Version 1
The
Corporate
Treasury
eBook
An Introductory guide to
Corporate Treasury.
A Publication of
2022 EDITION
The Corporate Treasury
101 Podcast
and
The Treasury
Recruitment Company
An eBook by Corporate Treasury 101 &
The Treasury Recruitment Company
About This eBook
Welcome to the Corporate Treasury 101 eBook!
If you are reading this, you heard of us! On our “Corporate Treasury 101” podcast, or
from our partner in crime Mike Richards and his “Treasury Career Corner” podcast or
via word of mouth!
In any case, thanks for your trust and for downloading it, we hope you find answers to
the questions you often ask yourselves about Corporate Treasury.
This eBook is born out of a flurry of requests from our listeners who wanted a sort of
almanac, where they could find the ABCs of Corporate Treasury in written form. And
from our collaboration with Mike Richards, who frequently receives requests from his
audience and from junior treasury contacts, seeking exactly this type of material.
The objective of the eBook is to break down the basics of Corporate Treasury, with a
light, non-corporate tone, to make the learning fun and entertaining. Yet, highly
enriching😉
Throughout this book, you will find links that will direct you towards different websites,
platforms, or videos. The idea is to provide you with as much Corporate Treasury
information as possible, in as user-friendly manner alternating between written, audio
and video content.
The major perk of writing an eBook, right?
In case you have questions shoot us an email at treasurypodcast@gmail.com or
connect with us via our Instagram account @CorporateTreasury101!
Hussam ALI, Guillaume JOUVENCEL
& Mike RICHARDS
Table of Contents
About this eBook
3
Introduction
5
1. Understanding Corporate Treasury
7
1.1 Treasury in Small Companies
7
1.2 Treasury for Small Businesses illustrated
8
1.3 What is Corporate Treasury?
2. Foundation 1: Cash Management
10
13
2.1 What is Cash and Liquidity Management
13
2.2 Liquidity, with an example
14
2.3 Why does Liquidity requires Management?
15
2.4 And what about Cash Management?
16
2.4.1 Collections
16
2.4.2 Payments
17
2.4.3 Cash Positioning
18
2.4.4 Cash (Flow) Forecasting
18
2.4.5 Funding and Investment
3. Foundation 2: Corporate Finance
3.1 Funding
19
20
20
3.1.1 The fundamentals of Funding
20
3.1.2 Short & Mid-term Funding
21
3.1.3 Long-term Funding
22
3.1.4 Interest, dividends and debt repayments
22
3.2 Investment
23
3.2.1 Invest externally versus internally
23
3.2.2 Risk, Liquidity and Yield
24
3.2.3 Short & Mid-term Investment
25
3.3 Trade Finance
25
3.3.1 A tool to enable International Trade and Commerce
26
3.3.2
27
Interview of Ellen Lauwers on Trade Finance
4. Foundation 3: Risk Management
28
4.1 Risks in Finance
28
4.2 Foreign Exchange Risk
28
4.3 Interest Rates Risk
30
5. Foundation 4: Banking Partnerships
33
5.1 The Business of making money… by selling money
33
5.2 The bank’s role in Cash & Liquidity Management
34
5.3 The Bank’s role in Corporate Finance
34
5.4 The Bank’s role in Financial Risk Management
35
5.5 Banks as a critical partner of a business
35
6. Bonus 1: All the rest! (Of Corporate Treasury)
6.1 Treasury Accounting
37
37
6.2 Treasury Reporting
37
6.3 Corporate Credit Cards Program
38
6.4 Interdependencies
38
6.5 Payroll & Tax
39
6.6 Treasury Systems
39
6.7 Treasury Policy
40
7. Bonus 2: What does a Corporate Treasury Department look like? A video by Mike Richards
41
Thank you!
42
Glossary
44
The Corporate Treasury eBook
Introduction
In this eBook, expect to find all you have ever dreamt of learning about Corporate
Treasury!
This is indeed the end of your endless wandering through the internet, jumping from
one non-specialized website to another, ending up with 18 Investopedia tabs opened.
Yes, I can relate.
The objective here is to cover what Corporate Treasury is, why it is important in a
company and what are its fundamentals that we, at Corporate Treasury 101 (“CT101”),
humbly called the “Foundations of Corporate Treasury”:
1.
2.
3.
4.
Cash Management
○ All you need to know about Cash & Liquidity Management, cash
positioning & forecasting, how to collect money and execute payments.
Corporate Finance
○ THE finance aspect that can’t be avoided in Treasury, where we break
down Funding and Investment, and what Trade Finance is!
Risk Management
○ You will finally get to know what is behind the word “hedging”, interest
rate risk management or even foreign exchange risk management.
Banking Partnerships
○ This 4th Foundation might be highly influenced by the fact that Guillaume
(co-founder of the CT101 podcast) comes from Corporate Banking, and
couldn’t stop himself from talking about it. But you will see that managing
your banking relationships is at the heart of Corporate Treasury!
Because we love to surprise our audience and always try to go “the extra mile”,
expect to find at the end of the eBook, some bonuses and an exclusive video from
Mike Richards, explaining how a typical Corporate Treasury Department is
structured!
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4
5
Introduction
Finally, and as you might expect, covering the entirety of Corporate Treasury topics is
impossible in a 40+ pages eBook.
We want to give you as much of a 360° overview as possible, covering at a high-level
a variety of different topics within Corporate Treasury.
For in-depth teachings about any topic, a good place to start is our podcast channel,
where we have 10- to 60-minute-long discussions about a specific topic of Corporate
Treasury in each episode.
And in case you are even more eager to learn about this marvelous world of
Treasury…
Then reach out to us and who knows, maybe our next eBook will be dedicated to the
topics you are keen to learn more about 😉
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4
6
1. Understanding Corporate
Treasury
Before rushing into the fascinating world of Cash Management, the thrill of hedging 1
foreign exchange exposure2, or the excitement of choosing between different Trade
Finance instruments3, - Yes, Corporate Treasury really is close to our hearts - we
would like to first start by answering what Corporate Treasury is.
Corporate Treasury, as its name might hint at, is mostly found in big Corporations. But
in order to properly grasp the matter at hand, why not starting with a simple example
we can all get to grips with?
