POSITION PAPER DEFINITION TREASURY

The treasury function in a company must first be categorised into the various operational functions. Companies are fundamentally characterised by the procurement, production and sale of goods and/or services. They are therefore primarily focussed on the basic operational functions of investment, personnel and purchasing for the input, production and materials management for the production and marketing or sales for the sale/output of goods and services. The income/expenses, costs/revenues and receipts/payments generated by these basic operational functions are mapped in the areas of accounting, controlling and treasury. At the top of the operational functions is corporate governance/management, which focuses on goal setting, strategy and control.

Treasury provides all areas of the company with liquidity. This means that the other areas, including the operational areas, are unable to act without a functioning treasury function. In principle, the treasury function is therefore on an equal footing with the other commercial (mainly accounting, controlling, legal and tax) and other areas.

Treasury is one of the original core tasks of corporate management. It supports the management or the Executive Board by providing information on the financial framework and the options for shaping it in the development and implementation of the corporate strategy. Treasury develops a financing strategy in line with the corporate strategy. Treasury's operational activities focus on financing the operational value chain and ensuring current and future solvency in any required currency. Treasury also manages and is responsible for the company's financial risks.

The central treasury objective of securing liquidity at all times results in three core functions for all economic entities, regardless of sector, business type and size:

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

The Cash & Liquidity Management ensures that the company has sufficient liquidity in the required currency to fulfil its financial obligations at all times. To fulfil this task, Cash & Liquidity Management must implement various tasks (see diagram), 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 the payment transaction function. Larger companies regularly choose multi-bank solutions, often with the aim of using as few core banks as possible. Local regulations, e.g. for tax and/or salary payments, regularly mean that cooperation with local banks is also required in payment transactions for regional coverage in certain countries. When selecting banks for cash & liquidity management, the requirements for corporate financing must also be taken into account, as these banks regularly act as lending banks (see also the "Financing & financial asset management" section).

In the area of responsibility Bank account management includes the management of external payment transaction accounts (bank accounts) and - if available - internal payment transaction accounts (financial clearing accounts), which ensure the processing of a company's payment flows^.[1] The tasks are as follows:

• Opening, managing and closing bank accounts in different currencies
• Maintenance of bank master data, including authorisations and legitimations (KYC process)
• Coordination of the payment formats for the respective bank accounts with the banks
• Selection/introduction/utilisation of electronic banking and/or treasury management systems

The Group-wide authorisations to open and close bank accounts should be specified by the central treasury department and must be carefully documented, including all account authorisations granted, and recorded in a guideline if necessary.

In the area of responsibility Cash management This includes the management of cash flows and liquidity. The tasks are as follows:

The Group-wide authorisations to open and close bank accounts should be specified by the central treasury department and must be carefully documented, including all account authorisations granted, and recorded in a guideline if necessary.

The Cash Management department is responsible for managing cash flows and liquidity. The tasks are as follows:

• Disposition of all bank accounts, including bank accounts in foreign currencies
• Short-term investment and borrowing of funds
• Initiation and authorisation of incoming and outgoing payments
• Initiating foreign currency purchases and sales
• Collection and compilation of information on payments received or made
• Review of payments (target/actual comparison, plan/plan comparison)
• Short-term financing of subsidiaries and activity as an in-house bank
• Establishment of cash pooling
• Intragroup management of cash flows and cash and cash equivalents via clearing accounts (if used)

Where available, the management of cash flows also includes the processing of documentary payment transactions and the issuing and cancellation of guarantees and sureties. The credit lines required for this are provided by the financing activities or by the company's own creditworthiness.

Another important area of responsibility is the Liquidity planning. (Rolling) liquidity planning provides an overview of the expected cash inflows and outflows as well as the liquidity holdings and reserves within a given period in the future. In principle, a distinction is made here between a planning/liquidity forecast (a few days to a few weeks), liquidity planning in the narrow sense (a few weeks to 12 months, in exceptional cases up to 18 months) and financial planning (several years). Effective liquidity planning is important in order to make the right decisions in the areas of cash management, financing and risk management.

