Treasury management.

...

Production function pertains to the building up of capacities and generation of output. Marketing function is concerned with the marketing of the output through establishment of the sales and marketing network. In the finance function, the manager is concerned with financing of inputs and outputs and management of funds during the entire production cycle.

Availability of cash, currency and credit by the government, business and foreign sectors is a must for macro operations of the economy. In broader terms, all financial

[pic 4] [pic 5] [pic 6]

Treasury function is a part of the total managerial functions. Managerial function set- up can be classified into three broad units, viz. production function, marketing function and finance function.

[pic 7]

397 PP-FTFM-11

resources including forex are to be made available to the micro-economic units, i.e. the companies. Similarly, the operations at the national level involve return flow of funds, repayment of loans, taxes, fees etc. to the government, business and foreign sector.

The finance function comes into play when the company is incorporated. With capital restructuring, efforts are made for arriving at least cost combinations of capital for financing of a project and forecasting for working capital. In this function, one has to coordinate with the production and operations manager, sales or marketing manager and they together constitute the marketing team. Apart from arranging the requisite funds for commencing an activity, the finance function is also concerned with managing the day-to-day finances of the company. Whereas arranging project funds and working capital finance is a one-time assignment, management of funds on daily basis is a much more astute activity requiring forecasting skills and prioritization ability of a high order.

The inflows and outflows of funds, their coordination and synchronization and making arrangements for meeting any gap between them is only one end of the spectrum of finance function. The other end of the spectrum is the management of the surpluses and maximization of returns from short term funds. These two ends of the spectrum form the core of activities of the finance function. But the handling of each of the activities requires further specialization. Arranging of long-term funds is the domain of the proper finance function but the management of funds required in and arising from the day-to-day activities of the firm is the domain of the treasury function. These two have to be viewed together and analysed for overall assessment of financial efficiency. So a finance manager need not have a treasury function or a treasury manager need not be bothered with long term arrangement of funds. The finance manager can be termed as an arranger of funds whereas the treasury manager can be viewed as a manager of funds.

Treasury management has both macro and micro aspects. At the macro level, the inflows and outflows of cash, credit and other financial instruments are the functions of the government and the business sectors. These inflows are arranged by them as borrowing from the public. In these sectors, the ratio of savings to investments is less than one, i.e. the savings are inadequate to fund the investments. Hence the need for borrowing. They accordingly issue securities or promissory notes which are part of the financial system. These borrowings for financial needs are met by surplus savings and funds of the household and the foreign sector, where the ratio of savings to investments is positive. The micro units utilize these inflows and build up their capacities for production of output. This leads to establishment of a production system which logically leads us to the natural consequence, i.e. the establishment of distribution and consumption systems. Once the production, distribution and consumption systems are in place at the micro level, the generation of surpluses at the units begins. These surpluses are channeled back into the macro system as outflows from the micro system. The inflows are the taxes paid to the government and repayment of loans made to the banks and financial institutions. These inflows into the macro level have to be managed by the treasury managers at the macro level.

While arranging funds for the micro unit, the finance manger aims at optimizing

PP-FTFM-11 398

the value of his assets or wealth and minimizing the burden of his liabilities. He may seek to maximise his operational profits and seek to maximise the wealth of stakeholders of the micro unit. The basic objectives are economy, efficiency and productivity of assets. These objectives can not be achieved at the one end of the finance spectrum unless the management of funds at the other end of the spectrum, i.e. the treasury segment is equally triggered by the dictums of economy, efficiency and productivity.

OBJECTIVES OF TREASURY MANAGEMENT

The main function of a treasury manager is the management of funds. While managing these funds, the treasury manager seeks to fulfill the under-noted objectives:

Availability in right quantity

The finance manager arranges funds for the unit. It is the duty of the treasury manager to ensure that after the funds have been arranged, these should be available in required quantity. The term quantity refers to the amount of funds required for day to day functioning of the unit. This quantity is available to the firm either as external loans or as internal generation. The loans quantity is arranged in the form of working capital finance.

Working capital finance can be available as finance against any of the current assets, viz. inventory or receivables. In order to ensure that the working capital finance is available in adequate quantity, the treasury manager has to maintain the desired level of security of current assets against which the finance has been provided by the lenders. Maintenance of the security is not a direct function of the treasury manager because the security partly becomes available from the functioning of the production department and partly from the marketing department. The production department is responsible for manufacturing the products and keeping track of the raw material, work-in-process and finished goods. These items form the inventory against which the working capital facility is provided. Similarly the marketing department is responsible for selling the goods and generating account receivables. Working capital finance is also provided by the banks against account