Treasury

Treasury is a key finance function which is very important from the inception of the business. 

As a small company the immediate priority is to ensure suppliers are paid on time to build a good credit standing for the company. However, invoicing and cash collection are also very important to keep the business running. Founders are often pool resources together, borrowing from family and friends in some instances to keep the lights on and even find innovative ways to make payroll, sometimes by asking employees to accepted deferred or partial payments of their salary.

Treasury operations attempt to minimize the costs of moving money around and find the cheapest alternatives to making payments via telegraphic transfers. A bunch of small fees on a recurring basis can eventually add up to a big total and impact profitability especially when foreign exchange conversion is involved. A few basis points versus a full percentage point lost in foreign exchange conversion can cost the company a pretty penny.

Treasury operations can also be a profit center. At large companies, where excess funds are invested in overnight repo’s can generate returns on idle cash. Managing payables with Zero Balance Accounts, cash pooling, overnight funds placements can also generate additional sources of profit besides normal company operations.

Startups often receive funding from VCs where the investment funds received are in excess of immediate cash requirements. Excess cash is often parked into liquid investments, notes, treasury bills and other safe investments, which carry low to zero risk but provide some return.

Many multi-national corporations have operations in multiple countries. Depending on the business model, funds may need to be converted and remitted to various jurisdictions in their home currencies if the operation is a cost center. If any country is a revenue or profit center, excess funds may flow back to the parent entity to deploy the funds as investments or fund operations in a third country. Foreign exchange rates are notoriously volatile and treasury teams monitor currency trends where they have significant exposure to protect against their cash holdings losing value. In other cases, companies have have obligations to be settled in foreign currencies, or long term contracts, where receipt of funds and settlement of expenses may be in different currencies. Long term contracts are an example where if the foreign exchange exposure is not actively managed, the project profit at the inception of the project may turn into a loss simply on an adverse currency movement.

Treasury works closely with the operations to forecast the sources and uses of cash and accordingly prepares a hedging strategy in large organizations. There are a number of tools that can be utilized to hedge exposure. Some companies could have a natural hedge with both receipts and expenses in the same currency. Where the exposure is not 100% balanced, there could be a need to hedge the exposure. Treasury teams also attempt to leave minimal cash lying around in current accounts as these cash balances generate little to no return and in turn invest any excess cash in marketable securities. Treasury team also owns the banking relationships and is the custodian of opening, operating and closing the bank accounts, providing access to the right individuals in the company based on their roles and responsibilities.

Ezee consultants have worked closely with treasury teams over many years and have a good understanding on managing cash safely, efficiently while trying to reduce transaction fees, bank fees and charges via an effective banking strategy.

Banking rationalization and consolidation and banking integration are two such strategies that can be used to make streamline treasury operations for higher efficiency.