The treasurer is also responsible for the efficient and (audit-)secure processing of payment transactions. Key tasks in the area of Payment transactions are:

• Creation of an efficient data exchange with the bank and implementation of the necessary message formats
• Creation of an audit-compliant payment transaction process (including release and control mechanisms)
• (day-to-day) execution of payment transaction instructions based on cash management specifications and company requirements
• Monitoring payment flows with regard to sanctions, money laundering guidelines and other legal requirements in the respective countries
• Prevention and defence against internal and external fraud attacks (fraud prevention)
• Mapping necessary liquidity flows and increasing cost efficiency on the basis of available liquidity and the Group's internal netting and/or clearing options for receivables and liabilities

The possible utilisation of the liquidity available within the Group and the reconciliation of receivables between the Group subsidiaries represent a significant opportunity to reduce the volume of external payments and thus save costs and effort. The so-called Intercompany netting resp. Clearing is therefore also a payment transaction instrument and, if required, falls within the scope of the tasks outlined above.

A special form of payment transactions are payment methods on the so-called Point of sale (POS) and in the E-Commerce represent. The treasury function should be involved in the design and management of payment methods and processes as well as in the selection and management of appropriate providers. The main reasons for this are

• Utilisation of in-depth treasury experience in relation to regulation, KYC and national and international payment transactions
• Large overlap between the providers of payment methods in e-commerce or at the POS and the established partners of a treasury function
• Avoidance of contractual risks, as interdependencies with existing (credit) contracts sometimes need to be analysed, and for fraud prevention
• Ensuring secure, orderly and economical processing of cash and liquidity management tasks

With its experience, the treasury function can also make an important contribution to the company's sales and customer loyalty. Nowadays, the payment method is a decisive factor in the purchase of a product (convenience factor). For example, customers expect contactless payment methods (e.g. Apple Pay, Google Pay, Samsung Pay) at the POS, payments via payment service providers (PSP; e.g. Klarna, PayPal) in e-commerce or participation in a loyalty programme.

The Working Capital Management (WCM) deals with the management of inventories, accounts receivable and accounts payable (working capital). Working capital is a financial indicator that is calculated in different ways and needs to be managed from a controlling, credit risk and credit agreement perspective.

While the stock of goods (inventory) itself is more of a strategic variable based on sales, delivery or production capability and is determined by management, the other two components of working capital (receivables from customers and payables to suppliers) have a direct influence on the financing and liquidity of a company. The treasury function includes advising the relevant managers on financial aspects and participating in a cross-functional coordination committee, particularly in the determination of payment terms and their financial impact on the company's tied-up liquidity. Treasury must provide appropriate instruments for optimising working capital (factoring, supply chain finance). The (structural and procedural) organisational integration of the topic varies from company to company in the respective specialist departments - but must always involve Treasury.

Avoiding damage from criminal activities, especially from increasingly professional external attacks, requires good processes and care in the implementation of cash and liquidity management. Clear organisational structures and standardisation increase protection against external attacks and should be specified in conjunction with a defined IT security strategy for all company sizes. Companies are also meeting these requirements with the increasing centralisation and automation of processes. As a result, the use of a payment factory and an in-house bank is also becoming more attractive for medium-sized companies due to the volume of transactions involved.

No company can do without payment transaction processing. Liquidity planning and management is of existential importance for every company to avoid insolvency. The scope of the activity as well as the technical and personnel resources are company-specific. The employment of several banks, especially banks abroad, and the existence of numerous bank accounts and active subsidiaries abroad, especially in foreign currency areas, could be an indicator for the full-time staffing of the treasury function and the use of advanced IT tools from a labour, cost and security perspective.

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

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

The function "Financing & Financial Asset Management" belong in the area of Financing the procurement and utilisation of various financing instruments and the long-term safeguarding of 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 the Executive Board and the minimum credit rating to be aimed for. The most important tasks in this area are the development and definition of a (long-term) financial strategy for the company and its operational implementation and monitoring. The financial strategy must include the permanent securing 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, 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 type and scope of the banking transactions that can be distributed (cross-selling potential of the banking partners). The distribution key is generally the amount of credit risk assumed by the respective bank. As part of a transaction banking strategy, Treasury selects the best providers for the respective transaction. A transaction bank strategy can be considered for companies that can operate largely independently of the traditional credit market. In any case, the diversification of financing partners, an optimal spread of the most stable possible banking relationships and all other external service providers etc. must be ensured. The same applies to the choice of financing instruments to be considered and then selected.

In principle, the financing function includes dealing with all financing instruments, regardless of their equity or debt character or maturity. In close coordination with other areas of the company, such as tax, legal and accounting, Treasury examines 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 documentary foreign business (e.g. for letters of credit).

In the case of financing instruments, the main focus is on conceptualisation, negotiations and ongoing support. Decisions on the short-term use or utilisation of instruments are made and implemented in the Cash & Liquidity Management department.

