When setting up a group treasury department, getting board buy-in as well as the appropriate systems in place can help you avoid headaches later.

The CEO walks into your office. He tells you that the group is undertaking a step change in its development by buying an overseas subsidiary and financing it with debt. As part of your career development he wants you to set up and run a group treasury department. What do you do?

Treasury function objectives

Agreeing the high-level treasury policies for the group with the board is a critical first step in gaining a shared understanding of the objectives the treasury function will be trying to achieve. It also clarifies what authorities will be delegated to you or more junior treasury staff and what decisions are retained at either FD or board level.
Appropriate policies are likely to vary from company to company depending on their circumstances, but will probably cover the following areas:

- Funding

- Interest rate risk management

- Foreign exchange exposure management

- Cash and liquidity management

- Commodity risk management, if appropriate Some policies may already be documented within the organisation and it is worth getting hold of these to begin with.

Understanding the strategy of the group is an important start to assessing what is needed. The immediate questions that come to mind are:

- What is the group’s appetite for risk? Can it withstand sharp fluctuations in trading performance or is it risk averse? Could a financial covenant in the proposed financing structure be accidentally breached, potentially leading to the banks calling for repayment of their loan when the company is unable to? What level of undrawn committed facilities – which cannot be cancelled by the banks unless covenants have been breached – does the group wish to maintain for emergencies?

- How stable is projected cash flow? How cyclical is the business and whereabouts in the cycle are you now?

- Given the higher levels of debt anticipated, how concerned is the group about rising interest rates? The risk of breaching an interest to Ebitda ratio, or equivalent, in the loan facility may mean the group wants to enter into derivative transactions to fix its effective interest rate.

- How important are currency exposures? These could arise in cross-border cash transactions, or in balance sheet translations of overseas assets. Are these risks important enough to hedge and, if so, how?

Staffing

Getting a clearer vision of what the treasury function needs to achieve will drive staffing decisions. Staff must understand the limits of their authority to enter into treasury transactions, and these must be agreed at FD and board level.

When setting up a treasury function, care must be given to establishing internal control and reporting systems around employee activities. Segregation of duties is important to ensure errors are investigated promptly and not covered up.
Controls must also cover checks on individual deals to ensure staff have not exceeded their authority.

Where transactions with external counterparties such as banks are undertaken, a confirmation process will be required which operates outside treasury’s influence for internal control reasons.

Regular reporting of appropriate treasury matters to the FD and the board is necessary so they know what is going on and can question accordingly.

A range of forecasting disciplines may be required, including cash and currency exposures. Currency management disciplines will need to be reviewed to ensure they are accounted for appropriately under International Financial Reporting Standards or UK Generally Accepted Accounting Principles.

Cash management is often centralised in order to minimise drawn loans, and a review of bank account arrangements and related electronic systems may well be needed.

In the case of the proposed acquisition, the treasurer’s role is to check their internal controls, signing authorities and bank mandates to ensure cash is immediately under control and unlikely to go missing.

Systems

Systems needed for treasury operations depend on individual circumstances. They can range from a series of spreadsheet and manual controls through to specialist treasury systems integrated with the group’s enterprise resource planning systems. The higher the level of transactions or risk, the more likely it is that a specialist treasury system will be required.

Where next...

www.treasury.org The Association of Corporate Treasurers

David Tilston has been FD of two listed PLCs and was most recently head of group finance at Mowlem

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Tags: commodity risk management, cash management, treasury function, interest rate risk, group treasury, cash and liquidity,

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