Defining treasury management is hard even for the professionals that practice it everyday. Our profession's body of knowledge, Essentials of Treasury Management, 6th Ed. (ETM) states it's the "tools, techniques, and skills needed to manage an enterprise's overall financial holdings ... and covers a wide variety of topics" (p. 5).
It's true, treasury management, or just 'treasury', does cover many functions that can seem disconnected from each other. It may be helpful to start by defining what is NOT treasury. Budgeting, accounting, procurement, payroll, and auditing are all finance areas most officers know. Treasury is not budgeting but is reliant on fiscal policy making to forecast cash flows such as expected tax revenues. It is not accounting but records or provides accounting entries that eventually become a part of ACFRs. It is not procurement or Human Resources but connected to both through accounts payable (procure-to-pay) and payroll, respectively. It is not audit but is audited. What does that leave? Or more relevantly, what ties the parts of financial management operations that might be considered treasury together?
Getting back to financial holdings ... long gone are the days when we hold physical stock certificates. Now we have digital assets held in trust by financial service providers. Assuming treasury owns the oversight of financial holdings, then treasury is the owner of the relationships with the financial services providers where the digital assets lie. As the owner, for example, it opens, closes, and manages bank accounts and attached services used to collect, disburse, and ideally, concentrate funds. These are the basic tools of treasury's primary responsibility: to ensure cash is in the right place at the right time to pay financial obligations.
On balance sheets, financial holdings can be assets (cash and investments) or liabilities (bonds and loans). This is a great lens through which to view treasury - as the management of cash, investments, and debt.
Cash (Management)
ETM also provides useful context for the oft confused terms treasury and cash management. Certainly, treasury management is rooted in cash management - which is ubiquitous across governments because the timing of daily cash inflows rarely matches its outflows - but it is more. Beyond the day-to-day of bank polling and cash positioning that comprises cash management is cash flow forecasting and liquidity planning that also fall under the purview of treasurers.
Accurate cash forecasting is at or near the top of issues for treasurers and CFOs year in, year out. The best cash forecasts are built on the foundation of the existing bank accounts, transactions, and cash management structure. In generating a daily cash position, essentially a forecasting process, a treasury team builds the granularity to capture the distinct nature of various cash flows.
A great example is payroll. While budgets can provide a general scale for the expense, simply dividing the total by twelve to create a monthly cash flow forecast often leads to 'variances due to timing' when three bi-weekly paydays fall within a month, which invariably happens twice a year. Not a huge problem in hindsight to note in budget variance analysis and report but it could be crippling if liquidity is tight, the third paydate hits the bank accounts, and treasury is unprepared to fund it. With a model based on daily data, its simpler to layer 26 pay periods across 12 months to give users a clear picture of cash. In the end, the main goal of cash forecasting, daily or otherwise, is to project whether there is a cash surplus or deficit, so treasurers can make decisions on how to respond to either situation.
Investments
When there’s excess cash, treasury owns the processes to select the best investments and/or asset managers to minimize risk and maximize return - all within policy, usually built around the SLY(1) framework. Newer investment programs lean towards safe investments such as U.S. Treasuries and agencies, and apply a buy-and-hold strategy. Pools or mutual funds also provide a relatively safe route to diversify holdings.
Some governments extend into medium-term investments if liquidity needs can be met with a band of 'core liquidity' that fluctuates minimally year over year(2). As investment programs mature and find that even with generous liquidity buffers, there may remain a 'deep core' or 'strategic' level of funds that are rarely, maybe never, needed for day-to-day funding. This deep core liquidity can be invested in a multi-asset strategy resembling an endowment-style asset allocation. Longer term investments rely on a different skill set centered around institutional investing, where managing the short-term investments normally fall within the responsibility and skill of cash managers. Comfort with institutional investing is often why treasury is involved with retirement plans - especially pensions and/or related foundation investments.
Debt
Like investments, debt can be short-term or long-term. For example, some governments maintain a line of credit as a short-term liquidity source to fund day-to-day operations. Another method of short-term funding is issuing short-term bonds a/k/a cash management notes like TANs, TRANs, and RANs. These notes fund shortfalls in cash that last months and are repayable within a year. Unlike investments, the skills used to access capital markets are same for short- and long-term debt.
When long-term financing is needed for capital projects, treasury navigates the process to sell the debt in the bond market and administer the bonds post-issuance. Managing the constellation of relationships around the issuance of bonds is critical to keeping borrowing costs low. Municipal advisors, credit rating agencies, bond counsel, and investment bankers rely on treasury to deliver timely financial and operational information. Post-issuance bond compliance maintains tax-exempt bonds' good standing and avoids technical defaults like missing covenant reporting deadlines. Compliance includes reporting material events that could impact the payment of principal and interest. Managing the refunding of bonds also is a key function of treasury.
Time Value of Money
A concept that ties these responsibilities together is the time value of money. (Perhaps more broadly “money”, though maybe too broad with entire books having been written about the history and relevance of money in all its forms). TVM is the common language of the financial services industry and therefore, the language of treasury.
Some treasury teams have added functions like financial risk management. Financial risk management is another iteration of accessing and buying from the financial services sector, in this case, insurance. Not surprisingly, TVM is critical understanding financial risks. Defining treasury via its ownerships, along with TVM, helps explains how these fall onto treasury's plate. It also explains the spectrum of treasury roles - from the cash analyst responsible for the daily cash positioning to the chief investment officer with billions of AUM.
TL;DR
The movement of money (account to account and through time) defines treasury’s primary role: to have money in the right place, at the right time. To do so efficiently and effectively, treasury owns the relationships with financial services providers.
(1) SLY - Safety, Liquidity, Yield. Prioritize capital preservation, then depth of the security market, and finally expected return.
(2) However, cash flows can fluctuate greatly within a year. For example, property taxes, if payable once a year, creates a large cash inflow that represents the majority of tax revenues for a government. For the remainder of the year, no other revenue sources will come close. However, year over year the inflow will look the same.
Last major update: March 4, 2024
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