MONASH

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BFF3651 Week 1

Introduction to
Treasury Management
 Welcome Note
• Chief Examiner: Lubna Rahman
– Lubna.rahman@monash.edu

• Teaching Assistants (Tutor)

– Nhung (Natalie) Le (Lead Tutor)
– nhung.le@monash.edu
– Taoran Guo
– Taoran.Guo@monash.edu
– Teaching and Learning Approach:
– 2hrs lecture + 1hr tutorial.

• No lecture on Mid-semester week

• Tutorial starts from week 1

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 Unit learning outcomes
• On successful completion of this unit, you should be able
to:
– explain the role of treasury operations in an
international or a local bank
– describe how risk management processes work
– demonstrate the application of hedging techniques
used in banks' treasury operations
– apply critical thinking, problem-solving, and
presentation skills to individual and/or group
activities dealing with treasury management and
demonstrate in an individual summative assessment
task the acquisition of a comprehensive understanding
of the topics covered by BFF3651.

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Unit Schedule

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Unit Schedule

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 Text books and others
• Textbook: Saunders, A., Cornett, M. M., and Erhemjamts, O.
Financial institutions management: A risk management approach
(10th ed., 2021). McGraw-Hill Irwin.

– Feel free to use the versions if you possess any

• Calculator policy: HP10bII+; Casio FX82 (any suffix).

• Recorded lecture will be available on Moodle

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 Moodle Communication
• Most of the after-class communication is through Moodle.
• Announcement forum: Lecturer posts announcements for
administration issues. Students should check regularly.
• Academic forum: Students post questions related to the unit
materials.–e.g., lecture, quiz, exam.
• Student discussion forum: Students post questions to interact
with other students.
• Before posting, check whether your question has already been
answered.
• Students are encouraged to answer questions from others.
• No last-minute question before exam/assignment due date.
• Be precise.

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 E-mail Communication
• Send an e-mail to the CE if –a privacy enquire which is not suitable to
appear on Moodle.
–Special consideration application (application form + supporting
documents), but not clarification questions.
–Urgent and others.
• ONLY send by Monash student e-mail. Ask question clearly.
• Unit code in the e-mail subject.–E.g., “BFF3651: Question”.
–E-mails without unit code may be categorized as junk.
• Be professional: Include Student ID, your name, email recipient’s
name, and unit code clearly
• If you send a question that supposes to be on Moodle, you will be asked
to post it on Moodle. So, all students can benefit from the answer.
• Acting professionally (reading and responding to emails, completing the
follow-up (post-class) activities, meetings, correspondence etc.

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•
Special Consideration
You may be eligible if you fail to complete your final exam or
assessment, due to exceptional circumstances beyond your control:
–acute illness.
–loss or bereavement
–hardship or trauma.
• You may also be eligible for special consideration if you can show
your obligation to:
–military service.
–jury service
–emergency services such as the Country Fire Authority.
– Monash Sport’s athlete support program, if you are
participating in a critical event.
• Apply no later than two University working days after the due date
of the affected assessment
• https://www.monash.edu/exams/changes/special-consideration

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 Workload requirements
• Minimum total expected workload to achieve the
learning outcomes for this unit is 144 hours per
semester typically comprising a mixture of scheduled
learning activities and independent study.
• Independent study may include associated readings,
assessment and preparation for scheduled activities.
• The unit requires on average three/four hours of
scheduled activities per week.
• Scheduled activities may include a combination of
teacher directed learning, peer directed learning and
online engagement.

