Treasury Function
Treasury Function
Most small to medium-sized companies do not have a specific treasury function but generally, a majority of them have a similar function in the organization. For small and medium-sized companies, the treasury function is specifically handled by the accounting department and overseen by the Chief Financial Officer or the Finance Manager. As opposed to larger companies such as publicly held entities, a specific business unit specializing in handling treasury functions is commonly available. The treasury function essentially manages and administers the financial holdings as well as the financial obligations of a company. The financial holdings encompass the cash, receivables, and investments, both short and long-term nature of these items. Financial obligations, on the other hand, cover both the short and long-term payables and debts of the organization. Despite the treasury function, being not a profit-generating but an administrative unit, it is equally, or if not, more important than the profit-generating function since it manages the cash flows and financial obligations of the company that keeps the company operating on a day-to-day basis with minimal disruptions.
The Treasurer leads the treasury function, or in the case of smaller and medium-sized companies, it is the Chief Financial Officer’s responsibility to look after the treasury function. The treasurer is assigned a broad range of duties which include but are not limited to cash management, short and long-term cash forecasting, investment, risk management, and more. Some aspects of corporate finance function also form part of the treasurer’s duties, including the use of hedges, swaption, and other related financial instruments, to minimize the company’s exposure to interest and foreign exchange fluctuation risks. Furthermore, since the treasury function handles all financial holdings and obligations, as well as is responsible for a large volume of fund movement transactions, the treasurer is required to establish and implement a comprehensive set of control frameworks supported by a broad array of standards and operating procedures.
Our team is able to assist the company in a variety of treasury functions comprising cash management, financing, risk management, and treasury systems. Specifically, these scopes of services are summarized as follows:
Bank Relations
It is our recommended practice to make the treasury function the main point of contact with the banks. In order for the treasurer to succeed in this role, our team could assist the treasurer in providing advisory on the aspect of deciding upon the number of banks to use, the key to maintaining ongoing communication with each of the banks, and the important core aspects of negotiating for more advantageous banking arrangements with banks.
Cash Concentration
One of the key roles of the treasurer is to collect cash from different bank accounts and centralized the cash into a central bank account in the shortest possible timeframe so that the cash is available to the operational needs, and the remaining sum is allocated for investment purposes. Our team will assist with exploring the mechanics of the cash concentration systems, such as using the cash sweeping approach, which is a service available from the aggregated services of the banks, and the notional pooling approach that aggregates available funds from different bank accounts for investment purposes without actually pooling the funds into a centralized bank account.
Cash Forecasting
An accurate cash forecast is a vital tool for the treasurer as the output of the cash forecast determines the funds available for working capital and investment purposes. The cash forecast primarily equips the treasurer with the understanding of the expected cash inflows as well as outflows over the next few weeks, and possibly months. If the cash forecast is well-prepared with a high degree of accuracy, the treasurer would gain a good insight into the amount of cash needed to support the daily working capital purposes, and any additional cash identified will be used for long-term investment purposes. This shall maximize the return of idle cash seated in the company’s bank accounts. Needless to say, accuracy in the cash forecast is imperative for the treasurer in order to succeed in his/ her role. Our team has profound experience in assisting with creating an accurate cash forecast, through assessing the reliability of the input source of information used in the cash flow forecast, as well as introducing different ongoing approaches to improve the cash flow forecast over time.
Investment Management
Available cash reserves available for investment purposes vary by company. Some companies may occasionally experience sudden cash surges, while large corporations have extensive cash reserves. Therefore, it is highly necessary for the treasurer to have a control framework and supporting system in place to monitor and control the cash movement, access the cash, and more importantly, invest the cash. In this respect, our team specializes in setting up the relevant guidance for investing, dealing with different cash excess scenarios, and recommending various investment strategies and methodologies, and investment instruments commonly used which give a higher return yield without compromising the risk control aspect.
Equity Financing
The Chief Financial Officer (“CFO”) or treasurer of a company may find it more appropriate to raise funds via selling shares to investors, especially when the company has a high debt to equity ratio, or the company lacks sustainable or consistent cash flows to qualify for debt financing. Our team is experienced in working closely with executive members and management of the company to explore potential aspects of equity financing, and address issues concerning accredited investors, shares dilution, rights offering, and more.
Debt Financing
In contradiction to equity financing, the company would opt for debt financing due to various reasons, such as being unable to obtain funding via issuing equity, shareholders may prefer debt over equity financing due to lower costs, and more. Our team has acquired proficiency in assisting the company with reviewing different types of debt options available for the company. Despite debt financing being a lower costs option for the company, the alternatives available for the company are largely dependent upon the asset base of the company. In other words, the extent of debt funding is limited by the available asset base to be set aside as security against debt funding. However, certain unsecured financing options are available should the company is able to demonstrate a robust financial performance.
Treasury Risk Management
A business is confronted with a broad array of uncertainties that could potentially impose major risks to the business and its operations. Therefore, we define risk as the uncertainty of future events for the business. Some common examples include the collectability of outstanding receivables. A business may have hundreds or thousands of outstanding accounts receivable of which the business will never be certain of how many of them will end up becoming bad debts. In addition, businesses which require a specific raw material commodity as the key ingredient for their product development, the business will not be certain of the commodity price of the specific raw material commodity a year later. Furthermore, for a business that is seeking to obtain approvals on the relevant permits and/or licenses, there is no guarantee that the permits and/or licenses will be approved. In short, it is almost impossible for businesses to predict the outcomes of certain events with exact certainty.
