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Principles
of
Corporate
Treasury
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PRINCIPLES OF CORPORATE TREASURY - AN INTRODUCTION

Executive Summary

Primary duty Treasury resources

A treasurer’s primary duty, or responsibility, to ensure A successful treasury requires the right balance of
that the company can meet its financial obligations as appropriately skilled people and efficient processes,
they fall due, including payments to suppliers, effective controls, underpinned by modern, automated
employees, tax authorities, shareholders, banks and treasury technology and supported by banking partners
bond holders. Financial obligations can be in a variety that understand and support treasury’s requirements.
of currencies, so cash needs to be available at the right
time, in the right place, and in the right currency.
Degrees of treasury centralisation
While most companies will seek to centralise their
treasury activities into a global or regional treasury
The timing mismatch
Fulfilling this obligation can be challenging due to the structure, this can be difficult to achieve in practice.
difference in timing between payment obligations to the Treasury technology and a focus on consistent policies
stakeholders we have just listed, and collections and procedures can help to address some of the
received from customers. Treasurers need to be potential disadvantages of a decentralised treasury
proactive in managing cash and liquidity to minimise organisation. ■
the amount of external borrowing that is required, and
reduce the amount of working capital that is required as
far as possible.

Major treasury responsibilities

Treasury functions have diverse responsibilities, but
cash management, borrowing, investment, FX and
bank relationship management are typically core
responsibilities of most treasuries.

Treasury policy Financial obligations can be in a variety

The treasury policy document provides the framework of currencies, so cash needs to be
for treasury’s activities, including responsibilities,
permitted activities and performance measurement. available at the right time, in the right
The treasury policy should not be a static document but
reviewed regularly in line with changes to the
place, and in the right currency.
company’s risk appetite and market conditions.

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What is
Corporate Treasury?
Treasury is a relatively new profession that first emerged Some of the key tasks for treasuries are therefore:
during the 1970s as corporations became increasingly Managing financial risk: that is, the impact of
his article provides an
●

international, and therefore their liquidity and risk fluctuations in exchange rates, interest rates and in

T overview of corporate
treasury, firstly defining
exactly what it is and what are
management challenges became more complex. There
are two useful definitions of what treasury is and what it
does, one from the UK Association of Corporate
●
some cases, commodity prices
Managing the company’s relationships with its
banks and obtaining the necessary funding for the
its key activities, assessing the
Treasurers (ACT) and one from its equivalent body in business
resources needed by today’s
treasuries in order to carry the US, the Association of Finance professionals (AFP). ● Managing the cash flows and balances arising from
out these activities effectively the company’s business activities.
and then looking at the “In essence treasury management is all about handling
different ways in which a the banking requirements, the funding for the business Each of these three is a complex task when a business
treasury can be organised. and management financial risk. It therefore operates internationally, and it is important for
incorporates raising and managing money, currency, treasurers to prioritise their tasks in order to operate
commodity and interest rate risk management and most effectively.
dealing, and in some organisations, the related areas of
insurance, pensions, property and taxation”
(Association of Corporate Treasurers, UK)
The primary duty of the corporate treasurer
While the treasurer’s role comprises a number of
“The Treasurer is primarily responsible for: different elements, he or she has one overriding
● Managing overall financial risks objective, often described as treasury’s ‘primary duty’.
● Arranging external financing Essentially, a company needs to be able to meet its
● Managing relationships with banks and other financial obligations as they fall due i.e., to pay
financial institutions employees, suppliers, lenders and shareholders.
● Overseeing day to day liquidity and cash This can also be defined as the need to maintain
management liquidity, or solvency of the company: a company
● Investing for the short term and long term needs to have the funds available that will enable it to
● Developing and implementing treasury policies and stay in business.
procedures “ Companies have a number of financial obligations:
(Essentials of Treasury Management, Third
Edition, Association of Financial Professionals, ● Pay suppliers that provide goods and services to
USA) the company;
● Pay salaries to employees, make employer pension
Although the wording of the two definitions is different, contributions and reimburse expenses
there are certain common features. These include the ● Pay taxes due to statutory bodies;
focus on financial risk, financing the business, managing ● Pay for capital items. These could be purchased,
banking requirements, and managing money (otherwise leased or rented;
known as cash management or liquidity management). ● Pay banks and bond holders that have lent to, or

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PRINCIPLES OF CORPORATE TREASURY - AN INTRODUCTION

invested in the company, in the form of interest

payments and repayment of loans or bonds; Figure 1 – The timing gap
● Pay dividends to shareholders.

