FINANCIAL RISK MANAGEMENT TOPIC 1THE ROLE OF A TREASURER

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AIMSTo understand the role of the corporate treasurer is a multinational company, and how that role interacts with that of other senior managers.To appreciate the importance of the monitoring and control of the treasury functions.

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Background to organisational structure of Multi-National companies (MNC).

Itis an organization that owns or controls production of goods or services in one or more countries other than its home country.MNCs usually consist of a parent company located in the host country and various subsidiaries which can be located around the world.It can have a centralised or decentralised organisation structure .

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MNC ORGANISATIONAL STRUCTURE

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FINANCE DIRECTOR CHIEF EXECUTIVE DIRECTOR

Liquidity management Currency management Funding management Risk management Advisory process

Balance sheet structure

Acquisitions and mergers

Investment/divestment appraisal

Project finance

Financial planning and Taxation

Accounting and profit analysis

Price analysis

Management services Accounts receivable/payable

Payroll systems

Treasurer

Corporate Finance

Financial

Controller

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FINANCIAL CONTROLFinancial control is about stewardship and the mechanics of accounting and finance:Statutory accounts and returnsPrice and profit analysis,Payroll systems, Management information,Operational aspects of creditors and debtors.Auditors and preparing financial statements.

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CORPORATE FINANCECorporate finance is the link between broad corporate strategy and objectives and the role of finance in attaining them.It covers: overall corporate performance assessmentCapital budgeting - process of determining which potential long-term projects are worth undertaking.capital structureMergers and Acquisitionsinvestment/divestment appraisalProject finance and taxation.Focus is on funding risk and capital investment risk.This role may be reserved for the finance director though frequently with technical support from the corporate treasurer.

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THE FIVE CORE ELEMENTS OF TREASURYCorporate financial managementCapital markets and funding Cash and liquidity management Risk managementTreasury operations and controlsOver time, various additional responsibilities have been added to the role ( such as pensions and insurance).

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.The treasurer carries a dual role which is both strategic and operational.While being responsible for the above functions. The treasurer usually also manages the channels, (treasury systems, operations and control) through which they are delivered.

MODERN TREASURY RESPONSIBILITIES

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CORPORATE FINANCIAL MANAGEMENTCorporate financial management is developing strategies and plans and making investment decisions that positively affect the value of the corporate. The key tasks include :to minimise the companys WACCto provide an accurate and valid contribution to the companys external reporting.to ensure that the company is fairly evaluated by investors. Provides investors with returns commensurate with their risks in the company.

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CORPORATE FINANCE

Setting the policy is primarily the responsibility of the finance director, but the treasurer is involved in:Arranging fundingDetailed evaluation of mergers, acquisitions and divestments,Project appraisalBusiness developments

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CAPITAL MARKETS There are two forms of funding: equity and borrowings in the form of loan capital.Capital raising and funding management is long term and it has a strong strategic linksThe optimal leverage or gearing is linked to the amount of business risk of the corporate:

the greater the business risk, the lower the optimal leverage and vice versa.

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FUNDING MANAGEMENTArranging debt finance and the other (ancillary) facilities needed for foreign exchange dealing and cash management. Sourcing finance efficiently from private and public markets on borrowing terms consistent with the companys credit standing.Developing good relationships with potential providers of finance and communication with lenders and investors about the companys financial position.

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BANK RELATIONSHIP MANAGEMENT

Bank relationship management is seen as the treasury departments public relations function.The treasury department may also manage the relationship with the credit rating agencies.Often the treasurer personally manages the rating agency relationship as this is a crucial factor for cost of funding or sometimes even for the survival of the business.

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CASH MANAGEMENTDaily monitoring of bank account balances and managing liquidity.Structuring accounts to minimise borrowing costs and maximise interest earned.Collections : efficient debt collection system.Making payments efficiently.Optimising the use of surplus funds.Short-term borrowing : procuring cost effective short-term credit facilities.

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LIQUIDITY MANAGEMENT Ensuring that cash is always available in the right place and in the right currency to meet the payment obligations as they fall due.Sufficient cash, borrowing facilities, or liquid assets (Headroom) must be available to meet due debts.The liquidity management is company wide. Cash management is day to day, whereas liquidity management is longer term. If liquidity management fails, the business fails.

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CURRENCY MANAGEMENT

Spot purchase or sale of a foreign currency (i.e. not the currency in which the organisation normally operates).Forward or futures transactions where trades that are fixed today will not settle for many days, weeks, months or even years.Currency (and commodity) management will take place in the context of the firms risk management policies, as developed from its risk management framework

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RISK MANAGEMENT It is the: identificationAssessment and evaluation.management and reporting of those risks that could damage a companys financial health.The treasurer is involved in setting risk management policy and managing risks against that policy.

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RISK MANAGEMENT Historically, treasury risk management included foreign exchange risk, liquidity risk and interest rate risk. Now, treasurys risk management role has often been expanded to adopt an enterprise-wide approach to risk management to include commodity, insurance, pensions, operational and credit risk.To manage risk effectively, treasury needs a deep understanding of the business.

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MANAGING THE TREASURY FUNCTION Manage treasury resources cost effectively.Develop policies and procedures to support the companys risk management framework.Develop reporting processes and controls appropriate to policy and procedures.Facilitate optimal corporate governance structures and outcomes for the firm.Maintain integrity and credibility at all times.

