The Functions of a Corporate Treasury

At the end of 2008, Verband Deutscher Treasurer e.V. commissioned a survey to examine the functions of a corporate treasury. In addition, 142 corporate treasury job advertisements were examined and evaluated and compared to a similar evaluation performed in 2002.

The treasurer’s functions can in principle be classified as follows:

As far as its definition is concerned, the treasurer’s professional profile is of Anglo-Saxon origin. An evaluation of the survey indicates, among the core functions, a wide overlap with the Anglo-Saxon treasury model, although, some clear divergences were also found within the marginal and other functions.

The result of the survey discloses 6 core functions of the treasury of general significance:

Cash management clearly forms part of the treasury’s core functions. In addition to dealing with payment transactions; cash management also includes planning, account organisation, cash flow monitoring, managing bank accounts, electronic banking, pooling and netting as well as the function of in-house bank. The figure below shows the cash management structures within companies.

Liquidity planning and control are closely linked to cash management. A central topic here also covers interest and currency risks, as well as increasingly also, commodity risks. This involves control of these risks, as well as the documentation of hedging transactions.

The core duties of the treasury also comprise the procurement of finance and financial investments, and therefore topics such as money dealing, working capital finance, but also factoring. An analysis of the job vacancy advertisements shows that the function of the procurement of finance is mentioned much more frequently than that of financial investments, the inclusion of systematic financial investments, in the sense of active asset management, were found to be the exception.

The corporate finance functions of treasury comprise medium and long term financing, particularly capital market instruments, ABS, group financing, credit, leasing, promotion instruments, shareholders’ loans and, in this instance, the handling, monitoring, terms, conditions, hedging, periods and contractual dates. It is interesting to note that this sector assumes less significance among the other core functions and is merely mentioned as a marginal function by about 15% of the replies. 

[[[PAGE]]]

Looking after contacts with banks and rating agencies, as well as discussions with credit insurers and, if applicable, suppliers concerning periods allowed for payment, in conjunction with the procurement of finance, also form part of the treasurer’s core business.

Matters are different as regards contacts with shareholders however, as shown by the frequent outsourcing of the subject of investor relations by the treasury. A typical feature – and this is indicated by the job vacancy advertisements – is the fact that equity capital procurement as opposed to external finance is only rarely mentioned.

A noticeable difference is found here in relation to the Anglo-Saxon treasury model in which, in addition to debt management, equity management does form part of the core functions.

The study demonstrates that credits are normally used for financing, whilst the typical capital market orientated corporate finance instruments are only used selectively, particularly in large corporations, which also explains the somewhat lesser significance of corporate finance as a core function. Own group finance companies are only found in one sixth of the companies.

The treasury’s core functions are confirmed by the analysis of job vacancy advertisements. Compared to 2002, an outstanding feature is that risk management and group finance in particular have gained considerable significance in the role of the corporate treasurer. It is worth noting however, that the percentages (Figure 4) are only a rough indicator of the content of the professional profile because, in the case of job vacancy announcements for executive positions, the various functions are not fully listed and, in the case of announcements for part-functions, such as cash management, the treasurer’s duties not to be allocated to this function, do not apply.

In addition, so-called marginal functions of the treasury can be identified with the aid of study 5:

Finance Controlling includes the part-functions of finance planning, finance control including financial structure control, as well as finance reporting systems. This range of functions plays an important role in all companies. In the case of half the interviewed companies, it even forms part of the core functions.[[[PAGE]]]

In about 25% of companies, however, such responsibility lies outside of the treasury. The treasury is confined here to the supply of data, as well as to the implementation of control decisions and job vacancy advertisements confirm the considerable importance assumed by this range of duties. In the Anglo-Saxon model, finance analyses and planning clearly form part of the core functions, moreover, the treasurer is tasked here with laying down the capital structure. These tasks are not found to a marked extent in German speaking countries.

The implementation and accompaniment of export and project finance, as a part of corporate finance in principle, forms part of the treasurer’s responsibility. Some of these financing schemes as “structured financing,” also form part of the treasury’s core functions within the scope of corporate finance. However, the allocation and importance of export and project finance may differ in a company-specific manner and this task does not exist or assume considerable importance in every company. In around 25% of interviewed treasury departments, the subject assumes no relevance in fact and in the case of one third of treasury departments, it merely represents a marginal subject. Project and export finance, in companies which are particularly active in this field, can occupy a special position demarcated from treasury and, in this case, may also be outsourced by the treasury (in barely 15% of cases). This task does not play any part in job advertisements.

The study indicates that the management of pension schemes and funds has no relevance in about 30% of companies and in fact only a very small proportion (13%) of interviewed companies operate their own pension scheme and pension fund.

The importance of this task to treasury is therefore relative, as the responsibility for pensions lie mainly outside of it’s function.

Whilst the company’s personnel management is normally responsible, in German speaking countries, in the area of retirement pensions, and as shown by frequent mentions, the treasury assumes an important function particularly in the case of pension funds and schemes, in the investment commissions of the institutions in particular as a result of the treasury’s financial investment core responsibilities. 