That leads to a vital issue: shouldn’t the money

Timing difference

received from customers cover these obligations and

allow the company to make a profit to fund future Invest in Buy raw Process Ship and sell Collect the Distribute

growth?
capital materials materials & products funds profits
equipment & produce
facilities finished goods

The timing gap

Payments

Payments

Payments
The problem is not necessarily that the amount paid

Collections
by customers is insufficient to meet the company’s
financial obligations; more typically, the issue is the
timing mismatch between incoming collections and
outgoing payments.
Figure 1 shows a generic analysis of a business. It
makes an upfront investment in facilities (such as
factories, production lines etc.). It then has to buy raw Figure 2 – Major responsibilities of most treasuries
materials required for production, and purchase the
labour to sell, produce and support the goods and
services the company provides.
Only when the production of goods or services is
complete, and these have been sold and shipped can Cash Management Liquidity Funding Investing
the company bill its customers. There may also be a
Management

lengthy invoice period before the customer actually

pays. While the model will differ between businesses
and industries, there are only a few companies that
can seek payment for goods and services before
production or delivery.
The significant factor therefore is the gap between
Currency Interest Bank Relationships
Rate
having to pay suppliers, employees etc. and the receipt
of funds from customers. The amount of cash required
to cover the mismatch in amount and timing of
incoming and outgoing cash flows is referred to as
working capital.
Working capital needs to be financed in some way, The problem is not
either by using internal funds from other parts of the
business or through external funding; for example, necessarily that the
bank borrowing. However, funding requirements can
be minimised by effective cash management. If the amount paid by
company is fortunate enough to generate surplus
funds, these can be deployed by effective liquidity and
customers is
investment management. insufficient to meet
Major responsibilities (found in most the company’s
treasuries) financial obligations;
To summarise briefly; the major responsibilities of
treasury include the following, depicted in figure 2. the issue is the
● Cash management and the management of
timing
associated liquidity; that is, the positive and
negative balances that accumulate on the bank
accounts

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Figure 3 – Where does treasury fit into the organisation?

Other responsibilities (found in some
treasuries)
Treasury is a support function to the business as a
whole, so it is likely to have additional responsibilities
Accounting Provides historic performance
data to management, investors
according to the specific needs and organisational
department and borrowers

structure of the business. These may include:

Accounts Pays suppliers

Commercial Credit Risk – that is, calculating,

Controller or payable
Chief ●

monitoring and managing risk to commercial

Accountant

customers (in addition to credit risk to financial

CFO Accounts Bills and collects from
customers
counterparties, which is typically a treasury
receivable

Treasurer responsibility)
Planning Provides forecast ● Property – large property transactions such as
capital investment and leasing has a major balance
data

sheet impact so it is often managed by treasury

Pricing Ensures products are priced to ● Commodity Price Risk - for companies with a
large exposure to commodity prices, such as
make and appropriate profit

energy, fuel or raw materials, commodity risk is a

major issue. It is managed in a similar way to
currency risk, so treasury is often a natural owner
● Funding the company by borrowing money when of this activity
necessary and vice versa, investing any cash ● Insurance – insurance is one aspect of risk
surpluses that the company might generate management, so it often makes sense for treasury
● Managing the effects and associated risks of to manage this in order to take an integrated view
fluctuations in currency and interest rates of risk
● Managing relationships with the banks that provide ● Working Capital Management – while
the products and services needed to support these treasury is typically responsible for managing
activities balances on accounts, an increasing number of
companies are involving treasury in the factors
A question that is frequently asked is: ‘What is the that influence working capital (such as payments
difference between cash and liquidity management – or and collections)
are they the same thing?’ ● Pensions – treasury may be involved in
Generally speaking, ‘cash management’ relates to the managing the company pension fund because of
management of transactions and the bank accounts the need to invest assets in a prudent and effective
across which these transactions flow. manner, so that the fund can pay staff pensions in
‘Liquidity management’ describes how balances on the future. In addition, many of the services
these accounts are managed. As these arise from the required by pension funds are provided by
mismatches between transactions that flow into and out financial institutions, including banks and their
of accounts, cash and liquidity management are so subsidiaries. As these relationships are managed
closely related that they can be regarded as a single by treasury, and treasury brings skills in
topic. investment management, it is logical for treasury
to play a role in pension fund investment
management
● Trade Finance – buying and selling goods and
services overseas brings a variety of risk, not least
the risk of counterparty default. Companies work
with their banks as intermediaries for financing
sales and purchases to reduce counterparty risk.
In the past, trade finance was typically managed
‘What is the difference between cash outside treasury, but as it can have a significant
impact on working capital and the accuracy of
and liquidity management – or are cash flow forecasting, treasury departments are
they the same thing?’ increasingly taking responsibility for trade
finance.

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Figure 4 – Where does treasury fit into the organisation?

