The Fundamentals of Corporate Treasury Revised

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

The Fundamentals of Corporate Treasury Revised

The Fundamentals of Corporate Treasury Revised- Featured Image

Welcome to Corporate Treasury 101. In today’s article, we’re hitting the refresh button and returning to the The Fundamentals of Corporate Treasury. Today, we are delving into the basic concepts of Corporate Treasury again. We thought it’d be helpful to revisit the summary of all these topics, focusing on the 4 fundamentals of Corporate Treasury, which are:

  1. Cash Management
  2. Corporate Finance
  3. Risk Management
  4. Bank Partnerships Management

Join us on this enlightening journey as we unravel these pillars, making complex concepts simple, manageable, and, more importantly, practical for your everyday role in the exciting world of corporate treasury.

Before we dive in, if you’re keen on exploring these concepts more deeply, we’d recommend taking a look at the following article: The 4 Pillars of Corporate Treasury

Let’s get started!

Cash Management: The 1st Fundamental of Corporate Treasury

Cash management is a broad topic. It involves handling the funds coming in and going out of a business. Businesses receive money from their clients and pay suppliers, employees, taxes, etc. Optimizing the processes of receiving client payments promptly and organizing outgoing payments is the first step toward efficient cash management.

Once the inflows and outflows are properly organized, other aspects of cash management come into play, particularly for the role of a Corporate Treasurer.

  1. Dealing with Cash Shortage: Businesses might sometimes have significant expenses before receiving money from their clients. This situation is typical in wholesale businesses, where the need to fund or finance the activities arises. This process falls under cash management.
  2. Handling Excess Cash: On the contrary, businesses sometimes have a cash surplus. Letting the cash sit idle in a bank account is not ideal. Hence, the Corporate Treasurer should optimize its return, potentially investing it elsewhere. This step is also an integral part of cash management.
  3. Cash Flow Forecasting: Another crucial aspect is cash flow forecasting. Businesses must estimate their cash inflows and outflows for specific periods (like a week, a month, or three months). This forecasting helps anticipate whether there will be a need to invest the excess cash or fund the activities due to cash shortage.
  4. Liquidity Management: This facet ensures the business meets its financial obligations on time. Companies need to have the agreed-upon amount of cash ready to fulfill their commitments, like paying suppliers. This step is crucial in maintaining good relationships with partners and ensuring the smooth operation of the business.

In corporate treasury, it’s not just about the net income or profit at the end of the month. A Corporate Treasurer needs to consider the timing of the cash flows. For example, an accountant might only care about the net revenue of $5,000 and expenses of $2,000 for the month. However, a Corporate Treasurer would be concerned about when these transactions occur. If the business has to pay $2,000 at the beginning of the month but only receives the $5,000 at the end, there might be a cash flow problem, even though the net income is positive. That’s where cash management comes in, managing these timing differences and ensuring smooth operations.

The Corporate Treasurer’s responsible for managing these differences efficiently, be it a cash shortage or excess situation. This management ensures that the business can meet its obligations on time while using surplus cash best.

Corporate Finance: The 2nd Fundamental of Corporate Treasury

The next pillar of Corporate Treasury is Corporate Finance. Here’s a detailed breakdown of Corporate Finance according to Guillaume.

The Core Principles of Corporate Finance

Corporate Finance, as discussed by Guillaume, is closely tied to cash management. It involves strategic decisions about funding and investment for the company.

You might be asking yourself, “What is funding and investment?” When a company is short on cash, it has to find a temporary funding source to sustain its operations. This funding could be in the short term (a few weeks or months), midterm (several months), or long-term (more than a year). Finding the cash to fuel the business is what we call funding.

You’re probably wondering, “How do companies secure funding?” They can either issue equity or borrow money, often called taking on debt. This decision hinges on various factors, such as the risk the company is willing to bear, the funding cost, and the debt’s maturity.

On the other hand, when a company has surplus cash, it seeks to invest that money to earn a return. Similar questions come into play here with funding, such as how long the cash will be invested (the investment’s maturity), what type of investments to make, and the risk level.

According to Guillaume, when it comes to investments, treasury professionals prioritize in this order:

  1. Risk: Minimizing risk is paramount when investing a company’s money.
  2. Liquidity: It’s vital to consider the period for which the money will be invested.
  3. Yield: This is the return on investment – how much the company will earn.

Lastly, Corporate Finance encompasses Trade Finance – a category that guarantees business dealings with unfamiliar parties, typically facilitated by a financial institution or bank for a fee.

Understanding Corporate Finance in Practice

In the words of Hussam, Corporate Finance involves answering questions like “What do you do when you have cash or when you don’t have it?” To put it, if you find yourself lacking the necessary funds, Corporate Finance steps in to bridge this gap.

On the other hand, if you have excess cash, Corporate Finance guides the decision-making process about what to do with it. Should it be invested for the short, mid, or long term? What aspects should you consider when making these investments? And yes, it always goes back to assessing security, liquidity, and yield.

Just as it helps when you need to secure funding for operational needs or long-term investments (like building a factory), Corporate Finance also directs what to do when you’re in a comfortable cash position, ensuring that every financial decision aligns with the company’s strategic goals.

Risk Management: The 3rd Fundamental of Corporate Treasury

The 3rd pillar of Corporate Treasury is risk management. As Guillaume enlightens us, financial risk is a significant factor to consider when navigating the world of finance and international financial markets. Three primary types of risk are integral to the corporate treasury universe:

  1. Interest Rates Risk Management
  2. Foreign Exchange Risk Management
  3. Counterparty Risk Management

Let’s break these down for a more comprehensive understanding.

Interest Rates Risk Management

Whenever your business launches a project, you’re likely to borrow money. The borrowing comes with a cost, commonly known as the interest rate. Here’s the catch: if the cost of borrowing or the interest rates go up, your project’s profitability may be hit.