1.1 Treasury in Small Companies
Treasury is present even in the smallest types of business. As long as you have
clients, you will find Treasury related tasks.
Starting with Some Definitions
Let’s start with the definition of Treasury from the Association of Corporate
Treasurers (“ACT”):
“Treasury involves the management of money and financial risks in a
business. Its priority is to ensure the business has the money it needs
to manage its day-to-day business obligations, while also helping
develop its long term financial strategy and policies.”
For a small company, one could also refer to Treasury as:
“The amount of money available at a certain moment in time (in
physical cash/bank notes/coins or in the bank accounts)”
1. Hedging: Hedging is doing an investment with the intention of reducing the risk of unfavorable price movement of a financial
The Corporate Treasury eBook asset
2. Exposure: Refers to the risk linked to an investment, it indicates the amount of money an investor may loose because of it
3. (Financial) Instrument: Refers to an financial asset/tool that can be exchanged, like cash, contractual right, ownership’s
evidence
7
The “available money” does not mean profits, and should not be used as such. The
available money at a certain moment in time represents the aggregation of the
collected money very likely from customers / clients, but might be (partially) used to
make payments (suppliers, salaries, rent, bills, the one that everybody likes the most:
taxes etc.).
Some Small-Business Jargon
You may have heard from a small-business owner phrases such as:
"I need to take care of my Treasury."
This could be interpreted as “the need to check whether my customers / clients have
paid the business what they owe, and anticipating what needs to be paid in the
upcoming days, weeks, months etc.”
Summarized, Treasury as a function for small businesses could be simply defined as
making sure that:
1. The business can pay what it owes in time
○ In other words: “Comply with financial obligation” in Corporate Treasury
jargon
2. The business collects the money owed from clients in due time
○ In other words: “Ensure collections are done in a timely manner” in
Corporate Treasury jargon.
1.2 Treasury for Small Businesses Illustrated
If you are an active listener of the CT101 podcast, you may know about this example
we often take to break down certain concepts. The famous “Hussam’s Café”.
Hussam indeed dreams of opening his own café some day.
Since examples are always the best way to explain a concept, we will use this
reference throughout this eBook as well!
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8
Hussam’s Café’s revenue & charges:
Revenue: On one hand we have a gain in
revenue from the customers / clients, paying
directly when ordering a coffee.
Charges: On the other hand, we find the
charges that the Café needs to pay in order to
run properly. Let’s make it simple and stick to:
●
●
●
●
the coffee grains
the salaries of the employees
the rent of the place
bills (electricity, gas etc.)
The Case of Positive Treasury
In this particular example, Hussam’s Café is in a situation where it will receive money
from the customers on the spot, whilst the payments of the goods used to make the
coffees are done at a later stage.
In the business world, it is often the case that suppliers get paid for delivering
products and goods at a later stage. Typically 10 or 30 days later but even up to 60
days after the fact.
Also salaries, rent and bills are often paid once a month. For the sake of simplicity,
let’s assume that Hussam negotiated very well with all of his counterparts, and those
payments are done at the end of the month.
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Hussam’s Café is therefore in a scenario where its treasury is positive. It will always
have cash in the bank account and / or cash register because the money is collected
before the payments are made.
However, the outgoing payments mentioned above need to be properly planned and
forecasted. Who needs to be paid, when and how much?
This is in order to avoid missing payments which are due and potentially going
bankrupt4.
In Corporate Treasury jargon: Make sure to comply with financial obligations, stay
liquid (refer to Section 2 “Foundation 1: Cash & Liquidity Management as of page 13
for a definition of liquidity) and avoid insolvency5.
What if Payments are Due Before the Business Collects Money?
Lucky for us, the case of Hussam’s Café is easy to manage from a Treasury
perspective. But how does it work when clients do not pay on the spot? Even worse,
when the business needs to pay its suppliers before it receives money from its
customers?
This is typically the case of wholesalers for instance. They are the ones providing the
Café with coffee grains, and getting paid only at a later stage. With potentially even
tighter payment conditions with their own suppliers.
Technically, the coffee grain wholesaler is not losing money. But if it cannot pay its
suppliers on time (let’s say the coffee grain farmers), they won’t be able to deal with it
anymore and it might have solvency6 problems.
Therefore, the wholesaler needs to find a way to pay its suppliers before receiving
money from its client. This is where short term funding enters into the equation. But
we will see that a little bit further down the line ;).
1.3 What is Corporate Treasury?
Now that we have explained what Treasury is and means, time to move on to the real
matter at hand… Corporate Treasury!
4. Bankrupt(cy): Legal process occuring when a business is unable to repay its outstanding debts or (financial) obligations
When a company is unable to repay the debts / outstanding financial obligations when they are due
The Corporate Treasury eBook 5.6. Insolvency:
Solvency: Ability of a company to meet its long-term debts and other financial obligations (opposite of insolvency)
10
Everything we just described about Treasury for small companies is applicable for
Corporate Treasury, simply at a much greater scale.
Paying out two employees in Hussam’s café presents much less complexity than
making sure thousands of employees receive their salary on time, and with the
correct amount. The same goes for suppliers.
The functions we describe in section 1.2 might seem rather straightforward. But when
a company has to deal with millions of clients, thousands of employees and suppliers,
in different countries and currencies, critical challenges arise.
Collecting money on time and via the best channel (electronic payment vs cheques
or bank notes), and most importantly, paying all the counterparties on time and with
the right amount becomes a strategic aspect of the business.
If not, its reputation is at stake and can easily go down the slippery slope of
insolvency, to end-up bankrupt.
Corporate Treasury becomes “a reality” for companies that reach a certain size (in
terms of turnover, number of employees, number of countries in which they have a
presence etc.)
Typically, a Corporate Treasury department / function is created within a company
when it hires its first Full Time Equivalent (FTE) corporate treasurer to:
●
●
●
●
●
●
Manage the cash a on daily / weekly / monthly basis
Execute payments
Set-up Foreign Exchange7 deals (to execute payments, receive money and / or
hedge an exposure)
Manage the relationship with the banks
Manage short & mid-term funding and / or cash investments
And so on…
7. Foreign Exchange: Refers to the currency of other countries than the one a company is operating in. For a
The Corporate Treasury eBook company based in the United States and so operating in dollars (USD), euro (EUR) is a foreign exchange
11
In conclusion, Corporate Treasury is the Management of all cash-related topics in a
company, to which we add the management of Financial Risks.
