Treasury function and banking - Bank relationships and payme...

Learning Outcomes

After reading this article, you will be able to explain the purpose of the treasury function and its importance in managing an organisation’s finances. You will identify the key features of banking relationships, distinguish between major payment methods, and outline fundamental controls and risks associated with the selection and use of payment systems. You will apply this knowledge to scenarios relevant for the ACCA exam.

ACCA Foundations in Financial Management (FFM) Syllabus

For ACCA Foundations in Financial Management (FFM), you are required to understand the role of bank relationships and payment systems in financial management. Specifically, you should be familiar with:

• The objectives and typical responsibilities of the treasury function within an organisation
• The factors in establishing and maintaining bank relationships
• The features and risks of commonly used payment systems (cheques, direct debit, electronic transfers, cards)
• The controls and security procedures needed to minimise risks in payments and banking activities

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes a primary responsibility of a treasury function?
   1. Managing staff payroll
   2. Overseeing company tax filings
   3. Optimising cash and liquidity
   4. Auditing supplier contracts
2. What is a common advantage of using electronic payment systems compared to paper-based methods?
   1. Lower risk of unauthorised transactions
   2. Faster processing times
   3. No need for bank account verification
   4. Guaranteed reversal of payments

3. True or false? A bank mandate specifies the individuals authorised to operate an organisation’s bank accounts.

4. Briefly explain why segregation of duties is essential in payment authorisation.

5. What is the key risk associated with using cheques as a payment method?

Introduction

Effective management of cash and payments is fundamental for every business. The treasury function oversees how funds are collected, stored, and distributed. At the core are the relationships with banks and the choice of payment systems. Understanding how these work, and the controls needed to manage risks, is essential for any financial manager.

This article explores the objectives of the treasury function, the management of bank relationships, and the different payment systems available to organisations. You will learn how payment methods differ, their key risks, and the controls needed to protect company resources.

Key Term: Treasury Function
The department or role responsible for managing an organisation's cash, funding, financial risks, and relationships with banks.

THE TREASURY FUNCTION

Objectives and Responsibilities

The treasury function aims to ensure the business has adequate cash to meet its obligations while minimising idle balances and managing risk. Typical responsibilities include:

• Cash and liquidity management
• Forecasting short-term and long-term funding needs
• Managing payments and receipts efficiently
• Identifying, measuring, and controlling exposure to foreign exchange and interest rate risks
• Overseeing relationships with banks, including negotiating terms and ensuring service quality

Key Term: Liquidity Management
The process of ensuring an organisation can meet its payment obligations as they fall due.

BANK RELATIONSHIPS

The relationship a business develops with its banks is a key part of financial management. Selecting suitable banking partners and maintaining effective communication can improve service and negotiate better terms.

Opening and Operating Bank Accounts

When opening a business bank account, documentation and a signed bank mandate are required.

Key Term: Bank Mandate
A formal instruction to a bank detailing who is authorised to operate an account, including who can sign cheques, authorise electronic payments, and set spending limits.

Maintaining Bank Relationships

Ongoing contact with bank managers allows the business to:

• Access new services
• Renegotiate fees and interest rates
• Resolve operational issues
• Arrange overdraft facilities or new lines of credit when needed

A strong bank relationship is also critical during periods of cash flow difficulty.

Security and Control

Management must ensure only approved personnel can access accounts and authorise payments.

Key Term: Segregation of Duties
A control principle where different people are responsible for initiating, authorising, and recording transactions to reduce the risk of error or fraud.

PAYMENT SYSTEMS OVERVIEW

Organisations use a range of payment methods, each with benefits and risks. Selection depends on transaction value, speed required, cost, and security.

Common Payment Methods

Cheques

• Paper-based instructions to a bank to pay a specific amount
• Slow to clear; risk of loss, forgery, and delay
• Suitable for some one-off or unusual payments

Electronic Funds Transfer (EFT)

• Includes systems such as BACS, CHAPS, SWIFT
• Faster, reduces paper handling, and generally more secure
• Bank details must be correct to avoid misdirection

Key Term: BACS
A UK automated payment system for bulk low-value payments, typically taking three working days.

Key Term: CHAPS
A same-day UK payment system for high-value or urgent payments, settling in real time.

Direct Debit

• Authorises a creditor to collect varying amounts from a payer’s account
• Useful for routine payments such as utility bills
• Debtor must have confidence in creditor controls

Payment Cards

• Credit, debit, and prepaid cards widely accepted for business and consumer payments
• Secure for point-of-sale and remote payments when combined with PIN or authentication
• Costs and limits vary between card types

Risks Associated With Payment Systems

• Fraudulent instructions or interception (especially with cheques and electronic payments)
• Unauthorised changes to payee details
• Duplicate or incorrect payments
• Reputational risk and loss of funds

Controls Over Payment Systems

• Segregation of duties for payment initiation and authorisation
• Use of dual signatories for large payments
• Reconciliation of bank statements to payment records
• Regular review and update of bank mandate and authorised signatories
• Use of encrypted communication for electronic instructions

Worked Example 1.1

A company makes weekly supplier payments using BACS. The sales manager requests to set up and approve payments “for efficiency.” What is the control risk, and what procedure should be in place?

Answer:
Allowing a single individual to set up and approve payments removes segregation of duties and increases fraud risk. The correct procedure is to require different staff to initiate and authorise transactions, ideally including independent review by the finance manager.

Worked Example 1.2

An organisation has two people able to sign corporate cheques but only one has access to online banking. The bank finds a series of unauthorised online payments. What control weakness does this reveal?

Answer:
The control weakness is the lack of dual authorisation and failure to limit online banking access. All payment platforms should enforce the same controls as physical cheque signing, with dual approval for releases above set thresholds.

Exam Warning

Payment errors, especially with electronic transfers, are often irreversible and costly to correct. Always know the difference between payment system types and the relevant controls for the exam.

Summary

The treasury function is central to cash management and risk reduction. Maintaining robust bank relationships allows access to the right services and better terms. Choosing secure payment systems and enforcing strict controls safeguard the business from fraud, errors, and loss.

Key Point Checklist

This article has covered the following key knowledge points:

• Define the treasury function and explain its responsibilities in cash, risk, and bank management
• Describe the importance and operation of bank mandates in controlling account access
• Identify major payment system types (cheques, EFT, direct debit, cards) and their key features
• Recognise the principal risks associated with each payment method
• List essential control measures, including segregation of duties and regular reconciliations, to secure payment processes

Key Terms and Concepts

• Treasury Function
• Liquidity Management
• Bank Mandate
• Segregation of Duties
• BACS
• CHAPS