Description
this is my project on treasury management .
Contents
INTRODUCTION .......................................................................... 2
Objectives ................................................................................. 7
FUNCTIONS AND SCOPE OF TREASURY MANAGEMENT ............ 13
FUNCTIONS .......................................................................... 13
SCOPE .................................................................................. 15
Uit !eve! ........................................................................... 15
D"#estic !eve! .................................................................. 1$
Ite%&ti"&! !eve! ............................................................. 1'
TREASURY OPERATION( PIC)ING T*E RIG*T MODE+ ................ 2,
RO+E AND RESPONSI-I+ITIES OF TREASURY MANAGER ........... 2.
TOO+S OF TREASURY MANAGEMENT ....................................... 2'
INTERNA+ TREASURY CONTRO+ ............................................... 2/
RO+E OF INFORMATION TEC*NO+OGY IN TREASURY
MANAGEMENT ......................................................................... 31
TREASURY CONTRO+ MEC*ANISM ........................................... 35
TREASURY OPERATIONS IN -AN)ING ....................................... 37
CONC+USION ........................................................................... 3'
-ibi!i"0%&123 ........................................................................... 3/
1
INTRODUCTION
Treasury management is the science of managing treasury operations of a firm.
Treasury in its literal sense refers to treasure or valuables of the Government. The
valuables are nothing but the coins and the currency which are the medium of
financial transactions in the country. In the earlier days when the level of
governmental operations was comparatively smaller, there used to be a centralized
treasury into which the revenue receipts of the government were credited and from
which the payments of the government were withdrawn. In a federal set-up, both the
central govt. and the state govts. had their treasuries for managing the inflows and
outflows of government finances.
As the size and spread of government revenues grew, it became difficult to manage the
flows of cash into a centralized treasury. The function of collecting revenues on behalf
of the government was gradually shifted to State an! of India and other nationalised
ban!s. These ban!s also started ma!ing payments on behalf of the state governments
through cash counters and through ban! accounts of various government departments.
Simultaneously with the increase in size of government revenues, the corporate sector
in India also grew manifold in operations. There were companies with multi-locational
set-up involving receipt and disbursement of cash and cash e"uivalents at more than
one places. In all such companies, the function of treasury management developed
analogous to the transfer of government treasury functions to an!s. Along with this
growth evolved the concept of profitable treasury management. The over-riding
motive was to provide a platform for transactions and little effort was made to
2
evaluate the costs and e#penses associated with managing large amount of currency,
che"ues and other li"uid instruments. Similarly, the opportunity available for ma!ing
profits from holding large li"uid funds was not recognized. ut with the arrival of
corporate treasuries, the function of treasury management was established as a
profitable venture.
Today when we spea! of treasury management, we refer to all activities involving the
management of revenues, inflows and outflows of government, ban!s and corporates
etc. It is a general concept applicable to overall fund management.
Government as the sovereign power is the fountainhead of all treasury operations. It
creates money by printing currency and minting coins. This money flows into various
channels which ta!e money to various users of currency and coinage as a medium of
e#change. Thus at the macro level, the treasury operations revolve around $eserve
an! of India. $I as a ban!er to the govt. creates the currency on behalf of the govt.
and manages public debt. It is also a ban!er to the ban!s and in this role, it controls
the credit creation of ban!s.
At the micro level the concept of treasury and its management is mirrored in small
corporate units which manage the cash flows on a daily basis. As we move from the
macro level to the micro level, the nomenclature of treasury management becomes
diffused. The terms treasury management and fund management are used almost
synonymously. %onceptually, the latter is a general term, applicable to the business
sector, while treasury management refers to the management of cash, currency and
credit of sovereign power of the country. The term currency here includes both
national currency and the foreign currencies dealt with by the government.