Where does treasury fit into the organisation?
Just as the range of activities for which treasury is
responsible can differ between companies, so too can
the organisational structure of which treasury is a part.
Usually, treasury will be a part of the finance function,
Treasury Month-end and year-end
Accounting accounts for treasury activities

but it may be geographically or functionally distinct,

with separate management reporting to the Chief
Managing cash flows, bank
Cash & Liquidity accounts and ensuring sufficient

Financial Officer (CFO). See figure 3.

Management funds (in the right location and
currency) to meet financial

The CFO is in overall charge of the finance function

obligations.
Controller or Obtaining finance from banking

Typically the CFO will have an individual reporting to

Chief Financing counterparties or in the capital
Accountant markets to fund short-term

him/her designated as controller or possibly chief

working capital or longer-term
CFO projects
accountant. That individual in turn will have a series of I esting cash not immediately
Investing

accounting and other departments reporting to him/her,

Investment required, either in short-term or
Treasurer longer-term investments.

including: Identifying, monitoring and

Currency managing exposures to foreign
Management
A General Accounting department,
currencies.
●

responsible for reporting historic financial Banking Managing relationships with cash

performance to internal management and external

management banks and financial
counterparties

stakeholders.
● Accounts Payable, responsible for settling
supplier invoices and other payments. This may be
a centralised function (in-country, regionally or in the company, often regarded as joint second or third in
some cases globally) or decentralised with each the finance function hierarchy after the CFO and
business unit taking responsibility for payments. Controller. The way in which the treasury team is
● Accounts Receivable, responsible for credit organised will depend on the scale and complexity of the
control, billing and collection of cash by customers. organisation. There may also be treasury teams in
As with Accounts Payable, this may be a centralised different locations, managing treasury in different
or decentralised function. In many companies, it is regions. These regional treasury centres will usually be
more difficult to centralise Accounts Receivable part of, and report into Group Treasury. Some of the
because of the commercial sensitivities of customer major functions, include the following:
relationships, so these activities are often conducted
by, or in close proximity to sales teams. ● Treasury accounting. Treasury produces month-
end and year-end accounts for treasury activities.
There may also be a Planning group or department, that These are then passed to the Accounts function for
provides forecast data to management. group-wide consolidation, and to add a level of
In some cases too, a central Pricing function is control.
responsible for ensuring that products and services are ● Cash and liquidity management. Treasury
priced correctly to maintain profitability and manages cash flows, bank accounts and ensures
competitiveness, but this will depend on the industry, that sufficient funds (in the right location and
business organisation and culture. currency) are available to meet the company’s
These traditional definitions are well understood in financial obligations.
most organisations, but specific responsibilities may
differ. For example, in some cases, treasury is Obtaining finance from banking counterparties through
responsible for centralised payments and/or collections credit facilities or overdrafts, or in the capital markets
(often called a ‘payments factory’ or ‘collections factory’), such as issuing bonds. Short-term borrowing may be
or takes on an oversight role, in order to be in a position used to fund short-term working capital requirements
to influence working capital as well as operational while bonds and drawdowns on credit facilities are
efficiency. typically used for longer-term projects.
These functions may be combined in smaller Cash that is not immediately required may be
companies. However in larger companies, treasury is a invested in short-term instruments, such as deposits
distinct business function that reports to the CFO. and money market funds (MMFs) so that it is
Figure 4 provides a ‘close-up’ of the position of the available when financial liabilities fall due. Cash may
treasury within the organisation. also be invested in longer-term instruments when it
The treasurer is normally a senior financial officer of will be required at some future date, such as to fund

