When is the last time you took a careful look at the treasury department of your business? How are you saving money and creating efficiencies while managing the lifeblood of your business: your cash? In this installment of our series on treasury and risk management best practices, explore the core responsibilities of an efficient and effective treasury department.
A well-functioning treasury department is an essential component of a finance organization. The treasury department covers a vast array of critical tasks centered around managing the capital assets of the business. Core responsibilities include cash management, managing banking relationships, forecasting working capital, managing foreign exchange risk, overseeing funding and investments, and treasury risk management programs. However, the most important responsibilities in this area include managing financial risk, cash and liquidity.
The core purpose of managing cash for the business is to facilitate cash movement between business bank accounts, related parties and external stakeholders. While working closely with the finance and accounting departments, a treasury department works to ensure invoices are paid on time with sufficient funds to process transactions. In some cases, the treasury department will complete payments to external parties, since they have access to the online bank accounts of the business. A treasury department also must have a thorough understanding of anticipated transactions to minimize bank fees. Without accurate forecasting and intentional planning, these costs can add up in a meaningful way for the business.
Managing Banking Relationships
When selecting a banking partner, a treasury department must consider the needs of the business both today and in the future. As the business grows, the banking partner should have flexible tools to scale up or down based on the company’s needs. We recommend a yearly banking relationship review, where your identify immediate gaps in the business or in the coming year and generate a plan to address the situation. Some items your treasury department should consider when selecting a banking partner include:
- Service offerings (advisory services, customer service, online banking options)
- Credit needs
- Proximity to physical bank locations
- Foreign currency/commodity trading and risk management
- Transaction limits
- Transaction charges
- Account maintenance fees
Review these considerations annually to determine if your existing banking partner fully addresses your business’ global treasury needs.
Forecasting Working Capital
A well-functioning treasury department should be integrated with the financial planning and analysis (FP&A) department. The FP&A department's focus on performing cash and working capital forecasts should coincide with the responsibility of the treasury department to forecast the short-term and long-term liquidity needs of the business. The treasury department’s number one goal should be to ensure the business has adequate cash and net working capital for all of its business operations at all times. Without the proper cash reserves, business operations can be impacted as a result of issues with creditors, vendors and paying operational expenses to function day-to-day. Alongside the FP&A department, a treasury department produces cash flow and liquidity forecasts, which predict surplus or shortages. With an accurate forecast in place, a business can plan for cash requirements and pursue funding to meet their needs. In the event of a surplus, a business can reallocate funds to pay down obligations, sweep funds into an investment account, return funds to shareholders through dividends or make strategic investments.
Treasury Risk Management
When managing the funds of a business, it is imperative to have safeguards in place to mitigate foreseen and unforeseeable risks. A treasury department should have up to date policies and procedures to value, control and mitigate the financial risks associated with common corporate functions. These policies and procedures should include defined tasks and processes designed to mitigate common treasury risks, such as those related to:
- Foreign currency
- Interest rates
- Commodity prices
- Counterparty or default
Foreign Currency Risk
Today many businesses maintain a global footprint; however, operating globally comes with unique challenges. Managing foreign currency risk is one of those risks that can directly impact financial results. Frequently, the responsibility of managing foreign currency risk falls on the treasury department. A treasury department must understand their foreign currency exposure in all countries and currencies in which the company operates. Once exposures are understood, a treasury department can then leverage tools at its disposal, including, natural hedges, futures, options and forward contracts to mitigate foreign currency risks. Without the proper mitigation efforts in place, a treasury department leaves the business susceptible to currency swings, which can have a detrimental impact on the business' financial results.
Funding and Investments
In addition to forecasting the liquidity needs of a business, the treasury department must assist with obtaining the cash necessary to run the business. This responsibility includes maintaining an active relationship with financial institutions and creditors. A few ways a business can raise funds include, positive free cash flow, borrowing (which increases leverage and interest expense) or issuing equity capital. By analyzing these available options, reviewing terms, modeling optimal capital structure and executing portions of the cash raise, your treasury department plays a critical role throughout the fundraising process. When a business is flush with cash, the treasury department pursues strategic options for the excess funds. Whether paying down obligations, sweeping funds into an investment account, returning funds to shareholders through dividends or making strategic investments, the treasury department ensures cash is deployed in a manner that reflects strategic business priorities.
Whatever your goals are for your treasury department in 2021 and beyond, be sure to form them on a solid foundation. A treasury department with a sound understanding of core responsibilities will allow your organization to mitigate risk while maximizing opportunities.
Contact John Cavalier at email@example.com, Jason Zeman at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.