves collecting and managing cash flows from the operating, investing, and financing activities of a company. Cash management is important for both companies and individuals, as it is a key component of financial stability. Though these terms are used interchangeably, the scope of Treasury Management is much larger and includes a company's funding and investment activities. In contrast, Cash Management usually refers to wire transfers, sweep accounts, merchant services, and business credit options. Cash Management is a practice devoted to planned expenditures. This perspective of Treasury is highly focused on operational efficiency and process optimization. It requires managing cash flows coming into and out of your accounts, to ensure that the company has the right amount of cash on hand. 216 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 12.3 Cash management Here is a list of the main activities of Cash Management: 1. Operations  Managing receipts and disbursements according to common standards and practices  Calculating and managing the company’s overall cash position  Reviewing transactions and cash balances to ensure the accuracy of the cash position calculation  Developing and managing cash account structures, aka “cash concentration”  Developing and generating cash management reports 2. Optimization  Evaluating receipt and disbursement methods in light of new payment technologies  Developing and monitoring cash flow forecasts  Analyzing foreign exchange transactions  Managing merchant services programs (e.g., fees, card security compliance, other requirements)  Optimizing the availability of short-term sources of cash, aka “liquidity” Role of Cash management in Treasury is following under: Everyday cash management responsibilities It is up to treasurer to translate the requirements just listed into daily workflows in the specific business. We can broadly identify the following areas of responsibility: Short-term liquidity Treasurers ensure that a business maintains enough liquidity to meet short-term financial obligations at any time. There must be sufficient credit/credit lines available, and surplus funds must be invested in a way that allows a treasurer to quickly and easily convert the investment into liquid funds. Cash flows and cash positioning Moreover, treasurers need to monitor and manage daily cash flows: which payments have been received or disbursed? Which payments and transfers do I need to initiate? Who has a cash deficit that needs to be addressed? This includes the monitoring of group-wide account balances that need to be collated to determine the cash position. In addition, planned and actual cash flows need to be reconciled and planned cash flows deleted or moved into the future if need be. Managing surplus funds 217 CU IDOL SELF LEARNING MATERIAL (SLM)

Another treasury responsibility is the optimization of liquid funds, in particular, surplus cash. Money needs to be invested or distributed in a way that makes for an optimum financial and organizational setup. Nowadays, this also involves keeping an eye on counterparty risk: liquidity should not be concentrated at one bank but be more diversified to be able to compensate for a potential inability to pay/insolvency. Procuring financing Another important aspect of cash management is the procurement of cost-efficient financing. The treasurer needs to ensure sufficient borrowing capacity (both short and long term) to be in a position to arrange for timely and affordable financing if it is not possible to move funds within the group (e.g. by means of cash pooling). Generally speaking, internal financing is (almost) always preferable to external financing. Treasurers have the responsibility of identifying cash needs, making funds available and allowing for a certain buffer. Gathering information A treasurer needs to gather the information they need, and the data needs to be both accurate and available in a timely manner. This covers both internal and external sources of information. Data optimization and efficient distribution of work: collaboration and cash management The treasury department must be on top of the group-wide cash situation to meet their cash management responsibilities in the best possible way. Moreover, the treasury needs to be aware of the cash availability in each and every group entity. Depending on how centralized a group is or how autonomous the group entities, there are various ways of going about this. For example, if the local teams are solely responsible for their own accounts, then reporting is a key information interface. If not, then determining the cash position involves monitoring various banking tools for the treasury team. In both cases, this is a tedious and time-consuming process: the treasurer needs to work their way through a number of very different portals or wait until the local teams have reported their account balances and transaction data, often by email. This data then needs to be converged. But we’re dealing with a very time-sensitive process! So how could it be optimized? One sole platform for everyone: accuracy and visibility Using a treasury management system is the first step to more visibility and workflow efficiency. The second and even more important step, however, is using a system that integrates both local teams and central treasury for a collaborative approach. Nothing short of this will enable treasurers to leave behind the tedious collation of data from countless sources. Account balances, cash flows and, transaction data are entered directly in the system. Businesses are left with only one source of information, and data becomes available in real time. This creates greater visibility and improves accuracy. 218 CU IDOL SELF LEARNING MATERIAL (SLM)

