This paper will discuss Corporate Treasury and the areas that are very essentials for a corporate treasury Department of a company. Corporate Treasury Corporate treasury deals with the handling and management of a company’s finances, the treasury department in a nutshell is responsible for the cash flows of the organization; it manages them in manner that is most efficient and turns out to be profitable for the company.
The treasury also analyzes the company’s activities, forecasts the company’s financial needs and arranges it from number of alternatives that it comes up with (Cooper, 2004). With the ever evolving financial dynamics of the world the field of corporate treasury has also spread its horizon, the areas of treasury now vary from risk management, allocation of resources and determining the capital structure for the company. Following areas are essentials for a corporate treasury department of a company
1. Liquidity Risk By definition Liquidity risk is the risk that a company bears that for not being able to sell its assets or securities within the time period to prevent itself from incurring any losses. Liquidity is divided into two basic types Asset and Funding, Asset liquidity is not being able to liquidate any asset due to market situation and Funding liquidity is when the company is not able to meet its liability at the given time (Cooper, 2004).
What the treasury department does in this case is that that it does all the contingency planning that is they analyze every aspect of all the situation and plan in such a way that the company stays out of trouble in all situations; one example of such strategy is that the companies usually diversify their liquidity providers so that in times of an economic crunch liquidity can be shared by a number of companies(Cooper, 2004). 2. Cash Management
Cash management is usually referred to the management of cash flows, and the fact that how much of cash reserves a company should have at a point of time so that the reserves are sufficient and the company doesn’t have too much of idle cash which is a lost opportunity in itself. 3. Debt Debt management is an integral part of treasury the company needs to do its financing in the most efficient that is it has to maintain the lowest financing cost as possible and not just that but also the terms on which the financing is agreed must also align with the company’s objectives.
From the lender’s point of view that are mostly banks they need to make sure that whoever they are extending loans to the bank will be able to retrieve it from them and at a profit(Cooper, 2004). 4. Hedging Hedging is referred to the procedure when a company builds a safety wall around its assets in order to secure it from the sharp and sudden drops in the market. Treasuries usually do that in order to provide a safety cushion for the company to sustain any downturns in the market. 5. Interest Rate Risk
It is the risk associated with the interest rate adjustments that come with periodic revisions in lending policies, any unfavorable adjustments can make the finance cost for the company go really high and can impact the profit making to a great extent so the treasury during its contingency planning always has a segment to deal with the vulnerability of interest rates. Not only finance cost but also company’s investments in different areas can be affected by it as well, to prevent this Hedging is a strategy that is used by a large number of companies.
6. Securitization Securitization is a process where the assets are put in a pool and then dividing these this pool in to shares, these shares are then offered to investors who may from these shares share profits and losses of the company. It is an important treasury decision where it needs to be decided how much of the company assets will be securitizes and what impact will they have on company’s financial structure (Cooper, 2004). 7.
Investment Management It is the responsibility of the treasury to manage the investments in an efficient manner that exposes the company to least amount of risk and makes most profit for it. The investments need to be well diversified and not accumulated to a risky few so that the company is able to sustain any crashes in a particular sector through better performance in other sectors, portfolio management is an integral part for any company’s treasury.
8. Capital Structure The treasury even decides the capital structure of the company that is it determines the ratio between the financing done by debt and financing done through equity, these decisions need to be done after proper analysis of companies resources that is how much of interest costs can the company sustain or how much of the profits can the company share or want to share in the case with equity financing.
The capital structure also shapes the company’s policies for the future as the decision making power is also dependent on the capital structure (Cooper, 2004). 9. Advisory The treasury department plays an important part in the decision making process knowing all the key details of the financial situation of the company it acts as an important advisor to the authorities and influence policies of the company to a great extent.
Treasury is an important department for any organization as it shapes the entire finance handling of the company, it is essential for the treasury to be efficient in order for the company to be successful, for treasury it needs to be aware of all the risks that the company might face and must plan accordingly to tackle these potential threats, a treasury must plan in a manner that the company is almost immune to any crisis that generally effects the market and still is able to make profits. 10.
Financial Analysts In the recent scenario and the problems that the world economics has been facing there is an extreme need to revisit the policies and plan the future accordingly, thus financial analysis are extremely necessary and this is what I want to pursue as a career I want to be a financial analyst. A financial analyst breaks down the activities of the company into parts and analyzes their financial status in mosaic approach; he deals each part as a problem and solves it one at a time.
He analyzes the amount of risk that the company faces and the company’s standing against these risks, he does so using standardized quantitative and qualitative parameters where he judges the company’s position. 11. The investor’s requirements Working for the company he focuses on making the firm attractive for the investor to invest in, and while working for the investor he determines the actual financial standing of the company and determines whether the company is worth the investment or not. Investors are usually interested in four major areas
• Value of the company What is the actual value of the company in terms of its assets and its liabilities this may be done to cross check the claimed value by the company. • Sustainability of the company Secondly the investor wants to know how secured his investment will be that is that if the company possesses the sustainability against the potential threats of the market, in terms of any market crash will the company stand or will it go bankrupt with the market basically they want to determine the company’s immunity and dependency on the market.
• Distribution of profits Third they want to know the profit or loss distribution to the shareholders, it is basically the concern of profit sharing and return on investments which of course every investor will be interested in. • Growth of the Company Fourth and the last thing that the investor is concerned about is the growth of the company as they want to know the growth of their investments in the future. Answers to the Investor • Allocation of Resources
In order to answer these concerns of the investors the financial analysts analyze the allocation of company’s resources and the efficiency of this distribution, it strengths, weaknesses and the impact of them on the company’s future performances. • Liabilities The analyst also exposes the company’s liabilities that is how much the company owes to others, its financing, the costs incurred because of it and its ultimate effect on the company’s profits, their terms on which these liabilities were accepted and their effect on company’s decision making process also is a matter of concern for the analyst.
• Investment Security In order to assure the security of investment and future profits to the investor the analyst also investigates the company’s ability produce long-term profits and sustainable cash in-flows. • Risks To educate the investor of all the threats to his investment it is the duty of the analyst to inform him of all the risks that the company bears during its operations as this will be an important parameter for any investor to judge whether he should invest in the company or not.
Financial analysts do not take decisions but serve as an aid in any decision making process, as any company cannot make decision without having all the information about its finances hence it requires comprehensive financial analysis to determine the current status of the company, the future of the company or to check the feasibility of any project that the company wants to undertake as part of its activities.
Financial analysis provides comprehensive information about company’s financial situation, its ability to sustain any instability in the environment, its ability to hop on to opportunities that may come in future, and its future growth with time. All of this information enables the authorities to make decisions that would shape the organization’s future not only this it also tells the investor how fruitful and secure it is to invest in the company and its ability to make profits. Reference: Cooper, R. (2004). Corporate Treasury and Cash Management (Finance and Capital Markets). Palgrave Macmillan