Treasury function and banking - Objectives and responsibilit...

Learning Outcomes

After reading this article, you will be able to explain the main objectives of a corporate treasury function, describe its key responsibilities such as liquidity management, risk control, and banking arrangements, and recognise how treasury supports the financial stability of an organisation. You will also be able to distinguish the roles of day-to-day cash management from longer-term treasury strategy and apply these principles in exam-style questions.

ACCA Foundations in Financial Management (FFM) Syllabus

For ACCA Foundations in Financial Management (FFM), you are required to understand the roles and priorities of the treasury function in a business. In revision, focus on:

• Explaining the core objectives of treasury, chiefly liquidity management and risk reduction
• Describing treasury responsibilities, including cash management, short-term borrowing, and investment
• Recognising how treasury supports banking relationships and negotiates credit facilities
• Identifying how treasury monitors, reports on, and controls financial risks (such as interest rate and foreign currency exposure)
• Understanding the distinction between operational treasury activities and treasury’s role in supporting business strategy

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. What is the main purpose of the treasury function in a business?
   1. Recording inventory balances
   2. Managing cash flows and financial risk
   3. Preparing financial statements
   4. Approving capital budgets
2. Which of the following is a typical treasury activity?
   1. Setting product prices
   2. Negotiating and reviewing bank credit facilities
   3. Auditing payroll
   4. Issuing shares

3. True or false? Treasury functions only perform routine processing of company expenses.

4. Give two examples of risks that treasury must monitor and help control.

5. Why is it essential for treasury to forecast future cash inflows and outflows rather than only tracking current bank balances?

Introduction

Every organisation must be able to pay its bills on time and protect itself from potential financial shocks. The treasury function exists to manage cash resources, maintain financial flexibility, and safeguard the business from exposure to risk. Treasury is not limited to day-to-day payment processing; it also provides key support for funding, investment decisions, and banking relationships. You must be able to clearly state treasury's objectives, describe its responsibilities, and show how it enables the business to operate securely and efficiently.

Key Term: Treasury Function
The department or role within an organisation responsible for managing cash flows, obtaining finance, maintaining banking arrangements, and controlling financial risks to ensure the entity meets its short-term and long-term financial obligations.

OBJECTIVES OF THE TREASURY FUNCTION

The overarching aim of treasury is to ensure that the business has access to funds as required and is not threatened by preventable financial risks.

Liquidity Management

Treasury's primary task is to ensure the organisation always maintains enough cash or readily available funding to satisfy payment obligations. This includes:

• Monitoring cash inflows and outflows daily
• Creating short- and medium-term cash forecasts
• Arranging overdrafts or credit lines to cover short-term shortfalls

A failure to manage liquidity can result in missed supplier payments or inability to cover wages, with severe reputational and legal consequences.

Key Term: Liquidity Management
The planning, monitoring, and control of cash resources to ensure that the organisation can always meet its short-term financial commitments.

Financial Risk Management

Treasury must identify, monitor, and mitigate various financial risks, such as:

• Interest rate risk (unfavourable changes in borrowing costs)
• Foreign currency risk (exchange rate movements affecting payables/receivables)
• Credit risk (counterparties failing to fulfil obligations)

Controls, policies, and regular reporting are used to limit these exposures.

Key Term: Financial Risk
The possibility that financial outcomes, such as costs or receipts, differ from expectations due to interest rate, currency, or credit changes.

Funding and Investment

Treasury arranges appropriate funding to meet working capital needs or strategic investments. Key aspects:

• Negotiating loan agreements, overdrafts, or short-term borrowing
• Scheduling repayments and interest payments to maintain good credit standing
• Investing surplus funds securely to achieve returns while preserving liquidity

TREASURY RESPONSIBILITIES

Treasury activities are wide-ranging but generally fall into the following areas.

Cash Management

• Monitoring all business bank accounts
• Consolidating cash positions across accounts and currencies
• Scheduling supplier and payroll payments
• Initiating internal transfers to optimise use of surplus balances

Banking and Banking Relationships

Treasury selects, negotiates, and manages relationships with banks to:

• Access credit facilities (overdrafts, loans, letters of credit)
• Secure cost-effective services and favourable terms
• Improve payment processing and issue resolution

Key Term: Bank Facility
A pre-arranged agreement with a bank allowing a business to borrow funds up to a set limit on agreed terms (e.g. overdraft, revolving credit line).

Short-Term Borrowing and Short-Term Investment

• Arranging necessary borrowing to cover shortfalls—managing repayment to limit interest costs
• Investing excess cash in low-risk, short-term products such as money market deposits, always ensuring sufficient access to funds if required

Risk Monitoring and Compliance

• Maintaining up-to-date documentation for all major transactions and credit lines
• Ensuring all activity remains within board-approved limits and company policies
• Preparing regular management reports summarising cash, debt, risk exposures, and compliance

Key Term: Counterparty Risk
The danger that another party involved in a financial transaction (e.g., a customer or bank) is unable to meet its obligations, potentially resulting in financial loss.

Strategic Support

Treasury provides financial input and advice on:

• Significant purchases, investments, or business expansion
• Risk assessments for proposed projects or transactions
• Ensuring that financing and liquidity needs are understood in business planning

Worked Example 1.1

A business receives most of its customer payments at the beginning of the month, but payroll and supplier bills are due near the end. How should treasury handle cash flow throughout the month?

Answer:
Treasury will forecast expected inflows and outflows, invest any early-month surplus to generate extra income, and ensure that enough liquidity is available to cover large end-of-month payments. This can include transferring cash between accounts or drawing on short-term bank facilities for any temporary shortfall.

Worked Example 1.2

An importer has to pay $100,000 to a supplier abroad in one month. The business holds all funds in its local currency. What is treasury’s responsibility in this context?

Answer:
Treasury needs to manage the currency risk. It can either buy foreign currency now at today's rate or enter a contract to buy the required amount at a fixed rate on the payment date. This reduces uncertainty over the payment amount in local currency.

Exam Warning

In exams, do not assume treasury only handles processing payments. It is equally responsible for forward planning, negotiating facilities, and formalising risk controls.

Summary

Treasury ensures that an organisation always has access to funds, controls exposure to financial risk, and develops efficient, reliable banking arrangements. Its activities range from monitoring daily cash positions to shaping financial strategy. Strong treasury practices are essential to business continuity and financial health.

Key Point Checklist

This article has covered the following key knowledge points:

• State the objectives of treasury, especially liquidity management and risk control
• List and describe treasury’s core responsibilities, including cash management, funding, and reporting
• Explain the role of banking relationships and how facilities are negotiated
• Identify and give examples of key treasury risks and standard mitigation measures
• Distinguish operational treasury from strategic and advisory roles

Key Terms and Concepts

• Treasury Function
• Liquidity Management
• Financial Risk
• Bank Facility
• Counterparty Risk