The definition of a financing strategy includes, for example, the decision to utilise or not to utilise certain financing instruments as well as the definition of financing-relevant performance indicators (e.g. net debt/EBITDA or equity ratio). If an instrument (e.g. corporate loan, bond, project financing, leasing, factoring) is to be used, the selection of financing partners and the drafting of contracts (term, conditions, collateral, covenants) with the involvement of legal and tax advisors are also part of the tasks of the Financing division, as is the monitoring and processing of contracts.

The financing function also includes communication with all investors (equity and debt) and creditors. If the company has a separate investor relations function, treasury and investor relations work closely together on capital market issues and often appear together at roadshows and capital market conferences. In any case, contact with capital market counterparties in the initiation of business and further support, continuous maintenance and expansion of these contacts with investors/lenders is a fundamental and original task of the treasury department. As part of this communication, Treasury must not only communicate information relevant to creditworthiness, but also the information known as ESG^[2] summarised sustainability information that the various investors require for their investments or investment decisions.

The acquisition or sale of companies or businesses (Mergers & Acquisitions - M&A) is not one of the original treasury tasks. However, Treasury must always be involved in the financial due diligence and, if necessary, accompanies or guides the appointed advisors. As part of the financing function, Treasury must also ensure that the financing for the transaction is secured, process the payments associated with M&A and hedge currency and interest rate risks. In the case of company acquisitions, Treasury is responsible for integrating the treasury function of the acquired company; in the case of company disposals, it is responsible for spinning off or outsourcing the treasury function of the sold company.

The Importance of the financing area varies greatly from company to company. For smaller companies with relatively low, less complex financing requirements, simple (preferably long-term) credit lines and sporadic investment loans may suffice. Larger and more capital-intensive companies require other, more complex types and structures of financing. There are companies that try to manage completely without or with as little outside capital as possible, e.g. for reasons of independence from external lenders, without regard to the economic optimisation of the financing and balance sheet structure. Other companies pursue a strategy of utilising debt capital to the maximum and even borrowing equity at holding company level. This is often the case, for example, with private equity companies or infrastructure companies whose capital is placed with pension funds and which are geared towards optimising the return on equity (while neglecting certain refinancing risks). In general, the larger the company, the greater its financial requirements and the more professionally the financial requirements are to be managed, the more important the treasury's financing function is and the broader the required use of financing instruments. For cost reasons (fixed costs of the transaction for the parties involved), the utilisation of the capital market in particular requires a more extensive financing requirement and corresponding professionalism on the part of Treasury. In industries with high fixed assets, the financing function is more important than in industries with low fixed assets, e.g. trade or the service sector, due to the associated long-term financing requirements of the treasury. International financing practices and the instruments of the most important national financial markets play a major role in international activities and international refinancing of the business. The more professionally the financial requirements are to be managed, the more important it is to have an appropriate set-up, (personnel) resources, organisation and authority to issue guidelines.

The Financial Asset Management includes setting up the investment strategy and managing the company's financial assets outside of (short-term) liquidity management or in special (pension) funds associated with the company. This involves the selection, use and management of financial investment instruments in the interests of the company. The focus is on

• Strategic and tactical asset allocation
• Creation and maintenance of an investment guideline based on this
• Making and cancelling financial investments as part of asset allocation
• Preparation or commissioning of asset-liability studies, e.g. for the management of pension assets
• Selection, support and monitoring of external asset managers and any direct investments, etc.

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

Asset management covers all types of financial assets, including real estate and financial investments. With Real estate and financial investments Treasury is involved in portfolio decisions for financial investments, must take care of their financing, process the payments associated with the investments and hedge the financial risks associated with these investments. In the case of family companies, the management of the Shareholder investments are part of asset management.

If a link between selected financial liabilities and financial assets is established by external or internal regulations, e.g. in the case of company pension schemes, financial assets are to be assumed. Asset Liability Management (ALM) to speak.

The Importance of the Asset Management division depends on whether and to what extent the companies have investable liquidity and whether and to what extent there is an internal company pension scheme. In the case of company pension schemes, the financial aspects are the responsibility of the treasury department, while the HR aspects are the responsibility of HR management. There must be no mixing of tasks that are the responsibility of the other department. If there is an internal company pension scheme, the financial part is often outsourced to specialised service providers, as it is not worth maintaining in-house expertise in view of the small scope of the activity. In this case, however, the monitoring of the outsourced function must remain within the company as a treasury task. The content and organisation of this function varies from company to company.

Further details on the activities in the area of financing and financial asset management are published in special VDT papers on this function.

