Question

Many large international organisations have a central treasury department, which might be a separate profit Cen tre within the group. The responsibilities of this department will include the management of business risk and market risk for the group as a whole.

Conduct a research and

(a) Describe the functions of a cen tral treasury department.

(b) Describe the information that the treasury department needs, from inside and outside the organisation, to perform its function.

Answer 1

a) Describe the functions of a central treasury department.

Ans

A central Treasury Department is generally responsible for company's liquidity and ensuring that funds are available with the company all the time to meet the need of the primary activities of the business. In other words the aim of the Treasury department is to manage the liquidity of the business. Therefore all present and projected cash flows should be monitored in order to ensure that sufficient cash is available to fund the company's operation.

Function of Central Treasury Department is as below

a) Cash Forecasting and Cash Management : Here the treasury staff need to compile all the data and records with respect to cash receipts and disbursement activities in order generate forcasted cash flows. So that thay can determine whether more cash is need and if so they can plan for raising fund either through debt or equity. And they can also plan for investment avenues in case of surplus. So that effective cash Management is effective.

b) Liquidity Planning and Control : This function is closely associated with cash manangement. It basically covers planning for interest and currecy risk and even commodity risk. Here, the treasury staff could use various hedging strategies to cover this risks.

c) Risk Management : Treasury staff has to develop a Risk Management Strategies in order to mitigate risk. For performing this they are required to anticipate interest risks and foreign exchange risk i.e. currency risk.

d) Procurement of Finance and Financial Investments: A treasury department need to determine when additional funding is needed by the company so that they can raise funds through acquisition of debt or sale of company's stock etc. As far as investment are concerned they are required to use corporate investment policy for allocating excess cash in proper investment profiles based on maximum return on investment matching the maturity dates of investments with a company’s projected funds need and most importantly not putting funds at risks.

e) Relation with Bank and Credit Rating Agencies : Having a healthy relation with bank can lead to a some degree of cooperation from banks when company is in liquidity crunch. Treasurer are responsible to maintain that relationship as they are the one who constantly interact with the Banks.    A Credit Rating Agency would review the company' s Marketable Debt instrument on the basis of company financial and hence treasurer sould be very prompt in reponding to their queries and information requested by them.

b) Describe the information that the treasury department needs, from inside and outside the organisation, to perform its function.

Ans : Treasury department has various information need not only within the organization but also outside the organisation in order to perform its functions.

If the Treasury department wish to generata cash forecasting, they need to rely on various information which would be provided by the Accounts and Finance Department in the organisation. The information is with respect to collection and disbursebent of funds. The also need consider cash budget.

For performing the function of risk management which is one of the crucial role of the treasury department is that they need to assess various risks affecting their business such as risk of losses in positions arising for movement in market price or curreny risk or interest rate risk when they have exposure in foreign currency or outstanding debt obligation.

For the purpose of assessing these risk they need information within the orgainization with respect what positions they have in the stock market. How much foreign currency exposure they have and what amount of debt obligation they have. Externally they need to look on various micro as well as macro econimic factors to assess these risk like whether interest rate are going to fall or rise. The need to closely monitor these economic factor to come to conclusion.

They can assess these economic factors looking at corporate journal and publication available. They have to look for changes in the legal structure of the economy. They need to be aware where the economy is going eventually. So that they can gauge the risk and prepare strategies to mitigate the same.

When it comes to Risk Management, the treasury department need to know the various mechanism available to manage the risk. For example they should be aware of the different hedging strategies and hedging operations available in the market to manage the risk.

Treasury Manager is required to report to the senior management with respect to market conditions, funding issues, returns on investment, cash-related risks, and similar topics. So for assesing Market Conditions the need to rely on external source of information which can be based on survey or reports. Hence for every function they perform they need to have an information base either from within the organisation or from external source or both, so that they operate effectivley and efficiently.