TREASURY AND FOREX

MANAGEMENT
 TREASURY
MANAGEMENT
 Treasury generally refers to the funds and revenue at the disposal of the
Bank/Corporate and day-to-day management of the same.

 The treasury acts as the custodian of cash and other liquid assets.

 The art of managing, within the acceptable level of risk, the consolidated
fund of the Corporate/Bank optimally and profitably is called Treasury
Management.
 CORPORATE
TREASURY
 What is Corporate Treasury?
 Determining Capital Structure
 Long-Term Cash Flow Analysis
 Public vs. Private
 Management
 Raising Capital
 Debt
 Equity
 Dividend Policy
 Who should issue dividends?
 Dividend Impact to Stock Prices
 Raising Dividends
 Career Advice for a Treasury Analyst 3
 WHAT IS
CORPORATE TREASURY?
 Corporate Treasury is the area within Finance that analyzes the company’s cash flow from
an internal perspective

 Internal Cash Flow Analysis includes:

 Debt Coverage

 Dividend Payments

 Initial Public Offerings (IPO)

 Secondary or Additional Equity Offerings

 Repurchase of Stock

 Cash Management and Investments RRS Dec 2020 4

 TREASURY OBJECTIVES
 Managing Liquidity

 Organizing Cash Resources

 Short term financing

 Medium and long term financing

 Managing risk

 Coordinating with all financial functions and sharing information (MIS & FIS)

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 TREASURY FOCUS

 Managing Liquidity

 Mitigating Risks

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 Cash Forecasting
 Working Capital Management
 Cash Management
 Investment Management
 Treasury Risk Management
 Management Advice
 Credit Rating Agency Relations
 Bank Relationships
 Fund Raising
 Credit Granting
 Other Activities
 MANAGING LIQUIDITY
 Optimizing Cash Resources

 Short term financing

 Medium to Long term financing

 Managing Financial information

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 CASH IS KING
 The Traditional Approach

 Matching – Purchase to Pay and Order to Cash Cycles

 Managing the Triad- Debtors (Accounts Receivables), Inventories and

Creditors (Accounts Payables)

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 TRADITIONAL FUNCTIONS

 Cash Forecasting- budgeting / accounting records/ Capital budgeting

decisions

 Dividend payments / Payment of Interests/ Redemption of bonds,

debentures, preference shares

 Working Capital monitoring

 Cash Management (limits)

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 TRADITIONAL FUNCTIONS (contd.)
 Investments

 Credit decisions

 Fund raising (Debt vs Equity, sale of assets)

 Bank Relationships (OD / CC limit negotiation)

 Cash management through lock-boxes

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 The accounting staff generally handles the receipt and disbursement of cash, but the
treasury staff needs to compile this information from all subsidiaries into short - range
and long - range cash forecasts.
 These forecasts are needed for investment purposes, so the treasury staff can plan to use
investment vehicles that are of the correct duration to match scheduled cash outflows.
 The staff also uses the forecasts to determine when more cash is needed, so that it can
plan to acquire funds either through the use of debt or equity.

 Cash forecasting is also needed at the individual currency level, which the treasury staff
uses to plan its hedging operations.
 A key component of cash forecasting and cash availability is working capital,
which involves changes in the levels of current assets and current liabilities in
response to a company’s general level of sales and various internal policies.

 The treasurer should be aware of working capital levels and trends, and advise
management on the impact of proposed policy changes on working capital
levels.
 The treasury staff uses the information it obtained from its cash forecasting and
working capital management activities to ensure that sufficient cash is available for
operational needs.

 The efficiency of this area is significantly improved by the use of cash pooling systems.
 The treasury staff is responsible for the proper investment of excess funds.

 The maximum return on investment of these funds is rarely the primary goal.

 Instead, it is much more important to not put funds at risk, and also to match the
maturity dates of investments with a company’s projected cash needs.
 The interest rates that a company pays on its debt obligations may vary directly
with market rates, which present a problem if market rates are rising.

 A company’s foreign exchange positions could also be at risk if exchange rates suddenly
worsen.

 In both cases, the treasury staff can create risk management strategies and
implement hedging tactics to mitigate the company’s risk.
 The Treasury Department is also responsible for the company’s dividend policy

 Are dividends paid monthly, quarterly, semi-annually, or annually?

 How much per share should be paid?

 What is the impact to long-term cash flow?

 What will be the impact on the long-term stock price?

RRS Dec 2020 17

The treasury staff monitors market conditions constantly, and therefore is an excellent
in - house resource for the management team should they want to know about interest
rates that the company is likely to pay on new debt offerings, the availability of debt,
and probable terms that equity investors will want in exchange for their investment in
the company.
 When a company issues marketable debt, it is likely that a credit rating agency will
review the company’s financial condition and assign a credit rating to the debt.

