POSITION PAPER: DEFINITION OF TREASURY

The treasury function within a company must first be categorised within the various operational functions. Companies are fundamentally characterised by the procurement, production and sale of goods and/or services. They therefore focus primarily on the core operational functions of investment, human resources and procurement for inputs; production and materials management for manufacturing; and marketing or sales for the sale/output of goods and services. The income/expenses, costs/revenue and cash inflows/outflows generated by these core operational functions are reflected in the areas of accounting, management accounting and treasury. At the head of these operational functions is corporate governance/management, with a focus on goal-setting, strategy and control.

The Treasury department provides liquidity to all areas of the business. Consequently, the other departments – including the operational ones – cannot function without a properly functioning Treasury function. In principle, the Treasury function thus stands on an equal footing with the other commercial departments (primarily Accounting, Controlling, Legal and Tax) and other departments.

Treasury is one of the fundamental core responsibilities of corporate management. It supports the management team or the Executive Board by providing information on the financial framework and the options available for shaping it, thereby assisting in the development and implementation of the corporate strategy. Treasury develops a financing strategy that is aligned with the corporate strategy. The focus of Treasury’s operational activities is on financing the operational value chain and ensuring current and future solvency in every required currency. Treasury also manages and is responsible for the company’s financial risks.

The central treasury objective of ensuring liquidity at all times gives rise to three core functions for all economic entities, regardless of sector, type of business or size:

• Cash & Liquidity Management
• Financing & Financial Asset Management
• Financial Risk Management

The Cash & Liquidity Management ensures that the company has sufficient liquidity in the relevant currency at all times to meet its financial obligations. To fulfil this role, various areas of responsibility must be implemented within Cash & Liquidity Management (see figure), which are described in more detail below.

About the Banking policy A company defines the group of banks from which it wishes to obtain banking services across the group. For smaller companies, it may be sufficient to establish a single-bank solution for payment processing. Larger companies regularly opt for multi-bank solutions, often with the aim of using as few core banks as possible. Local regulations – for example, regarding tax and/or salary payments – often mean that, in payment transactions, collaboration with local banks is also required to ensure regional coverage in certain countries. When selecting banks for cash and liquidity management, the requirements for corporate finance must also be taken into account, as these banks regularly act as lending banks (see also the chapter on ‘Financing & Financial Asset Management’).

Within the scope of responsibilities Bank account management includes the management of external payment accounts (bank accounts) and – where applicable – internal payment accounts (financial settlement accounts), which ensure the processing of a company’s cash flows^.[1] The tasks are as follows:

• Opening, managing and closing bank accounts in different currencies
• Maintenance of core banking data, including powers of attorney and identity verification (KYC process)
• Co-ordinating payment formats for the relevant bank accounts with the banks
• Selection, implementation and use of electronic banking and/or treasury management systems

Group-wide authorisations for opening and closing bank accounts should be issued by the central treasury department and must be carefully documented, including all account authorisations granted, and, where appropriate, set out in a policy.

Within the scope of responsibilities Cash Management This involves managing cash flows and liquidity. The specific tasks are as follows:

Group-wide authorisations for opening and closing bank accounts should be issued by the central treasury department and must be carefully documented, including all account authorisations granted, and, where appropriate, set out in a policy.

The remit of Cash Management includes the management of cash flows and liquidity. The specific tasks are as follows:

• Management of all bank accounts, including those held in foreign currencies
• short-term investment and borrowing of funds
• Initiating and authorising deposits and withdrawals
• Initiating foreign currency purchases and sales
• Collection and compilation of information on payments received or made
• Verification of payments (target-actual comparison, plan-plan comparison)
• short-term financing for subsidiaries and acting as an in-house bank
• Setting up cash pooling
• Intra-group management of cash flows and cash balances via intercompany accounts (where used)

Where applicable, the management of cash flows also includes the processing of documentary payments and the issuance and revocation of sureties and guarantees. The credit facilities required for this are provided either through financing activities or through the company’s own creditworthiness.

Another key area of responsibility is the Liquidity planning. (Rolling) liquidity planning provides an overview of expected cash inflows and outflows, as well as liquidity balances and reserves, within a specified future period. A basic distinction is made here between a cash flow forecast (a few days to a few weeks), liquidity planning in the strict sense (a few weeks to 12 months, in exceptional cases up to 18 months) and financial planning (several years). Effective liquidity planning is essential for making the right decisions in the areas of cash management, financing and risk management.

