What are the 4 Pillars of Corporate Treasury departments?

💲 We simplify Corporate Treasury Concepts - 🎙️ From the podcast Corporate Treasury 101

What are the 4 Pillars of Corporate Treasury departments?

In our previous episode, we delved into the fundamental aspects of corporate Treasury. If you haven’t had the chance to read it yet, you can find it here: What is Corporate Treasury?. It provided a comprehensive overview of the Treasury and corporate Treasury. Building upon that foundation, this article aims to explore the 4 Pillars of Corporate Treasury in-depth.

If you’re new to this field, I highly recommend listening to or reading previous episodes before continuing with this one. As promised, we will now expand on the different topics within corporate treasury. However, we will gradually delve into more details in future articles. Our goal, for now, is to provide a high-level 360-degree view of corporate treasury.

Corporate treasury may seem like a niche topic but it encompasses many subjects. Our website strives to cover as much as possible, ensuring you gain a comprehensive understanding. However, we might postpone discussing them for now due to the complexity and relevance of certain subsections. We will focus on the essential and applicable topics in the current context.

Here’s what you will learn by reading this article:

  1. The Vital Importance of Cash and Liquidity Management: You’ll understand the essence of ensuring your company has ample cash to meet financial obligations and how it contributes to overall corporate stability and success.
  2. The Intricacies of Corporate Finance: Discover the core financial activities that steer a company, including capital structuring, investment management, and financial planning.
  3. The Crucial Role of Financial Risk Management: Gain insight into the identification and mitigation of potential financial risks like interest rates, foreign exchange, credit, and others, ensuring your corporation is always prepared for financial turbulence.
  4. Engaging Real-World Examples: We’ll provide practical examples to make concepts relatable, helping you adapt and apply your newfound knowledge to actual business scenarios.
  5. Empowering Steps for Self-Funding: Uncover how to leverage investment opportunities to steer your organization towards self-funding, fostering financial independence and resilience.
  6. How to Navigate through Financial Risks: Understand the varying degrees of financial risk and learn how to navigate them wisely in treasury operations.
  7. The Important Role of Banks: Discover why banks are more than just places to store money but essential allies in the corporate world.
  8. The Art of Bank Relationship Management: Learn how to build and sustain positive relationships with banking partners, negotiate favourable terms, and optimize banking services for your corporation’s advantage.

Understanding the 4 Pillars of Corporate Treasury

To better grasp the scope of corporate treasury, let’s introduce the 4 Pillars of Corporate Treasury that serve as its foundation. These pillars are essential aspects that require specific tools and processes to effectively manage them:

  1. Cash and Liquidity Management: This pillar focuses on ensuring the company has enough cash to meet its financial obligations, such as timely payments to suppliers and collecting payments from customers.
  2. Corporate Finance: This pillar deals with the financial activities and decisions within the company, including capital structure, investment management, and financial planning.
  3. Financial Risk Management: Managing financial risks is crucial for any organization. This pillar involves identifying and mitigating risks related to interest rates, foreign exchange, credit, and other financial factors.
  4. Bank Relationship Management: Building and maintaining positive relationships with banks is important for corporate treasury. This pillar encompasses selecting banking partners, negotiating terms, and optimizing banking services.

These 4 pillars of corporate treasury may sound complex but don’t worry. By the end of this article, you’ll see them in a whole new light. We aim to explain each topic in a way that is easy to understand and approachable, regardless of your knowledge or experience.

Now that you have an overview of the four pillars of corporate treasury, we’ll dive into each individually. Together, we’ll demystify corporate treasury and equip you with valuable knowledge to excel in this field.

1- Cash and Liquidity Management: Understanding the Basics

Let’s start from the beginning and break down the cash and liquidity management concept. Cash and liquidity management is about effectively managing your money and ensuring you can access it when needed. Within the 4 Pillars of Corporate Treasury, Cash and Liquidity Management holds a pivotal position. It involves understanding how and when money comes into your company and how and when it goes out. It may sound simple, but there’s more to it than meets the eye.

What is Liquidity?

To grasp the concept of liquidity, let’s take a closer look. Liquidity refers to your company’s ability to quickly raise cash when necessary. It’s like having readily available funds to meet various financial obligations. These obligations could be paying suppliers, salaries, taxes, or even unexpected expenses, like replacing a faulty machine or repairing a damaged roof in your restaurant.

Let’s make it more relatable with an example. Imagine you’re back in 1980, and a well-known company like Apple has just entered the stock market through an initial public offering (IPO). You have a hunch that Apple will thrive in the future, so you want to invest in their shares, hoping for a profitable return.

