The Treasury function objectives are to manage the company’s cash and liquidity on short and long-term working capital requirements, invest and manage excess cash and investments, and oversee its financial risk management. Other key areas supported by treasury’s reach includes supporting the overall capital structure, valuation and strategy, tax planning, corporate governance, investor relations, and operations.
The CFO is also responsible for identifying, transferring, mitigating, and monitoring hazard and business risks and building risk mitigation processes into operating management.
Cash Management Strategy
Successful cash management orchestrates fund inflows and outflows to/from all destinations/sources to ensure the most effective use of liquid assets. Accomplishing this objective includes a detailed cash flow forecast to best understand the entire picture. The cash management strategy should consist of establishing cash flow budgets centrally against monthly, weekly, daily, and rolling projections. As part of this strategy, it is essential to utilize this information to assess investment appetite and alternatives. The treasury function should meet with bankers to determine current systems’ efficacy and plan for the future. Tax planning should also take a straightforward and quantifiable approach, working with tax advisors to best understand impacts. Cash management also includes evaluating the status of pension plans and contingencies in the event of changes.
Cash Management Execution
As part of executing cash management, treasury should analyze and work to improve working capital. Effective execution requires the correct treasury systems are in place. The CFO and head of treasury should work together with IT to identify the best systems. The internal capital market should be utilized through investing and lending to subsidiaries. Treasury should work to establish the market and interest rate monitoring systems. In addition, all this needs to be properly accounted for in compliance with policies and contracts while ensuring covenant coverage is achieved.
Teaming with Other Functional Areas
Treasury will work directly with other functions, such as FP&A, to optimize the business capital structure by analyzing metrics such as ROIC and WACC. The treasury function helps arrange liquidity for strategic events such as M&A, divestitures, and JV’s. Risk management and treasury will also have a close working relationship, and treasury will support hedging, interest rate management, and other capital risk mitigation strategies. Outside the company, treasury will manage banking, investor, and credit rating agency relationships.
Treasury will work closely with the company board, CEO, and risk management function to create a risk policy as part of the greater risk management strategy. The strategy should identify, assess, prioritize, transfer, and mitigate/manage all risk exposures, including:
- Strategic Risks: Competitive position and market demand; customer and industry changes; network channels; earnings drivers
- Operational Risks: Information systems; human capital; accounting/control systems; key managers; business continuity; suppliers and vendors
- Financial Risks: Credit risk – receivables and investments; financial market risks; interest rate risk; FX risk; liquidity and cash flow; cost of capital
- Hazard risks: Property damage; general liability; legal risks; business interruption; warranties
The strategy should assess and prioritize risks relative to their impact and probability. Each residual risk should be addressed, monitored, and controlled, assigning specific responsibility wherever possible.
As business continuity risks are assessed, contingency plans for response and recovery should be created in view of risk factors such as the location(s), type(s) of operation, and supply chain (critical dependencies with suppliers and customers). This will include identifying and planning alternative operations sites, including costs to transfer the operations and changes in procedures. Back-up suppliers for essential resources will also need to be identified.
Treasury should help assess business interruption insurance to cover at a minimum the variable contribution of lost sales. Coverage should also be assessed for:
- Product liability
- Workers comp
- Key person
- Loss of goods in transit
Broker relationships should also be scrutinized and maintained.
Intellectual Property Protection
Depending on the business’s nature, the company should strive to protect and enhance its intellectual property (IP), whether copyrights, patents, trade secrets, etc. In addition, avoiding infringement on a third party’s copyrights can provide additional legal risk management.
Lastly, assess employee benefits plans from a risk management perspective, including the cost increases, liability, etc.