The efficient and (audit-)compliant processing of payment transactions is also one of the Treasurer’s responsibilities. Key tasks in this area Payment transactions are:

• Establishing an efficient data exchange with the bank and implementing the necessary message formats
• Establishment of an audit-compliant payment processing procedure (including approval and control mechanisms)
• (day-to-day) execution of payment instructions in accordance with cash management guidelines and the company’s requirements
• Monitoring of cash flows with regard to sanctions, anti-money laundering regulations and other legal requirements in the respective countries
• Prevention or defence against internal and external fraud attacks (Fraud Prevention)
• Mapping of necessary cash flows and improvement in cost efficiency based on available liquidity and the Group’s internal options for offsetting receivables and payables (netting and/or clearing)

Making use of the Group’s available liquidity and offsetting receivables between Group subsidiaries represent a key way of reducing the volume of external payments and, consequently, saving on costs and effort. The so-called Intercompany netting or Clearing It is therefore also a payment instrument and, where necessary, falls within the scope of responsibilities outlined above.

Payment methods via the so-called Point of Sale (POS) and in the E-commerce . The treasury function should be actively involved in the design and management of payment methods and processes, as well as in the selection and management of relevant providers. The main reasons for this are:

• Utilising in-depth experience in treasury relating to regulatory matters, KYC and national and international payments
• significant overlap between providers of payment methods in e-commerce or at the point of sale and the established partners of a treasury function
• To avoid contractual risks, as interdependencies with existing (loan) contracts sometimes need to be analysed, and to prevent fraud
• Ensuring the safe, proper and cost-effective execution of tasks relating to cash and liquidity management

With its expertise, the treasury function can also make a significant contribution to the company’s sales and customer retention. This is because, nowadays, the payment method is a key factor in the decision to purchase a product (convenience factor). For example, customers expect contactless payment methods (e.g. Apple Pay, Google Pay, Samsung Pay) at the point of sale, payments via payment service providers (PSPs; e.g. Klarna, PayPal) in e-commerce, or the opportunity to join a loyalty programme.

The Working Capital Management (WCM) deals with the management of stock, accounts receivable and accounts payable (working capital). Working capital is a financial ratio calculated in various ways, which must be managed from the perspectives of financial control, credit risk and credit agreements.

Whilst stock levels (inventory) are, in themselves, generally regarded as strategic indicators relating to sales, delivery or production capacity and are determined by management, the other two components of working capital (receivables from customers and payables to suppliers) have a direct impact on a company’s financing and liquidity. The treasury function involves advising the relevant managers on financial matters and participating in a cross-functional coordination committee, particularly in determining payment terms and their financial implications for the company’s tied-up liquidity. Treasury must provide appropriate instruments for optimising working capital (factoring, supply chain finance). The organisational integration of this area (in terms of structure and processes) varies from company to company within the relevant specialist departments – but must in all cases involve Treasury.

Preventing losses resulting from criminal activities, particularly from increasingly sophisticated external attacks, requires sound processes and due care in the implementation of cash and liquidity management. Clear organisational structures and standardisation enhance protection against external attacks and should be mandated for organisations of all sizes, in conjunction with a defined IT security strategy. Companies are also addressing these requirements through the increasing centralisation and automation of processes. Consequently, the use of a payment factory and an in-house bank is becoming more attractive even for medium-sized companies, given the volume of transactions involved.

No company can manage without payment processing. Liquidity planning and management are of vital importance to every company in order to avoid insolvency. The scope of these activities, as well as the technical and human resources required, vary from company to company. The use of several banks, particularly foreign banks, and the existence of numerous bank accounts and active subsidiaries abroad – especially in foreign currency areas – could, from the perspectives of workload, costs and security, be an indicator that the treasury function should be staffed by full-time personnel and that advanced IT tools should be utilised.

Further details on cash management activities and processes can be found in the VDT publications on cash management.

Financing & Financial Asset Management deal with the long-term procurement of funds and the management of long-term financial assets.

