Treasury Management

Treasurers serve as financial risk managers that seek to protect a company’s value from the financial risks it faces from its business activities. Because these risks can arise from many sources, the role requires an understanding of many areas of business and the ability to communicate with a variety of financial professionals. Treasurers manage several key risks related to changes in interest rates, credit, currency, commodities and operations.

  1. Liquidity Risk – Perhaps the most important risk a treasurer must manage is liquidity risk, or the risk that the company will run out of cash either from insufficient revenue, excessive expenditure, or the inability to access funds from banks and other external sources.
  2. Credit Risk – The treasurer must ensure that all of the following are financially sound and credit-worthy:
    1. Any issuer of investment instruments that the corporation uses to earn a return from it’s excess cash
    2. All suppliers, both materials and services as they form an integral part of any business
    3. Counterparties to financial instruments used to manage risks (such as interest rate swaps)
  3. Currency Risks – Companies face currency transaction risk when they translate proceeds from foreign sales and expenses into their home currencies. Multinational companies also face translation risk in financial reporting when the values of their foreign subsidiaries’ assets and liabilities fluctuate upon conversion to a single home currency.
  4. Interest Rate Risk – Companies that need to borrow to finance operations face risks with any change in interest rates. This interest rate risk must be matched to a company’s assets and be congruent with it’s policies and goals.
  5. Risk Policies – A treasurer will help formulate a set of board-approved policies that define the methods allowed to manage the above risks and the discretionary powers of the treasurer and other authorized personnel. These policies will vary from company to company.

Dividend policy is concerned with financial policies regarding the payment of a cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends and what amount, is determined mainly based on the company’s unappropriated profit (excess cash) and influenced by the company’s long-term earning power. When cash surplus exists and is not required by the company for positive Net Present Value (NPV) investment opportunities, then management is likely advised to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company’s stock through a share buyback program.