&istorically, the treasury of a sovereign included gold, silver and other precious metals
which were used as a medium of e#change. As a ruler, the sovereign e#ercised un-
challanged rights over all the precious metals e#tracted from the earth. The booties
earned from wars, foreign e#ploits and domestic plundering !ept on adding to the
treasure chest of the sovereign. These metals were circulated in the form of coins
which became a medium of all commercial transactions in due course, replacing the
earlier system of barter. The practice continued till the nineteenth century when paper
currency began to be issued.
$eserve an! of India manages the macro treasury management of the country. This
is done through
? Issue of %urrency notes
? 'istribution of small coins, one, two and five rupee coins and rupee notes on
behalf of the government
3
? (aintenance of currency chests.
The currency is issued by the $eserve an! of India in terms of the Indian %urrency
Act whereas the small coins and rupee coins are issued under the provisions of the
Indian %oinage Act. The provision of ade"uate supply of currency and coins is the
responsibility of the government which was at first discharged by providing currency
chests at the branches of Issue 'epartment of $I and at branches of Imperial an! of
India )which later became State an! of India*. SI carried out the business of
Government treasury and maintained the currency chests at all district head"uarters.
+ater on all the nationalized ban!s were also entrusted with the tas! of maintenance of
currency chests.
The basic ob,ective of !eeping the currency chests at various places in India is to
facilitate "uic! disbursement of currency and coins to far flung places and also to
facilitate remittance to ban!s. This way, the ban!s can remit surplus cash to the
currency chests located in their region and avoid transportation of cash over long
distances. Also, the ban!s can draw from the currency chests during time of need.
%urrency chests are the agents of the $eserve an! of India for !eeping custody of
currency and coins. Any deposit of currency and coins into these chests implies that
the money circulation has been curtailed to that e#tent. Similarly, any disbursal from
these chests would e#pand their supply. Thus e#pansion and contraction of currency
ta!es place on continual basis due to operation of the currency chest.
Government as a sovereign power has control on cash and currency circulated in the
country. The issue of currency and coins is based on the treasures of the government
in the form of gold and silver stoc!s which are supposed to bac! such issue. (ore
recently, government securities and their promissory notes became the basis of such
issue. In fact, the coins of gold and silver were first replaced by the paper currency on
the one hand and coins of base metals li!e copper, nic!el, bronze, zinc etc., on the
other. To supplement the available currency and to facilitate trade and business, credit
instruments came into vogue in the form of promissory notes to pay at a future date by
the trade and industry. Thus on the one hand, the government promissory notes
became the basis for coins and currency rather than precious metals li!e gold and
silver- and on the other hand, the promissory notes of trade and industry became the
source of credit instruments. These credit instruments, particularly the safest among
them such as government securities, in fact became the medium of par!ing of li"uid
funds over a period of time. Thus apart from handling cash and currency and ban!
funds, the li"uid investment in government securities and mutual funds became
another function of treasury management.
.
Treasury function is a part of the total managerial functions. (anagerial function set-
up can be classified into three broad units, viz. production function, mar!eting
function and finance function.
.roduction function pertains to the building up of capacities and generation of output.
(ar!eting function is concerned with the mar!eting of the output through
establishment of the sales and mar!eting networ!. In the finance function, the
manager is concerned with financing of inputs and outputs and management of funds
during the entire production cycle.
Availability of cash, currency and credit by the government, business and foreign
sectors is a must for macro operations of the economy. In broader terms, all financial
resources including fore# are to be made available to the micro-economic units, i.e.
the companies. Similarly, the operations at the national level involve return flow of
funds, repayment of loans, ta#es, fees etc. to the government, business and foreign
sector.
The finance function comes into play when the company is incorporated. /ith capital
restructuring, efforts are made for arriving at least cost combinations of capital for
financing of a pro,ect and forecasting for wor!ing capital. In this function, one has to
coordinate with the production and operations manager, sales or mar!eting manager
and they together constitute the mar!eting team. Apart from arranging the re"uisite
funds for commencing an activity, the finance function is also concerned with
managing the day-to-day finances of the company. /hereas arranging pro,ect funds
and wor!ing capital finance is a one-time assignment, management of funds on daily
basis is a much more astute activity re"uiring forecasting s!ills and prioritization
ability of a high order.