At Corporate Treasury 101, we like to talk about “The Foundations of Corporate
Treasury”, that we are going to break down in this eBook:
1.
2.
3.
4.
Cash Management
Corporate Funding & Investing
Risk Management
Banking Partnerships
Let’s get on with the show!
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12
2. Foundation 1: Cash (&
Liquidity) Management
The functions we describe in section 1.2 could seem rather straightforward. But when
a company has to deal with millions of clients, thousands of employees and suppliers,
in different countries and currencies, critical challenges arise.
If you recently entered Corporate Treasury, you might already have heard things such
as “Cash is King”.
This is an understatement.
Especially in a period of recession, rising interest rates and inflation (Hello 2022),
cash becomes a very expensive resource.
Therefore, Cash and Liquidity Management becomes critical for big corporations.
But what is Cash & Liquidity Management?
2.1 What is Cash and Liquidity Management?
To describe it, one could say that the name says a lot already. We are here looking at
the management of cash (money) and liquidity.
Cash:
For Cash, it is rather straightforward: How, When, and in which quantities does the
company receive cash?
Same questions goes for money going out (supplier payments, payroll, taxes and so
on.
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Liquidity:
The interesting term here is liquidity. Liquidity can be seen as “availability”.
What is liquidity management?
A simple definition would be: The ability of a company to raise cash when it needs it,
typically to pay suppliers, salaries, taxes etc…
Or, to tackle unexpected events:
● A machine that needs to be replaced
● The company needs to pay a fine
● There has been water damage in the factory and the insurance will only
reimburse the company after it first pays for the repair. So the company needs
the cash to pay first before getting the money back.
● Etc.
2.2 Liquidity, with an Example
As it always works better, let’s take an example. When you were younger, you
probably got pocket money / allowance.
Let’s imagine you are given 5 dollars by your parents every week.
Every month, you get a total of 20 dollars. Which is great because we actually dream
of buying that brand new remote-controlled car with 6 wheels. This car costs 60
dollars.
Therefore, you need to save money for 3 months in order to be able to buy the car.
However, at the end of month 2 (our available cash at this point is 40 dollars in your
possession), your friend Steve asks you to lend him 20 dollars to buy a bracelet for
his crush. The future of his relationship literally is at stake. He promises to repay you
in 2 months, with an additional 5 dollars to thank you for lending him the money.
At the end of month 3, we have 40 dollars in cash, and 25 in the form of an
investment (the loan to steve), but we cannot use this money yet! That 25 dollars is
not available, is not liquid to us.
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We could potentially pressure Steve to give (part of) our money back, but that would
damage our friendship and possibly reduce the return on our investment he promised
us (as you didn’t decide to hire a lawyer to make a contract for you)
At the end of month 4, you now have 60 dollars in cash from your parents, plus the 25
dollars Steve has paid us back! Our piggy bank is now full… and our cash liquid!
Now, back to Treasury. With Liquidity management, we talk about the liquidity of cash
(money). How much cash can a company free to meet its financial obligations
(supplier payments, salaries, taxes…), regardless of what you have in terms of worth,
money that is technically yours but you can’t use etc.
Is the cash liquid or not? For instance, is it sitting in a bank account that I can access
easily? Or do I need to request 3 days in advance for my bank to make that money
available?
A company might have huge assets such as real estate, which are worth a lot of
money. But real estate is not sold overnight. Therefore the “amount of cash” that
represents real estate is not liquid yet.
We are purposefully taking an obvious example here. But in the finance world, when a
company decides to invest its money (to get some interest out of it), certain
investment instruments could require the money to be blocked for 1, 3, 6 months or
even more. Making this money illiquid.
In a Treasury Department, if the financial assets owned can be sold easily and in a
timely manner, those financial assets are called liquid.
2.3 Why Does Liquidity Requires Management?
If all we care about is being liquid, why not simply keep our cash in a bank account,
that can be tapped in at any moment?
This is an excellent question I am sure you were just asking yourself.
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The challenge of the Treasurer is not only to keep the company’s assets liquid, but
also to optimize the return of available cash. Having too much cash sitting on a bank
account literally means losing money. Yes, as counter-intuitive as that might sound.
Money not used or invested is money that could be bringing interest/dividents or
financing internal projects that could, in their turn, return a greater amount of money.
Liquidity management is all about finding the right balance between investing the
company’s cash to earn even more money, and keeping it liquid enough to comply
with financial obligations and be prepared in case of unexpected events.
2.4 And What about Cash Management?
We just spent a lot of time describing what Liquidity Management is. But what about
the first part of this section: Cash (Management)?
Five topics are at hand when it comes to Cash Management (simplified version ;)):
1. Receiving money - Also called “Collections”
2. Sending money - Also called “Payments”
3. Getting visibility on how much cash is available right now - Also called “Cash
positioning”
4. Forecasting how much cash should be available in the upcoming days, weeks
and months - Also called “Cash Forecasting”
5. The use of investment or funding instruments depending on the cash needs of
the company - Also called “Funding & Investment”
2.4.1
Collections
There would not be much cash to manage if the company is not able to collect money
from its clients. Collections represent all the money “entries” for customers that a
company has in place.
In order to receive payments from clients, a company needs:
● A bank account, ideally in the same currency as the one the client is paying in
○ This account is opened at a bank, I know… shocking right?
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○
Collection Instruments:
■ If the customer/ client pay by card, the company needs card
terminals and a service provider
■ In case they use cheques, the company has to have a process in
place to bring the cheques to the bank
■ If they’d rather pay by electronic transfer, the company needs to
easily send bank account details
There are as many collection instruments as countries, and even within those
countries dozens of different tools exist. The idea here is not to go through all of
them but to give enough of an overview to understand what we are talking about.
●
A Reconciliation Process….
○ A what?
○ A reconciliation process means a way to identify which payments
correspond to which invoice (and so which clients)
○ Typically, this can be done manually, or in an electronic and automated
manner
2.4.2
Payments
All of the above (2.4.1 Collections) applies for payments as well. Except instead of
getting money in, we are looking at money going out, and the proper management of
it.