About the function “Financing & Financial Asset Management” belong to the field of Financing the procurement and use of various financing instruments, as well as ensuring long-term liquidity through appropriate planning and management of the maturities of financial instruments and the maintenance of financial reserves. This is based on the financial requirements derived from the strategic decisions of senior management and the target minimum credit rating. The most important tasks in this area are the development and definition of the company’s (long-term) financial strategy, and its operational implementation and monitoring. The financial strategy must ensure the long-term availability of the necessary cash and guarantee liquidity, taking into account the relevant instruments in the currencies required by the company.

As part of a core banking strategy, the Treasury selects the financing banks with which the company wishes to work on a long-term basis. The number of core banks depends on the nature and scope of the bank business that can be distributed (the cross-selling potential of the banking partners). The allocation formula is generally based on the level of credit risk assumed by the respective bank. As part of a transaction banking strategy, the Treasury selects the best providers for each specific transaction. A transaction banking strategy is suitable for companies that can operate largely independently of the traditional credit market. In any case, diversification amongst financing partners, an optimal spread of banking relationships that are as stable as possible, and all other external service providers, etc., must be ensured. The same applies to the selection of eligible financing instruments from which the final choice is then made.

In principle, the financing function involves dealing with all financing instruments, regardless of whether they are equity or debt capital or of their maturity. In this context, the Treasury department, in close consultation with other corporate functions such as Tax, Legal and Accounting, assesses the financing mix of equity and debt capital and then makes a recommendation. Financing also includes the procurement of (non-cash) guarantee credit lines and credit lines for international documentary trade (e.g. for letters of credit).

When it comes to financing instruments, the main focus is on planning, negotiations and ongoing management. Decisions regarding the short-term use or deployment of these instruments are made and implemented by the Cash & Liquidity Management department.

Defining a financing strategy involves, for example, deciding whether or not to use certain financing instruments, as well as setting key financial performance indicators (e.g. net debt/EBITDA or equity ratio). Wherever an instrument (e.g. a corporate loan, bond, project finance, leasing, factoring) is to be utilised, the tasks of the Finance department include selecting financing partners and drafting contracts (term, terms and conditions, collateral, covenants), in consultation with legal and tax advisers, as well as monitoring and executing the contracts.

The treasury function also involves communicating with all investors (equity and debt) and creditors. Where a company has a separate investor relations function, the treasury and investor relations teams work closely together on capital market matters and frequently appear together at roadshows and capital market conferences. In any case, maintaining contact with capital market participants – from initiating business deals through to ongoing support, the continuous nurturing and expansion of these relationships with investors and lenders – is a fundamental and core responsibility of the Treasury department. As part of its communication, the Treasury must not only convey information relevant to creditworthiness, but also that covered by the term ESG^[2] summary sustainability information required by various investors for their investment decisions.

The acquisition or sale of companies or businesses (Mergers & Acquisitions – M&A) This is not one of the Treasury’s core responsibilities. However, the Treasury must always be involved in the financial due diligence process and, where necessary, supports or leads the appointed advisers in this regard. As part of its financing function, the Treasury department must also ensure that financing for the transaction is secured, process payments associated with M&A, and hedge against currency and interest rate risks. In the case of company acquisitions, the Treasury department is responsible for integrating the Treasury function of the acquired company; in the case of company disposals, it is responsible for the separation or handover of the Treasury function of the sold company.

The The importance of the finance department varies considerably from one company to another. For smaller companies with relatively modest and straightforward financial requirements, simple (preferably long-term) credit facilities and occasional investment loans may suffice. Larger and more capital-intensive companies require different, more complex forms and structures of financing. There are companies which, for reasons such as maintaining independence from external lenders and without regard for the business optimisation of their financing and balance sheet structure, attempt to manage entirely without borrowed capital, or with as little as possible. Other companies pursue a strategy of utilising debt to the maximum extent possible and even financing their equity at holding company level through debt. This is often the case, for example, with private equity firms or infrastructure companies whose capital is invested with pension funds and which are focused on optimising their return on equity (whilst neglecting certain refinancing risks). As a general rule: the larger the company, the greater its funding requirements and the more professionally these requirements are to be managed, the more important the treasury’s financing function becomes and the broader the range of financing instruments required. In particular, tapping the capital market requires, for cost reasons (fixed transaction costs for the parties involved), more extensive financing needs and a corresponding level of professionalism on the part of the treasury. In sectors with a high level of fixed assets, the financing function is more important than in sectors with a low level of fixed assets – such as the retail or services sectors – due to the associated long-term financing requirements of the treasury. Where a company operates internationally and refinances its business on an international basis, international financing practices and the instruments of the major national financial markets play a major role. The more professionally financial requirements are to be managed, the more important it is to have an appropriate structure, staffing, organisation and policy-making capabilities.

