Treasury Operations
Due to the uncertainties in today’s economic environment, organisations maintain more cash for effectively carrying out their routine operations. According to a report by Infosys, most organisations in the S&P 500 Index have increased their cash holdings by 1.5% every subsequent year.
This has resulted in more cash to be handled efficiently by treasurers. The treasury team has to constantly maintain the organisation’s liquidity against investment opportunities, optimise the organisation’s cash resources, meet the financial requirements of the organisation and manage associated risks.
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Although every organisation uses its unique set of tools and techniques for carrying out treasury operations, there are some common practices used by most organisations.
Best Practices in Treasury Operations
The main treasury operations and the best practices used to carry out these operations are:
Receivables management
This is the main function of treasury management and has a direct impact on an organisation’s financial position. Delays in receivables collection directly affect the working capital requirements of the organisation. If managed effectively, receivables may help organisations to effectively project their cash flow, which would increase their liquidity. Some of the best practices in receivables management are as follows:
Lock box processing
This technique accelerates the processing of payments received, thereby enabling the organisation to forecast and manage cash. Commercial banks use lock box processing to simplify collection and process accounts receivable. Lock box processing is carried out by the way of direct mailing of payments to a location that is accessible to the bank.
A organisation receives its payments via mail directed to a post office box. Later, the bank picks up the payments several times a day and deposits them in the organisation’s account. The advantages of using lock box processing include:
- Minimised errors owing to reduction in manual payment processes
- Faster processing of payments allowing the organisation to maximise its returns
Deposit consolidation
This is a process whereby deposits held in various banks are consolidated onto a single bank account each day. This account can be accessed online to enable treasury managers to analyse the current cash status and plan further usage. This technique is particularly useful if an organisation has its business presence in several geographies. Treasury managers need to be updated of the organisation’s cash position at all times.
Comprehensive receivables
These refer to a receivables service that allows treasury managers to access a single file for all receivables from the bank. Comprehensive receivables help the treasury to consolidate all other types of receivables. A reconciliation system integrated with an organisation’s Enterprise Resource Planning (ERP) system allows treasury managers to access the reconciled information in real time. This promotes effective cash management and reduces manual work considerably.
Disbursement management
Equally important to receivables management is the process of disbursing of funds by organisations. Treasuries need to plan the disbursement of funds effectively in order to minimise the cost involved in case of defaults. Some of the best practices for disbursement management are as follows:
Controlled disbursement
Organisations use this technique to enable the effective use of any excess cash. In this technique, all cheques deposited in the bank are notified to an organisation. This allows the organisation to keep only as much funds as required to clear the cheques while use the remaining cash for other purposes/investments. The advantages of using this technique are that it reduces the chances of return of cheques due to non-availability of funds and reduces the borrowing expenses.
Positive pay
As a general practice, all high-value transactions are conducted through cheques, which are prone to several frauds. Positive pay is a disbursement service offered by banks to safeguard organisations from frauds. This technique is used to identify mismatches in cheque numbers and amounts sent across banks against those that have actually been issued by them.
In case of a doubt, the bank promptly notifies the organisation and provides them sufficient time to validate the details. If the bank is informed to reject the transaction, it does so, thereby saving the organisation from possible fraud.
Reverse pay
This technique is quite similar to the positive pay technique. The only difference between the two is that in reversal pay, the process is reversed. In this case, the onus lies with the organisation issuing the cheques. Banks provide the organisation with details about the cheque number, amount, account, etc., which the organisation cross-checks using its internal records.
The organisation notifies the bank of all the cheques that match with its internal records and the bank pays those cheques. Later, the cheques that do not match the organisation’s internal records are validated by the bank and rectifications are made for any misreads or encoding errors.
Cash pooling
This is a technique where cash deficit in one business function is offset with cash surplus in another business unit. This is done to reduce the costs of short-term borrowing and increase returns from short-term investments. Two types of pooling techniques are used in treasury operations, which are as follows:
- Physical pooling: This is also referred to as zero balancing and is used to transfer funds at the end of the day to the pooling account from the operating account of the organisation. The balances in the operating accounts are brought to zero irrespective of the account having positive or negative cash.
This technique offers the following advantages:- The pool account may be invested promptly to maximise returns.
- The overdrafts of operating accounts may automatical- ly be adjusted at the end of the day.
- Notional pooling: This technique is the same as the physical pooling technique in the sense that the net balance in the operating accounts of the organisation is brought to zero. The difference lies in the fact that in this case the bank has an agreement with the organisation that the bank would treat the subsidiary accounts for interest calculation. The funds are not physically transferred to the pooling account. Rather, banks record pooling calculations in their
Bank reconciliation
Reconciliation of an organisation’s cash is an important task that should be carried out periodically to ensure that the numbers as per the organisation’s records match with those in the bank account statements. In case of any mismatch, the amount figures can be verified and corrections can be made. Reconciliation of accounts helps treasurers in the process of compliance and audit, and in identifying any fraud.
Treasury Operations in Banks
The act of balancing and managing cash flows and liquidity of a bank is entrusted upon the treasury department of the bank. In addition, the treasury department in a bank is responsible for handling investments of the bank in different avenues, forex, asset and liability management and cash management. The treasury department also acts as the main custodian of cash and other liquid assets in a bank.
The main objective of banking treasury is to manage the consolidated fund of a bank in the most profitable way within an acceptable risk level. The treasury is also responsible for raising and investing funds. The scope of operations of banking treasury includes:
Reserve and investment management
It comprises activities pertaining to maintaining the quantum of CRR and SLR as provided by the central bank. In addition, it includes policies pertaining to a portfolio that ensures optimisation of the yield earned.
Funds and liquidity management
It includes the analysis of cash flow that affects the asset and liability position of a bank. It aims to build a diversified liability base for funding various assets of the bank.
Asset-Liability Management (ALM)
It includes activities that facilitate the optimal size and growth of the bank’s balance sheet. In addition, it ensures that the value of assets and liabilities is in accordance with the guidelines prescribed by the central bank.
Risk management
The banking operations are made of flow of money that results into the uncertainty of return and recovery. Therefore, risk management covers activities that ensure the management of risk in a bank.
Derivatives trading
It includes activities related to transacting in derivative products to hedge risk such as buying and selling exposures.
Transfer pricing
The treasury department of a bank sets the price of various goods and services for the transfer transaction (buying and selling) that takes place between two controlled legal entities of the bank.
Capital adequacy
Treasury management ensures the quality of assets by maintaining return on assets (ROA) earned on invested funds.
Arbitrage
The treasury department of a bank perform arbitrage by making selling and buying transactions in two different markets. As a result, the difference in price between a buying and selling transaction is considered as profit for the bank.
