Treasurers serve as financial risk managers that seek to protect a company's value from the financial risks it faces from its business activities. Because these risks can arise from many sources, the role requires an understanding of many areas of business and the ability to communicate with a variety of financial professionals. Once an offshoot of the accounting department, corporate treasury management has evolved into its own company department and professional body.
Treasurers manage several key risks related to changes in interest rates, credit, currency, commodities, and operations. Companies face some or all of these risks to varying degrees. The most common include:
Perhaps the most important risk a treasurer must manage is liquidity risk: the company running out of cash either from insufficient revenue, excessive expenditure, or the inability to access funds from banks and other external sources. The inability to meet payment obligations as they are due can mark the end of a company if its creditors sell off its assets to pay corporate debts.
Surplus cash can be invested to earn interest, and the treasurer must be sure that those issuing or insuring securities are financially sound and credit-worthy. One way to do this is by checking an issuer's credit rating, which provides an independent assessment of the likelihood that a third -party will pay on time and in full as expected. The treasurer must also be confident that counterparties to financial instruments used to manage risks (such as interest rate swaps) will perform as expected.
In addition to credit risk, exporting companies face currency transaction risk when they translate proceeds from foreign sales into their home currencies. Multinational companies also face translation risk in financial reporting when the values of their foreign subsidiaries' assets and liabilities fluctuate upon conversion to a single home currency. Investors and analysts may view currency moves that cause a drop in the value of consolidated foreign assets and in profits as a problem, potentially causing the company share price to fall.
Another type of currency risk, which treasurers may find more difficult to manage, occurs when a competing company from another country experiences a more favorable currency translation. For example, the sales of two exporters from different countries, both selling goods to a Japanese importer, will depend in part on how their respective currencies move against the Japanese yen. Tactical moves to remain competitive, such as relocation of manufacturing plants to match the competitor's currency cost base, can have major ramifications. Senior management, with input from the treasurer, would only implement such a move after extensive discussion.
Interest Rate Risk
Most companies need to borrow to finance operations, such as buying raw materials, machinery or premises. Borrowing at variable interest rates allows companies to pay less if market interest rates fall, but raises their costs if rates go up. If a company does not pay interest because of insufficient cash, it may run into a liquidity crisis that could undermine its ability to borrow in the future, or to raise it only at higher interest rates that reflect its heightened credit risk to lenders.
The financial risks discussed above are external risks. Operational risk is an internal treasury risk that reflects inadequate operational controls that could lead to a loss of company value. An example of inadequate controls might be if a treasury dealer borrows money under a company loan agreement, apparently for a business purpose, but transfers the proceeds to their own bank account because the treasurer is able to undertake both dealing and funds transfer activities. In a well-controlled treasury, such functions would be segregated and attempt to undertake both by the same individual would be immediately detected.
A treasurer will formulate a set of board-approved policies that define the methods allowed to manage the above risks and the discretionary powers of the treasurer and other authorized personnel. These policies will vary from company to company. Not all companies, for example, allow treasurers to use derivatives or to leave risks unprotected, or they may only allow such practices within defined limits and terms.
The treasury department's actions and its compliance with treasury policies must be assessed independently and regularly by the internal audit department and by a treasury committee comprised of senior management, including the treasurer. This committee, or an asset and liability committee (ALCO), will also regularly review and discuss financial risks across the company's assets and liabilities, and agree on appropriate actions to manage or transfer them. ALCOs will usually delegate the task of executing agreed-upon actions to the treasurer and their team.
When there is no single obvious solution to managing a financial risk, a treasurer must be able to weigh the pros and cons of a course of action. Decisions may involve consulting relevant internal and external specialists and undertaking data analysis and possibly scenario analysis in order to recommend a course of action.
Traditionally, many treasurers were trained as accountants and undertook treasury activities as an offshoot to their accounting roles. However, with the development and proliferation of financial instruments and the globalization of financial markets and companies, treasury management has become more specialized, complex and time-consuming. Large and multinational companies establish treasury departments as autonomous risk management units, and corporate treasury management is now recognized as a profession distinct from accountancy. Many countries have specialized professional bodies, such as the Association of Corporate Treasurers in the U.K., as well as specialized education programs.
Specialist and Generalist
Although a treasurer is essentially a risk management specialist, performance is enhanced by having a practical knowledge of various associated corporate support functions such as law, tax, insurance, accounting, economics, and banking. In these areas, the corporate treasurer is also a generalist.
Because financial risks come from various sources within a company (such as interest rate risk in loans, credit risk in investments, or currency risk in debtor invoices), a treasurer must understand the nature and financial dynamics of each of a company's assets and liabilities across many different departments, underscoring the benefit of a broad financial education.
In addition to consulting relevant internal colleagues, a treasurer will often execute the actions to manage financial risks only after also consulting with external specialists such as bankers, lawyers, credit rating agencies, tax and accounting consultants, and auditors. A glance at any tombstone will confirm the wide range of specialists involved in raising debt or equity, for example. Strong interpersonal and communication skills are therefore an important personal attribute for a treasurer.
The impact of financial risks on company value and survival can be catastrophic and sudden. The treasurer, along with perhaps a small team consisting of a treasury accountant, cash manager, treasury analyst, and dealer, are entrusted with a great deal of responsibility. As such, a treasurer is often a member of a company's senior management team, usually reporting directly to the CFO or even commanding a seat on the board of directors.
The Bottom Line
Treasurers are increasingly assuming more strategic roles in companies. They have moved beyond managing working capital to becoming increasingly involved with working with a company's senior management to manage risk and boost the bottom line.