Knowledge directly from the source: optimized distribution of work Account statements are key here, as they not only show the status quo but also allow treasurers to make evaluations at any time. Cash management specifically targets the short- term picture, and this means that cash flows can be planned relatively well. Invoices have been entered in the system and HR or tax payments are fixed. One of the main aspects that sets a load balanced treasury apart is the fact that the transfer of information becomes redundant. The treasury department no longer has an obligation to request and collect the information. Conversely, the local teams are required to make their data available directly in the system. Treasury can profit from reliable data from one single source, and the local teams benefit from central and structured reporting workflows. At the same time, automated data import enables teams to directly receive data (account statements for example via SWIFT) and reduce manual processes. Strategic planning and decision-making Treasury can make decisions and plan strategically on the basis of centrally available data. Where is my cash? What should I be doing with my money? Who needs financing? How can I optimize interest? Where should I opt for a payout or where do I need a credit facility? Where is internal financing needed, where external? These and other crucial questions have one both simple and reliable answer: A company-wide collaborative approach 12.5.2 Risk management Risk management is at the heart of most treasury operations, and it is helpful to situate the risks managed by treasury within the overall risk map of the company. ISO31000 defines risk as the effect of uncertainty on business objectives, including both positive events as well as negative ones. Risk Management is a practice devoted to unexpected expenditures. This perspective of Treasury is highly focused on research and operational controls. It identifies and plans for the potential impact of changes in technology, company operations, and the financial environment in which a company operates. This requires financial research in each of these areas and involves the implementation of operational controls. Risk management important in treasury management because the cash and liquidity management function helps to achieve this is by monitoring and managing working capital, the risk management function is concerned with assessing and managing risks to liquidity. Together, these two roles help to protect the business from shortfalls and the costs of borrowing. 219 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 12.4 Risk Management Here is a list of the main activities of Risk Management: Financial Research  Researching and evaluating risks posed by overseas operations and financial transactions, aka “foreign exchange risk”  Researching and evaluating risks posed by fluctuations in borrowing costs, aka “interest rate risk”  Researching and evaluating risks posed by changes in the prices of raw materials required by the business, aka “commodity risk”  Researching and evaluating risks posed by customers who do not pay their bills, aka “credit risk”  Researching and evaluating risks posed by a shortage of cash, aka “liquidity risk”  Researching and evaluating risks posed by changes in technology and the potential for fraud, aka “operational risk” Operational Controls  Evaluating treasury management systems (e.g., treasury software, third-party products and services) 220 CU IDOL SELF LEARNING MATERIAL (SLM)