Getting money from customers/ clients is critical in order to keep the business going.
But missing a supplier payment, or worse, salaries and tax payments can mean
consequences.
The reason a company is making business with another one is because they have
trust in its ability to comply with its financial obligations. If that ability was to be
compromised, it would heavily compromise the trust in the business, and then other
businesses won’t want to deal with it in the future.
The payments aspect of cash management is therefore critical for any company,
especially when dealing with hundreds of third parties throughout the world.
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2.4.3
Cash Positioning
To make the right decisions in terms of Cash Management, a proper Treasury
Department needs to first have a clear visibility on cash. Answering the question
“How much cash do I have right now, in my different bank accounts, cashier, vaults,
liquid assets etc.”.
To do so, the Treasury Department has to set in place a process that allows all this
information to be gathered, centralized and reported in a digestible manner.
This is typically the job of Treasury Systems (Treasury Management Systems for
instance), reporting tools and bank applications (web-platform or smartphone apps).
2.4.4
Cash (Flow) Forecasting
Once the cash positioning system is put in place, Treasury departments can go even
further and try to forecast as accurately as possible the future cash position.
In principle, we look at daily positions throughout the coming weeks and sometimes
months.
But how does that even work?
Usually, a business would have a vision on when it has to make payments to
suppliers, salaries, taxes, bills, rent… and all the other types of expenses you can
think of!
Likewise, thanks to negotiated payment terms and delays with its clients, the
business would know when to expect each invoice payments.
In an ideal world, all customers would pay on time and no unexpected events
(requiring a sudden need for cash) would happen.
It would then be easy to aggregate all this information into a system and have a clear
visibility of the daily available cash for the coming days, weeks and months.
Even if we do not live in an ideal world, this exercise can be performed and - if done
properly - be accurate enough to serve its purpose.
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That purpose being, the business would then know if it might have to borrow money
from external investors, if it can invest excess cash (on a liquid or non-liquid asset) in
case it is cash rich at certain points in time.
2.4.5
Funding and Investment
This last topic is our transition to the next section “Corporate Finance”. Because this
one mainly concerns funding and investment, but is part of the Cash Manager’s tasks.
Once a company has a clear view on its available cash, and the potential upcoming
funding needs or investment opportunities, it chooses among the different
instruments available on the market.
Therefore, the Treasury Department ensures the business gets enough money to run
and thrive, or optimize cash returns thanks to investments.
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3. Foundation 2: Corporate
Finance
Corporate Funding and Investing (Also called Corporate Finance) can be seen as the
link between Cash Management and the relationship with third party financial
institutions.
As explained previously, a company may have some funding9 needs in case payments
occur before collections in the cash cycle10, or to finance important projects. Those
funding needs can be seen as short, mid or long-term.
In the scenario where the company is cash-rich, meaning collections occur before it
has to make payments, the company might want to invest and leverage this available
cash to make even more money thanks to incentives such as interest from banks.
Last but not least, an important aspect of Corporate Finance in Treasury is Trade
Finance. Where, in order to make deals with third-parties that you do not know and
trust or you are making deals of very high amounts of money - the company may be
interested in making those deals “safer” through guarantees and other instruments
from a “neutral” middle-man.
3.1 Funding
3.1.1
The Fundamentals of Funding
A company may require funding when its available cash or forecasted cash do not
cover (a) complying with its financial obligations or (b) to finance strategic and
important projects.
a)
In order to run its day to day activity, a business can either have positive or
negative
cash-flows.
Let’s take the example of running a steel-manufacturing business.
9. Funding (/Financing): Process of providing funds for business activities, making purchases, or investing.
institutions, such as banks, are in the business of providing capital to businesses, consumers, and
The Corporate Treasury eBook Financial
investors to help them achieve their goals
10. Cash Cycle: The period of time it takes a company to convert funds invested in production and then sales
to cash
20
In order to make the steel products that its customers want, the company
needs to buy raw materials (steel, energy etc.). The demand for raw material
can be quite high and therefore, steel mining companies might be asking their
clients to pay upon delivery.
But on the other hand, it takes time for the company between the moment it
receives the raw materials and the moment it delivers the end, fully shaped,
steel product. Plus its clients may have negotiated some payment delays.
In such cases, the company will require some funding (borrow money) in order
to buy the raw materials, and will pay its debt once the product sold and the
money from the customers received.
b)
On top of its daily activities, companies might want to invest into development
projects. The building of an additional, new steel factory for instance.
These types of projects can be a profitable investment in the long run, but very
costly and require an immediate injection of cash that certain companies may
not
have
at
hand.
Here again, a business would look at funding instruments in order to be able to
invest in those projects. Whilst repaying the debt once the investment starts to
bring money in.
3.1.2
Short & Mid-Term Funding
When it comes to short-term funding, we typically look in time periods of a few
weeks, but it can range from days to months.
Short term funding aims at giving the company instant, short term injections of cash
in order to keep the business running, pay suppliers before receiving money from
customers/ clients, correct a forecast mistake or cover an unexpected event.
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What we call mid-term funding doesn’t really have an “accounting” meaning. Whilst
Short term and Long term do.
Short term investing is anything below a one year period.
If you are interested in knowing more about what type of instrument can be used by
companies, you can head to the dedicated episode we recorded on Corporate
Treasury 101.
Spotify link: Episode 23 - What are common methods of short-term financing
Apple podcast link: Episode 23 - What are common methods of short-term financing
3.1.3
Long-Term Funding
Long term funding corresponds to all the funding needs that exceed one year. In
these cases, we are more looking at long term plans, projects and strategy.
Treasurers need to align with the Finance Department and the Chief Financial Officer
(“CFO”) when it comes to long term funding, because it involves the overarching
strategy of the company and long-term planning.
Companies can leverage debt instruments such as loans, but also by selling shares of
themselves.
3.1.4
Interest, Dividends and Debt Repayments
Short, mid and long term funding, regardless of the instrument used to perform them,
all have the same thing in common. They eventually need to be repaid. On top of this,
companies need to cover the cost of borrowing money by paying interest (in the case
of a debt instrument), or dividends (in the case of an equity instrument).
The objective of this eBook is to remain comprehensive whilst not going into the nitty
gritty details of each funding instrument, their repayment conditions and their cost.