However, many other smart investors worldwide share the same sentiment. They also want to buy Apple shares, but there aren’t enough sellers willing to part with their shares. Everyone believes the shares will become even more valuable over time, so the supply of shares doesn’t match the demand. In this situation, we say that the shares aren’t liquid because they are not readily available on the market.

As time passes, the price of the shares goes up, and some people start selling. Supply and demand have started to balance out, and the shares have become more accessible on the market. They become liquid assets that can be bought and sold easily.

Applying Liquidity to Cash Management

Now, let’s relate this to cash management. When we talk about liquidity in cash, we’re referring to how easily you can access your cash to fulfill your financial obligations. Consider this scenario: you may own valuable assets like extensive real estate holdings worth significant money. However, your cash liquidity is low if you can’t sell these properties quickly to convert them into cash.

On the other hand, if you have a substantial amount of stock in a highly sought-after product and you can sell it rapidly, your cash liquidity is high. It means you can quickly convert your stock into cash, increasing the availability of funds in a short period.

To summarize, liquidity is simply another word for availability. When your business is more liquid, you have more cash readily available to handle uncertainties and respond to your needs. On the other hand, if your business is illiquid or non-liquid, you don’t have enough cash available quickly to react to what you require.

The Importance of Cash and Liquidity Management

Now that you understand the cash and liquidity management concept, you can see why it’s crucial for treasury professionals like you. Effective management ensures you have enough cash to navigate unexpected events and promptly meet your financial obligations. It helps you maintain stability and confidence in your company’s financial health.

Remember, the goal is to have a healthy level of liquidity, where you can access the cash you need when you need it. This way, you’ll be well-prepared to handle any challenges that come your way.

2 – Corporate Finance: Funding and Investment Management

Let’s dive into the world of corporate finance. Corporate Finance represents one of the critical constituents within the 4 Pillars of Corporate Treasury. It’s a broad topic, but for now, we’ll focus on the treasury aspect of it. Corporate finance in treasury can be seen as the management of funding and investments. These two components ensure a company’s financial health and growth.

Funding: Obtaining Money for Big Investments

When discussing funding, we refer to obtaining money for significant investments or projects. Imagine you want to buy a building to transform it into a new store or construct a new factory. These endeavors require substantial money you probably don’t have readily available in your bank account.

To finance such ventures, you need to find sources of funding. This could involve taking out loans, issuing bonds, or seeking investment partners. The goal is to secure the necessary funds to support your business’s growth and expansion.

Investments: Making the Most of Available Cash

On the other hand, when it comes to investments, we look at the other side of the coin. Let’s say you have a significant amount of cash available, but you don’t have any major investments or projects. You want to ensure your cash is not idle but working for you and generating additional returns.

This is where the principle of interest comes into play. Banks and other financial institutions can lend you money because they can earn interest. Similarly, when you have excess cash, you can invest it in various ways to generate more cash over time. It’s about making your money work for you and maximizing its potential.

The Role of Corporate Treasury

In the context of corporate treasury, we want to ensure that our company’s activities and operations are well-funded. This means securing the necessary resources to support our business endeavors. It also involves managing cash effectively, not just sitting idle but actively contributing to the company’s growth.

Corporate finance in treasury encompasses both funding and investment management. By strategically securing funding and making wise investment decisions, treasury professionals like you can ensure the financial stability and success of the company.

Funding and Investment Examples in Corporate Treasury

Let’s dive into some examples to make funding and investment more relatable. Imagine you own a car manufacturing company, and business has been booming. You have a fantastic opportunity to expand your operations in Asia. However, your current factories are already producing at maximum capacity, and you’re selling all the cars you can make. To seize this opportunity, you must build a new factory, which requires a significant investment.

So, how do you fund this new factory? There are several ways to do it. You can approach banks for loans, issue new shares on the market if your company is publicly traded, or seek private investors interested in supporting your expansion. The options are numerous, and in this episode, we won’t delve into all the funding instruments available.

Example of Investments: Adapting to Market Conditions

Now, let’s consider the other side of the coin—investments. In this example, you’re still a car manufacturer, but this time, you’re facing challenges in one of the regions where you operate—Latin America. Business isn’t going as well there, and you’ve decided it’s best to exit that market.

To do so, you sell all your stores and factories in Latin America. You have a significant amount of cash after finding a buyer who pays for all these assets. The question arises: What should you do with this newfound cash?