The inflows and outflows of funds, their coordination and synchronization and ma!ing
arrangements for meeting any gap between them is only one end of the spectrum of
finance function. The other end of the spectrum is the management of the surpluses
and ma#imization of returns from short term funds. These two ends of the spectrum
form the core of activities of the finance function. ut the handling of each of the
activities re"uires further specialization. Arranging of long-term funds is the domain
of the proper finance function but the management of funds re"uired in and arising
from the day-to-day activities of the firm is the domain of the treasury function. These
two have to be viewed together and analysed for overall assessment of financial
efficiency. So a finance manager need not have a treasury function or a treasury
manager need not be bothered with long term arrangement of funds. The finance
manager can be termed as an arranger of funds whereas the treasury manager can be
viewed as a manager of funds.
5
Treasury management has both macro and micro aspects. At the macro level, the
inflows and outflows of cash, credit and other financial instruments are the functions
of the government and the business sectors. These inflows are arranged by them as
borrowing from the public. In these sectors, the ratio of savings to investments is less
than one, i.e. the savings are inade"uate to fund the investments. &ence the need for
borrowing. They accordingly issue securities or promissory notes which are part of the
financial system. These borrowings for financial needs are met by surplus savings and
funds of the household and the foreign sector, where the ratio of savings to
investments is positive. The micro units utilize these inflows and build up their
capacities for production of output. This leads to establishment of a production system
which logically leads us to the natural conse"uence, i.e. the establishment of
distribution and consumption systems. 0nce the production, distribution and
consumption systems are in place at the micro level, the generation of surpluses at the
units begins. These surpluses are channeled bac! into the macro system as outflows
from the micro system. The inflows are the ta#es paid to the government and
repayment of loans made to the ban!s and financial institutions. These inflows into the
macro level have to be managed by the treasury managers at the macro level.
/hile arranging funds for the micro unit, the finance manger aims at optimizing the
value of his assets or wealth and minimizing the burden of his liabilities. &e may see!
to ma#imise his operational profits and see! to ma#imise the wealth of sta!eholders of
the micro unit. The basic ob,ectives are economy, efficiency and productivity of
assets. These ob,ectives can not be achieved at the one end of the finance spectrum
unless the management of funds at the other end of the spectrum, i.e. the treasury
segment is e"ually triggered by the dictums of economy, efficiency and productivity.
$
Objectives
The main function of a treasury manager is the management of funds. /hile
managing these funds, the treasury manager see!s to fulfill the under-noted ob,ectives1
Availability in right quantity
The finance manager arranges funds for the unit. It is the duty of the treasury manager
to ensure that after the funds have been arranged, these should be available in re"uired
"uantity. The term "uantity refers to the amount of funds re"uired for day to day
functioning of the unit. This "uantity is available to the firm either as e#ternal loans or
as internal generation. The loans "uantity is arranged in the form of wor!ing capital
finance.
/or!ing capital finance can be available as finance against any of the current assets,
viz. inventory or receivables. In order to ensure that the wor!ing capital finance is
available in ade"uate "uantity, the treasury manager has to maintain the desired level
of security of current assets against which the finance has been provided by the
lenders. (aintenance of the security is not a direct function of the treasury manager
because the security partly becomes available from the functioning of the production
department and partly from the mar!eting department. The production department is
responsible for manufacturing the products and !eeping trac! of the raw material,
wor!-in-process and finished goods. These items form the inventory against which the
wor!ing capital facility is provided. Similarly the mar!eting department is responsible
for selling the goods and generating account receivables. /or!ing capital finance is
also provided by the ban!s against account receivables. Thus we can say that for
maintenance of ade"uate security, the treasury manager has to coordinate with the
production and mar!eting departments. The conse"uences of ade"uate security not
being available in "uantity can be far reaching.