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But bear in mind that interest, dividends and debt repayments must be taken into
account by the Treasurer, especially when it comes to planning and forecasting cash
flows.
3.2 Investment
Now that we have covered how a company can finance its activity when it needs
money, let’s have a look at what happens when it is the other way around. When a
company does not need cash but actually has more than needed.
This is typically the case of certain industries such as big retail companies, where
some parties can negotiate very long payment delays but get their money paid right
away by their customers, this can quickly make a lot of cash available.
In Treasury, we mostly look at short and mid-term investment. Long term, as for
funding, must be addressed together with the CFO since it involves long term
planning and strategy of a company.
3.2.1
Invest Externally Versus Internally
In Treasury, we mostly look at short and mid-term investment. Long term, as for
funding, must be addressed together with the CFO since it involves long term
planning and strategy of a company.
First and foremost, we would like to highlight the fact that not all excess cash is (or
should be) invested into external instruments such as financial markets for example.
It is very common for certain companies to leverage their available cash to fund their
own projects that are deemed worthy of investing in. Because they will bring even
more money in the future.
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If you would like to learn about how projects are funded in a multi-billion dollar
company, then listen to our interview with Daniel Sanches, Engineering Director and
Programme manager on the Corporate Treasury 101 podcast:
Spotify link: Episode 46 - Project Financing in Giant Companies
Apple podcast link: Episode 46 - Project Financing in Giant Companies
External options for making investments to increase your cash should only be
considered when internal projects have been already funded and there's some cash
available after that.
3.2.2
Risk, Liquidity and Yield
When investing, the priorities of the Treasurer are ranked in the following order:
1.
2.
3.
Protecting the company’s asset (here, the cash) and minimize the risk taken
with it. A.k.a the risk of losing part or all of the invested money
Keep a certain level of Liquidity to be able to react in case of unexpected
events
Optimize the return on investment and try to make the most profitable
investment as possible
You may have noticed that the “Profitability” criteria is only third on the list of
priorities. This is because the company’s money, from a Treasury perspective, should
never jeopardize its solvency. Which means, we are looking at very low risk
investments and should plan according to the upcoming liquidity needs.
Typically, the safer the investment, the less “profitable” it is. Same for liquidity. If
money can be taken out of an investment at any time, then it’s probably not going to
make you a lot of money.
However, it will always be better than keeping the money in a bank account, with no
interest at all.
The Corporate Treasury eBook
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3.2.3
Short & Mid-Term Investment
In this subsection, you may have a feeling of “Déjà-vu”. This is because we are talking
about the same thing as for short and mid-term funding. Except here, we are talking
about lending and borrowing money from a lender’s standpoint. Where earlier we
were looking at it from a borrower standpoint.
When it comes to short-term investment, we typically look at periods of maximum a
few months, often a few weeks or even a few days. It also includes “Overnight”
investments. Which means, we invest our money at the end of the day, and get it
back in the morning the day after.
Short term investing aims at giving the company instant, short term return on
investment of cash in order to optimize it. It may not be a lot on a day-to-day basis,
but consolidated throughout the year, they could be substantial returns.
What we call mid-term investing doesn’t really have an “accounting” meaning. Whilst
Short term and Long term do.
Short term investing refers to anything less than a year. It’s typically talked in terms of
weeks, but can go down to days.
If you are interested in knowing more about what type of instrument can be used by
companies, you can head to the dedicated episode we recorded on Corporate
Treasury 101.
Spotify link: Episode 23 - What are common methods of short-term financing
Apple podcast link: Episode 23 - What are common methods of short-term financing
3.3 Trade Finance
No, we are not talking here about the commonly known “trading” - exchanging
financial products, companies’ shares or obligations on the financial market.
But then what is Trade Finance?
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3.3.1A Tool to Enable International Trade and Commerce
Since examples are always worth a thousand words, let’s take one. I know, normally it
is a picture but we should get there nonetheless ;)
Let’s take the example of “Best-Boats Company”, a company that builds… you will not
believe it… boats!
This company is based in France - Europe, and is doing quite well. It has some
opportunities in Latin America, where the demand for boats is rising. Best-Boats
Company really wants to do business with another company, located in Latin
America, because there is a lot of money to be made.
But it doesn’t know the Latin American market. On top of that, it is not sure about the
capacity of companies in the region to fully pay for the products on time once they
are delivered. But, building and delivering the boat already is a big investment for
Best-Boats Company.
In order to do business nonetheless, Best-Boats Company can choose to use Trade
Finance instruments.
Trade Finance instruments are offered by Financial Institutions. For a fee, a financial
institution such as a bank will provide a kind of “guarantee” that Best-Boats Company
will be able to claim in case its client does not fully pay, or is not meeting the terms of
the contract.
It works as an insurance, to allow companies to do international business when they
would otherwise be hesitant to do so, because of a too high a risk of not getting paid.
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3.3.2
Interview of Ellen Lauwers on Trade Finance
Again, the objective of this eBook is to remain high-level and give an overall
understanding of what Corporate Treasury is.
If you would like to learn more about what Trade Finance is, the different instruments
used and what type of industries use it, we interviewed an expert of that topic on our
podcast:
Spotify link: Episode 29: [INTERVIEW] Trade Finance with Ellen Lauwers
Apple Podcast link: Episode 29: [INTERVIEW] Trade Finance with Ellen Lauwers
The Corporate Treasury eBook
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4. Foundation 3: Risk
Management
Financial Risk Management is, so far, the most listened to series on The Corporate
Treasury 101 podcast. So we are going to try and be as good at writing about it as we
were talking about it!
4.1 Risks in Finance
Evolving in the Financial world means facing risks (of losing money) at every corner.
The one that may pop into your head right now is the risk taken when investing
money.
When an individual or an investor buys stocks11, obligations12 or any kind of financial
product, they face the risk of losing part of the invested money, if not all of it.
This is called a “Counterparty Risk”: the risk that the counterpart to which money is
lended doesn’t repay (fully) its debt. Reasons can be diverse as the world is an
uncertain place, things can come up (like a global pandemic for instance), the
business plan being too far from reality and so on…
This risk taken when lending/investing money also impacts the expected returns of
such investment. Typically, the higher the risk, the higher the potential return.
