The overall objective of a Corporate Treasury Function is to - "Maximize shareholder value through optimal use of the firm's financial resources to meet funding demand from the business lines and net working capital requirements of the firm"
Treasury Function is effectively a Bank that sits within a company. In the case of a company that is a Bank, Treasury Function is like a Bank within a Bank. For example - If you wanted a mortgage or a personal loan, you'd go to a Bank. But, how does the Bank have the money to lend to you as a loan or a mortgage? Bank has a Treasury function that manages the process of matching funding supply and funding demand to ensure that at all points in time the Bank has sufficient financial resources to operate as an organization and also to fund its various business lines such as Mortgage Desk or a Loan Desk that we customers interact with seeking products like mortgages or loans.
Let's take another example - If XYZ (a Telecommunication Corporate) wants to build new 5G towers all over the UK, the 5G business line within XYZ will go to its Corporate Treasury department with a Business Case seeking funding to pay for the 5G infrastructure project. There may be many other business cases submitted by other business lines in XYZ as well, so Corporate Treasury will have to use a criteria or key performance indicators including balancing risk and return to evaluate and prioritize the various projects across business lines. Corporate Treasury also have access to Funding - both internal sources i.e. reserves accumulated over the years of XYZ's profitability and external sources i.e. relationships with investors who may be willing to invest in XYZ. If the Corporate Treasury department, the CEO and the Board approve the 5G infrastructure project (in this example), the business line's funding need will be met with Treasury's funding supply.
So, a Corporate's Treasury Function is a Bank within the Corporate that manages internally accumulated funds over the years and has access to external funding sources (i.e. relationships with investors) to tap into if required to meet the Corporate's business funding needs as and when they arise. So, Treasury Function's Objective #1 is "Match funding supply with funding demand".
Because Treasury uses the various funding sources to meet funding demand from businesses, it knows how much to charge every business for the funding they are utilizing. Business Lines within a company should not be allowed to function thinking the funding is all free. When capital is given for free, it can drive wrong incentives and behavior within the firm. So, Business Lines within the company need to be charged for the funding they are using so that the P&L they generate takes into account the cost of funding that they are utilizing to perform their business. Treasury is accountable for managing these charging mechanisms within a corporate. A diverse company with many business lines and operations in multiple geographies will invariably have a fairly complicated internal charging mechanism. These internal charges generally net off or disappear on consolidation but they are key to driving the right behavior within the company. We will cover theses in some detail in the Transfer Pricing section. So, Treasury Function's Objective #2 is "Charge the business line for the funding it is using to perform its business"
When Business Lines within a Corporate generate P&L, the cash arising from the business is deposited with the Treasury, who can then either choose to hold it as Cash or invest in other liquid assets to generate more returns. It is also important to understand that P&L is not Cash. So, Treasury Function's Objective #3 is "Manage cash generated by the company by either holding as cash or investing in high quality liquid assets."
If there is any excess capital after meeting all funding requirements across the company, Treasury may recommend a capital distribution plan to its investors, this includes paying dividends, planning share buybacks, liability management exercise etc. So, Treasury Function's Objective #4 is "Formulate and recommend a plan for capital distribution to investors. Seek approval from the Board before finalizing this plan"
Treasury function will also closely track the duration for which a business line requires funding so that it can optimize by matching the tenor of the externally raised funding for the tenor for which the business needs funding. I have simplified this a bit here, but effectively Treasury tries to match the tenor on both the Assets and Liabilities side so that the firm does not have a tenor mismatch. Having funds for longer duration than required results in higher funding costs for the company. In a similar vein, Treasury also hedges for Interest Rates and FX risks that the company may be subject to. So, Treasury Function's Objective #5 is "Centrally manage tenor mismatch, FX risk and interest rate risk after taking into account any diversification benefits that may exist due to the different businesses performed by the organization."
Other than the Business lines that are P&L generating functions in a company, there are a number of central functions within a corporate, like HR, Legal, Technology, Finance and so on. All these functions have staff, internal project costs and so on. Treasury is accountable for calculating the company's Net Working Capital requirements and ensuring that the company has sufficient funding to meet these requirements. A key metric that Treasury tracks is Cash Conversion Cycle (CCC), which involves Accounts Receivables (AR), Accounts Payable (AP) and Inventor Turnover (IT). AR and IT are short-term assets, while AP is a liability. CCC refers to the company's ability to generate cash using short-term assets to cover for its liabilities. Shorter the CCC, the more efficient the firm is at cash generation. So, Treasury Function's Objective #6 is "Centrally manage the company's working capital requirements and liquidity needs to ensure the company always has sufficient financial resources to meet its obligations when they fall due"
Given the dividend distribution recommendations, and the management of relationships with external investors, Corporate Treasury functions often play an import role in articulating the firm's strategy in the periodic reporting of financial statements and to key external stakeholders. So, Treasury Function's Objective #7 is "Manage relationships with external stakeholders such as Investors, Credit Rating Agencies and Regulators".
Based on all of the above, a Corporate Treasury function plays a lead role in the following key activities:
Funding Strategy - Capital Raising, Capital Allocation, Capital Management
Cash Management
Liquidity Management
Capital Distribution Strategy
Tenor, FX and Interest Rate Risk Management
Transfer Pricing
Stakeholder Management (internal and external)
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