+et us assume that a firm has a credit facility of $s. 233 lacs provided by the ban!
against the security of inventory. It is a condition of the sanction of the loan that a
margin of 245 shall be maintained by the firm against the security at all the times. It
7
means that the firm can avail a credit facility of $s. 233 lacs only if it has a security of
around $s. 264 lacs. The security value is indicated by means of the inventory
statement or the list of debtors depending upon whether the finance has been obtained
against stoc!s or against boo! debts. This statement is provided to the ban! on
monthly basis usually. In case the statement is not given, the ban! determines
availability of credit on the basis of previous month7s statement. Thus if the statement
of inventory and boo! debts is not provided to the ban! well in time in case the value
of security is higher than the previous period, then the firm stands to lose out on the
availability of the differential amount of credit which it otherwise would have
obtained.
8rom the above illustration we can well imagine the importance of availability of
ade"uate funds for day-to-day functioning of a firm. This function is one of the
ob,ectives of treasury management. Alongside, the treasury manager has also to
ensure that the funds are ,ust ade"uate for the re"uirements, neither more nor less. In
case funds are !ept in e#cess of the re"uirement, the e#cess portion imposes an
opportunity cost over the system, i.e. the cost represented by the earnings which these
funds would have obtained instead of being left idle. Again, the ade"uacy of funds has
to be determined carefully. 8or this purpose, the cash flows for the relevant period
have to be accurately charted out. %ash flows are the actual cash flows in this case and
not the pro,ected cash flows. etween the pro,ected cash flows and the actual cash
flows, there can be a lag in terms of less realization of the pro,ected flows. Thus actual
cash flows only have to be considered while determining ade"uacy. 8urther, while
actual inflows should be ascertained, as regards outflows a margin of contingency
should be maintained to ta!e care of the uncertainties. %ash is understood here to
include both cash and ban! balances plus that portion of highly li"uid securities that
can be converted into cash within a stipulated time period.
Availability in right time
The re"uisite funds for day-to-day wor!ing of the firm should be available in time in
addition to being available in "uantity. y the term 9availability in time we mean ?
that the funds should be available at the right moment, ,ust in time so to say. The right
time is the reasonable time ta!en to procure the funds. .rocurement of funds is done
by the firm in a number of ways and this activity is a!in to the cash inflows. %ash
inflows ta!e place on account of )i* %apital receipts li!e proceeds of loans or sale of
assets )ii* $evenue receipts li!e sale proceeds of finished goods. %apital receipts are
not a daily occurrence for the firm and their realization can be anticipated well in
advance. The revenue receipts can flow in at a more random pace but with some
amount of rigorous cash flow planning, even the trend of revenue inflows can be well
anticipated. 0nce the cash flow both on the capital and revenue account has been
planned, the priority of treasury manager remains to ensure that the schedule of
'
conversion of realizations into funds ta!es place as planned. $ealisation of the capital
receipts is more related to the domain of the finance manager whereas realization of
revenue proceeds falls within the domain of the mar!eting staff. The treasury manager
has thus to coordinate the matter with both the finance manager and the mar!eting
manager in order to ensure that the realizations and receipts are converted into funds.
Timely availability of funds smoothens the operations of the firm and brings about
certainty to the "uantum of inflows that would be available at a particular point in
time. /hat is timely is a relative matter dependent upon the situation of each case.
Again the inflows have to be actual inflows at the determined time and not pro,ected
or anticipated flows. This is because the element of uncertainty has to be accorded due
consideration. In case of a firm having a large number of transactions, timely
availability of funds is e#tremely important because the e#ecution of many
transactions would be dependent upon funds position. This is relevant also for
transactions involving foreign e#change. 8or the purpose of treasury operations, we
consider foreign currencies at par with the domestic currency. It is assumed that the
regulatory mechanism for holding foreign currency and domestic currency is the same
and there is no constraint on holding or converting currencies. 8or foreign e#change
transactions, funds have to be made available for meeting many critical situations. The
treasury manager ensures that all the receipts of funds are credited to the account of
the firm well in time. Another way of ensuring timely availability of funds is to par!
short-time surplus funds in li"uid securities which can be sold conveniently and
"uic!ly to realize cash. In this way, availability can be ensured without straining other
resources.