In this scenario, you want to make smart investments with your cash to gain interest and generate returns. The level of risk you’re willing to take will determine the potential returns on your investments. Remember, the higher the risk, the higher the potential reward and the higher the chance of losing some or all of your investment.

The goal is to make your cash work for you and maximize its potential. You may explore various investment options, such as stocks, bonds, real estate, or even investing in innovative technologies or new business ventures. The decision on where to invest your cash requires careful analysis, considering your risk appetite, market conditions, and potential growth opportunities.

Maximizing Opportunities through Investments

When you have significant cash available, you want to ensure it doesn’t sit idle. Instead, you want to put it to work and maximize its potential. Investing in various opportunities can drive your business forward and help it thrive.

Expanding your business by building new factories or entering new markets are examples of investment activities that can lead to growth. However, investments aren’t limited to external ventures. You can also invest in your business to improve operations, develop new products, or enhance existing services. You can increase profitability by strategically investing and propelling your business to new heights.

Taking a step towards Self-Funding

One interesting aspect to consider is self-funding. You may not always need external funding sources if you have substantial cash available. By using your funds to finance investments, you can potentially reduce costs and retain full control over your business decisions.

Self-funding offers advantages such as lower interest expenses and increased flexibility in decision-making. It allows you to allocate your available cash in ways that align with your business objectives. However, carefully assessing each investment opportunity, and considering factors like profitability, risks, and potential returns, is essential.

Image by G-tech from Pixabay

3- Financial Risk Management

When dealing with money, especially in business, you will encounter risks. In the 4 Pillars of Corporate Treasury, Financial Risk Management serves as a fundamental component. Let’s try to simplify this complex topic of financial risk management and see how it relates to the world of treasury.

Understanding Risk in Finance

Let’s start by understanding what risk means in finance. It’s pretty much like crossing a busy street. You could get to the other side safely (that’s your reward), but there’s also a chance you could stumble or have an accident (that’s your risk). When you invest money, there’s always a chance you might lose part or all of it. The more risk you take, the bigger the potential reward. But remember, there’s also a bigger chance of losing your investment.

Examples of Low and High-Risk Investments

Now, let’s put this into context with some examples. If you’re looking for a safe place to park your money, consider lending it to a government by buying government bonds or debt. Why? Because it’s very unlikely that a government will collapse and not pay you back. It’s a low-risk investment, so you’ll only get a small interest.

On the other hand, let’s say you’ve got a buddy starting a new technology company. He’s planning to shake things up in the market. If you decide to fund his startup, it’s a high-risk investment. There’s a chance you could make a lot of money if his company takes off. But there’s also a high risk of losing your investment if his startup fails.

Navigating Risk in Treasury

When doing business in different currencies, the foreign exchange risk pops up. Suppose your company sells products in the U.S., but your suppliers are in Europe. If the exchange rate between the dollar and euro changes dramatically, it could affect your profits.

The second risk you need to manage is the interest rate risk. In corporate finance, you’ll often deal with loans and credit lines based on a floating interest rate. If this rate increases significantly, it becomes risky because your company will pay more interest on its loans.

In a nutshell, financial risk management is about being aware of the potential risks and coming up with strategies to minimize them. This will help you keep your company’s finances on solid ground. And that, my friends, is a key part of being a successful treasury professional.

let’s dive into the exchange rate and interest rate risks using real-life scenarios.

Exchange Rates Risk in Action

Imagine you’re the owner of a French shoe company. You make lovely shoes and have started selling them to a big shoe store in the United States. The store buys your shoes and pays you in U.S. dollars. So far, so good, right?

But here’s the thing. You still have cost back home in France. You’ve got suppliers and employees to pay wages to, and they all want to be paid in euros, not dollars.

Let’s take a real scenario. Your American client makes an order and agrees to pay you 120,000 USD monthly. At the time of the agreement, 120,000 USD is worth 100,000 euros. But guess what? The exchange rate between the dollar and the euro can change.

If the value of the U.S. dollar drops dramatically against the euro, by the time you get your payment, those 120,000 dollars are worth less in euros. You were expecting 100,000 euros, but now you might only get 60,000 euros. This potential loss due to changes in exchange rates is what we call foreign exchange risk.

And what’s the remedy? Well, it’s something called hedging. By hedging, you ensure that no matter how much the dollar or euro value changes, you will still receive your 100,000 euros.

Interest Rates Risk in Real Life

Now let’s shift our focus to interest rates. You’re still running that successful French shoe company. This time, you need some extra money to buy a new machine for your factory. So you take out a loan from the bank.

