Treasury Management is a relatively new concept in Ghana. It was introduced into the banking sector in the early 1990s but is non-existent in the Ghanaian corporate world except for a few multinational companies.
In the developed world, the establishment of the specialist treasury function can be traced back to the late 1960s when it was part of the finance department. There was therefore the need to separate the treasury function from the finance function, which is primarily responsible for the provision and management of financial resources. The separate treasury function enhances the development of appropriate skills and achievement of economies of scale. The Treasury’s primary role is to monitor the opportunities and risk for business as a result of developments in technology, the breakdown of exchange rates and the increasing globalization of business.
The treasury function is the management of monetary assets and liabilities, financial risks and other risks associated with banking relationships. This includes activities such as cash management and transmission, placing and liquidating investments, raising and redeeming finance and the management of foreign exchange and interest rate exposures. All of these have to be managed in such a way as to maximize yields, minimize costs and control the related risks within approved limits.
Today, Ghanaian businesses are growing and becoming global in their operations. Some have assets that can be equated to that of a non-bank financial institution. Generally, businesses have to survive in a complex financial environment and thus need to actively manage both their ability to take advantage of opportunities and their exposure to risks. It is imperative for such establishments to separate the treasury function from the core business of the company so that, like the banks, each business unit is responsible for a set objective that is in line with the company’s mission and shareholders’ expectations.
The role of corporate treasury
Corporate treasury departments provide a vital role and have developed significantly in the decade or so. The role of the corporate treasury is directly related to the nature of the company’s business activities and the objectives that executive management and the board assign to it. A company that imports and retails merchandise through its chain of outlets throughout the country, would require some expertise in foreign exchange, interest rate and cash management.
The level of the corporate treasurer within management depends on the company’s level of responsibility allotted. This would definitely affect the extent to which the department or unit can initiate and develop policy in line with the agreed corporate policy. Further, outside of what may be considered the core universal responsibilities of treasury management, there are always potentially grey areas between what treasury management is and what is financial control, company secretarial, tax, risk management and insurance. It is therefore unlikely that any two corporate treasurers will enjoy exactly the same responsibilities and even in similar companies, their roles and responsibilities will differ.
Based on the foregone, we can define the role of the corporate treasury under five core functions.
They are;
- Corporate Finance and Funding
- Cash & Liquidity Management
- Corporate Financial Management
- Risk Management
- Treasury Operations & Controls
Corporate Finance and Funding
Under this umbrella, the treasurer considers the funding options that are available to the company and the way funds are raised to finance the business and on what terms such funding can be acquired and managed.
The funding gap of a company could be financed by short, medium or long term options. The determination of the type of financing required is the first step to consideration of the type of funding
This is an area that often requires building external relationships and negotiating with providers of either equity or debt.
Cash & Liquidity Management
Cash and liquidity is principally about ensuring that the cash needs of the company are met in the most cost effective manner. The type of company to a large extent determines its cash and liquidity management.
Effective cashflow management and forecasting would aid the company from incurring the unnecessary costs of unforeseen short term borrowing and or avoid holding large pools of cash and ensure its effective deployment into appropriate investments.
Corporate Financial Management
Companies need to ensure that their corporate and financial strategies are appropriately aligned. Potential investments need to be appraised, the assets should be providing the required return and that the company is running the most appropriate capital structure.
Corporate financial management includes ensuring that legal and tax issues are appropriately considered.
Risk Management
Risk management is about understanding and quantifying the business and financial risks that a company undertakes in its normal course of business. It ensures the returns are adequate and that appropriate risk management techniques are deployed.
For a corporate treasury, it is imperative that interest rate and exchange risks are considered, of course, based on the operations of the company. This may involve looking at the effect of interest rate and exchange rate movements and putting the appropriate hedges in place.
Interest rate risk management helps the company monitor the rates at which it borrows and lends funds to ensure that it minimises its expense and maximises its income.
Exchange rate risk management enables the company to take informed decisions on its foreign exchange activities to minimise the impact of exchange rate movements against the local currency.
Treasury Operations & Controls
This function envelopes the other four preceding ones into a coherent and appropriately managed framework. A well laid out treasury operation and control enhances effective management of the treasury department or unit and its various functions within the company.
A standard operations manual needs to be in place to spell out its mode of operations, especially in relation to communication with other stakeholders and to assure the board and management that the treasury department is aligned with its aims and objectives.
Recent developments
Corporate treasury departments are becoming relatively important in financial management of companies especially when there seems to be an extended period of economic and financial turbulence. Companies need to have their monetary and financial risks managed to enable them concentrate on their core functions.
It is becoming evidently clear that Ghanaian companies will have to respond to this new environment. Secure banking relationships and sources of financing have become more precarious. Executive management now requires more information and reassurance that can be provided by their corporate treasury function. Most large corporate Ghanaian companies deal with a number of banks and the corporate treasury can provide information that would enable management to take informed decisions in line with its fundamental objectives.
To provide such information, treasury departments require systems and in some cases software to manage related risks. Corporate treasurers are required to be more proactive and to ensure that assumptions about risks and hedging strategies are challenged and tested. Corporate treasurers will need greater knowledge of the financial markets together with the ability to make strategic assessments and communicate them effectively to management.
Outsourcing of the treasury function is a recent development that enables companies to reduce the cost associated with having a full-fledged treasury department or unit.
The recent introduction of the cloud information management concept also enables companies to access their reports and other information without the expense of having a physical server on site.
Both facilities are available in Ghana to provide cost effective treasury management to corporate clients that require the ease and access of this service.