A very low risk type of investment would be ones linked to the government (typically
in developed countries). The risk of a government not repaying its debt is very low.
This is why government bonds such as Treasury Bills13 (note, a different type of
“treasury”) in the USA provide an interest rate lower than other types of investment
instruments. So you could say the interest you get paid is linked to how risky the
investment is. Low risk, low interest payment to you - and vice versa.
11. Stock: A stock (= equity) is a security (/financial asse) that represents the ownership of a fraction of a company
(Financial) Obligation: Outstanding/ongoing debts or normal payments that a company must make in the upcoming future
The Corporate Treasury eBook 12.
13. Treasury Bills: A Treasury Bill (T-Bill) is a short-term U.S. government debt. This time of obligation is backed by the
28
Treasury Department with a maturity of one year or less
4.2 Foreign Exchange Risk
Foreign exchange risk is occuring when a company is doing business in another
currency than its local/reporting one i.e. The one used to consolidate the financial
statements14 at the end of the year and assess the financial “health” of the company.
When doing so, the company exposes itself to the risk of the money it will receive a
payment in losing value. I know… it might be a bit blurry, so how about an example?
●
The case of “Best-Shoes Company” (“BSC”)
○ A French company selling… shoes!
Let’s say that this company is rather successful in France and now wants to start
selling its product in the United States.
By doing so, Best-Shoes Company will now receive part of its revenue in US Dollars
(“USD”) instead of everything in Euros (“EUR”).
Obviously, BSC wants to deliver in big quantities and contract with local distributors
and stores to sell its shoes. Big quantities involve certain payment conditions and its
clients in the United States will not pay BSC upon delivery, more likely after 60 days,
AND in USD.
However, BSC still has its suppliers, factories, employees and so on… in France! And
they will not accept payments in dollars. Therefore, the company needs to eventually
exchange the USD received into EUR.
-
Let’s say that a client will pay 120,000 USD in two months
At the moment the contract is signed and agreed upon, this amount is worth
exactly 100,000 EUR
Over the course of the two months, USD is losing value against EUR.
- Which means that in order to get the equivalent of 1 EUR, there needs to
be more USD than when the contract was signed
14. Financial Statements: Records representing the business activities and the financial performance of an
The Corporate Treasury eBook entity over a certain period of time
29
-
-
Instead of needing 1.2 USD to get 1 EUR, we now need 2 USD to get 1 EUR
In order to get the initially expected 100,000 EUR, 120,000 USD is no longer
enough. BSC would need to receive 200,000 USD instead
But the contract terms have been signed and the client will not pay almost
double the price. They will still pay BSC 120,000 USD - regardless of how many
euros that makes.
In consequence, the payment BSC receives is worth way less (60,000 EUR),
probably not even enough to cover its own costs
This is what Foreign Exchange Risk is. The fluctuation of what a currency is worth
compared to another currency. We call this foreign currencies rates.
Managing this risk means using instruments that will ensure, no matter what happens
in the world, to receive the expected amount of money after two months. For a fee, of
course.
This mechanism is called hedging. In case you would like to know more about how
hedging works, guess what… We have a dedicated episode about it!
Spotify link: Episode 15: Hedging in Financial Risk Management - All Episodes
Apple Podcast link: Episode 15: Hedging in Financial Risk Management - All Episodes
4.3 Interest Rates Risk
In the finance world, all the funding, financing and investing instruments (loans, credit
lines, stocks etc.) are expected to bring a return on investment. One of the main
aspects of them is interest rates, representing the amount of interest one would get
out of an investment.
For 1,000 USD invested, if the interest rate is 10% per year, the investor would get 100
USD interest at the end of the year.
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How about we re-use the example of our beloved “Best-Shoes Company” (“BSC”)?
●
The Case of “Best-Shoes Company” (“BSC”)
Because of its flourishing business in the United States, BSC now needs to build a
new machine to manufacture even more shoes in its factory. So they need cash.
After analyzing its different options, BSC chooses to contract a loan with a bank.
The bank accepts to lend money to BSC but to calculate its profit from giving the
loan, it decides to base itself on what the money costs the bank on a monthly basis.
The idea here is not to enter into the technicalities of how interest rates are
calculated or set. But:
-
-
BSC borrowed 100,000 EUR to build its new machine
Let’s say the first month, the cost for the bank (which is acting as a kind of
“seller” for money) to lend money is 2%
On top of that, the bank will apply an additional 1% as it’s fee
The first month, BSC is then paying a total of 2% + 1% = 3% interest to the
bank.
- The interest is therefore 3,000 EUR/month
The situation remains like this for a few months
But as of month 6, because of external events, the cost for the bank to lend
money is now 4% of the total amount
The bank still applies its 1% profit as a fee
The total interest rate is now 5%
BSC ends up paying 5,000 EUR/ month
- Instead of the initially planned 3,000 EUR/month
The cost of borrowing money has almost doubled in 6 months!
And this could potentially make the whole investment not profitable for BSC
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This is what we call Interest Rates risk. Again, the risk that an underlying cost (the
cost of debt) goes too high because of external events. Potentially, making the whole
project that was funded in the first place, not profitable anymore - because the cost
of lending the money is now unpredictably higher.
The management of this risk involves making sure that, regardless of what happens
to the market of interest rates, BSC would still pay the same thing.
We are again here talking about hedging.
Spotify link: Episode 15: Hedging in Financial Risk Management - All Episodes
Apple Podcast link: Episode 15: Hedging in Financial Risk Management - All Episodes
The Corporate Treasury eBook
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5. Foundation 4: Banking
Partnerships
We are closing off The Foundations of Corporate Treasury (according to Guillaume
and Hussam ;)).
We wanted to emphasize it because, as you will read in the next section there are a
lot of other topics surrounding this wonderful world of Corporate Treasury. But Bank
Partnership (management) is at the heart of it.
Among all the topics we broke down in this eBook, all of them involve, at one point or
another, a financial institution which is very likely a bank.
5.1 The Business of Making Money… by Selling Money
First and foremost, we would like to highlight what the bank stands for. All companies
are in the “business of making money”. At the end of the day, what matters is to sell
products and/or services with a margin, in order to make money out of the value you
delivered.
No matter if a company sells shoes, manufactures steel, sells coffees with a cozy
atmosphere, it all comes down to being able to earn profits.
