CGMA SPECIAL REPORT TREASURY & CASH MANAGEMENT

SPECIAL REPORTCGMA SPECIAL REPORTTREASURY & CASHMANAGEMENTESSENTIALSWhat Is Treasury andCash Management?Whether it knows it or not, almost every business of any size administers itsfinancial assets and holdings, with the aim of optimising liquidity, ensuringthe right investments are made, and reducing risk.As guardians of organisations’ assets, managementaccountants are responsible for stewardingliquidity, optimising capital structures, andsupporting the execution of strategies thatgenerate value for all stakeholders. Since the2008 global financial crisis, however, theenvironment in which the treasury functionhas to generate value has become much morecomplex. Management accountants musttherefore update their skills and competenciesto cope with the new expectations.According to the CGMA Global ManagementAccounting Principles, treasury and cashmanagement is defined as:“The corporate handling of all financialmatters, the generation of external andinternal funds for business, incorporatingthe management of currency and interestrate risk, bank facilities, funding andcash management.”This treasury resource has been written in partnership with the Association of CorporateTreasurers (ACT), the chartered body for treasury. It draws on the ACT’s technicalexpertise, the CGMA Competency Framework, and the ACT Competency Framework.This special report will prove invaluable to management accountants who recognise thenew challenges in treasury and wish to develop their capabilities to take advantage ofarising opportunities.APRIL 201747

SPECIAL REPORTPOSITIONING TREASURY ANDCASH MANAGEMENTThe key role of the treasury function is to advise the board and management on the businessdecisions and financial considerations that are fundamental to corporate strategy.Securing finance, maintaining funding, and managing risks are essential treasury skillsthat enable the execution of that strategy.Every organisation deals with treasury issues, butmany organisations do not have a distinct treasuryfunction. Treasury may mean a discrete practicewithin an organisation or it may be among theresponsibilities of a management accounting function.Similarly, the role of treasurer may be a discrete roleor may be one responsibility within a broader role,such as financial controller or CFO.At the strategic level, treasury is about advising onthe appropriate choices, trade-offs, and compromisesinvolved when financial decisions are made.Three strategic and interrelated questionsare fundamental to treasury decision-making:1.2.3.What do we invest in?How do we fund these investments?How do we manage the risk of our choices?It is impossible to make sound decisions about anyone of these questions without influencing or beingaffected by the answers to the other two. In otherwords, they are interdependent. These questions arethe foundations of business strategy development andare central to the financial criteria for investing.“Investing” refers to any use of resources for futurebenefit. It covers not only acquiring property, plantand equipment, M&A, and intangible assets such aspatents, know-how, and brands, but also R&D, stafftraining, and marketing programmes.Although management accountants address thesequestions on a routine basis, the very differentfinancing considerations of different organisations (autility company and a confectionery manufacturer, forexample) will result in different answers.The time horizons they have to consider and the risksthey need to manage may be different too, whetherbecause of the nature of the business or the type offinancing chosen.The answers to all three questions also depend onexternal factors, often interrelated, which can furtherincrease uncertainty. Some strategic choices that mayseem straightforward on the surface actually concealunforeseeable consequences. Accordingly, judgementis constantly required – from the outset and asconditions change.APRIL 201748

SPECIAL REPORTTHE CHANGING TREASURY ANDCASH MANAGEMENT LANDSCAPEThe banking landscape is changing dramatically. Individual banks’ capabilities areshrinking. Banks’ balance sheets and corporate credit have become finite resources whichhave to be used as cost-effectively as possible. Increasing regulation will continue to addto the costs of funding and hedging. These changes are driving increased complexityand reshaping the key elements of the treasury function.The following sections identify and describe the key constituents of the modern treasury function’s role.1. Treasury and corporate strategyBUSINESS STRATEGYFINANCIAL STRATEGYCourse of action, includingthe specification of resourcesrequired to achieve aspecific objective.Decide on optimum financing,hurdle rates, dividend policy,financial market risk, in whichmarket to raise debt or equity,and counterparty limits. CORPORATESTRATEGYKey questions to consider– Start the dialogueKey questions to consider– Start the dialogueKey questions to consider– Start the dialogueIn raising funds, consider: Are the risks from the actualinvestment acceptable whencompared to the businessto which it contributes? Are your financialstrategies integrated withyour business strategy? To which types of fundingand fund-providers doesyour organisation haveaccess? Should additional financebe raised as equity, debt,or a combination of thetwo? Does what is beinginvested in lend itself toasset-based finance; inother words, could it berented or leased and atwhat cost? Are there other existingassets that could befinanced more easily,releasing funds for thenew investment? Is the cash flow impact ofservicing and repaying(equity aside) the fundingand any associatedconditions (such as covenantsand default wording)both acceptable to andmanageable by theorganisation and thosewho provide its funding? Is the overall business risk,including the total fundingand cash flow risks,acceptable to andmanageable by theorganisation and thefund-providers?APRIL 201749 Are your treasuryobjectives clearly definedand aligned with yourorganisation’s objectives? Do your treasury policiesaccurately reflect thoseobjectives and addressany risks to reaching them?