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 Assessment
Assessment Task Weighting Due Dates Learning
Outcomes
Assessed

In Semester Assignment 1 10% End of Week 3, 17th March, 2024 1, 2,3,4

(Individual)
In Semester Assignment 2 10% End of Week 9, 5th April, 2024 1, 2,3,4
(Individual)
Mid Semester Test 30% Teaching Week 6 – Please refer to the 1, 2, 3,4
University timetable for details.
Final Examination 50% To be advised 1, 2, 3,4

• Exams:
– MST: WK1-4
– Final: 1-12
– Moodle quiz
• Assignments: 1000 words individual assignment
– Penalty for late submission
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 Lecture: Week 1
• Learning Objectives
• By the end of this lecture, students should be able to:
– Understand the functions of treasurers
– Explain some challenges of treasury management
– Uunderstand Treasury Management System (TMS)
– Understand the recent trends of liquidity management

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Lecture: Week 1

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 Quick Facts: Tyco International in 2002
• A conglomerate with $35.6 billion in global sales operating in 90
countries worldwide in 2002
• CEO Dennis Kozlowski and CFO Mark Swartz were forced to resign for
taking bonus without board approval and using corporate resources for
personal use
• The scandal came out in 2002 when Enron and MCI Worldcom had
declared bankruptcy, and investor faith was at an all-time low. Tyco was
a potential candidate of bankruptcy
• Problem:
• Mismanagement of corporate resources by senior executives although
its business was strong and generating positive cash flows
• Faced liquidity crisis for poor debt maturity profile planning
• $11 billion Tyco corporate bonds were maturing in Q3 2003
• Due to negative publicity, the company was struggling to refinance the
debt
• Tyco had ~$6 billion of cash not in treasury, somewhat scattered in
subsidiaries
• Source: HBR cases MONASH
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 Quick Facts: Tyco International in 2002

• Dealing with the problem:

– Appointment of new treasurer Martina Hund-Mejean
– Challenges: getting access to cash and refinancing debt
– Issuing convertible debt at a very high-risk premium to get over
the refinancing requirement
– Restructuring the treasury system: centralized and ensuring that
headquarters have access to cash when required

Source: HBR cases

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 Treasury Management (TM)

Learning Objectives
– Understand the functions of treasurers
– Explain some challenges of treasury management

In short:
Role of treasurers, challenges, and techniques

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 Treasury Management (TM)
• What is treasury management?
• In short: Managing a firm’s liquidity
– Liquidity management is a daily business of an institution.
– It is needed for the ability to meet working capital requirements
and payout cash as deposit holders request withdrawals of their
funds or creditors require repayments, etc.
– A firm can usually meet the liquidity demand by
• Sell off other liquid assets.
– Fire sale lowers equity value
• Borrow additional funds
– Borrowing on the market for purchased funds (e.g., bank
loans)
– Selling some notes and bonds

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 Treasury Management (TM)
• Liquidity management technique: Borrow funds
• Challenges: –The cost of funds (market rate) might be higher –the
availability of these funds can be limited when the lenders are
concerned about the solvency of the firm
• Treasurers foster a strong relationship with creditors (e.g., banks),
credit rating agencies, and regulatory bodies
• A long-term and open relationship with bank>bank cooperation in
financial difficulties, and modest reductions in bank fees.
• When a company issues marketable debt, a credit rating agency
reviews the company’s financial condition based on the treasurer’s
information and assigns a credit rating to the debt.

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 Treasury Management (TM)

Learning Objectives
– Understand the functions of treasurers
– Explain some challenges of treasury management

Role of treasurers, challenges, and techniques: In details

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 Treasury Management (TM)
• What is treasury management?
• Specifically: a system of
– monitoring current and projected cash flows, and using this
information to invest excess funds correctly, as well as making
additional borrowings or capital raises.
– safeguarding existing assets, which calls for the prudent
investment of funds while guarding against excessive losses on
interest rates and foreign exchange positions
– monitoring the internal processes and decisions that cause
changes in working capital and profitability, while also
maintaining key relationships with investors and lenders.

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 Treasury Management (TM)
• Let’s zoom in:
• Treasury management is a system of monitoring current and
projected cash flows and using this information to invest excess
funds correctly
– Challenges that treasurers face: Trade-off:
• Holding too many liquid assets reduces the profitability of an
institution and therefore threatens its existence.
• Holding too few liquid assets causes liquidity crisis and
regulatory interventions and thus endangers an institution’s
existence.
• Role of treasurer:
– Minimizing mismatch between liquid assets and short
term liability
– Securing low-cost financing sources is challenging
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 Treasury Management (TM)
• Let’s zoom in:
• Treasury management is a system of safeguarding existing assets,
which calls for the prudent investment of funds while guarding
against excessive losses on interest rates and foreign exchange
positions

– Is taking less risk optimal for shareholders? No. Why?