Deployment in right quantity
:ust as procurement of funds in right "uantity is important for a treasury manager,
e"ually important is to ensure that the right "uantity of funds is deployment. y
deployment of funds, we mean earmar!ing of funds for various e#pense heads,
par!ing of short-term funds and investing surplus funds.
The e#pense heads can be capital e#penditure and revenue e#penditure. %apital
e#penditure involves allocation of funds for ac"uisition of fi#ed assets. Such
e#penditure is not a routine occurrence. The amount involved per transaction in capital
e#penditure is large and such e#penditure is usually !nown well in advance. $evenue
e#penditure on the other hand is routine e#penditure for purchase of raw materials and
ma!ing payment for utilities, wages and other miscellaneous items. The number of
transactions for revenue e#penditure is large and the amount involved per transaction
is smaller as compared to the capital e#penditure. Some items of revenue e#penditure
are in the form of cash payment but the capital e#penditure is mainly through ban!
account.
/
8or deploying the right amount of funds, the treasury manager has to !eep trac! of all
receipts of funds. Simultaneously, the time table of deployment of funds is to be
drawn up. In this time table, the payees are prioritized according to the urgency of
their payments. There are certain e#penses li!e important raw material payments,
utility payments etc. which have to be accorded top priority over others. 0ther
payments li!e payment to capital goods suppliers and financiers have also to be
arranged in the right "uantity. Apart from these payments, some e#tra funds have to be
!ept available for meeting contingencies. The sum of all these deployments ma!es the
right "uantum of funds to be deployed. %o-ordination with the purchase department is
re"uired for raw material purchases. 8or fi#ed assets ac"uisition and loan repayments,
coordination with the finance manager is needed. +iaison with administrative and
&$' staff is re"uired for deploying funds for utility and wages payments. /ithout
this type of tie-up, right "uantity of funds can not be deployed. If the deployment is
not in right "uantity, the result can either be under deployment resulting in higher cost
of funds or over deployment resulting in funds remaining idle. In case all the
re"uirements of deployment of funds have been met and procurement of funds has
been done in the right "uantity, there is a possibility that some amount of funds would
remain in surplus with the treasury department. This surplus would be in e#cess of the
contingency re"uirements and as such can be deployed further on short term or long
term basis depending upon the "uantum of funds. If the "uantum of surplus is large
enough, some amount from this can be earmar!ed for long term deployment in
investments etc. otherwise the entire surplus can be par!ed in short term securities.
Short-term li"uid securities are the Government securities and the schemes of mutual
funds. 8unds from these investments can be withdrawn at short notice period of 2;<
days as such these are a!in to cash holding or ban! balance holding.
'eployment of the right "uantity of funds can not be achieved in case the procurement
of funds has not been done in right "uantity in the first place. This is because
ultimately the inflows of funds shall be utilized for feeding the outflows on
whatsoever account. If the deployment has been done rightly, there shall be no
bottlenec!s in the funds flow of the firm. The allocation and use of funds follow each
other in a cyclical manner and both have to be done in the right "uantity for optimal
use of the funds.
Deployment at right time
A logical corollary of sourcing funds at the right time is that the funds should be
deployed at the right time. The description of the right time is a relative term and what
amount of time is appropriate varies from firm to firm. The span of time varies from a
wee! to a month in case of purchase of fi#ed assets. &owever, in wor!ing capital
1,
deployment, the range of time allowed may be "uite narrow ; say 2;< days only. The
treasury manager has to honour the outstanding commitments on wor!ing capital
account within this short span of time. .ayment for wages and utilities etc. has to be
made in time to avoid any defaults. Similarly, payment to trade creditors, domestic
and overseas, has to be made within a stipulated short period of time for avoiding
interest payments etc. /ith the advancement in accounting systems aided by
technological progress, it is now possible to send global remittances within no time.