SPECIAL REPORT2. Business operations and stakeholder relationshipsEffective treasury requires a thorough understanding of the organisation’s business model and its industry.Treasury interfaces with a range of business stakeholders, making it vital that the management accounting, tax,and treasury functions are all properly aligned and mutually supportive. To do its job effectively, treasury relieson building credibility and trust, throughout the business and externally.Externalrelationships Regulators Owners, lenders, and credit agencies Finance, accounting, and systems providersOrganisationalrelationships Finance functionrelationships CFO/board and board committees Management accounting Tax and FP&AHRITM&ABusiness units3. Capital structure4. Cash and liquidity managementExternally raised capital may be debt or equity,although hybrid structures can also be created.Liquidity means access to cash. Its managementis the most fundamental element of treasurymanagement. If it fails, the organisation cannotcontinue to function.Treasury has a fundamental role to play in setting anorganisation’s financial strategy, using the followingthree factors to assess the optimal financing solution:The key tools for managing liquidity are: R anking of capital: The ease and cost of financing. C ash management: Using cash generated bybusiness operations, cash surpluses retained inthe business, and short-term liquid investments toensure that payment obligations can be met. L everage: How to measure and monitor the ratioof debt to equity. M arkets: The diversity of sources and the maturityof financing. W orking capital management: Managingsupplier payments, receivables, and inventoriesto optimise the investment in working capital. O rganising and managing borrowing facilities:Using cash flow forecasts, building in planned/required new funding and maturing funding thatmust be repaid or refinanced.APRIL 201750

SPECIAL REPORTCash management componentsDay-to-day cash control(including intra-daywhere necessary)This involves having the information to monitor bank account balances and the toolsto manage liquidity so that the organisation has enough cash or near-cash resourcesto meet its immediate obligations.Money at the bankBuilding an efficient bank account structure that minimises overall borrowing costs,maximises overall interest earned, and facilitates liquidity management.ReceiptsThis requires the maintenance of bank accounts that are optimised for collectionstreams and an efficient infrastructure for managing items during collection.Payments controlThis involves maintaining bank accounts that are optimised for making payments,whether routine or urgent, together with appropriate systems support.Short-term investmentsOptimising the use of surplus funds by making short-term investments.Short-term borrowingsThe use of borrowing facilities to cover immediate funding shortfalls.5. T reasury operations and control E conomic foreign-exchange risk: The risk of aTreasury operations are exposed to particularrisks such as fraud, error, and failures of marketsand systems. They are particularly susceptiblebecause of the large amounts of money involved,their ability to make payments, and the potentialcomplexity surrounding their activities. C urrency/commodity transaction risk:Segregation of duties is designed to prevent fraud anddetect errors. It is an essential approach that means notransaction or payment, internal or external, is evercarried out without at least one other person knowingabout it. This is a general principle in the treasury function,meaning those executing and recording transactionsmay not confirm or settle those transactions. F oreign-exchange translation risk: Results fromchange taking place in the value of an organisationdue to varying exchange rates. The largest componentis sometimes called “strategic foreign-exchange”risk, which arises from any consequential changes inthe organisation’s competitive position.Pre-transaction risk arises when an organisation hasto commit to a price before actually entering intotransactions or commercial agreements.Transaction risk is the risk that changes in FX ratesmay make committed cash flows in a foreigncurrency worth less or cost more than expected.exchange differences that arise when consolidatingforeign currency assets and liabilities into the groupfinancial statements. This is not a cash exposure butan accounting issue, and it is therefore often nothedged by the organisation.6. T reasury and financing risksTreasury and financing transactions are subjectto a number of risks and consequences that areimportant for management and boards to understand.These include: I nterest rate risk: If interest rates rise, borrowerswill pay more interest. If they fall, depositors willearn less. However, there are more facets than thisto interest rate risk.APRIL 201751