Of course, additional aspects come into account such as ethics, regulation, selling
quality products or aiming at low cost. Today, a dimension that is being taken more
and more seriously is the Environment and Social Governance (“ESG”) aspect of a
business. Consumers are more cautious about what type of companies they buy
from.
But at the end of the day, a company would not stand if it is not for the profits it is
able to make.
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In the case of banks, money is literally their business. They sell money, lend money,
arrange money transfers, invest it, and so on… Their profits are the interest or fees
taken directly from all the money services they provide.
Since Treasury is also all about money and the management of risk linked to money,
banks play a major role in it.
5.2 The Bank’s Role in Cash & Liquidity Management
As highlighted in the first foundation’s section, in order to manage cash a company
needs a way of storing the money it receives and a “place” from where money is
taken to execute payments. In 99.9% of cases, this would be a bank account.
Also, banks are the first providers of payments and collections instruments. Bank
notes, cheque books, electronic transfers initiated from their website and so on.
Cash positioning also requires a document sent by the bank reflecting the situation of
a bank account and the movements that occurred during the day. We call this
document a “Bank Statement”.
Last but not least, money on a bank account is the most liquid financial asset you can
have. Overnight investments and a lot of other liquidity enabling instruments are
provided by banks also.
5.3 The Bank’s Role in Corporate Finance
It goes without saying that when it comes to loans or credit lines, the major actors on
the market are banks. Therefore, the bank is a key partner when it comes to short,
mid and even long-term funding.
Investment banks will also be playing an important role when a company wants to
access the financial markets to issue new shares, contract complex debt instruments
or execute other financial market related tasks.
15. Bank Statement: A printed (or electronic) report of the balance in a bank account, highlighting the
The Corporate Treasury eBook movements (credits and debits) that happened during a period (day/week…)
34
When it comes to investment, banks are again present at the forefront. As explained
above, overnight investments are enabled by banks. But instruments allowing longer
term investments also.
Last but not least, Trade Finance relies mostly on banks. Some other institutions
(insurance companies) can play a role in certain instruments but the first “Contact
Person” is a Trade Finance expert at a bank, also because a (strong) bank
guaranteeing a trade enables confidence and trust on the market.
5.4 The Bank’s Role in Financial Risk Management
When you are looking at tools enabling hedging (an insurance against a financial risk),
you might want to look into what… you get it… banks have to offer! I know, what a
surprise eh ;)
Foreign exchange risk can be hedged thanks to forwards and futures and other
derivatives.
We didn’t tackle these concepts in this eBook, for the sake of clarity and length. But if
you are interested to know what it is, we highly recommend you have a look at the
episode of our podcast mentioned in the Financial Risk Management section (4.
Foundation 3: Financial Risk Management) ;)
These instruments are mainly offered by banks.
Without entering the details, the same goes for interest rates risk management with
interest rates swaps and other fancy instruments.
5.5 Banks as a Critical Partner of a Business
You will have understood it by now, it is really hard (if not impossible, at least in our
current society), to do business without a bank for a corporation.
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Since banks are everywhere in a Treasurer’s journey, he or she must make sure to
manage the relationship with their banking partners, and to manage them well!
In the meantime, one of the roles of a Treasury Department is to look at the cost of its
different banking partners, and make sure to have them under control. Still today, a
lot of corporations pay very high fees to their banks.
This happens when a globalized company does not have a global, consolidated view
on its banking fees and inherits from a shattered, decentralized banking landscape
through years of growth and acquisitions.
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6. Bonus 1: All the rest!
Yes, Corporate Treasury is broad, and full of fascinating topics!
In the eBook, we covered the 4 Foundations of Corporate Treasury by Hussam and
Guillaume, but there is much more to it!
Without entering into much detail… This eBook ended up being quite a bit longer than
expected when we first started it… We would like to give you a feel of what Treasury
has in store for you.
6.1 Treasury Accounting
For all the Treasury functions we described above, there is an accounting principle
linked to it. All transactions must be recorded and booked in a General Ledger16, and
Treasury is no exception.
Treasury also has an “In-House bank” function, where it organizes the borrowing and
lending from entities of the same group. This also must be properly captured,
recorded and reported.
All the financial transactions executed by a Treasury Department must be accounted
for.
6.2 Treasury Reporting
As for Finance, the Treasury function is in charge of different types of reporting. Cash
positioning, Forecasting, consolidated debt (short, mid and long term), Foreign
exchange exposure and so on…
Treasurers usually use these reports themselves to drive their strategy, but also
present them to their CFO’s.
16. General Ledger: Record-keeping system of the financial data of a company, debit and credit are recorded
The Corporate Treasury eBook and validated by a trial balance
37
6.3 Corporate Credit Cards Program
Certain companies allow their employees to have access to a Credit Card Program.
This typically is the case when some employees travel a lot or have certain expenses
(lunches, dinners, external representation events etc.), that would justify having a
Credit Card program in place. This allows the companies and the employees to
manage expenses in an optimized manner.
Corporate Credit Cards program would often be a joint responsibility between
Treasury and the Human Resources department.
6.4 Interdependencies
As many other functions, Treasury is linked to other departments in a company, some
more than others. The objective here is to highlight the most important ones:
● Tax: Because of the liquidity structures, movements of cash around the world
and management of debt and even movements of cash within the entities of
the group, Tax plays a major role when in comes to Treasury operations
● Legal: Whilst Treasury seeks to optimize the use of cash and minimize financial
risk, it also needs to make sure these exercises remain within the boundaries of
the law. Legal is therefore often consulted on different activities, structures and
partnerships
● Finance: This is a given, Treasury is part of the Finance department, but also a
little bit “on its own”. Simplified, we could say that Finance looks at the past and
makes sure the present remains stable, whilst Treasury looks at the future of
money and takes care of it. That being said, these two “functions” are actually
one.
● IT: Treasury is aiming to optimize and automate processes whilst making them
safer. On top of that, all the Treasury operations imply money, which is probably
the most sensitive asset of all for a company. This obviously implies systems
and software, and therefore Treasury always works with IT on these matters.