The bank agrees to give you the money but will charge you interest. The interest rate is based on how much it costs the bank to lend you the money, plus a little extra for their fee. Let’s say the total interest is 3% when you take the loan.

Six months down the line, the interest rates have increased. It’s now costing the bank 4% to lend you the money, and they still charge their 1% fee. So now you’re paying 5% interest instead of 3%. This is an example of interest rate risk.

And guess what? You can hedge against this risk too. By hedging, you can ensure that you’ll still pay the same interest on your loan no matter what happens to the market interest rates.

So there are a couple of examples to help you understand exchange rates and interest rates risks. It’s always smart to be aware of these risks and have a strategy to handle them. Remember, being prepared is half the victory!

How Does Financial Risk Management Involve Hedging?

Financial risk management is much like getting insurance for your business’s finances. Just like you’d buy insurance to protect your house from unexpected events, in the business world, you take steps to protect your business’s money from things that could affect it negatively.

This could include investments, loans, sales, and even daily operations. The main goal? To make sure you don’t lose more money than you should.

Exchange Rate Risk

One major risk comes from doing business in different countries. If you sell products to a company in another country, they’ll pay you in their currency.

When you convert that back to your local currency, the value might have changed due to fluctuations in exchange rates. These rates can change because of all sorts of things happening worldwide.

So, even if your foreign company pays you the same amount every time, you could get less money in your local currency. That’s exchange rate risk.

Interest Rate Risk

The other biggie is interest rate risk. Let’s say you take a loan from a bank, and the interest rate isn’t fixed. Instead, it varies from month to month.

The bank can change the interest rate based on their calculations. So, you might pay more interest one month and less the next. This unpredictability can be a blessing but can also become a curse.

The Importance of Hedging

That’s where hedging comes into the picture. It’s like your financial safety net. With proper hedging strategies, you can shield yourself from these risks. It’s like buying insurance for your money, ensuring that your initial investments are safe, whatever happens.

4 – The Role of Banking Relationships in Corporate Treasury

Let’s talk about the importance of banks in your treasury operations. This is a key part of corporate treasury that ties together the different parts we’ve already discussed. In the world of corporate treasury, Banks are an important pillar among the 4 Pillars of Corporate Treasury. They play a crucial role in supporting and facilitating various operations. They serve as reliable partners, assisting in managing cash, mitigating financial risks, and providing essential financial services.

Why Are Banks Important?

Banks are like your go-to helpers in the world of corporate treasury. They’re involved in almost every aspect we’ve discussed, from managing cash to dealing with financial risks.

  1. Banks Help Manage Your Cash and Liquidity: Think about it. When you need a place to keep your money, you open a bank account, right? It’s the same with businesses. Banks provide the accounts businesses use to receive money from their customers and pay their suppliers.
  2. Banks Assist with Funding and Investments: Need a loan to build a new factory? You’ll most likely get it from a bank. Want to invest money in the market? Again, banks are typically your main contact point.
  3. Banks Provide Tools for Financial Risk Management: When we talked about hedging, remember we said it’s like an insurance for your finances? Banks are the ones providing these “insurance policies.” They offer products that help you hedge against risks, like interest and exchange rate fluctuations.

Managing Your Banking Relationships

Just like any relationship, banking relationships require careful management. As a treasury professional, fostering positive and mutually beneficial partnerships with your banks is essential. Regular communication, trust-building, and collaboration are key to ensuring your banking relationships remain strong and productive.

When working with multiple banks, balancing obtaining the best financial products and managing costs is crucial. While it is essential to collaborate closely with your banks to meet your business’s needs, it is equally important to ensure that you are not being overcharged. Maintaining a healthy balance in these relationships will maximize the benefits while minimizing unnecessary expenses.

Final Verdict:

And there you have it, You’ve just navigated the intriguing world of corporate treasury. Now you have a deeper understanding of the 4 Pillars of Corporate Treasury, such as cash and liquidity management, corporate finance, financial risk management, and banking relationships. Pretty cool, right?

While all this information about the 4 Pillars of Corporate Treasury may seem overwhelming, remember you don’t have to digest it all at once. Take it step by step. In time, you’ll see how each piece fits together to give you a clearer picture.

Always keep in mind that understanding these topics is crucial for your role in treasury. It’s like having a superpower that helps you make informed decisions, manage risks better, and navigate your banking relationships like a pro!

Of course, there’s always more to learn. The world of corporate treasury is vast and ever-changing. But with this foundation, you’re on your way to becoming a real treasury whiz!

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