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mergers and acquisitions. monetary amounts with time-critical value dates in its
Treasury identifies, monitors and manages exposures day-to-day operations, while other departments such as
to foreign currencies, and converts these either to the Accounts Payable may deal with a higher volume of
company’s base currency, or another currency required smaller cash flows.
by group companies. Some currencies are restricted, The combination of these four factors mean that
such as Chinese RMB, which limits a company’s ability treasury is typically regarded as a specialist area that
to move funds out of a country. requires specific skills, technology, policies and
Managing relationships with cash management banks processes to deal correctly with areas of great sensitivity
and financial counterparties. to the company.
In smaller companies, some of these activities will be
combined and/or managed by the same individuals.
Activities such as back-office processing and cash
Governance and treasury
management may take place in a financial shared In addition to treasury’s distinctive role and
service centre (SSC) to take advantage of economies of characteristics, it is clear that its activities are business-
scale and a central system infrastructure, but will still be critical. It is therefore essential that there is a framework
within treasury’s remit. in place to ensure that the board of directors and CFO
have visibility and control over the way in which
treasury conducts these activities.
The board and CFO will ensure that there is an
Distinct characteristics of treasury
There are several distinctive features of the appropriate organisation in place and define its
responsibilities undertaken by a treasury which require responsibilities in order that the company’s cash and
it to be a separate function. risk management objectives can be met. This includes
Firstly, other parts of the finance function value appointing a treasurer with specialist skills and
physical assets and liabilities such as inventory and fixed experience who can then recruit the resources required
assets. While treasury also deals with assets and to do this. They will set a strategy or direction by which
liabilities, these are financial rather than physical, such those objectives are to be achieved, and, and from a
as loans, investments and future cash flows. Managing practical point of view, they will agree a policy and
financial assets and liabilities requires specialist skills, control framework which will act as guide and reference
calculations and systems, so it makes sense for these to point for treasury’s activities
be managed by a separate, specialist team. Treasury’s compliance with the policy and control
Secondly, while other parts of the company deal with framework, and specific activities such as borrowing,
business risks, treasury deals specifically with financial investment and exposure management are monitored
risks; for instance, the risk that an investment by a Treasury Committee that often comprises some
counterparty may not repay a deposit, or the risk that a representatives of the board (including the CFO) and
future customer collection in a foreign currency may specialist finance executives from departments such as
have a lower value to the business than expected as a Internal Audit.
result of changes in the value of the currency. Treasurers
consider how to measure and evaluate that risk and if
necessary to hedge (or insure) it using specialist
The importance of policy
financial instruments. Treasury policy therefore outlines what a treasurer and
Thirdly, the risks in question can be very large, and the treasury department may and may not do and
significant enough to have an effect on business results, defines its overall approach.
so they require dedicated management More specifically, it will inform treasury’s objectives,
Finally, the transactions associated with these and what powers and responsibilities it has been
activities are often very large, so treasury deals with high granted by executive management to achieve these
objectives. It should also, if properly drafted, define how
treasury’s activities are to be measured and reported
back to management.
Finally, policy should cover all the areas that may
significantly impact the company’s financial operations.
Managing financial assets and
liabilities requires specialist skills, Treasury Resources
To achieve its objectives treasury needs many different
calculations and systems. resources, of which the four most important are:

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People (and how they are organised)

Figure 5- Treasury organisation
●
● Processes (and how these are controlled)
● Systems that people use to support or automate
treasury processes
● Banks Dealing

Front Office
People. Treasury is a specialist discipline and therefore
treasury professionals require specialist skills and
Risk
Management

training or education. Many entrants to treasury are

already accounting or finance professionals, although
Treasurer
Separation of Duties

others may come from other disciplines, particularly

banking.
Settlement &
Confirmation

It is often said that accounting is backward-looking

Back Office

and treasury forward-looking. This should not be Cash

considered a derogatory description, and it does

Management

illustrate the fact that treasurers have more time-critical

responsibilities and need to be responsive to current and
projected events in a different way from other finance
professionals. In some cases, senior finance of technological sophistication in a treasury function will
professionals are appointed to treasury for a limited depend on its scale and complexity, but there are few
period to gain exposure to treasury as part of their treasury departments today that do not have specialist
career development in finance. technology provided by their bank or banks, ERP
Treasury departments are often small (fewer than five provider or specialist treasury systems vendor. ERP
people) except for the largest multinationals which may stands for ‘enterprise resource planning’. Systems such
have 50 or 60 treasury employees across different as SAP and Oracle are widely used by large corporations
locations, so treasury professionals often need to take on to integrate information and processes across different
a varied spectrum of responsibilities. parts of the business, including finance and accounting,
manufacturing, inventory, sales, service and customer
Processes. Efficient processes for managing relationship management. These systems may be used
information and transactions are essential to a well-run to provide treasury and cash management capabilities,
treasury. For example, the first task for most treasury or may be integrated with specialist treasury
departments each morning is to retrieve bank management systems for cash positioning, forecasting
statements to determine what the current bank balances and accounting purposes.
are and reconcile the previous day’s transactions against The importance of treasury control was mentioned
what was expected to happen. Then they create a cash earlier. It is very difficult to achieve the right level of
position based on opening balances, and expected control without the appropriate systems in place. The
movements during the day and business unit funding, specific types of technology in place in treasury
investment or foreign currency requirements on which departments, their purpose and how they are connected
daily decisions can be based. Each one of these tasks can is covered briefly later in this article, and the term
be highly labour-intensive, and any mistake can have a ‘treasury management system’ or TMS is used to refer
significant financial impact. Therefore, not only do both to specialist treasury systems or ERP systems that
efficient processes mean that the best use is made of provide treasury management capabilities.
treasury professionals’ expertise (as opposed to Treasury’s relationships with its banks are key to
spending time on manual, bureaucratic tasks) but they achieving its objectives. Banks support treasury
also ensure that costly mistakes are minimised. departments in a variety of ways, as we will discuss later
Treasury’s activities are vulnerable to a range of risks, in this module.
such as financial losses due to fraud, error, market or
system failures. This is particularly the case due to the
high value of transactions, its ability to make payments
People
and the complexity of its activities. There are many different ways of organising a treasury
department and defining individual roles, according the
Systems. Technology has an increasingly important scale and complexity of the operation. It will also depend
role in treasury for automating processes, performing on the degree to which treasury is centralised or
sophisticated calculations, communicating with internal decentralised, a theme discussed below. However,
and external partners and monitoring risk. The degree assuming for now a single, centralised treasury

