Role of Corporate Treasury

The corporate treasurers in a new strategic role, they have to change their roles to become business advisors on potential economic risks which can affect the business value chain.

Role of the corporate treasury is progressing slowly, transforming from the management of liquidity and financial risk to a strategic role. If we observe the historical data of large and mid-sized corporates, the desire to reduce the cost led to a massive growth of the corporate treasury. A corporate treasury department is considered as an in-house solution for managing funds of an organization. Normally, the corporate treasury executes functions such as liquidity planning, managing risks, cash management, and procuring finance for the business. Although the Treasury has a solid role to perform in financial risk management along with the regular functions like financing working capital and funding for long-term growth. Worldwide it is expanding its footprints into services like managing credit relations and providing advice to business units. What are those business changes that are responsible for the changing corporate treasury management?

In a complicated and fast pace business scenario, corporate treasuries have experienced a gradual shift to capital structure management from debt management. They increased their focus on improving return on equity by leveraging and managing investor relations, to support long-term growth partly from raising long-term equity capital and aligning business cash flows with debt servicing obligations.

After the global financial crisis, financial risk management has also become the main concern for companies. Going forward, corporate treasurers require to focus on optimizing the cost of hedging, engaging with businesses to provide risk management solutions, accounting for hedging transactions, effective netting of forex flows, and contract structuring to pass on forex risk.

Engaging business to provide risk management solutions is one of the most essential internal areas to focus and it signals a greater involvement of the treasury function in understanding the inherent risks in the business model. Many global organizations believe that diverse risk exposure across geographies makes it vital to have a global treasury setup. Setting up a global treasury Centre has a number of benefits like access to deeper financial markets, increased range of hedging instruments, reduced regulatory and documentation requirements and reduced cost of working capital financing.

In India companies still do not visualize the need for a central set-up and financial risk management continues to be largely India-centric. Due to rapid globalization and the rise in the internationalization of businesses, the role of corporate treasury in cross-border activities has increased. A smooth flow of information from various business units will help manage global cash flows.

One of the reasons for difficulty in managing cash flows is variability in forex and commodity prices. While volatility has made forecasting and management of working capital requirements difficult, the ability to evaluate impact from volatility on a regular basis through the use of forecasting and decision support tools is judgmental. Managing liquidity risk emerging from market volatility has become a focus area of corporate treasurers. Corporate treasurer’s responsibility is to focus on improving return by utilizing idle surpluses by gathering cash across various geographies and entities, diversifying present short-term instrument mix and raising the level of monitoring the idle cash.

As per the Deloitte survey, 65 percent of the companies invest cash surplus for less than six months. The main principle for short-term investment is the liquidity risk followed by credit risk and market risk with a focus on return from these investments being low.

When business is going global, there is a significant evolution of treasury management and companies need to decide whether to place the treasury as a centralized or decentralized department. In a centralized set-up, a specific team takes the important decisions and functions on behalf of all the group companies located at various locations. In such cases, there is a central location handling of functions, like fund management and risk management for the whole group. In contrast, a decentralized structure assigns the decision-making power to smaller units, located geographically apart, with cash management done locally. Since local management has numerous benefits, like customs, language, and culture, familiarity with business, companies have an advantage from decentralized control when it comes to treasury operations.

However, the benefits of decentralized operations are more significant than the advantages of centralized operations. Choosing centralized treasury operations can help in increasing professional treasury knowledge and reduce the cost of services. Though a completely centralized environment may seem to be the most opted structure for multinational corporations, in reality, many companies in India will not prefer to take this route. Due to practical reasons, most of them end up with a hybrid or decentralized arrangement.

With increasing scopes, there are some challenges to be resolved by corporate treasurers to meet increased expectations. The absence of a clear view of exposures and inadequate control over working capital utilization are the main internal challenges for corporate treasurers. Quality talent crunch in the marketplace, laws affecting cash pooling along with unmanageable volatility in financial markets are their external concerns. Additionally, price discovery continues to be the main concern for corporate treasurers. Covenant management, matching cash flows, and servicing obligations are also main operational challenges.  So how do we address these challenges?

Technology is the answer. Investments for automating treasury processes, implementation of treasury performance management systems, developing decision support tools and risk models will be vital and would make corporate treasurers ready for the new role. Also, placing clear and measurable treasury performance metrics and monitoring those metrics is another way to meet the expectations.

In future corporate treasury management will transform into a strategic role for organizations, in addition to liquidity maintenance and financial risk management. Going forward corporate treasury is expected to function under a three-tiered structure:  

  • Firstly, the strategic roles where the key focus will be on enhancing shareholder value by strategic investments and long-term funding in addition to increasing overall ROE, and maintaining relationships with various stakeholders like investors and institutions.
  • The management role, it is further divided into financial risk management which comprises interest rate, credit, currency, counter-party risk management, and financial supply chain management includes cash and liquidity management
  • The final one is the operational role, which includes the treasury operations.  

Corporate treasurers in new strategic roles, they have to transform themselves to become business advisors on the potential economic risks, which in turn can affect the business value chain. In India, organizations are reclassifying themselves to meet the global best practices by making decision-making more central and using more complicated ecosystems like technology platforms. They are also using a seamless interface for managing transactions and reporting requirements.

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