• Shareholders hold diversified portfolios

– Interest rate risk and Foreign exchange risk: Will

discuss later.

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 Treasury Management (TM)
• Let's zoom in:
• Treasury management is a system of monitoring the
internal processes and decisions that cause changes in
working capital and profitability while also maintaining
key relationships with investors and lenders.
– Challenges that treasurers face: Working capital v.
profitability: trade-off problem
• More working capital: smooth day-to-day
operation. However, profitability may suffer
– Challenges that treasurers face: Satisfying investors
(e.g., shareholders) and lenders (e.g., creditors)
• Taking more debt provides tax advantages, but
creditors’ risk increases
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 Treasury Management (TM)
• Role of Treasurers: Head of the corporate treasury department
• Main takeaway: Treasurers are not only cash managers
– They are risk managers who apply strategic skills to monitor
potential risks and design techniques to mitigate those risks,
– They design financing and debt repayment procedures
– They engage in capital budgeting (capital expenditures and
acquisitions) and dividend payment plans
– They review and adjust financial strategies to operate in a
changing environment
– They are management advisors. They send early warnings to
senior managers on the potential threat to earnings and help to
improve firm value

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 Treasury Management (TM)

• Learning objectives:
– Understand the functions of treasurers
– Explain some challenges of treasury management
– Understanding Treasury Management System (TMS)
– Understanding the recent trends in liquidity management

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 Treasury Management
• “the management of an organisation’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 as to
minimise financing costs, maximise the return on surplus funds of
the business and control the associated risk to an acceptable level”
(Finance and Treasury Handbook)

• To ensure liquidity, which type of treasury management is

appropriate?
– Centralized or decentralized

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 Treasury Management
• Decentralized Treasury Management: Treasury duties conducted
at the local level
– each unit
• maintains own bank accounts, own liquidity position, and
own banking relationship
• establishes own financing and investment decisions
• sets up its own guidelines and control procedures.

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 Treasury Management
• Centralized Treasury Management: Group Treasury (GT)
undertakes all treasury activities.
– Better visibility and more control over liquidity that leads to
improved investment and funding decisions, better forecasting,
and faster repayment
– Regulatory Implications: Sarbanes-Oxley Act (SOX): CEO and
CFO must sign financial statements
• Since after SOX, top executives are more accountable for
financial statements, they prefer instant and centralized
visibility of corporate finance and cash positions
(Centralized TM)

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 Treasury Management
• Will centralized TM provide a hedge against global liquidity shock?
NO
– Recent trends: Firms are reducing non-essential capital
expenditures and operating costs
– Other recommended steps:
• Maintain adequate liquidity position
• Extend debt maturity profile
• Protect credit rating
• Benefits of Tyco from Centralized Treasury Management
– Reducing free cash holdings and increasing profitability
– Restructuring debt repayment
– Minimizing reliance on external funding
– Developed their relationship with key vendors, clients, and
distributors

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 Treasury Management (TM)

Let’s detect some changes in Tyco after TM restructuring

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 Treasury2002Management
2003 2004 2005 2006

Cash and Cash Equivalents $6,475.40 $4,804.80 $4,467.00 $3,505.00 $3,267.00

Receivables $5,831.90 $5,714.80 $6,463.00 $6,732.00 $7,060.00
Inventories $5,016.40 $4,679.40 $4,365.00 $4,197.00 $4,793.00
Other Current Assets $2,315.70 $2,040.50 $3,250.00 $4,103.00 $3,552.00
Total Current Assets $19,639.40 $17,239.50 $18,545.00 $18,537.00 $18,672.00
Total Assets $65,457.50 $63,545.00 $63,667.00 $62,621.00 $63,012.00