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department, some of the most commonly defined roles office. See figure 5.
include the following: The terms ‘front office’ and ‘back office’ are derived
The most senior treasury professional (Group from the banking sector, and in reality, only large
Treasurer or Treasury Director) has overall multinationals will have the scale to warrant specific
responsibility for treasury activities, and may also front- and back-office departments. However, even the
have a deputy treasurer assisting in this. Below this, smallest treasury needs to ensure segregation of duties,
treasury is often divided into front office and back a point already noted, to ensure that no single individual
is responsible for managing every stage in a transaction
lifecycle.
Front office (often managed by Head of Front Office
Figure 6 – Example Process – Account reconciliation or Chief Dealer) is responsible for dealing with
counterparty banks, such as loans, deposits and other
investments, foreign currency and hedging instruments.
The front office is often therefore responsible for risk
Download Reconcile to Reconciliation Investigate and
Bank systems OK? make

management, although this could be a separate

Statement adjustments
No

department.
Back office (often managed by the Treasury Manager,
Yes Head of Back Office or Treasury Controller) is
responsible for administration and support of
transactions conducted by the front office, including
settlement, payment and confirmation with the banks.
Mark items as
reconciled &

This function often also includes treasury accounting.

account
posting

Cash management may be a separate function or part

of back office, but this will depend on the organisation.
Other responsibilities noted previously, such as
Pensions, Insurance and Trade Finance, may also be
Approve

separate, or split between front and back office.

reconciliation

Processes
The critical role and function of treasury policy was
emphasised earlier. However, treasury policy does not
Figure 7 – Example Process – Business unit request define the day-to-day processes that need to take place
to achieve treasury’s objectives. In particular, it does not
lay out the sequence of individual tasks or the details of
Unit sends Received Check Within Inform individual controls that we rely on for a robust process.
Consequently, the policy document is often
deal by against policy Unit
request Treasury policy No
supplemented by a process document that outlines how
each task should be performed. The advantage of a
Yes documented approach is that there is clarity and
consistency as personnel change over time, processes
Aggregate can be audited by internal and external auditors, and
with other treasury performance can be monitored and reported.
One of the first daily tasks in treasury is to reconcile
requests

the previous day bank account statement with the flows

that were expected to take place. This process could be
Reassess automated or manual, but the steps required are
typically the same. An example is given in figure 6.
cash and
risk
position

● The bank statement of all treasury accounts is

downloaded from the bank’s electronic banking
Deal Confirm
system or a non-proprietary bank communication
tool such as SWIFT.
deal to unit

● A report is downloaded from the TMS showing

expected movements during the day

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A treasury analyst compares each item on the bank

Figure 8 – Preventative control
●

statement with items from the TMS report

● Amounts that match can be marked as reconciled in
the TMS
● Amounts that do not reconcile may need to be Unit sends Received Check Within Inform
followed up with the bank or the business unit deal by against policy unit

involved. An adjustment may need to be posted in

request Treasury policy No

the relevant system

● The reconciliation process may need to be approved
by a manager.
Yes

Few large multinationals adopt an entirely manual

Aggregate
with other
process for account reconciliation, so an automated requests

process could be conducted as follows:

● The bank statement of all treasury accounts is Reassess

downloaded from the bank’s electronic banking cash and

system or a non-proprietary bank communication

risk
position

tool such as SWIFT, either as a manually initiated or

automated/ scheduled event
● The bank statement is imported into the TMS (this Deal Confirm
could be ‘pushed’ from the bank communication
deal to unit

system or ‘pulled’ from the TMS)

