Importance of Treasury management in an organisation

Topics: Investment, Risk, Exchange rate Pages: 5 (3143 words) Published: October 21, 2014

Question: Discuss the importance of the Treasury Management function in a profit making organisation with relevance to an organisation of your choice. Also comment on whether the Treasury function is of any relevance to non-profit making organisations such as Non-Governmental organisations, football clubs, churches and charity organisations. Introduction

According to Ogilvie (2002) the practice of establishing a specialist treasury function in the finance department can be traced back to the late 1960s. Technological developments, the breakdown of exchange controls and increasingly volatile interest rates and exchange rates, combined with the globalisation of business, have all created greater opportunities and risks for businesses over the past three decades. To survive in today’s complex financial environment, businesses must be able to manage both their ability to take these opportunities and their exposure to the risks they create. It is the job of the treasurer to reduce the company’s exposure to risks it is not in business to take while reshaping its exposure to those risks it does wish to take. Treasury management now plays a vital role in the management of operations because most business decisions have implications for cash flow and risk, both of which are of direct relevance to treasury management. The objective of this essay is to discuss the importance of the treasury function to a profit making organisation using an example of Hyundai and also commenting on its importance to non-profit making organisations. Definition of terms

According to Giddens(1990) globalisation is the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice-versa. Liquidity

Horcher(2006) defines liquidity is the ability of an organisation to meet its short term financial obligations. Derivative
A financial instrument whose value depends on or derives from the values of other more basic underlined assets or variables. Importance of the Treasury Function
For one to assess the significance of the treasury function in a profit making organisation, one must critically analyse its contribution to the main corporate objective of profit maximisation or maximising shareholders’ wealth. The treasury management department contributes to financing decisions, investing decisions, strategic decisions, asset investment decisions and it helps in mitigating risks which might lead to the fall of the company if they are not dealt with. However, setting up a treasury function is not a solution to all the company’s problems. Functions of the treasury management department

Minimisation of Currency Risk
With the rising globalisation of economies all over the world, companies are gradually more importing and exporting services and goods. This offers rise to the problem of foreign exchange exposure. Exporting companies face currency transaction risk when they translate proceeds from foreign sales into their home currencies. The treasury function of Hyundai deals with issues related to foreign exchange at a global level in order to mitigate the adverse effects of changes in foreign exchange rates. Reasons for crisis in the currency market are analysed by the treasury function and this might result in Hyundai benefiting from it because they will buy resources at a cheaper price in some countries. The firm can also hedge against currency risk through the use of financial derivatives such as futures contracts and swaps. In a world where it is extremely difficult to predict future raw material prices with any confidence, Hyundai and a manufacturer of fabric may exchange uncertain prices of fabric delivered next year for a fixed price. Hyundai hedges against prices escalating whilst the fabric manufacturer hedges against prices dropping. The treasury function is therefore a useful function because it enables the company to offset risks...
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