Following up on my last article on controllership, let’s talk about the treasury function which is one of the most important roles of a CFO.
The Treasury Function deals with the current financial health of a business and covers:
Risk Management
Planning for and operating in a way to avoid, reduce or have contingencies in place for external and internal risks. External risks include but are not limited to market volatility affecting the company stock price and the price of commodities needed for production of goods (eg: cocoa to a chocolate manufacturer), interest and exchange rate risks, general economic risk, political risk, legal risk and (physical) environmental risk.
Internal risks include operating risk (the ability to ensure continuity of operations), counter party risk, key person risk, risk to assets (fire and accidents), risk of strikes, risk of a hostile takeover and to an extent poor management practices and internal politics. Most internal risks can be managed through appropriate polices, processes, best practices, contingency plans and suitable insurance coverage.
Liquidity Management
Collectively refers to the practices that ensure a business has enough cash flow and operating capital to run uninterrupted and cover its cost of debt in the form of interest expenses without having to resort to the sale of assets unwillingly. Even profitable businesses can have cash flow issues if they don’t manage their receivables and payables well.
Capital Structure Management
This is one of the most important aspects of the Treasury function, especially in large companies and can be considered to be as much of an art as it is a science. It refers to managing the balance of debt, equity and internal financing that a business has to invest in growing sustainably while optimizing the cost of capital needed. The industry, business model, size of the company, financial performance, external economic growth, interest rates, credit rating, legal environment, expansion options and a host of other factors need to be considered individually and collectively on an ongoing basis.
That’s a quick overview of the Treasury role. It’s not unreasonable to compare it to a scaled up version of a household with mortgage payments, renovation plans, monthly expenses for food, utilities, children’s education, contributions to the retirement fund and so on. In that sense, we are each the CFO of our own lives.