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MANAGING THE TREASURY FUNCTION Understanding the aims of the company and its investors.Controlling financial processes and taking responsibility for important but difficult decisions.Maintaining an appropriate treasury departmental.Structure to coordinate and deliver all its objectives.

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THE ROLE OF TREASURYIN THE ORGANISATIONDepending on how an organisation chooses to structure itself, treasurys role will be different .

DimensionRange of choices

The role of treasuryAdvisory, agency, in-house bankResponse to riskProfit centre, cost-saving centre, cost centreTreasury authorityCentralised, decentralised, balanced

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TREASURY AUTHORITY: CENTRALISED/DECENTRALISED

The main choices are between centralisation and decentralisation.The more centralised the organisation, the more authority will be reserved to the group departments as opposed to business unit and country functions. More centralised should mean more financial efficiency and control.Disadvantage: local demotivation and lack of alignment of treasury policy with local needs.

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BENEFITS OF CENTRALISATIONSingle financial status: outsiders assess the organisation and its subsidiaries as a single entity, so manage the finances centrally.Synergy of expertise and IT systems. Good IT systems and treasurers are hard to find : so gather a limited number of quality treasury personnel and IT systems at the centre.Cost saving: by netting of cash positions internally and by lower bank costs: size= buying power.Control: more control (cash, funding and risk management of exposures) Rogue dealing by subsidiaries should be reduced.

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DRAWBACKS OF CENTRALISATIONThose in charge of individual business units should also be in charge of their finances. Centralising treasury prevents this. Thus, possible local demotivation and lack of alignment of treasury policy with local needs.In dispersed organisations, there are often unique local circumstances e.g. in countries where foreign exchange regulations restrict international transfers. Local knowledge/ contacts/authority are necessary.

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A CENTRALISED TREASURY STRUCTURE

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DECENTRALISED TREASURY

Normally, head office retains some overall treasury functions to set policy guidelines, monitor operating unit performance, enforce procedures.However, a decentralised treasury will give each operating company within the group responsibility and flexibility to manage their own treasury requirements to meet their own precise needs.

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ADVANTAGES OF DECENTRALISED TREASURYLocal autonomy: efficient and profitable treasury to meet local business needs. Alignment of Treasury policy with local needs, especially for cash management, banking and taxation where Head Office can often give relatively little added value.Reduce Head office costs, although costs and headcount will rise at a local level instead.

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DISADVANTAGES OF DECENTRALISED TREASURYDuplication: each profit centre will require some treasury operation so there will be significant replication of similar activities. Loss of economies of scale: less bulk buying power. Need for suitably qualified staff. Loss of control. It is harder to obtain a clear picture of the groups overall cash and risk position. Danger of rogue trader.

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RECENT TREND TO DECENTRALISEHistorically, the trend has been to centralise authority.In recent years, firms pursuing global spread with a greater variety of environments to manage are beginning to push some discretion back down to subsidiary level.Why? Partly due to size and complexity and partly to make subsidiary managers more aware of how their financing and risk management activities feed through to shareholder value.Rarely are firms wholly centralised or decentralised.

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DEGREES OF CENTRALISATION There can be many reasons why firms choose to be wholly or partially decentralised. Thus there are many variations and treasuries can be organised along two major axes; policy making and execution.

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TREASURYADVISORY ROLE

Applicable in decentralised organisations.Treasury often comprises a small group of specialists located at head office that act as advisors to the firm. Treasurys authority may vary, from pure advice, to the authority to set corporate policy, and therefore effective control over the overall direction of treasury activity.

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TREASURYADVISORY ROLEExamples of the advisory role:Setting treasury policies and objectives, including recommending or instructing on operational procedures.Establishing treasury reporting and monitoring systems.Acting as a central source of financial markets information.Managing the Head Office treasury requirements

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TREASURYAGENCY ROLE

The agency role occurs in a more centralised operation.Treasury division of the subsidiaries make day-to-day treasury decisions but the execution is centralised to obtain efficiencies and economies of scale. The treasury unit therefore acts as an agent of the local management units.Thus treasury specialists manage the firms treasury transactions, rather than subsidiary treasury managers.Transactions between the central treasury and the subsidiaries are mostly by way of intercompany loans.

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TREASURYIN-HOUSE BANKING ROLE

Central group treasury acts as an internal bank for the group, with which all the subsidiaries deal. Business decisions are still taken by local management at subsidiary level, but as far as possible banking services are provided by the central treasury. Central treasury, like a bank, charges the subsidiaries for its banking services.

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BENEFITS OF TREASURY AS IN-HOUSE BANKReduces group banking costs : bulk buyingReduces number of bank accounts overallMinimises the number of transactions done through external banks (e.g. intercompany payments will be cashless transactions passed over to the accounts of the In House Bank).Reduces the number of treasury trained staff by having one centre of excellence, staffed by treasury specialists

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BENEFITS OF TREASURY AS IN-HOUSE BANKbulk buying power in relation to external banks or markets.Enhances control through transparency of entire liquidity position by having access to all bank accounts with electronic means.Improves visibility into transactions and information.

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ANY QUESTIONS

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