This article explores the fundamental distinctions between treasury management and financial management. Treasury management involves establishing and overseeing policies and procedures to effectively manage financial risk within a company. It encompasses the objectives, scope, and functions of treasury management.
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Understanding Treasury Management
Treasury management involves the meticulous planning, organization, and control of cash and borrowings to optimize interest and currency flows while minimizing the cost of funds. In simpler terms, it encompasses handling all financial matters within a company, including generating internal and external funds, managing currencies and cash flows, and implementing complex corporate finance strategies, policies, and procedures. The primary goal is to ensure that adequate funds are available when needed and that funds are not left idle for extended periods.
This involves managing cash flows, banking transactions, money-market activities, and capital-market transactions, while effectively controlling associated risks and striving for optimal performance within those parameters.
Objectives of Treasury Management
- Availability of the Right Quantity: Ensuring that the necessary funds are available in the required quantity, sourced either externally or internally.
- Availability at the Right Time: Ensuring that funds needed for day-to-day operations are available promptly.
- Deployment of Funds in the Right Quantity: Ensuring that funds are deployed appropriately, with a clear timetable for deployment.
- Deployment of Funds at the Right Time: Honoring outstanding commitments on working capital promptly.
- Profiting from Availability and Deployment: Seeking to profit from sourcing and deploying funds efficiently and effectively.
Scope of Treasury Management
Treasury managemen. operates at both macro and micro levels within the economy. At the macro level, it involves managing cash inflows and outflows, credit, and other financial instruments, which are functions of both the government and business sectors. Micro units utilize these inflows to build production capacities, leading to the establishment of production, distribution, and consumption systems. Surpluses generated at the micro level are channeled back into the macro system.
Functions of Treasury Management
- Cash Management: Controlling the organization’s cash assets and liabilities.
- Liquidity and Funds Management: Analyzing cash flow from asset-liability transactions and funding various assets on the balance sheet.
- Risk Management: Actively managing risks associated with changes in interest rates, credit risk, and other financial risks.
- Reserve Management and Investment: Selecting investment products, brokers, and borrowing methods, and developing cash management information systems and investment policies.
- Maintaining good relations with fund suppliers, investors, and shareholders.
- Addressing the financial implications of strategic and policy decisions.
- Interacting with financial markets, including the capital market.