● Automatic reconciliation takes place based on the
rules that have been defined in the system. For
example, small rounding differences may have
automatic account postings so that items can be
marked as reconciled.
● Reconciled items are posted automatically on the In many cases, treasury will
account in the TMS, and unreconciled items are
displayed to the user.
operate as an ‘in-house bank’
● Amounts that do not reconcile may need to be to the group as a whole.
followed up with the bank or the business unit
involved. An adjustment may need to be posted in
the relevant system.
The reconciliation process may need to be approved
Figure 9 - Detective control example
●

by a manager

Business unit request Download Reconcile to Reconciliation Investigate

systems OK? and/ or make

In many cases, treasury will operate as an ‘in-house

Bank
Statement adjustments
No

bank’ to the group as a whole. This means that business

units (or group companies) can (or may be obliged to)
deal with treasury as if it was a bank, as opposed to Yes

approaching banks themselves. The advantage of an in-

house bank is that bank relationships are managed Approve

through treasury, treasury can aggregate financial

Reconciliation

requirements across the group and potentially net off

surpluses and deficits to minimise the need for external
financing. The total amount available for investment
may be higher, and foreign exchange exposures netted. Create cash

Figure 7 shows a simple internal deal request process.

position for
daily decision-

Business units may request deals from treasury,

making

either via phone, email or fax, or increasingly through an

online process that is integrated directly with the TMS.

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Controls can be either preventative or detective in

Figure 10 – Preventative and detective controls nature. Preventative controls (see figure 8) are relatively
self-explanatory, in that checks take place in advance to
avoid a breach in policy, error or fraud.
Treasury action Control type In the example process of the business unit request,
Authorisation and approval of financial Preventative there are two preventative control points:
transactions (before transaction) The first is to check that the request is in line with
group policy and authorised internal limits.
Detective (after
transaction)
Segregation of duties Preventative The second is to make sure that the appropriate deals
Transaction checking Detective are being performed in order to keep the company’s
Access controls Preventative cash and risk position is in line with policy, and to
Reconciliation and confirmation of Detective ensure that external transactions are of a sensible size
transactions (that is, not too small or too large to achieve competitive
Treasury performance monitoring Preventative/ rates).
In both these cases the control is preventative, in that
detective

it aims to prevent something happening which is either

Reporting of exposures, positions, limits Preventative/

not approved or not efficient.

etc. detective

Figure 9 shows an example of a detective control,

Internal/ external audit checking Preventative/
detective
that is, it highlights problems that have already
happened. This example was cited previously: the
reconciliation of a bank statement with the cash flows
On receiving a deal request, treasury will check this that were anticipated. If an item on the bank statement
against the treasury policy to ensure that it is compliant. can be reconciled, then it is marked as such and posted
Again, this may be a manual or automatic process. If the to the ledger. The reconciliation process may also be
request does not comply with policy guidelines, treasury approved once completed as another level of detective
will inform the business unit. control. If an item cannot be reconciled, meaning that
If a deal request is accepted, treasury may aggregate there is a difference between what treasury expected to
requests from different business units, and net off happen, and what actually happened, then further
surpluses, deficits and foreign currency risk exposures to action needs to take place. It is clearly in treasury’s
minimise the number of external transactions that need interests to have as accurate a view of cash as possible to
to be conducted. Again, this could be automated or avoid surplus balances or overdrafts on an account.
manual. Reconciliation exceptions can happen for a variety of
Treasury will then determine what deals need to be reasons. For example, suppliers may not have paid on
transacted in the market and deal them manually or time, or the payment may have had incorrect or
electronically. Having performed these transactions, incomplete settlement instructions, delaying receipt.
treasury will post an internal deal with each relevant Payments may have been made after the cut-off time
business unit. (i.e., the deadline for payment instructions) and
therefore the value date is one day later than expected. If
charges are deducted from a cash flow, or it has been
converted from a foreign currency, there may be a
Treasury controls
Almost every treasury task has an associated process to rounding difference which makes it difficult to reconcile.
ensure consistency, efficiency and control. Efficiency is In addition, the reconciliation process aims to pick up
important to ensure the best use of resources and reduce errors or fraud as quickly as possible.
the scope for error, while appropriate controls are In the event of a reconciliation exception, treasury
essential to avoid financial losses as we discussed earlier. personnel take the action appropriate to the event. This
could involve following up with the bank, contacting the
internal business unit or central department involved,
and adjusting the TMS so that the differences from
expected cash flow activities are reflected in the cash
position.
Almost every treasury task has an
associated process to ensure Preventative and detective controls
consistency, efficiency and control. To summarise, controls can be preventative or detective.
A well-managed treasury function will combine both

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PRINCIPLES OF CORPORATE TREASURY - AN INTRODUCTION

types of control as part of its processes. Figure 10

illustrates some frequent controls, but treasury Figure 11 - Treasury Management System
functions will have different systems and safeguards in
place according to the specific nature of their
responsibilities, technology infrastructure, processes
and organisational structure.
Electronic Banking System/
SWIFT