The Corporate Treasury eBook
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6.5 Payroll & Tax
As mentioned in the Cash Management section, Treasury is also in charge of making,
or at least optimizing, the execution of a company’s payments. Among these, there
are two particular types of payments that need to be highlighted.
They are not only critical for a company, they also present an additional challenge as
each country has its own type of process, regulation and requirements.
Payroll for instance, needs to be kept anonymous, and this is a whole particular
process to set-up.
For taxes, the amount varies and certain connections (to local government
institutions) may be required.
6.6 Treasury Systems
As all Financial operations, Treasury requires IT systems in order to operate in an
optimized, streamline and safe manner. We can typically find:
●
●
●
●
●
●
Treasury Management System: Allow Treasury to execute all its Treasury
Operations
Payment HUB: Software optimized for payments execution and bank
connectivity
Cash Flow Forecasting tool: Being one of the main functions of Treasury, tools
allowing proper forecasting are more than critical
Guarantee system: Created for optimization of Trade Finance operations
Trading platform: Allows Treasury to execute its Foreign exchange deals and
hedging operations
Investment platform: Allows Treasury to easily invest its excess of cash, or
potentially get funding
These are the main systems we can find in a Treasury Department but obviously,
hundreds of different systems exist, all with their tweaks and different added value.
The Corporate Treasury eBook
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6.7 Treasury Policy
Not always up-to-date, especially in newly created or sub-optimized Treasury
Departments, a Treasury Policy lists all the Treasury guidelines and good practices
that should be followed within the Treasury function.
The Corporate Treasury eBook
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7. Bonus: What Does a Corporate Treasury
Department Look Like?
Interview with Mike Richards
As explained in the “About this book” section, this eBook is born from the partnership
between the Treasury Career Corner podcast and the Corporate Treasury 101
podcast.
Mike Richards, the host of the Treasury Career Corner, is the CEO of the Treasury
Recruitment Company alongside recruiting leading Global Treasury professionals for
the corporate treasury profession, he also interviews the worlds’ top treasury
professionals and publishes them in an insightful podcast about, and for, Treasury
Professionals - with an emphasis on their careers.
Each week he talks to Treasurers about how they have built their careers, where they
are now and where they see both themselves and the treasury profession going to
next.
With over 230+ episodes published so far, Mike provides incredible value to his
listeners, and he has developed a knowledge and expertise about Treasury careers,
roles and department structures that is not available anywhere else.
Since you downloaded this eBook, we wanted you to have access to some exclusive
content.
If you would like to learn more about how a Corporate Treasury Department is
structured and what it looks like from the inside, clink on the link below, only
accessible from this eBook:
Mike Richards on the structure of a Corporate Treasury Department:
Click on this link to watch the video!
The Corporate Treasury eBook
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Thank you!
Congratulations for getting here!
When talking about writing it, we wanted to keep this eBook rather short, 8 to 10
pages maximum. Well, needless to say that we failed! :D
That being said, we wanted to make it worth it for you, who downloaded this eBook
and probably wanted to get as much information and insights about what Corporate
Treasury is.
Again, this is only a high-level overview of what Corporate Treasury is, and its various
aspects. Of course, it is a fascinating world, and it would take much more than 40+
pages to break it down. But we hope you got what you were looking for and that it
either made you curious to learn more, or that you now have the answers to your
questions!
In any case, if you would like to get more “knowledge snacks” and listen to podcasts
that break down Corporate Treasury concepts, well we invite you to head to your
favorite podcast platform and hit the subscribe button for The Corporate Treasury 101
podcast ;)
Also, if you are interested in listening to some amazing Treasury Professionals talking
about their careers and their visions of Corporate Treasury, then head to the
www.TreasuryCareerCorner.com podcast and well… you know what to do!
Last but not least, a big thank you for reading these last words.
It means you reached the end of this eBook!
Thank you so much for downloading. We sincerely hope you enjoyed it!
If this is the case, or if you have any questions or suggestions, do not hesitate to
reach out to us either via email: treasurypodcast@gmail.com or via our Instagram
page: @CorporateTreasury101
Cheers!
G&H
The Corporate Treasury eBook
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“
With all that being said, let’s not forget that
Treasury
is a
People
Business
“
Mike Richards
Glossary
Word
Definition
First seen at
Page:
Order of
appearance
(Financial)
Instrument
Refers to an financial asset/tool that can be exchanged, like cash,
contractual right, ownership’s evidence
7
3
(Financial)
Obligation
Outstanding/ongoing debts or normal payments that a company
must make in the upcoming future
28
12
Bank
Statement
A printed (or electronic) report of the balance in a bank account,
highlighting the movements (credits and debits) that happened
during a period (day/week…)
34
15
Bankrupt(cy)
Legal process occuring when a business is unable to repay its
outstanding debts or (financial) obligations
10
4
Cash Cycle
The period of time it takes a company to convert funds invested in
production and then sales to cash
20
10
Exposure
Refers to the risk linked to an investment, it indicates the amount of
money an investor may loose because of it
7
2
Financial
Statements
Records representing the business activities and the financial
performance of an entity over a certain period of time
29
14
Foreign
Exchange
Refers to the currency of other countries than the one a company is
operating in. For a company based in the United States and so
operating in dollars (USD), euro (EUR) is a foreign exchange
11
7
Funding
(/Financing)
Process of providing funds for business activities, making
purchases, or investing. Financial institutions, such as banks, are in
the business of providing capital to businesses, consumers, and
investors to help them achieve their goals
20
9
General
Ledger
Record-keeping system of the financial data of a company, debit
and credit are recorded and validated by a trial balance
37
16
Hedging
Hedging is doing an investment with the intention of reducing the
risk of unfavorable price movement of a financial asset
7
1
Insolvency
When a company is unable to repay the debts / outstanding
financial obligations when they are due
10
5
Liquidity
Ability of a company to raise cash when it needs it, typically to pay
suppliers, salaries, taxes etc
14
8
10
6
28
11
28
13
Solvency
Stock
Treasury Bill
Ability of a company to meet its long-term debts and other financial
obligations (opposite of insolvency)
A stock (= equity) is a security (/financial asse) that represents the
ownership of a fraction of a company
A Treasury Bill (T-Bill) is a short-term U.S. government debt. This
time of obligation is backed by the Treasury Department with a
maturity of one year or less
The Corporate Treasury eBook
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