The role of the corporate treasury is nothing if not multifaceted. A treasury team’s activities typically range from liquidity management and cash management to regulatory compliance. It is also a role that has evolved considerably over recent years, with treasury increasingly being seen as a strategic function within the organization, rather than a distant satellite. So what is the purpose of the treasury department in a company? And what does a corporate treasurer do? 

What is corporate treasury management? 

In a nutshell, the role of a treasury department is to manage the company’s financial resources in order to help meet the company’s business objectives. This includes making effective use of cash and other financial instruments, and ensuring enough cash is available for upcoming obligations. It also means managing a variety of different internal and external risks, such as foreign exchange risk, interest rate risk and operational risk. Other areas of focus for the corporate treasury function include the effective use of technology, as well as keeping up to date with regulatory requirements and ensuring compliance. 

Let’s look in more detail at these key treasury department functions.

Liquidity management

At the core of corporate treasury management is the need to manage the company’s liquidity and make sure that enough cash is available to cover outgoing flows on any given day. Incoming cash flows may include accounts receivable and interest income, while outgoing flows can include accounts payable, payroll and tax payments. Effective cash management also includes finding opportunities to offset cash flows using techniques such as netting, and thereby reduce the need for external borrowings. 

Where liquidity is concerned, one important activity is managing the company’s short-term investments through instruments such as bank deposits and money market funds, and understanding how quickly a particular investment can be converted to cash. To do this, treasurers will need to weigh up the key considerations of security, liquidity and yield (SLY): 

• Security – What is the risk that the company will not receive the principal when due? 
• Liquidity – How quickly can the investment be converted into cash when needed? 
• Yield – What sort of returns can the company receive from the investment? 

Treasury teams will typically prioritize security and liquidity over yield. A further consideration when investing cash is the need to diversify investments by placing cash across a selection of different banks or instruments. These considerations will be addressed in the treasury’s investment policy. 

Another consideration of liquidity management is the effective management of the company’s financial obligations. This can include the use of credit lines for short-term borrowing to cover daily operations. Treasurers may also make use of term loans and corporate finance instruments such as bonds. This area of corporate treasury includes managing not only interest payments and principal repayments, but also the company’s overall debt profile. 

Risk management

As well as managing the organization’s liquidity, corporate treasury teams must also identify, measure and, when necessary, manage the possible impact of different external risk factors on the company’s cash.  

These include market risks, such as the impact of an economic downturn on the company’s forecast revenue – for example, in the event of a pandemic. Risk management also incorporates the management of financial risks, where changes to prices, exchange rates or interest rates could negatively impact on the company’s cash – meaning that the company could need to pay more than previously anticipated.  

• FX risk. FX risk includes transaction risk, where changes in exchange rates mean that the company has to spend more than expected in order to purchase goods that are denominated in another currency. It also includes translation risk, where losses are incurred when translating an overseas subsidiary’s financial statements into the parent company’s currency. FX risk can be managed using a variety of techniques – for example, by using instruments such as forwards and options to protect the company from future losses.   
• Interest rate risk. Companies may be adversely affected by movements in interest rates which can affect everything from borrowing costs to future capital purchases and pension obligations. Interest rate risk may be managed using techniques such as hedging using derivatives and managing the fixed/floating ratio of debt. 
• Commodity risk. The treasury’s remit may also include managing commodity risk – in other words, the risk that the price of commodities will change in a way that adversely affects the organization. Depending on the nature of the business, this could include commodities ranging from jet fuel and electricity to metals and agricultural products. Again, treasurers may use hedging instruments such as futures and options to mitigate commodity risk. 

Beyond market and financial risks, treasury corporate finance may also be wholly or partly involved in managing other types of exposure such as: 

• Liquidity risk – the risk that the company will not be able to access cash when needed. 
• Counter-party risk – the risk that a counter-party fails to fulfill its contractual obligations. 
• Operational risk – such as fraud and compliance risks, systems failures and litigation. 
• Supply chain risk – the risk that disruptions to the company’s suppliers may impact its ability to fulfill orders.

Technology

Technology has an essential role to play in the treasury management function. While many treasuries continue to use basic spreadsheets to manage their activities, these have long been associated with considerable risks, including the risk of keying errors. Fortunately, there are more sophisticated options available than spreadsheets, some of which use cutting edge technologies such as bank APIs. Increasingly, treasury teams are embracing the benefits of lightweight technology that can provide access to real-time bank information without the need for hefty maintenance. 

With the right technology in place, treasury teams can gain more visibility over their cash balances, payments and activities, meaning they are better placed to make effective cash management decisions. Treasuries can also eliminate manual processes and thereby benefit from greater efficiency across their activities – and they can use technology to enforce controls and automated workflows that reduce the risk of internal and external fraud.

Regulation

Complying with necessary regulations is an essential part of corporate treasury’s role, although organizations will be subject to different regulations depending on where they operate. 

One notable regulation is the 2002 Sarbanes-Oxley Act (SOX), a U.S. regulation introduced in the wake of several high-profile corporate scandals to protect investors from fraudulent financial reporting. In order to achieve SOX compliance, treasury teams need to keep their activities documented for audit purposes and enforce the separation of duties through predefined workflows. Technology can play an important role in helping treasury teams comply with SOX requirements through automation and by providing more visibility over internal controls. 

Different countries have different regulatory environments, with some highly regulated countries applying foreign exchange controls or prohibiting the use of some types of cash management structures. Other notable regulations range from data protection rules to industry-specific considerations.  

As well as complying with regulations that directly affect the organization, treasurers should also be aware of the indirect impact of other types of regulation. For example, regulations that apply to financial institutions can affect the way in which banks are able to serve their corporate clients – open banking is a great example of this phenomenon. Likewise, recent changes to money market fund regulations around the world have impacted the way in which some treasuries manage their short-term investments. 

Planning ahead

Alongside the other activities of a corporate treasury listed above, treasury teams also need to undertake cash forecasting and modeling. The goal of these activities is to understand future cash inflows and outflows in order to optimize cash. The resulting information will feed into decisions about critical actions such as funding, investments and risk management – so it is important to forecast these flows as accurately as possible. But in practice, this can be a challenging exercise. 

Typically, the cash forecasting process involves gathering data from various colleagues around the organization. However, other departments may not understand the importance of the exercise, which can result in delays and discrepancies in terms of how data is provided. Other challenges include a lack of resources and disconnected technology tools. 

In times of uncertainty, further challenges can arise if customer behavior deviates significantly from historical sales patterns. In an unpredictable market, it can be particularly valuable to model the impact of different scenarios on the company’s cash flow, thereby helping the treasury plan ahead for different eventualities.

Treasury roles

Like any organization, corporate treasury has a variety of job seniority levels, typically starting with a Treasury Analyst, progressing to Senior Director of Treasury and Treasurer. Treasury professionals are also regularly named to the CFO position. A treasury team collaborates with a variety of other departments, including Accounting, FP&A and others. 

Moving forward 

The importance of the corporate treasury’s role within the organization is not to be underestimated. Treasury teams play a vital role in managing, protecting and optimizing the company’s cash, as well as mitigating a variety of risks.  

The treasury’s role has also expanded considerably in recent years, with treasury teams increasingly playing a more strategic role within the organization, and working more closely with colleagues in different functions to benefit the business as a whole. 

Last but not least, as cutting-edge technologies create new opportunities to carry out treasury activities more efficiently, effectively and securely, treasurers are paying closer attention to how new solutions can help to move treasury forward.