 Evaluating treasury management functions and strategies (e.g., internal workflows, outsourcing)  Developing, maintaining, and testing business continuity plans (e.g., reporting processes, funds transfer capabilities)  Implementing and monitoring operational risk prevention measures (e.g., fraud prevention tools, internal controls and procedures, cybersecurity, compliance)  Preparing and maintaining documentation (e.g., bank accounts, service agreements, resolutions, archiving information)  Monitoring compliance with internal controls, debt and investment policies, covenants, regulatory requirements, and other legal agreements  Preparing and reporting treasury data to stakeholders (e.g., board of directors, financial services providers, accounting, operations, auditors) 12.5.3 Corporate finance Corporate finance is a specific area of finance that analyzes the financial decisions of corporations. It concentrates on capital budgeting, financing decision and day –to-day operations. Corporate finance Manages the firm's liquidity, funding, capital and allocation of financial resources to align with the firm's overall strategy. In some organizations, the Treasury department might also include the mergers and acquisitions team, corporate finance, corporate planning, pension fund management, economic analysis and fintech. Corporate Finance is a practice devoted to financing expenditures through borrowing and investment. This discipline of Treasury is highly focused on strategic planning. Based on the objectives set forth by the company’s leadership, it evaluates potential sources of funding and sets the overall financial strategy that the company will use to meet those objectives. The work of Corporate Finance involves strategic analysis and executive management. The term Corporate Finance involves both short- and long-term financial planning, but it is generally associated with corporate strategy, which by nature is oriented towards the long- term. Most short-term financial planning is covered by a sub-discipline of Corporate Finance, known as Working Capital Management. 221 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 12.5 Characteristics of corporate finance Corporate Finance is a practice devoted to financing expenditures through borrowing and investment. This discipline of Treasury is highly focused on strategic planning. Based on the objectives set forth by the company’s leadership, it evaluates potential sources of funding and sets the overall financial strategy that the company will use to meet those objectives. The work of Corporate Finance involves strategic analysis and executive management. The term Corporate Finance involves both short- and long-term financial planning, but it is generally associated with corporate strategy, which by nature is oriented towards the long- term. Most short-term financial planning is covered by a sub-discipline of Corporate Finance, known as Working Capital Management. Foreign exchange From the multinational firm’s perspective, the treasury management system’s role is perhaps obvious, but nonetheless pivotal to operations. Being able to manage the flow of funds across borders to different strands of the business while factoring in fluctuations in currencies – and monitoring for potential future changes in foreign exchange based on a variety of factors such as interest rates in different jurisdictions – has become more important in recent years as firms expand across global markets. Getting the foreign exchange function wrong can be costly, should the value of cash deteriorate as it crosses borders. For smaller firms, treasury’s capabilities to utilize proper foreign exchange functionality is no less important. Most firms in today’s global markets import and export goods and services, so 222 CU IDOL SELF LEARNING MATERIAL (SLM)

naturally funds come in and go out in different currencies. Here, not only is it important for the treasury department to provide the requisite funds for transactions to be able to be carried out, but a modern treasury manager will recognize that arbitrage opportunities lie in the conversion of currencies at different rates at different times – and not necessarily in the company’s home currency. Financial supply chain The firm’s management of its funds across its supply chain will necessarily be decided upon by its corporate treasury, which it leans on for the smooth transition of those funds through its network. A treasury department’s ability to move funds fluidly, with ease and economic environments change, is widely seen as the lifeblood of the firm. There are many software packages that can assist the treasury department to move funds around, but human interaction is still a large part of providing a subjective analysis of the firm’s short and long-term financial requirements. Financial technology The various software tools to have come on the market over the past few years promising to help company’s better use their financial supply chains and treasury systems have played a large part in supporting the treasury function. Many of these systems have added to the functionality of each firm’s treasury capabilities, but also created the need for the department to constantly assess the software market, should a new offering be made available that could add significant competitive Here is a list of the main activities of Corporate Finance: Strategic Analysis  Evaluating current market conditions related to long-term borrowing and investment strategies (e.g., credit availability, spreads, interest rates, terms, risk) and the company’s long-range forecast (e.g., new products, acquisitions, divestitures, capital expenses)  Developing long-term investment strategies, including capital and financial investment  Developing long-term borrowing strategies, including arranging financing and capitalization for operations and projects. Executive Management  Implementing long-term investment and borrowing strategies  Aligning treasury activities with the company’s overall financial strategy  Managing the capital budgeting process  Optimizing sources of short-term and long-term funding  Balancing sources of internal and external funding 223 CU IDOL SELF LEARNING MATERIAL (SLM)