Authorisation and approval of financial transactions

Electronic
● balance and Payment

Segregation of duties, that is, ensuring that different

transaction instructions
● reporting

individuals are responsible for each stage of a

financial transaction, such as dealing, approval and
Treasury Management System
Cash flow
Deal requests

settlement
information
• Reconciliation
• Cash position

Checks on recording of transactions to ensure that

• Check limits
● • Record/ approve internal/ external

none are omitted or duplicated

transactions
Business Units/ • Manage transactions ERP/

Safeguards for access to systems or documents

Accounting
Intercompany • Initiate payments
Subsidiaries statements
information Internal Systems
● • Create accounting entries/ valuations

Reconciliation/checking of records, such as

• Exposure, position and risk
● management reporting

confirming transactions with counterparty banks

• Cash management and forecasting

● Measurement of treasury performance, including

the use of key performance indicators, known as
KPIs
● Reporting of positions, exposures, transaction by the TMS itself, such as through a web browser
statements and limits made available to business unit users, or these
● Checks by internal (and external) audit requests could be imported from an external system
● Import cash flow information such as payables and
receivables from an ERP or other internal systems.
With this information, the TMS can then produce a
Systems ●

One of the several factors that influence the processes cash position that will enable the front office to
and controls that each company has in place is the make dealing decisions, such as what funds are
technology that underpins them. Treasury technology available for investment, what funds may need to be
infrastructure can vary enormously between companies borrowed, and which amounts in various foreign
according to their size, complexity, degree of currencies may need to be exchanged.
centralisation and a range of other factors, but the ● Before dealing, the TMS will show what credit limits
purpose of the systems used in treasury are the same: are available with authorised counterparty banks to
that is, to provide efficiency, control and transparency facilitate the dealing process. Dealers may transact
over processes and decision-making in treasury. deals on the telephone or through an on-line
A treasury management system (TMS) can refer to dealing portal which may be integrated with the
both a specialist cash and treasury management system, TMS.
or a module of an ERP. (See figure 11.) While systems ● Once deals have been recorded in the TMS, the
differ in their functionality, which corporations may also relevant approval tools will be made available to the
choose to deploy in different ways, some of the most relevant users
common capabilities of a TMS include the following: ● Back-office users can then check transactions for
settlement. The TMS allocates settlement
● Import the bank statement from the bank, either instructions based on pre-defined rules. It also
through an electronic banking system provided by produces confirmations that can be sent to the
the bank, or a portal that provides information from counterparty bank manually or integrated with a
multiple banks through a single channel such as confirmation matching system. Intercompany
SWIFT. The bank statement typically shows the statements are transmitted to the relevant business
previous day’s activity, but intra-day statements are units, or available for download
also available in some cases. ● Once the relevant approvals have been completed in
● Reconcile the bank statement to expected activities the TMS, payment instructions and advices to
● Import deal requests from business units and receive are transmitted to the bank in the relevant
subsidiaries, such as requests for funding, surplus format, again through the electronic banking
funds for investment, or foreign exchange (known system or SWIFT
as FX) requests. This capability is typically provided ● The TMS will typically also provide the accounting

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PRINCIPLES OF CORPORATE TREASURY - AN INTRODUCTION

entries and valuations for internal and external difficult to access. Therefore, an essential service
transactions. The monthly and year end accounting provided by key cash management banks is to provide
process may be completed in the TMS itself, or the liquidity management solutions to enable treasury to
accounting entries sent to a separate accounting have full visibility and control over the company’s cash.
system for month-end and year-end processing One such technique is cash pooling or cash
● The TMS will provide a range of reporting and concentration, which is the transfer of funds from a
decision-support tools for risk management number of accounts into a single header account. A cash
purposes, and may also support hedge accounting pool may be within one country, include accounts from
(that is, compliance with accounting regulations on different countries, and in some cases, can involve
the treatment of transactions used to manage different currencies.
financial exposures)
● The system will also support cash management and Counterparty banks
forecasting. Banks are also counterparties to most financial
transactions that treasury undertakes to fulfil its
objectives.
Banks
Financial institutions (particularly banks) play a major ● They provide credit facilities and overdrafts to
part in helping treasury to achieve its objectives. Banks provide funding
fulfil a variety of roles and support treasury in different ● They provide long-term finance for large-scale
ways. capital projects
● Companies can deposit cash with banks (that is, the
Cash management banks bank is borrowing money from the company) and
Every organisation will work with one or more bank(s) receive an agreed rate of interest in return. Banks
for cash management purposes. also provide other types of instrument in which
Banks provide bank accounts, both in the company’s treasury can invest such as commercial paper
domestic currency and foreign currencies. These may be ● They organise the issue of company debt such as
interest-bearing or non-interest bearing according to the bonds
type of account, country and currency in which the ● They provide foreign exchange services
account is held, and the policy of the bank. Banks may ● They provide hedging transactions for managing
also provide overdraft facilities on certain accounts, interest rate, currency and commodity risk
which is often an important form of short-term ● They provide trade financing for imports and
borrowing for many companies. Most banks provide exports
electronic banking systems to provide statements ● They provide a range of ancillary services such as
detailing balances and transactions on accounts. commercial card programmes.
Banks provide payment and collections services, both
domestic (within the same country) or cross-border (to Bearing in mind the range of activities in which they are
or from counterparties in other countries, and involved, successful bank relationship management is
potentially in other currencies). In countries where an essential requirement for treasury.
electronic payments are prevalent, these most
commonly made through the bank’s electronic banking
system.
Treasury Structure
With many companies holding a large number of Treasury departments may be organised in different
bank accounts, cash can become fragmented and ways. This extends not only to the structure of the
department, but also how treasury activities are
distributed across the group.

