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Introduction to Corporate Treasury


Treasury, when compared to other corporate functions such as financial control, company secretarial, tax and internal auditing, became an identifiable profession relatively late. In the 1960’s few major UK public companies had separately identifiable corporate treasury departments. However, by the end of the 1970’s they had become widely established and by the 1980’s they were almost universal.

Whilst the rapid development of the profession in the UK and Europe in the 1970’s was most likely born out of the high inflation and financial uncertainties of that decade, its origins in the United States were the result of their early development of professional of management. Corporate treasury has subsequently continued to develop into a discrete profession in its own right in response to the growing sophistication and volatility of financial markets and the globalisation of business. Corporate treasury departments may be seen as the logical response and effective in-house counterpart to external bankers and are certainly the conduit through which day to day transactions and communications pass. Tactically they manage cash and foreign exchange, banking and credit facilities and at a more strategic level capital and financing structures and more generally financial risk management.

In the UK the Association of Corporate Treasurers, the ACT, was established in 1979 and an examination syllabus and professional examinations followed soon after in 1985. The number of members who were already qualified accountants proves a clear pointer to the origins of the profession and the financial nature of much of the work. The present day faster track route to qualification open to qualified accountants helps maintain the close relationship.

Whilst the profile of the treasury profession in the UK and worldwide is growing, it still remains a relatively small profession. In the UK the ACT currently has 3600 members and relative to their numbers, could be thought to have a disproportionate profile. Given the pace of economic and financial developments that is an integral part of business, treasury management offers a career that is both potentially exciting and influential.

The role of corporate treasury

Corporate treasury departments provide a vital role and have developed significantly in the last thirty years. What a company expects from its treasury department is substantially dependant on the nature of the company’s activities and the responsibilities that executive management entrust to it. For example a service company operating substantially in the UK will have little need for expertise in foreign exchange but will most likely require a highly sophisticated cash management system. Where the responsibility for the various aspects of cash management falls between treasury and financial control will differ. A professional association like the ACT is the source of best practice but not the ultimate arbitrator.

Whilst a treasury department will implement agreed corporate policy, the extent to which it initiates and develops policy and the parameters within which it works, will vary. Some corporate treasurers are formally part of executive management, others are not. Further, outside of what may be considered the core universal responsibilities of treasury management, there are always potentially grey areas between what is treasury management and what is financial control, company secretarial, tax, risk management and insurance. It is therefore unlikely that any two group treasurers will enjoy exactly the same responsibilities and even in otherwise similar companies, their roles and responsibilities will differ.

Given this, it is best to rely on the ACT for their description of the five core elements of the role.

They are;
  • Capital Markets and Funding
  • Cash & Liquidity Management
  • Corporate Financial Management
  • Risk Management
  • Treasury Operations & Controls

Capital Markets and Funding

This covers what funding options are open to a company and the way funds are raised to finance the business and on what terms such funding can be acquired and managed. For example it may be simply whether an asset should be purchased or leased? It is a broad area that often requires building external relationships and negotiating with providers of either equity or debt.

Cash & Liquidity Management

Cash and liquidity is principally about ensuring that the cash needs of the company are met in the most cost effective manner. Avoiding large pools of cash that are not effectively deployed or incurring the unnecessary costs of unforeseen short term borrowing. Most groups will have effective cash forecasting and pooling arrangements that need to be developed and managed.

Corporate Financial Management

Companies need to ensure that their corporate and financial strategies are appropriately aligned. What for example is the most appropriate capital structure? How are potential investments appraised? Is an asset providing the required return and if not should it be disposed of? Corporate financial management includes ensuring that legal and tax issues are appropriately considered.

Risk Management

Risk management is about understanding and quantifying the business and financial risks that a company is taking. It ensures the returns are adequate and that appropriate risk management techniques are deployed. This may involve looking at the effect of interest rate and exchange rate moves and putting the appropriate hedges in place. It is about understanding the risk appetite of a company and ensuring that executive management are fully aware of their exposure.

Treasury Operations & Controls

This final element is about putting the preceding four into practice in a coherent and appropriately managed way. It is about managing a treasury department and its various functions in an environment where priorities may regularly shift. It requires effective communication and for executive management to be confident that the treasury department is aligned with it aims and objectives.

Recent developments

Corporate treasury departments have recently needed to respond to what may become an extended period of economic and financial turbulence. Having escaped imminent financial Armageddon with unconventional fiscal and monetary responses, it is clear that at least in the short term, the fundamental problem of excessive debt and consumption are seemingly to be cured by even more debt and consumption. However, it is likely and ultimately logical, that the unprecedented expansion of credit that preceded the crisis, will be followed by a period of credit contraction from which no credible exit strategy exists.

It is clear that executive management and corporate treasury departments have and will need to respond to this new environment. Secure banking relationships and sources of financing have become more precarious. As banks have retreated corporate treasurers have needed to be more proactive. Executive management now requires more information and reassurance. Assumptions about risks and hedging strategies will routinely be more robustly challenged and tested. Corporate treasurers will need greater knowledge of the financial markets together with the ability to make strategic assessments and communicate them effectively to executive management. It is likely to be an exciting and challenging time to be in treasury management.

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