 Managing shareholder expectations and relationships with banks and other lenders 12.6 DIFFERENCES BETWEEN TREASURY MANAGEMENT AND FINANCIAL MANAGEMENT Treasury management: it refers to the administration of all financial matters such as raising funds from various sources, handling currencies and cash flows and the strategies of corporate finance. Financial management: It is the planning and mobilization the finance of the company, so as to meet out financial objectives, i.e. the maximization of the wealth by increasing the value of the firm. 1. Meaning: Treasury Management is a part of financial management, which is concerned with the management of firm's cash and funds. Financial Management refers to the managerial activity that stresses on the management of firm's financial resources, to achieve the overall aim of the enterprise. 2. Plan: T.M is the Implementation of financial plan.FM Formulates, coordinate and administers financial plan, for controlling operations. 3. Focus on: TM focus on Periodic examination of income and expense budgets. But FM focus o Preparation and presentation of financial statements. 4. Strategy: TM adopted short term and financial management adopted long term strategy. 12.7 DIFFERENCES BETWEEN TREASURY MANAGEMENT AND FINANCIAL ACCOUNTING It is Treasury’s job to optimize cash flows based on business objectives, whereas it is the job of accounting to prepare financial statements that present the clearest possible picture of the financial health of the company. In Accounting, revenue is booked when a sale is made. However, it might take some time before this revenue actually reaches the company in the form of cash. Until it does, booked revenue is generally irrelevant for Treasury. The same is true for expenses. An expense may be booked, but from a Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand. 12.8 DIFFERENCES BETWEEN TREASURY AND CORPORATE FINANCE In general, Corporate Finance refers to the borrowing and investment strategies used by corporations in order to finance operations and meet strategic objectives. Corporate Finance is a broad field, which is related not only to Treasury, but also to financial accounting and 224 CU IDOL SELF LEARNING MATERIAL (SLM)

banking. From a financial accounting perspective, Corporate Finance is concerned not only with cash flows but also with the overall financial health of the company. From a Treasury perspective, Corporate Finance is the long-term strategy that determines the scope and objectives for Cash and Risk Management. Within banking, the term “corporate finance” is often used differently. When bankers speak of Corporate Finance, they are usually referring to a particular line of business for the bank, which involves raising money for corporations or acting as advisers on their behalf. From a banking perspective, Corporate Finance usually means brokering deals between corporations and potential investors. 12.9 ROLE OF TREASURER Figure 12.6 Characteristics of corporate finance The role of the Treasurer is involved in financial planning and budgeting. Financial reporting. Banking, book keeping and record keeping. He is like a watch dog for the company. In small organizations, Treasury work is mostly done by the Chief Financial Officer or finance department. Larger organizations often have their own treasury departments, which are headed by a treasurer who reports to the CFO. Ultimately, Treasury is controlled by the CFO. Although the basic role of the treasurer remains the same over time, the content of Treasury activity evolves over time. Due to external factors, such as technology, regulations, and new financial products, some tasks are less time consuming nowadays then they were in the past. Traditionally, the job of the treasurer was filled primarily with tasks like bank selection, reconciling bank statements, and managing daily transactions. These days, many of these tasks can be automated. A treasury management system (TMS) can handle much of this work for the treasurer. Instead, the modern treasurer works increasingly closely with colleagues in 225 CU IDOL SELF LEARNING MATERIAL (SLM)

the finance and risk departments. The risk of cyber fraud, for example, is now an ever-present concern. In the past, a treasurer only went to the company’s bank for financing. These days, there are many other options for financing, or for reducing financial risk. Increasingly complex banking and governmental regulations also take up more and more of the treasurer’s time. It is the task of the treasurer to keep up to date with developments, and to be the consultant for the Organisation on all treasury-related subjects. 12.10 SUMMARY  The purpose of Treasury is to manage a company’s liquidity and to mitigate its financial and operational risk.  Treasury function can be seen in three perspectives.  Treasury’s overall objective is to safeguard the company’s holdings and to follow the long-term strategy set forth by Corporate Finance.  Cash Management, focused on efficiency and process optimization,  Whereas Risk Management is oriented towards financial research and operational controls.  Corporate finance is primarily concerned with maximizing shareholder value through long and short-term financial planning and the implementation of various strategies.  The Treasurer has a watchdog role over all aspects of financial management, working closely with other members of the Management Committee to safeguard the organisation's finances. ... Financial planning and budgeting. Financial reporting. Banking, book keeping and record keeping.  Treasury management: it refers to the administration of all financial matters such as raising funds from various sources, handling currencies and cash flows and the strategies of corporate finance.  Financial management: It is the planning and mobilization the finance of the company, so as to meet out financial objectives, i.e. the maximization of the wealth by increasing the value of the firm.  Treasury is multi-disciplinary. Treasury functions span across Cash and Liquidity Management, Payments Management, Risk Management and next generation payments/ emerging etc. Treasury involves the management of money and financial risks in a business. The money needed for the day to day activities of the business will be through treasury management. 226 CU IDOL SELF LEARNING MATERIAL (SLM)