The Financial Asset Management This involves formulating the investment strategy and managing the company’s financial investments outside the scope of (short-term) liquidity management or within special (pension) funds associated with the company. It concerns the selection, deployment and settlement of financial investment instruments in the company’s best interests. The focus is on:

• Strategic and tactical asset allocation
• Drawing up and maintaining investment guidelines based on this
• Making and liquidating investments as part of asset allocation
• Preparing or commissioning asset-liability studies, for example for the management of pension funds
• Selection, supervision and monitoring of external asset managers, as well as any direct investments, etc.

The Cash & Liquidity function within Treasury is responsible for making and unwinding short-term investments for the purposes of (operational) liquidity management.

Asset management covers all types of financial investments, including property and financial holdings. In the case of Property and financial investments The treasury department is involved in portfolio decisions relating to financial investments, is responsible for arranging their financing, processes the payments associated with the investments, and hedges the financial risks associated with them. In family-owned companies, the treasury department may also be responsible for managing the Shareholders’ investments are part of asset management.

Where external or internal regulations establish a link between selected financial liabilities and financial assets, e.g. in the case of occupational pension schemes, Financial Asset-Liability Management (ALM) to speak.

The The importance of asset management This depends on whether, and to what extent, companies have investable liquidity, and whether, and to what extent, there is an in-house occupational pension scheme. With regard to occupational pension schemes, the financial aspects fall within the remit of the treasury department, whilst the human resources aspects fall within the remit of human resources management. There must be no blurring of the responsibilities that fall within the other department’s remit. Where an in-house occupational pension scheme exists, the financial aspects are often outsourced to specialist service providers, as maintaining in-house expertise is not cost-effective given the limited scope of the activity. However, in this case, the monitoring of the outsourced function remains a mandatory responsibility of the Treasury department within the company. The specific nature and organisational structure of this function vary from company to company.

Further details on activities in the areas of financing and financial asset management will be published in specific VDT papers on this function.

The Financial Risk Management deals with the identification, quantification, analysis, management and monitoring of all financial risks, in particular those arising from cash flows and the associated financial activities (e.g. foreign exchange and interest rate management) resulting from the company’s operational activities.

To the Financial Risk Management This includes managing the various financial risks arising from the areas of cash management, financing and financial assets. In this context, financial risks are understood to mean the negative effects on the company’s liquidity or profitability. These include liquidity risks, currency risks, interest rate risks and price risks (collectively referred to as market price risks), as well as credit risks:

• Liquidity risks are characterised by deviations from planned cash inflows and outflows.
• Currency risks arise from differences between actual future exchange rates and planned exchange rates on transactions in foreign currencies.
• Interest rate risk arises from differences between future interest rates and planned interest rates.
• Exchange rate risks comprise the financial effects of possible deviations between the future value of financial assets and their current value.
• Credit and counterparty risks are the financial consequences arising from business partners failing to fulfil their agreed obligations, or failing to fulfil them in full or by the agreed deadlines.

Dealing with Commodities falls within the remit of the business division responsible for the underlying asset (the relevant commodity or raw material). Assessing the counterparty risk (credit risk) arising from such transactions is always the responsibility of the Treasury department. Treasury often possesses the specialist expertise and experience in dealing with forward contracts or exchange-traded transactions, derived from financial risk management. It seems sensible here to distinguish between the responsibilities of the operational functions based on settlement: in the case of financial settlement, the transaction is classified as a financial transaction (and falls under the remit of Treasury); in the case of physical settlement, it is assigned to purchasing or production.