As of the podcast recording (October 2022), interest rates are increasing significantly to combat inflation. If you’re in a similar situation, managing your interest rate risk is crucial to ensure the rising cost of borrowing doesn’t jeopardize your projects.

Foreign Exchange Risk Management

The business world doesn’t recognize borders, and you will likely work with clients or partners operating in different currencies. Suppose you’re in Europe, in Euros, and have clients in the United States who pay in Dollars. When you sign a contract with them, you take on the risk of currency fluctuations.

The amount of money you’re set to receive at the contract signing time might decrease by the time you receive it due to changes in the exchange rate. You must manage your foreign exchange risk effectively to avoid losing money.

Counterparty Risk Management

This type of risk involves your business relationships. Whether it’s a bank, a client, or another third party, there’s always a chance that they might fail to repay you or even go bankrupt, leaving you with unpaid dues.

Counterparty risk management, therefore, involves careful consideration of the financial health and reliability of those you do business with to avoid such unfortunate situations.

To sum up, these three types of risks—interest rate, foreign exchange, and counterparty—are integral to your business dealings. You must focus on them to ensure your company’s financial health. Hedging, or employing strategies to offset potential losses, is vital in mitigating these risks.

Bank Partnerships in Corporate Treasury
Photo by Andrea Piacquadio on Pexels

Bank Partnerships: The 4th Fundamental of Corporate Treasury

Let’s delve into the last crucial aspect of our discussion: Bank Partnerships. Guillaume gives us the lowdown on how vital bank partnerships are to successfully manage corporate treasury activities.

Banks – Enabling Cash Management

Cash management sits at the heart of any business. However, to receive cash, you need a bank account. And who provides those bank accounts? Banks, of course. In essence, banks are crucial players in managing your cash flow. Moreover, for effective cash forecasting, you need regular bank statements. These statements detail your current bank balance and daily transaction activities and give you an idea of your future financial position.

Banks – Facilitating Corporate Finance

Banks come into play when looking for funding options, such as credit lines or overdrafts for short-term requirements. They provide these financial tools to help you manage your immediate funding needs.

Banks – Helping in Investments

Planning on investing your money? Banks, along with other financial institutions, play a vital role. They are authorized to trade on financial markets and issue investment instruments. In other words, banks are your gateway to investment opportunities.

Banks – Enabling Financial Risk Management

Managing financial risk is a major part of corporate treasury activities. Banks provide you with the financial instruments to hedge, i.e., safeguard your finances against potential risks. Most of these risk management strategies involve derivatives, which banks manage.

Why do Good Bank Partnerships Matter?

Banks play an indispensable role in managing cash, facilitating corporate Finance, helping with investments, and enabling financial risk management. These aspects are fundamental to corporate treasury activities.

However, it’s important to remember that people run banks. Building a strong, mutual partnership with your banking partners can help you navigate your corporate treasury activities more efficiently. Hence, managing your banking partners well is crucial to the success of your corporate treasury functions.

Having a good relationship with your bank is more than just a formality; it’s a strategic move that can significantly benefit your company’s financial stability and growth. It empowers you to manage cash flow, finance operations, make wise investments, and manage financial risks effectively.

The eBook: The ABCs of Corporate Treasury

Hussam and Guillaume have laid out the fundamentals of corporate treasury. But where can you go if you want to dive deeper? Many great resources are available if you want to understand more about this fascinating world. The first place you can go is here; You can listen to any podcast or read our comprehensive articles.

But there’s another, more comprehensive resource. Guillaume and Hussam have created an eBook. Aptly titled “The ABCs of Corporate Treasury,” this eBook offers an in-depth look at the basics of corporate treasury.

The best part is that they’ve worked hard to make it easy to understand. They’ve kept the jargon to a minimum and used simple language so everyone can understand. This is not your average finance book full of complicated terms. Instead, it’s a user-friendly guide with definitions, a glossary, and clear examples. It’s a hearty 44 pages long, so it’s packed with useful insights.

The Unique Approach of the eBook

What sets this eBook apart is the conversational tone that Guillaume and Hussam use. They have kept the friendly, approachable style that is the hallmark of their podcast. They want this book to feel like a chat between friends, even though it’s about a serious topic like a corporate treasury.

How to Access the eBook

Even better, the eBook is free. You need to provide your email address and name, and they’ll send the eBook to you. You can find the link to the eBook in the podcast’s show notes.

A Flexible Reading Experience

The eBook is designed to be flexible. You can read it all at once with a few hours to spare. Or, if you prefer, you can dip in and out, reading sections that particularly interest you.

A Special Surprise Inside the eBook

As a bonus, the eBook includes a special, exclusive podcast episode unavailable elsewhere. This bonus episode covers interesting topics that benefit anyone keen to learn about corporate treasury.

Wrapping It Up

That brings us to the end of our enlightening journey through the world of corporate treasury. You’ve learned about the fundamentals of corporate treasury and where to find comprehensive resources to expand your knowledge even further.

Remember, a sound understanding of corporate treasury is pivotal for a thriving business. And that doesn’t have to be daunting! With friendly, accessible resources like podcast episodes and the free eBook offered by Guillaume and Hussam, you can tackle the subject head-on. They have made the world of corporate treasury accessible to all, presenting expert knowledge in a relatable, easy-to-understand way.

So go ahead and dive deeper into these resources. Remember, the key to personal and professional growth lies in continuous learning. Keep exploring, keep learning, and keep growing in your role as a treasury professional. We hope you found this article informative and engaging, and we look forward to joining you on your next learning journey.

Happy learning, and until next time!

If you liked the article, why not spreading the Treasury word? :)

Leave a Reply

Your email address will not be published. Required fields are marked *