12.11 KEYWORDS  Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business  Financial Planning is the process of estimating the capital required and determining its competition.  Risk is the possibility of something bad happening.  Foreign exchange, or forex, is the conversion of one country's currency into another.  A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer  Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, controls, systems or from external events.  A control assessment is the review of operational risks and the effectiveness of the associated controls  Authentication: The verification of the identity of an individual, system, machine, or any other unique entity. 12.12LEARNING ACTIVITY 1. Elucidate the benefits of cash management. ___________________________________________________________________________ ___________________________________________________________________________ 2.What is role of Treasurer in society? ___________________________________________________________________________ _________________________________________________________________________ 12.13 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Give the meaning of treasury. 2. Point out the importance of treasury management 3. List out the treasury management function 4. Recall the term risk management. 5. What do you mean by foreign exchange? 227 CU IDOL SELF LEARNING MATERIAL (SLM)

6. What is the role of treasurer? Long Questions 1. Analyse the perspectives of treasury functions in detail. 2. Discuss the types of treasury functions. 3. Elaborately explain the treasury management in cash management perspective. 4. Describe the treasury function in the perspective of risk management. 5. Outline the scope of corporate finance. 6. Differentiate between Treasury Management and Financial Management. B. Multiple Choice Questions 1. Which of the following is the function of treasury. a. Production of coin and currency b. Production of Raw material c. Production of Finished products d. Production of Consumable tools 2 Treasury function can be seen in ---- perspectives. a. 6 b. 5 c. 4 d. 3 3. ------- is primarily focused on operational efficiency and process optimization a. Cash management b. Financial management c. Risk management d. Corporate finance 4. -------- is defined as the risk of loss resulting from inadequate or failed internal processes, people, controls, systems or from external events. a. Operational risk 228 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Financial risk c. Hedging d. Corporate risk 5. Treasurer is a --------- of a company. a. Brain b. Eyes and ears c. Watchdog d. Heart Answers 1-a, 2-d, 3-a. 4-a, 5-c 12.14 REFERENCES References books  Rajiv Srivastava and Anil Misra, Financial Management, Oxford university press.  S.N.Maheswari Financial Management, Sultan Chand, New Delhi Textbooks  Punidavathi pandiyan. Financial Management. Mumbai: Himalaya Publishing House.  I.M.Pandey, Financial Management, Pearson  Essentials of financial management, Pearson Websites  https://keydifferences.com/ddifference-between-treasury-management-and-financial- management.html  https://yourbusiness.azcentral.com/importance-treasury-management-26921.html  https://www.accountingtools.com/articles/2017/5/15/treasury-functions  https://www.coupa.com/blog/treasury/cash-management-and-role-treasury  https://www.google.com/search?q=function+s+of+tresury&oq=function+s+of+tresury +&aqs=chrome..69i57.8486j0j7&sourceid=chrome&ie=UTF-8 229 CU IDOL SELF LEARNING MATERIAL (SLM)

 google.com/search?q=perspectives+of+treasury+management&biw=1536&bih=754& sxsrf=ALeKk01QDYA2KSBQcbNM3YlfQUbyy_fbYw%3A1625395058894&ei=co _hYOuMNpuprtoP1rW50Ag&oq 230 CU IDOL SELF LEARNING MATERIAL (SLM)