Hedging is an essential Core function of financial risk management. This enables the mitigation of currency, interest rate and market price risks, as well as credit risks and, where applicable, commodity risks. The Treasury department analyses and manages risk positions, enters into risk-mitigating hedging transactions (derivatives) and settles the associated payments. The accounting treatment is primarily the responsibility of the accounting department. However, due to the specialist knowledge required, in practice the Treasury department, as part of the Financial Risk Management function, is often responsible for so-called hedge accounting (the accounting treatment of hedging transactions) (a ‘support function’ of the Treasury department). Entering into transactions without a corresponding underlying transaction is not hedging, but speculation, and does not form part of the Treasury’s remit.

Corporate risk management (Enterprise Risk) generally describes a comprehensive approach to risk that goes beyond the traditional financial risks described above. Examples include risks arising from operational functions such as procurement or production, taxation and compliance. Enterprise Risk establishes links between different risks across business units and enables an overarching portfolio view of the company’s risks and their management. (General) corporate risk management does not fall within the remit of the treasury function, although operational risk management does to some extent, for example where operational risks arise from treasury activities. Here too, the allocation and structure depend on the company’s organisation and its core business activities. Financial risks arising from other areas of the company and their management are, in any case, part of Treasury’s core function of financial risk management, such as counterparty risk arising from supplier and customer relationships. The associated activities of the Treasury department may then also include credit checks on counterparties (always for financial contracts).

Insurance These fall within the remit of the Treasury department, in particular where and to the extent that financial risks are insured. This applies above all to credit and surety risk insurance, as well as trade credit insurance. The tasks within the Insurance management are very similar to the traditional responsibilities of a risk manager in treasury. Given the use of insurance to mitigate and limit quantifiable risks, it therefore makes sense to regard insurance management as part of the treasury function. In individual cases, the integration into the treasury function depends largely on the nature and extent of the risks insured within the company.

The range of insured risks can be wide-ranging: property, income and personal risks, as well as credit risks or project-related risks, always pose an immediate threat to a company; product or environmental risks initially affect external third parties, but may subsequently have negative consequences for the company itself. Insurance management as a whole is therefore a task of optimisation. In particular, it deals with quantifiable risks that lend themselves to a traditional insurance solution, i.e. risks that can be transferred to third parties by taking out insurance policies. In this context, the search for the optimal balance between self-retention and transfer is tailored to the specific nature, scope, risk profile and complexity of the company’s business activities.

In the context of ensuring business survival – a goal shared by all companies – the management of financial risks that could threaten a company’s survival is relevant to businesses of all types and sizes:

• The more extensive a cross-border activity (purchasing, sales or production) is in other currency areas, the more important it is to manage currency risk.
• Whilst interest rate risks cannot, in themselves, be eliminated (changes in interest rates versus changes in present value), they primarily affect companies with a high level of long-term capital tied up and a high level of debt, particularly in the property sector.
• Commodity risks vary considerably depending on the sector and the type and volume of the raw materials used.

Particularly when using derivatives for risk management, a high level of specialist expertise and process reliability are essential, as the leverage associated with derivatives can lead to significant losses very quickly. The need for financial risk management, in conjunction with cash and liquidity management, can lead even small businesses to allocate dedicated staff to this area and often marks the start of setting up a treasury organisation.

Further details on the activities and processes within the Financial Risk Management function will be published in separate VDT papers on this function.

In addition to the three core functions, there are functions within treasury that are influenced by the company and, in turn, influence the company; whilst these do not form part of the core functions, they are nonetheless important and must be implemented. These include frameworks, regulations, guidelines and corporate requirements from various areas, which give rise to specific treasury activities. The issue of strategy is relevant across all operational functions, including treasury. Treasury transactions must be recorded in accordance with accounting standards. Information and analysis, reporting, documentation and settlement activities overlap across the core functions.

All of this is incorporated into the Treasury Framework. This also refers to interface functions or tasks from the areas mentioned, which do not form part of Treasury’s core responsibilities but do affect Treasury. The same applies to the peripheral activities derived from the core treasury functions, the handling of which is necessary for the fulfilment of those core functions.

The more detailed job description takes into account interface functions and tasks, and, where applicable, control loops.

Within a company, the treasury organisation performs a support function within the value chain; in other words, it supports the other processes in the corporate value chain – development, procurement, production and sales. In this sense, the treasury organisation is structured as a service centre and is action-oriented. There is no fixed, prescribed structure for the treasury organisation. Rather, the treasury organisation is shaped by the corporate structure and by the nature, scope, risk and complexity of business activities across the three core functions and other areas of responsibility. Nevertheless, there are generally accepted principles that must be taken into account when designing the organisational structure.