The Financial Risk Management deals with the identification, quantification, analysis, management and monitoring of all financially relevant risks, in particular from cash flows and the other financial activities associated with them (e.g. foreign currency and interest rate management) from the company's operating activities.

To the Financial Risk Management includes dealing with the various financial risks arising from the areas of cash management, financing and financial assets. Financial risks are defined here as the negative effects on the company's liquidity or earning power. These are 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 described by deviations in the planned cash inflows and outflows.
• Currency risks result from deviations between future actual and planned exchange rates from transactions in foreign currencies.
• Interest rate risks result from deviations in future interest rates from planned interest rates.
• Price risks comprise the financial effects of possible deviations in the future value of financial assets from their current value.
• Credit and counterparty risks are the financial effects resulting from the fact that business partners do not fulfil their agreed services, do not fulfil them in full or do not fulfil them on the agreed dates.

Dealing with Commodities belongs to the division responsible for the underlying (the respective commodity or raw material). Assessing the counterparty risk (credit risk) from such transactions is always the responsibility of Treasury. Treasury often also has the expertise and experience in dealing with futures or stock exchange transactions from financial risk management. It makes sense to differentiate the tasks of the operational functions according to settlement (fulfilment): In the case of financial settlement, the categorisation as a financial transaction (to treasury) fits, while in the case of physical settlement, the allocation to purchasing or production fits.

Hedging is an essential Core function of financial risk management. Currency, interest rate and price risks as well as credit risks and, where applicable, commodity risks can be limited. Treasury analyses and manages the risk positions, concludes risk-mitigating hedging transactions (derivatives) and processes the associated payments. The accounting treatment is primarily the responsibility of the accounting department. In practice, however, Treasury is often responsible for hedge accounting (the accounting of hedging transactions) under the Financial Risk Management function (treasury "auxiliary function") due to the relevant expertise. Concluding transactions without a suitable underlying transaction is not hedging, but speculation and is not part of the treasury function.

Enterprise risk management (Enterprise risk generally describes a comprehensive approach to risks that goes beyond the classic financial risks just described. Examples here include risks from operational functions such as procurement or production, taxes and compliance. Enterprise risk establishes links between different risks across business areas and enables an overarching portfolio view of the company's risks and their management. (General) enterprise risk management is not the responsibility of Treasury, but operational risk management is to some extent, e.g. if the operational risks result from Treasury activities. Here too, the allocation and organisation depend on the corporate structure and the focus of activities. Financial risks from other areas of the company and their management are always part of the treasury core function Financial Risk Management, such as the counterparty risk from supplier and customer relationships. The associated treasury activities can then also include the credit assessment of counterparties (always for financial contracts).

Insurances are part of Treasury's responsibilities in particular if and to the extent that financial risks are insured. This primarily relates to credit and surety risk insurance as well as trade credit insurance. The tasks in the Insurance management are very similar to the classic tasks of the risk manager in treasury. Due to the use of insurance to minimise and limit quantifiable risks, it therefore makes sense to consider the management of insurance as part of the treasury function. In individual cases, integration into the treasury function depends largely on the type and scope of the insured risks in the company.

The spectrum of insured risks can be diverse: property, earnings and personal risks as well as credit risks or project-related risks always pose a direct threat to a company; product or environmental risks initially affect external third parties, but can subsequently have negative consequences for the company itself. Insurance management as a whole is an optimisation task. In particular, it deals with quantifiable risks that are accessible to a traditional insurance solution, i.e. that can be transferred to third parties by concluding insurance contracts. The search for the optimum balance between self-insurance and transfer is orientated towards the type, scope, risk and complexity of the company's business activities.

The management of financial risks that could threaten the existence of a company is relevant for all types and sizes of companies in order to safeguard their existence:

• The more extensive a cross-border activity (purchasing, sales or production) in other currency areas is, the more important currency risk management is.
• Although interest rate risks cannot be eliminated per se (change in interest rates vs. change in present value), they primarily affect companies with a high long-term capital commitment and a high level of borrowing, particularly in the property sector.
• Commodity risks vary greatly depending on the industry and the type and volume of raw materials used.

The use of derivatives for risk management in particular requires a high level of expertise and process reliability, as the risk leverage associated with derivatives can lead to large losses particularly quickly. The need for financial risk management in conjunction with cash & liquidity management can also lead to dedicated personnel deployment at small companies and often marks the start of the establishment of a treasury organisation.

Further details on the activities and processes in the area of Financial Risk Management are published in separate VDT papers on this function.