Companies deal with vast amounts of uncertainties in their daily operations. Unfortunately, managers, in general, tend to ignore or neglect these highly variable outcomes which contain significant risks. Managers generally rely on annual business planning and annual budget as their only view of the future. Whenever the actual results deviate significantly from the budget, the common practice is for managers started looking for excuses to explain to CEO and/or Board of Directors the significant variances between predicted and actual events. The truth is there is never a single valid reason that could justify the variances simply because there are hundreds, or if not, thousands of highly uncertain events that will impact the performance of the business. According to our experience, this is the primary reason why most companies failed to deliver results in alignment with budgeted financials.
Treasury risk is usually the first thing that comes to the management’s mind when they think about risk management. A broad array of risks are covered under the treasury functions, some of which include funding, investment, credit, financial planning, capital structure, and other specific areas such as foreign exchange and interest rates. Managing treasury-related risks is crucial since the impact of associated risks may result in significant losses and in certain cases, it leads to poor liquidity and potentially bankruptcy issues via eliminating cash reserves within a short timeframe. Some modest impact of treasury risk is highly variable earnings and cash flows that potentially interrupt the original business plan of the company. In short, it is one area that should not be overlooked by any organization.
Our team shall assist with sharing our views and recommendation in relation to risk management pertaining to credit policy, accuracy in relation to the annual budget, quarterly forecast, and short-term cash forecast, funding, credit exposure, credit concentration, foreign exchange, and interest rates. In addition, upon specific request by the company, we shall assist with additional aspects such as reviewing risk related to Investments, Credit Management, and Credit Insurance.
Insurance
The Chief Financial Officer or Treasurer may be tasked with managing the insurance policies of the company. Insurance is often used by companies in passing the risks to insurance carriers via a contractual arrangement, and through this arrangement, it shall minimize the risks exposure of the companies. Per our experience, insurance is a sensible option when dealing with risk events that are infrequent, or with a high amount of loss. However, it is a less feasible option for high-frequency events due to high insurance costs. We recommend companies consider self-insurance for high-volume events with small losses. Our team could assist with sharing our views and recommendations on reviewing the policy terms and conditions, and how to manage the cost of insurance.
Credit Management
The credit function of a company essentially engages in funds lending to customers, usually with a credit term of no interest charge and on a short-term basis. This function is usually led by the CFO or treasurer, who is generally responsible for four core activities within the credit function – (a) establishing the credit policy, (b) deploying credit application, (c) calculating and assigning a credit rating to customers according to their debt payment ability, and (d) consistently monitoring the credit terms to ensure the correct limits, as well as credit periods, are given to each customer. We could assist with addressing these activities in the course of improving the credit management function of the Company.
Working Capital Management
Undoubtedly the working capital is the center core of the short-term cash forecast. Oftentimes, working capital is highly difficult to predict with high accuracy in line with the mix of short-term assets and liabilities of high volatility nature, coupled with its nature of high cash consumption. The combination of these factors is the main cause of poor accuracy in short-term cash forecasts, which in turn affect the working capital forecast and management. Our team is equipped with practical proficiency in assisting the executive members and management of the company in developing an in-depth and proper understanding of working capital via addressing the individual components embedded within the working capital, identifying the appropriate level of working capital which a company is required, assessing the different scenarios and impacts of rapid sales growth and decline have on working capital and assisting in establishing spot-on strategies pertaining to each segment.
Treasury Controls
A significant amount of cash flow through the treasury function in its daily activities as mentioned in the preceding topics, from working capital management, and cash flow forecasting to investment and hedging activities. Naturally, it is critical to have strong controls to minimize these risks of loss from fraud and error. Should it be required by Company, our team could assist with addressing the control issues, beginning with cash forecasting (note: information from cash flow forecast is the foundation for the other treasury activities), followed by proposing a range of possible controls tailored made to the specific situation of the company, recommending the minimum set of controls, and the supporting policies.
Treasury Measurements
Similar to other ordinary sales, production, and operation activities of a company, it is necessary for treasury activities to have a set of measurements. However, attributable to the different nature of treasury activities, it is measured by an entirely different set of measurements. Information output from these measurements produces resourceful insights into many aspects of treasury activities, encompassing the whereabouts of the cash used in an organization, the accuracy of cash flow forecast and projection, return generated from the investment, the liquidity and debt leverage of the company, and more. Our team could assist with proposing a number of treasury metrics that are useful in monitoring these issues.
Other Aspect – Accounting for Treasury Transactions
Accounting for recording and treating treasury transactions is a highly critical aspect of the treasury function. Depending on the adoption of accounting standards, and policies, some treasury transactions result in immediate recognition of gains and losses, while others may be deferred into the future. Our technical team is experienced in working closely with the finance department in assisting with sharing guidance relating to the proper treatment of accounting for investments, hedging, and insurance. Generally, the accounting for hedging opens room for deferred recognition of gains and losses. Deferring underlying gains and losses is also possible for accounting for investment should the company opt to continue to be held until the maturity of the investment instruments. The simplest of the three is accounting for insurance, as it is less complicated since it deals mostly with insurance payments and claims receipts.
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