Global treasury centre

The most straightforward treasury organisation is a
With many companies holding a global treasury centre. This conducts cash and treasury
management activities through a single treasury
large number of bank accounts, function on behalf of the rest of the group. It can be
difficult to manage the cash and treasury needs of a
cash can become fragmented and geographically diverse organisation through a single
difficult to access. centre, not least due to differences in time zones.
Therefore, it is often smaller companies or those with

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PRINCIPLES OF CORPORATE TREASURY - AN INTRODUCTION

the majority of their business in a single country or

region that are most likely to have a single global
treasury centre, but large, complex multinationals have
also achieved this. When companies have a single, global RTCs represent Group Treasury by
treasury centre, treasury often acts as an in-house bank,
where business units deal with treasury as if it were a providing treasury services to the
bank, as opposed to approaching banks themselves.
Treasury can aggregate financial requirements across
group in a particular area.
the group and potentially net off surpluses and deficits
to minimise the need for external financing. The total
amount available for investment may be higher, and
foreign exchange exposures netted. relationships, and bank charges may be higher if
business units cannot leverage the purchasing
Regional treasury centres power of the group
For companies that wish to manage their cash and ● It is difficult to gain visibility over the group cash
treasury management activities centrally, but need to position
transact business across a number of time zones, a ● Treasury policies and processes cannot be enforced
regional treasury structure is often the most easily
appropriate. Regional treasury centres, or RTCs as they ● The cost of treasury technology and maintaining
are commonly known, represent Group Treasury by interfaces with each bank is replicated across each
providing treasury services to the group in a particular business unit
area. RTCs usually operate according to policies and ● Surplus cash in one business unit cannot be offset
procedures determined by Group Treasury, and may against deficits in another, leading to a high cost of
share a common TMS. A company may have two or borrowing (particularly as business units may have
more RTCs depending on the business requirement. In reduced borrowing capacity and less advantageous
some cases, back-office processing may take place rates than Group Treasury would be able to achieve)
centrally, such as through a shared service centre or and the interest obtained on surplus cash may be
SSC. lower
In some cases, an RTC may operate more ● Foreign exchange risk may be considerable, and
independently from Group Treasury, for example, with exchange costs high if each business units manages
different systems, policies and/or processes. For FX risk locally.
example, many companies with major operations in
countries such as China that have restricted currencies By centralising treasury into a global or regional
and widely differing regulatory environments may have treasury structure, companies can gain economies of
a separate treasury function in China, but reporting to scale with their banking partners and manage their risk
Group Treasury. more effectively. By gaining visibility and control over
cash and risk, they can also offset FX exposures, surplus
Decentralised treasury and deficit balances across the group. Ensuring
In a decentralised treasury, each country or business compliance with internal and external regulations, and
unit will conduct its own cash and treasury management treasury policies and procedures is more
activities, independently of the group. This is most likely straightforward, and companies can reduce technology
to be the case where a group’s business activities are costs through a single treasury technology infrastructure
quite diverse, and each business division or subsidiary and standard interfaces to banking partners.
operates in a largely autonomous way. Despite the advantages of a global or regional
Group treasury can play a variety of roles in a treasury environment, however, some companies that
decentralised treasury environment. For example, it have centralised their treasury activities in the past have
may formulate treasury policies and procedures which devolved limited treasury responsibilities to local
local treasury operations should follow, and provide treasury centres, that effectively operate as satellites of
treasury advisory services. However, increasingly, group or regional treasury. In some countries, for
companies are moving away from an entirely example, borrowing or investment conditions may be
decentralised treasury structure, for a variety of reasons: more favourable than in the company’s home
jurisdiction. Furthermore, where a company is a market
● It is difficult to monitor and manage credit risk to leader in a country, it may be beneficial to establish local
financial counterparties (e.g., banks) if each banking relationships and play a part in developing the
business unit maintains separate banking country’s financial infrastructure. ■

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