DID PAYDAY TO GO FTP PLUSBy that, I mean that it is the overall weighted average cost of all liabilities plus the internally shared costs of the business minus treasury profit.įunds-transfer pricing is the process of costing a balance sheet and then setting the requisite prices for asset creators or liability gatherers to pay or earn for their respective tasks. Unlike the widely-known cost of debt figure, which can be represented as a standalone loan or benchmark bond yield, the FTP represents a fully-loaded cost. The FTP reflects the cost of liabilities and is charged to a business unit when it wishes to originate a new asset. Treasuries are mini-banks for their own companies (or banks) and must price up the liabilities on hand for use in everyday asset-generating activities. Factoring receivables to gain a competitive advantage by winning new customers with attractive payment terms.Share repurchase schemes enacted at opportunistic periods.Direct to consumer vendors (e.g., supermarkets, eCommerce) that have negative cash conversion cycles and offer consumer credit services.This is not just in the domain of banks here are some examples of companies using treasury management to assist business: Optimizing assets and liabilities in a proactive manner increases profitability and business opportunities. An ALM function monitors this liquidity horizon, prescribing limit buffers and advising on any changes that can be observed in advance. This can all come crashing down during market flashpoints when credit dries up and liabilities become harder to roll. The graphic below demonstrates generic balance sheet compositions for corporates and banks and, as you can see, banks are generally more leveraged through their increased use of liabilities relative to equity capital.īecause it’s generally cheaper to borrow short-term liabilities and invest in long-term assets, there is a natural tendency for companies to stretch this funding mismatch to a limit. How they interact with each other and represent the overall position could be metaphorically described as being similar to the concept of Beta in portfolio management.ĪLM is most relevant for treasury management in banks because their fundamental purpose is based upon the gearing dynamic of borrowing and lending money. Companies hold a range of instruments on balance sheets, which behave with varying characteristics. Asset Liability Management (ALM)ĪLM concerns the blend of assets and liabilities that sit on a balance sheet and the subsequent mismatches between tenor, currency, and interest rate (cost). The basics of treasury management can be distilled into five critical responsibilities. For example, if the board decides to buy a business or expand into new territories, Treasury will help to determine the fit of the company from a balance sheet perspective and find the cash (or issue stock) to purchase it ultimately.īy actively managing liquidity, treasuries ensure that businesses stay alive, save money, and can respond quickly to change. In addition to enabling business-as-usual (BAU) activities, treasuries partake in the macro-financial direction of a company and oversee the execution of company-wide strategies. Their management of this enables the basic fundamentals of an organization: allowing teams to operate and conduct activities by ensuring that there is cash on hand, be it in the petty cash box or an opportunistic M&A raid. The two levers of this are through the sheer size of the balance sheet and the relative stickiness (liquidity) of assets and liabilities held. Treasuries are the custodians of cash in a business, they control this through 1) the amount held and 2) its liquidity. I have regularly had to explain (courteously) that corporate treasury is not centered around wooden chests, nor whip-rounds for group holiday cash. Through reasons that I will explain in this article about treasury management best practices, such teams are pivotal to the success of their organizations, yet are often misunderstood or underestimated. I began my career working in a bank’s treasury team, and it provided a fantastic basis of financial education that has direct influence over all manner of work that I do now.
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