TREASURY MANAGEMENT

Treasury Management can be understood as the planning, organizing and

controlling holding, funds and working capital of the enterprise in order to make the
best possible use of the funds, maintain firm’s liquidity, reduce the overall cost of
funds, and mitigate operational and financial risk.

It covers working capital management, currency management, corporate finance

and financial risk management.

Functions of Treasury Management

Treasury Management aims to ensure that adequate cash is available with the
organization, during the outflow of funds. Further, it also contributes to optimum
utilization of funds and makes sure that there are no unutilized funds kept in the
firm for a very long term. The functions of treasury management are discussed
below:

1. Cash Management: Treasury Management includes cash management, and

so it ensures that there are an effective collection and payment system in the
organization.
2. Liquidity Management: An optimum level of liquidity should be maintained in
the business, for the better and smooth functioning of the business, i.e. the
company must be able to fulfil its financial obligation when they become due
for payment, such as payment to suppliers, employees, creditors, etc. And to
do so, cash flow analysis and working capital management act as the most
important tool for treasury management, to achieve its strategic goals.

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3. Availability of funds in adequate quantity and at the right time: The treasury
manager has to ensure that the funds are available with the organization in
sufficient quantity, i.e. neither be more nor less, to fulfil the day to day cash
requirement for the smooth functioning of the enterprise. Further, timely
availability of funds also smoothens the firm’s operations, resulting in the
certainty as to the amount of inflows available with the company at a particular
point in time.
4. Deployment of funds in adequate quantity and at the right time: The deployment
of funds has to be done in right quantity such as the acquisition of fixed assets,
purchase of raw material, payment of expenses like rent, salary, bills, interest
and so forth. For this purpose, the treasury manager has to keep an eye on all
receipts of funds and the application thereof. Further, the funds must be
available at the time of need, which may be different for different firms and also
for the purpose for which they are used. The period may differ from a week to
month when it comes to acquisition of the fixed assets and two to three days in
case of working capital requirement.
5. Optimum utilization of resources: Treasury Management also aims at ensuring
the effective utilization of the firm’s resources, to reduce the operating costs
and also prevent liquidity shortage in the coming time.
6. Risk Management: One of the primary objectives of the treasury management
is to manage financial risk to allow the enterprise to meet its financial
obligations, as they fall due and also ensure predictable performance of the
business. It tends to identify, measure, analyze and manage risk in order to
mitigate losses, that has the potential to affect the company’s profitability and
growth in any way. Hence, treasury management is accountable for all types
of risk that can influence the business entity.

Advantages of Centralized Treasury Management:

Under the centralized cash management, the treasury department is setup in head
office which will look after the management of funds of multi-locational centers of
the organization.

The important advantages of centralized treasury department are as follows:

 It avoids a mix of cash surpluses and overdrafts at different centers of the firm.
 The bulk cashflows allows the company to negotiate with its bankers for lower
rate of interest and timely availability of funds.
 The surplus cash can be efficiently invested in short-term and marketable
securities to earn interest on it.

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 Borrowings in bulk might necessitate to raise funds from international money
and capital markets at cheaper rates of interest.
 Foreign currency risk can be efficiently managed by adopting hedging
techniques.
 It will use the services of experts with specialized knowledge of dealing in
forward contracts, futures, options, euro currency markets, swaps etc.
 The balance of funds to be maintained for entire organization, on precautionary
measures.
 Efficient utilization of funds is ensured by centralized funds management.

Advantages of Decentralized Treasury Management:

The decentralized treasury management is advocated for the following reasons:

 Sources of finance can be diversified and can match local assets.

 Greater autonomy can be given to subsidiaries and divisions because of the
closer relation-ships they will have with the decentralized cash management
function.
 The decentralized treasury function may be able to be more responsive to the
needs of individual operating units.
 Since cash balances will not be aggregated at group level, there will be more
limited opportunities to invest such balances on a short-term basis.

Cash Management Vs. Treasury Management:

The cash management is very closely linked with the treasury operations of any
business organization.

The treasury operations of any organization can broadly be divided into two parts
as follows:

 Short-term investment of surplus funds in the money market to maximize the

benefit arising out of availability of surplus funds.
 Short-term borrowings of funds from banks or market for normal working capital
require-ments and for temporary shortage of funds at the lowest possible cost
to the company.

The broad objective of cash management with regards to the treasury operations
of the organizations is to maximize the availability of funds at any point of time and
at the desired place for investment purposes and/or also to minimize the deficit or
shortfall in the requirement of funds at any point of time, i.e., what cash

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management seeks to do for treasury operations is to convert its sales, whether
on cash or credit into ‘available cash’ as fast as possible.

INTERNATIONAL FINANCIAL MANAGEMENT

International Financial Management is a well-known term in today’s world and it is

also known as international finance. It means financial management in an
international business environment. It is different because of the different currency
of different countries, dissimilar political situations, imperfect markets, diversified
opportunity sets.

International Financial Management came into being when the countries of the
world started opening their doors for each other. This phenomenon is well known
by the name of “liberalization”. Due to the open environment and freedom to
conduct business in any corner of the world, entrepreneurs started looking for
opportunities even outside their country boundaries. The spark of liberalization was
further aired by swift progression in telecommunications and transportation
technologies that too with increased accessibility and daily dropping prices. Apart
from everything else, we cannot forget the contribution of financial innovations
such as currency derivatives; cross-border stock listings, multi-currency bonds and
international mutual funds.

Difference between International and Domestic Financial Management:

Four major facets which differentiate international financial management from

domestic financial management are an introduction of foreign currency, political
risk and market imperfections and enhanced opportunity set.

 Foreign Exchange: It’s an additional risk which a finance manager is required

to cater to under an International Financial Management setting. Foreign
exchange risk refers to the risk of fluctuating prices of currency which has the
potential to convert a profitable deal into a loss making one.
 Political Risks: Political risk may include any change in the economic
environment of the country viz. Taxation Rules, Contract Act etc. It is pertaining
to the government of a country which can anytime change the rules of the game
in an unexpected manner.
 Market Imperfection: Having done a lot of integration in the world economy, it
has got a lot of differences across the countries in terms of transportation cost,
different tax rates, etc. Imperfect markets force a finance manager to strive for
best opportunities across the countries.

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 Enhanced Opportunity Set: By doing business in other than native countries, a
business expands its chances of reaping fruits of different taste. Not only does
it enhance the opportunity for the business but also diversifies the overall risk
of a business.

Just like domestic financial management, the goal of International Finance is also
to maximize the shareholder’s wealth. The goal is not only is limited to the
‘Shareholders’ but extends to all ‘Stakeholders’ viz. employees, suppliers,
customers etc. No goal can be achieved without achieving welfare of shareholders.
In other words, maximizing shareholder’s wealth would mean maximizing the price
of the share. Here again comes a question, whether in which currency should the
value of the share be maximized? This is an important decision to be taken by the
management of the organization.

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Electronic Sources:

http://www.accountingnotes.net/financial-management/treasury-management-
meaning-and-role/11070

https://businessjargons.com/treasury-management.html

https://www.quora.com/What-is-the-concept-of-international-financial-
management

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