In the Anglo-Saxon treasury model, however, this task is clearly more pronounced as in this model the treasurer’s sphere of influence does also comprise matters of retirement pension. Large corporations frequently offer their workforce an additional corporate retirement benefit in the form of pension funds and the efficient and secure investment of these funds is the treasurer’s primary responsibility.

As far as investor relations are concerned, it is noted that only one third of the interviewed companies are stock exchange listed. Investor relations play a role in about 80% of interviewed companies. But the responsibility lies outside the treasury in most cases. In principle, the function of investor relations can lie with the CEO as an independent organisational unit, because there exists a strong link with public relations. However, as public relations managers do not operate in the financial area, it may make sense to place investor relations under the responsibility of the CFO and therefore in the treasury’s sphere. The decision as to which allocation is chosen however, of course has to be company-specific. If there are a large number of shareholders, it may make sense to set up an independent investor relations department next to the treasury. This explains the fact that investor relations are considered a core function by 16% of the interviewed treasury departments and a marginal function by 18%. In the Anglo-Saxon model, investor relations are the treasurer’s responsibility more frequently than in Germany.

Mergers and Acquisitions only play a role in 85% of companies. Only 13% of them consider these to form part of the treasury’s core functions. M & A assume no great importance in the treasury as a marginal function. In the case of M & A, the treasury of most companies only assumes an accompanying and supporting function, namely financing of the transaction. It follows that M & A are merely a treasury marginal function in the case of 13% of interviewed companies.

In addition, the survey results in 5 additional functions which are important, but only come under the treasury in exceptional circumstances:

As regards corporate control, risk management, balance sheet and valuation of financial transactions, contract management, subsidised finance, working capital management and fiscal aspects of the treasury, there is a need for the treasurer to collaborate closely with other organisational units, particularly in control and accounts. [[[PAGE]]]

Whilst insurance forms part of risk management and is thus important to the treasury, responsibility for it is found either (mostly) in separate organisational units or (exceptionally) also in the legal department. Only credit insurance is in actual practice allocated to the treasury. It is therefore not surprising that this subject forms part of the treasurer’s core business in only a few cases. This is in contradiction to the Anglo-Saxon model, in which the insurance manager is a member of the treasury. He ensures internally by agreement with other departments that the insurance cover is adequate and concludes the insurance contracts. This does not merely involve, for example, credit insurance contracts, but all types of insurance, particularly third party liability, insurance for the company’s board members and senior executives (D & O insurance), accident insurance covering the company’s workforce, as well as sickness insurance, in as much as they are taken out by the employer.

Debtor Management only rarely forms part of the treasury’s core functions in the case of the interviewed companies, a fact which is borne out by the analysis of job vacancy advertisements. The same applies to collection and dunning. Whilst both have a lot to do with working capital management and thus affect the above-mentioned core functions of the treasury, they involve a task which affects various corporate spheres, because working capital is part of the production and sales circle. In the case of working capital management, the treasury department merely assumes a controlling and advisory function and is only able to deal with the operative and administrative part to a limited extent. It follows that the slight importance of these two tasks to the treasury is not surprising. Here, too, the competence in the Anglo-Saxon model goes further as the credit manager is a member of the treasury.

Further clear interfaces to controlling, accounts, law and taxation can be found in a number of other fields. The analysis of job vacancy advertisements shows that 39% of the advertisements mention “additional functions” among the job description. The main emphasis was thus on support in the accounts sector (29%). Furthermore, the job vacancy advertisements indicate that the treasurer assumes an interface function in communication, particularly as regards contact with tax consultants and auditors (15%).

The treasurer’s assistance in drawing up the balance sheet, the valuation of finance instruments and control of the balance sheet structure is essential. However, balance sheet management and balance sheet policy are by preference allocated to accounts. On the other hand, accounts as suppliers of data are important to the treasury department or as a posting unit for treasury business transactions. The handling of finance contracts also calls for close collaboration with the legal department or external firms of lawyers. In a great many instances, the treasury’s own legal knowledge proves useful, particularly if complex financial schemes are used to a considerable extent or if the structure of the legal department is weak. Taxation plays a substantial role in group finance. This subject is therefore also important to the treasurer, but constitutes no core function.[[[PAGE]]]

A remarkable feature found is the differentiation of tasks according to corporate size (workforce, turnover). Particularly regarding the “other” functions mentioned, the treasury departments of small companies are set up on a clearly broader basis.

This picture is plausible because a treasury unit capable of functioning, in view of the authorisation rules, calls for a minimum of 2 – 3 persons, and as this size is not always justified by the size of the business viewed from efficiency aspects. This minimum size can be achieved by the transfer of functions from other technical departments. On the other hand, only very large corporations are able to afford specialists of their own for the marginal areas mentioned.

The VDT survey did not disclose special sectorial features or differentiation of tasks according to sectors.