Treasury Management for Different Organisations

Contributed by: Jayna Gandhi, CFA

When we think about Treasurer , what comes to our mind ? Is the treasury profession an extension of accounting profession or are treasury professionals just liquidity managers and cash flow planners ? Well, the answer is both Yes and No. Treasury management is different for different organisations. It is largely a fallout of main business activities of the organisation and also depends upon philosophy and thinking of the Board of Directors. Since treasury management involves handling organisations’ cash kitty , the Board is expected to be naturally conservative and risk averse. So every Treasurer has to respect this connotation and act accordingly in fiduciary capacity as a custodian of shareholders’ wealth.

So how does a treasurer add value to the business ? In different type of businesses , a treasurer can add value differently. In case of a Corporate conglomerate with significant debt, a treasurer’s significant KRA is minimizing the after tax cost of debt and if there is a cash surplus at all, improve the float efficiency through most suitable deployment.

In contrast,take the case of an FMCG company where cash realization on sale of product is instantaneous and no significant capital expenditure is required in foreseeable future. Here the stockholders equity minus fixed assets of the firm and current liabilities is almost equal to cash surplus of the Company. In such cases , treasury professionals have to assume the role of investment professionals or like fund managers managing the private corpus of a single organisation instead of many investors money. Here, investment management is a subset of treasury management.

Investment management is very niche activity ,whereas treasury management is a broader function , since- along with investment management- treasury managers are expected to anticipate various financial and non financial risks such as liquidity risk, interest rate risk, credit risk, price risk for equity, commodity and currency and operational, systemic, legal/regulatory and accounting risk associated with their activities.It is imperative to mention that risk management and associated risk mitigation and hedging strategies are integral to treasury function. Also, for effective discharge of their duties and responsibilities, treasures are expected to maintain cordial relationship with various internal and external stake-holders such as Board of Directors, Credit Rating Agencies, bankers for credit lines and various other market intermediaries.

Now a look at treasury management in banks: Banks, which are heavily regulated entities, are in the business of taking deposits and advancing loans. Negative or positive difference between deposits and loans is a part of treasury activities . Regulations require that certain percentage of every rupee mobilized as deposit should be invested in highly liquid notified Government securities, Cash or Gold. Asset – Liability Management(ALM) which is the backbone of not only treasury function but also entire bank as well is very much regulated. The Regulator has specified the broader norms for treasury investment. Hence, it is safe to say, here the Regulator actually determines how a bank treasury should run. Also, earning maximum treasury return adds to banks financial health and creates wealth for its shareholders. Unlike Corporates, for banks treasury management is not a byproduct of the main business activity , but is a main business segment itself.

To sum up, it can be concluded that since each organisation and its business are different and unique, it calls for different type of treasury management and in all cases the ultimate goal is to contribute to ROE. Consequently, in today’s complex business environment , the role of treasurer is becoming increasingly important and becoming more strategic. Today’s treasurers are tomorrow’s business leaders.

• JG