 The treasury staff responds to information requests from the credit agency’s review
team and provides it with additional information over time.
 The treasurer meets with the representatives of any bank that the company uses to
discuss the company’s financial condition, the bank’s fee structure, any debt granted to
the company by the bank, and other services such as foreign exchange transactions,
hedges, wire transfers, custodial services, cash pooling, and so forth.

 A long - term and open relationship can lead to some degree of bank cooperation if a
company is having financial difficulties, and may sometimes lead to modest reductions
in bank fees.
• Leverage -means to use
• Operating leverage - Operating leverage compares sales
to the costs of production.
• Fixed costs involve the property, plant and equipment you use to create
products. These costs are independent of the number of units you
produce. Variable costs are the additional costs required to produce a unit
of marketable inventory, such as the costs of raw materials, electricity,
packaging and transportation.

• You can measure operating leverage as the ratio of fixed costs to

variable costs or fixed costs to total costs.

• Higher values of this ratio indicate high operating leverage. High operating
leverage may indicate unutilized capacity.
• Financial leverage is a measure of debt, usually defined
as total debt divided by the owners’ equity, which are assets
minus liabilities.
FL = Total Debt/Equity
• By increasing financial leverageinstead of issuing stock, you can use
the additional funds to increase production without diluting earnings
among a greater number of shareholders. In this sense, it
magnifies your profits per share.
 MODERN APPROACH

 The Strategic Approach (strategic risk/ reputational risk)

 Automated processes (Operational Risks, Operational Security measures)

 Cash may not be favoured always (Money Laundering Risk)

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CORPORATE TREASURY PRIORITIES
& DAILY TASKS
1 Market Overview (Micro/Macro)
Fx Operations & Fx Exposure
2 Management
Short-term Funding And Interest
3 Rate Exposure Management
Long-term Funding And Capital
4 Structure Analysis
Industry Peer Relative Value
5 Analysis
Cash (including Fx) Management, Risk
6 Management & Portfolio Management

Industry Specific
7 Intelligence & Overview

24
 CASH AT BANK ON A FEW
FRIDAYS AT DAY END
Fridays Closing Cash Balance

3rd June 2016 INR 20,98,765.97

10th June 2016 INR 11,76,654.89

17th June 2016 INR 1,36,23,672.11

24th June 2016 INR 1,78,29,567.28

1st July 2016 INR 1,20,97,239.01

8th July 2016 INR 12,13,145.45

15 July 2016 INR 1,44,30,566.30

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 FORECASTING AND
DEPLOYMENT OF IDLE CASH

 Which are the possible investment options on a Friday?

 Opportunities and Risks

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Type of risks in a Treasury Market risk is defined as the
risk that the value of ‘on’ or
‘off’ balance sheet positions
will be adversely affected by
movements in equity and
interest rate markets,
currency exchange rates and
commodity prices
Funding risk is driven by Market
the possibility that, over a Risk
specific horizon, the bank Credit risk is defined as the
will become unable to potential that a bank
Credit borrower or counterparty will fail to
settle obligations when
due.
Funding Risk meet its obligations in accordance
with agreed
Risk terms

Risk Types
Regulatory risk is the risk
that every regulator bound
bank or company is exposed The risk of loss resulting
to, with respect to the from inadequate or failed
‘license to operate’ being Regulatory Operational
internal processes, people
withdrawn or repercussion risk Risk
and systems or from external
that would adversely lead to events. Typically, includes
an impact on economic value legal risk, but excludes
of an enterprise strategic and reputational
Counterparty
credit risk
risk.
Counterparty Credit Risk
(CCR) means the risk that
the counterparty to a
transaction could default
before the final settlement of
the transaction's cash flows.
 Market Risk Components
• Refers to the • Risk that one's
uncertainties of future investments will
market values and of depreciate because of
the size of the future stock market
income, caused by the dynamics causing one
fluctuation in the to lose money.
prices of commodities Commodity Equity
Risk Risk

Interest
Currency
Rate • Interest rate risk is
Risk defined as the risk
Risk that the relative
• Risk that arises due value of a security,
to change in price of especially a bond,
one currency against will worsen due to an
another. interest rate increase

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 Treasury Functions
 Assets Liability Management (ALM)
 To Maintain Liquidity.
 To use Excess Funds effectively.
 To Borrow Necessary Funds at Minimum.
 Trading (Currency, Papers).
 Regulations Monitoring.
 Risk Management.