The key principle governing the structure of the treasury organisation is the clear functional and organisational separation of the areas responsible for concluding transactions (front office) from those responsible for control and settlement tasks (back office), as well as those responsible for risk monitoring (Middle Office).^[3] In particular, a dual-control principle must be ensured for all treasury activities.

The Front Office is responsible for negotiating and concluding financial transactions. The Middle Office deals, on the one hand, with strategic treasury matters, such as defining methods for measuring risk and performance or handling complex individual transactions, and, on the other hand, with the operational monitoring of financial activities and the associated reporting and disclosure systems. The Back Office documents control activities and their results, draws up and monitors contracts, settles the transactions concluded by the Front Office, prepares the necessary reports and disclosures, retains information on all transactions and handles payment processing.

The degree to which decision-making powers and responsibility for tasks are centralised within a group’s treasury organisation is also of key importance. Business practice largely favours the centralisation of treasury functions. It is also important to organise interfaces with other corporate functions, such as accounting, tax, management accounting and legal, and with operational processes, such as procurement, production and sales.

Small businesses do not usually have a dedicated treasury department. (Large) companies always have a treasury organisational unit, although this is not always referred to as ‘treasury’. In the case of very large or international groups with many subsidiaries, the treasury function may also be outsourced, either wholly or in part, to specialist finance companies. Outsourcing to service providers can generally be a sensible option for smaller firms and, to a lesser extent, for larger ones. However, care must be taken to ensure that senior management or the head of the treasury function does not lose control over the area.

When determining staffing levels, it is important that the required segregation of duties and the necessary arrangements for cover are clearly set out and can be adhered to. The staffing requirements and the qualifications of staff for the treasury function depend on the scope and complexity of the tasks involved. In small and medium-sized firms, these functions are often divided amongst several people, with each contributing a small proportion of their time. Even in small groups with several operating subsidiaries, the scope of work may require a full-time employee with treasury training. This may also be necessary from a risk management perspective (fraud prevention, preventing liquidity bottlenecks and avoiding price risks that could threaten the company’s survival) and may be advisable to save on bank charges and interest expenses.

In a dynamic environment, the treasury function also makes extensive use of information technology (IT) to handle most processes digitally. The extent of this use of IT varies significantly depending on the size of the treasury function and the scope of its responsibilities. When it comes to implementation, development and process integration, the treasury function usually works closely with IT departments, banks and system providers. Accordingly, IT skills appropriate to the task at hand are an advantage.

A specific Treasury Management System (TMS) is generally used as the core system for, amongst other things, cash and liquidity management as well as risk management. The TMS may also form part of an ERP system (Enterprise Resource Planning, software for managing the entire organisation). The implementation, operation and (international) expansion of the TMS are key tasks for an efficient treasury function. In addition to the TMS, which interfaces with the ERP system, other systems such as trading, market data, documentation and analysis systems are also used. The system landscape is usually tailored to the individual company, depending on its business activities and treasury functions.

The ongoing digital optimisation of financial processes therefore encompasses, in particular, automation, system integration and interface management, with a view to establishing (real-time) processes and financial innovations whilst utilising existing standards and employing (agile) project management. As part of digital change management, continuous, holistic implementation is ensured, taking into account all resources as well as IT security aspects and compliance. The error-free, ongoing operation of IT solutions and processes is guaranteed through digital quality management.

Given the economic significance of comprehensive financial data, it is often used within the framework of business analytics (a methodology for deriving new insights from corporate data using statistical and iterative methods) to optimise business operations – particularly in the areas of automated optimisation of liquidity forecasts, risk management, treasury reporting, cost management and fraud detection (the computer-assisted identification of risks of fraudulent activity within the organisation). Artificial intelligence (AI) is also utilised in this context within the treasury function.

The Treasury works to ensure that the measures identified through its analyses are implemented across all areas of the organisation. In doing so, the Treasury acts as a financial business partner and adviser to other departments and, as a result, assumes increasing responsibility for the business itself. In this context, the development of digital products and digital financial services – for example, for the use of financial instruments, and on-demand financing, settlement and payment solutions – is also being driven forward to support the business.