In addition to the three core functions, there are also treasury functions that are influenced by the company and influence the company, which are not part of the core functions but are nevertheless important and must be implemented. This involves frameworks, regulations, guidelines and company specifications from different areas that lead to treasury activities of their own. The topic of strategy is relevant in all operational functions, including treasury. Treasury transactions must be posted in compliance with accounting regulations. Information/analysis, reporting, documentation and settlement activities overlap for the core functions.

All of this is summarised and embedded in the treasury framework. This also refers to interface functions or tasks from the areas mentioned that are not part of the core treasury functions but which affect treasury. The same applies to the peripheral activities derived from the treasury core functions, the processing of which is necessary for the fulfilment of the treasury core functions.

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

In companies, the treasury organisation performs a support function within the value chain, i.e. the treasury organisation supports the other processes in the corporate value chain, development, purchasing, production and sales. In this sense, the treasury organisation is organised as a service centre and is action-oriented. There is no fixed prescribed form for the treasury organisation. Instead, the treasury organisation is based on the corporate structure and the type, scope, risk and complexity of the business activities in the three core functions and other areas of responsibility. Nevertheless, there are generally recognised principles that must be observed when designing the organisation.

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

The front office deals with the negotiation and conclusion of financial transactions. The Middle Office deals on the one hand with strategic treasury issues, the definition of risk and performance measurement methods or complex individual transactions and on the other hand with the operational monitoring of financial activities and the associated reporting and notification systems. The back office documents the control activities and their results, draws up and monitors the contracts, processes the transactions concluded in the front office, prepares the necessary reports and notifications, stores the information on all transactions and takes care of payment processing.

The degree of centralisation of decision-making authority and responsibility for tasks in the treasury of a corporate group is also of central importance for the treasury organisation. Corporate practice largely favours the centralisation of treasury functions. The organisation of interfaces to other corporate functions, such as accounting, tax, controlling and legal, and operational processes, such as purchasing, production and sales, is also important.

Small companies usually do not have an independent treasury organisation. (Large) companies always have a treasury organisation unit, although it is not always called Treasury. In very large or international groups with many subsidiaries, the treasury function may also be outsourced in whole or in part to special finance companies. Outsourcing to service providers can make sense for smaller companies in general and for larger companies in part. However, care must be taken to ensure that the management or the head of the treasury function does not lose control of the department.

When determining staffing levels, it is important that the required separation of functions and the necessary substitution rules are clearly presented and can be adhered to. The personnel requirements and qualifications of the staff for the treasury function depend on the scope and complexity of the task. In small and medium-sized companies, the functions are often distributed over several people in small time shares. Even in small groups with several operating subsidiaries, the scope of work may require a full-time employee with a treasury qualification. This may also be necessary from a risk perspective (fraud prevention, prevention of liquidity bottlenecks and avoidance of price risks that could jeopardise the company's existence) and make sense in terms of saving bank costs 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 IT deployment varies significantly depending on the size of the treasury function and the scope of tasks. When it comes to implementation, development and process integration, the treasury function usually works closely with IT departments, banks and system providers. Appropriate IT knowledge for the respective task is advantageous.

A specific treasury management system (TMS) is generally used as the core system for cash and liquidity management and risk management, among other things. The TMS can also be part of an ERP system (Enterprise Resource Planning, software for managing the entire company). The introduction, operation and (international) expansion of the TMS are core tasks for an efficient treasury. In addition to the TMS with interfaces to the ERP system, other systems such as trading, market data, documentation and analysis systems are also used. The system landscape is usually customised for each company depending on its business activities and treasury tasks.

The continuous digital optimisation of financial processes therefore includes, in particular, automation, system integration and interface management to establish (real-time) processes and financial innovations using existing standards and (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 operation of IT solutions and processes is guaranteed as part of digital quality management.

Due to the economic importance of comprehensive financial data, it is often used as part of business analytics (methodology for gaining new insights from company data using statistical and iterative methods) to optimise business activities - particularly in the areas of automated optimisation of liquidity forecasts, risk management, treasury reporting, costs and fraud detection (computer-aided identification of risks for fraudulent activities in the company). Artificial intelligence (AI) is also used here in treasury.

Treasury works towards implementing the measures resulting from the analyses in all areas of the company. In doing so, Treasury assumes the role of financial business partner and advisor for other areas and thus also assumes increasing responsibility for the business itself. In this context, the development of digital products and digital financial services, e.g. for the use of financial instruments, financing, billing and payment transaction solutions as required, is also being driven forward to support the business.