RRS DEC 2020

Some Micro Challenges
 ALM
 Interest Rate Mismatch
 Gap Analysis
 Payables and Receivables Management

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Macro Challenges
 Policy Standards
 Regulation
 Compliance
 Technology adoption
 Transfer Pricing

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STRATEGIC CONSIDERATIONS
Capital
Programme
Balance Sheet
Position Deliverability
of Schemes
Budget
Pressures
Slippage etc

Security of
Capital
Capital
Receipts
Budget
Profiling –
Capital and Cash Flow
Revenue Management

32
Risk Management Infrastructure
Best practice institutions have the following elements that
constitute a sound risk management system:

1. Active board and senior management oversight

2. Adequate policies, procedures and limits

3. Adequate risk measurement, monitoring and

management information systems

4. Comprehensive internal controls

RRS DEC 2020

 Best practice institutions ensure that all the employees read
from the same script and sing from the same sheet of music.
Every employee of the institution, is sensitized to the issues
of Risk Management.

 All need to march to the same beat of the drum

RRS DEC 2016

 Policy Statement
 To have a well-articulated policy
statement generally approved by the
Board of Directors.

 The policy statement is customized

and is not a "cookie cutter" ; they
believe that "one size does not fit
all" RRS DEC 2020
 Control Framework
Best Practice institutions ensure that the Risk
Management limits are articulated to place a "ring
fence" around operating managers rather than
tying their hands with rigid limits. They strive for
a judicious balance between "tight controls" and
"loose controls".

RRS DEC 2020

 TREASURY IS DIRECTLY LINKED
TO STRATEGY
 Is Treasury department a/an
 Cost Centre

 Investment Centre

 Profit Centre ?

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 SOMETIMES

 Treasury is called a business partner

 Hierarchy

 Importance of technology

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 RAISING CAPITAL
 How do you see the corporate financial scenario in 2020?

 From the business opportunity point of view

 Investor’s point of view

 Rates and rating point of view

 Various Markets and tradability point of view

 Should a company proceed for an IPO

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 THE CHALLENGE IN RAISING
CAPITAL

 Private Equity

 Venture Capitalists

 Angel Financing

 IPO (with premium)- Book Building

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 DETERMINING CAPITAL
STRUCTURE
 A company’s capital structure is effectively how a company is financed

 What percentage of total assets are financed from debt?

 What percentage of total assets are financed from equity?

 Determining the best capital structure for a company is based on its long-term cash flow
and as a going concern

 Does the company have a limited life?

 Are future cash flows certain for variable?

RRS Dec 2020 41

 LONG-TERM CASH FLOW
ANALYSIS
 If the company has strong certain cash flows for several years, it should be weighed
towards debt

 Cash flow to make debt payments

 Tax benefit from the interest payments

 Ownership is not diluted by issuing additional shares

 Debt has a fixed time horizon

RRS Dec 2020 42

 LONG-TERM CASH FLOW
ANALYSIS
 If the company has variable or uncertain cash flows for several years, it should be
weighed towards equity

 Less of a cash obligation for debt payments

 Greater flexibility for cash flow fluctuations

 Allows for long-term investing without worrying about short term obligations

 Start-ups generally issue equity as they don’t have the cash flow for the debt
obligations
RRS Dec 2020 43
 RAISING CAPITAL
 Companies raise capital for many reasons:

 Expansion

 Internal Investment

 Purchasing a new building

 Purchasing new technology

 Acquisition

 Handle Seasonal Cash Flow Needs

 Ski Resort in summer time

RRS Dec 2020 44
 RAISING DEBT
 Debt can be raised through Loans or Bonds
 Loans are made through a commercial bank
 Bonds are issued through investment banks

 Loans would be used for smaller cash flow needs, as they carry higher yields

 When issuing bonds, a Treasury Analyst would…

 Do comps on similar issuances to determine maturity and rates
 Analyze the overall after-tax impact
 Match the financing to the investment time horizon
RRS Dec 2020 45
 RAISING EQUITY

 Equity would be issued through an investment bank

 The investment bank would help determine the price and quantity of the shares to
be issued

 The company would pay flotation costs to the investment bank for the issuance

 The present ownership, if private, would receive cash in exchange for reducing
ownership in the company

RRS Dec 2020 46

 THEN WHAT DO WE MEAN BY
TREASURY MANAGEMENT?
 Management of Organization’s Liquidity to ensure that the Right amount of
cash resources are available in the Right place in the Right currency and at the
Right time in such a way that it maximizes (rather optimizes) the return on
surplus funds; minimizes the financing costs of the business and controls
various risks, particularly the interest rate risks and currency exposure to an
acceptable level.
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 WHO LOOKS AFTER TREASURY?

 CFO

 VP- Finance or Director of Finance

 Treasurer

 Controller

 Investment Managers

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 Board of Directors

Chairman and CEO

President and COO

VP, Sales/Marketing VP, Finance VP, Operations VP, R&D

Controller Treasurer

Cash Manager Credit Manager Global Finance Capital Financial

Expenditure Planning

Exposure Budget Bid Support Process Foreign

Management Planning Currency

RRS Dec 2020 49