Accounts Payables $3,173.80 $2,716.70 $2,698.00 $3,065.00 $3,526.00

Notes Payables $0.00 $0.00 $0.00 $0.00 $0.00
Accrued Expenses $2,219.10 $0.00 $0.00 $1,682.00 $1,643.00
Debt (Long-term) due in
one year $7,719.00 $2,718.40 $2,116.00 $1,954.00 $800.00
Other current liabilities $6,578.60 $5,137.20 $6,338.00 $5,134.00 $4,615.00
Total current labilities $19,690.50 $10,572.30 $11,152.00 $11,835.00 $10,584.00

Sales $35,589.80 $36,801.30 $40,153.00 $39,727.00 $40,938.00

Cost of goods sold $20,965.80 $22,273.10 $24,166.00 $24,508.00 $25,864.00
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Net Profit -$9,179.50 $979.60 $2,879.00 $3,032.00 $3,590.00
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 Treasury Management
Liquidity 2002 2003 2004 2005 2006
Current ratio 99.74% 163.06% 166.29% 156.63% 176.42%
Quick ratio 74.26% 118.80% 127.15% 121.17% 131.13%
Cash ratio 32.89% 45.45% 40.06% 29.62% 30.87%
Net working capital
to assets -0.08% 10.49% 11.61% 10.70% 12.84%
Profitability
Net profit margin -25.79% 2.66% 7.17% 7.63% 8.77%

• After Centralized Treasury Management, Tyco’s

-liquidity position measured by the current ratio and the quick
ratio has improved
-Cash ratio, which is a very conservative measure of liquidity has
declined, which indicates that Tyco has held less free cashflows
-Tyco’s working capital position has improved.
-Martina’s strategy improves Tyco’s profitability without
hampering its liquidity.
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 Treasury Management
Efficiency 2002 2003 2004 2005 2006
Sales to assets 54.37% 57.91% 63.07% 63.44% 64.97%
Days in inventory 87.33 76.68 65.93 62.51 67.64
Average collection period 59.81 56.68 58.75 61.85 62.95
Cash conversion cycle 91.89 88.84 83.93 78.71 80.83

•After Centralized Treasury Management, Tyco’s

-Efficiency measured by sales to assets (sales turnover) has improved
-Cash conversion cycle and inventory processing period have become
shorter
-Although firms prefer to have a more concise collection period,
Tyco’s collection period has become longer compared to 2002.

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 Treasury Management
• Current ratio = current assets/current liabilities
• Quick ratio = (current assets-inventories)/ current liabilities
• Cash ratio = cash and cash equivalents / current liabilities
• Net working capital to asset = (current assets-current
liabilities)/total assets
• Net profit margin = net profit/net sales
• Sales to asset (sales turnover)= sales/ assets
• Days in inventory = 365/(COGS / inventory)
• Average collection period = 365 / (sales/accounts receivables)
• Average payment period = 365/(COGS/accounts payables)
• Cash conversion cycle = Average collection period + Days in
inventory - Average payment period

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 Treasury Transformation at Roche
• The case study explains how Roche, a conglomerate comprising
diverse business divisions such as Pharmaceuticals, Diagnostics,
and Fragrances, initiated and established its treasury management
system.
• In 2002, Roche suffered huge losses due to its position in equities
in other companies and FX derivatives.
• The company quickly made announcements of losses within a very
short period, leading to the replacement of two CFOs as losses were
coming to light over 2001-03.
• Mr. Martin Schlageter joined as the head of the treasury division,
and since 2004, Roche's treasury team has been on an ambitious
journey that has proved to be a model for treasury functions
worldwide.
• The team first centralized and optimized its banking and cash
management operations, focusing on operational efficiency and
automation.

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 Conclusion
• Learning Objectives
• By the end of this lecture, students should be able to:
– Understand the functions of treasurers
– Explain some challenges of treasury management
– Uunderstand Treasury Management System (TMS)
– Understand the recent trends of liquidity management

MONASH
BUSINESS
SCHOOL