8unds can be procured more "uic!ly than in the past, spanning the spatial barriers.
The compulsion for online deployment is all the more pressing currently.
The treasury manager see!s to prioritise the deployments according to the ease of
payment within the time horizon selected for planning deployment. 0nline payment of
funds is ensured through offsite debits from a centralized pool ban!ing account.
/here such payments are not possible, ban! drafts or pay orders are purchased to
ensure timely payment to pressing creditors. Timely disbursement ensures that the
funds are not left idle for the shortest span of time. In case the sourcing and
deployment of funds is well organized, surplus of funds shall soon start emerging
which can be deployed in short term li"uid investments.
&owever, if the inflow and outflow of funds is not evenly matched in the time
dimension, bottlenec!s and mismatch of funds are sure to emerge. Apart from causing
administrative problems and rationing of funds, such a situation also leads to increase
in cost of funds. Thus the treasury manager see!s to avoid such situations. Timely
deployment of funds is a well planned activity re"uiring intra-organisation co-
ordination and liaison with ban!s and financial institutions apart from fore# dealers.
Profiting from availability and deployment
0ne of the prime ob,ectives of a treasury manager is to ensure timely
procurement of right amount of funds and timely deployment of right amount of
funds. This ob,ective results in administrative smoothening and paves way for easier
achievement of performance targets of the firm. (odern day treasury manager has
another ob,ective, which is to profit from such sourcing and deployment. .rofit from
this function is derived as under1
Sourcing of funds at the right time and in right "uantity is a result of realization of
debtors and financing of borrowings. $ealisation of debtors in time has a direct impact
upon profitability of the firm through decrease in cost of holding debtors. 8inancing of
borrowings is a capital structure decision but the actual availment of these borrowings
is the domain of the treasury manager. Ade"uate and timely utilization of the
borrowed funds results in the avoidance of strain on other sources of funds.
11
0nce the funds have been sourced in correct measure, the deployment adds further to
the profitability of the firm it has been done in tandem with the pace of sourcing.
%orrect deployment ensures that there is no unnecessary accumulation of funds in the
firm at any point in time. =eeds of every department are met as per schedule. This
action results in avoidance of special and e#traordinary costs, interests and the li!e.
/ith costs being in control, surplus funds emerge from the system which are deployed
profitably either as long term investments or as short-term par!ing tools. oth ways,
the net result for the firm is an addition to profits.
12
FUNCTIONS AND SCOPE OF TREASURY MANAGEMENT
FUNCTIONS
• %ash forecasting. %ompile information from around the company to create an
ongoing cash forecast. This information may come from the accounting
records, the budget, capital budget, board minutes )for dividend payments* and
even the %>0 )for e#penditures related to ac"uisitions and divestitures*.
• /or!ing capital monitoring. $eview the corporate policies related to wor!ing
capital, and model their impact on cash flows. 8or e#ample, looser credit
results in a larger investment in accounts receivable, which consumes cash.
• %ash concentration. %reate a system for funneling cash into a centralized
investment account, from which cash can be most effectively invested. This
may involve the use of notional pooling or cash sweeps.
• Investments. ?se the corporate investment policy for allocating e#cess cash to
various types of investments, depending on their rates of return and how
"uic!ly they can be converted into cash.
• Grant credit. Issue credit to customers, which involves management of the
policy under which credit terms are granted.
• 8und raising. 'etermine when additional cash is needed, and raise funds
through the ac"uisition of debt, sale of stoc!, or changes in company policies
that impact the amount of wor!ing capital re"uired to run the business.
• $is! management. ?se various hedging and netting strategies to reduce ris!
related to changes in asset values, interest rates, and foreign currency holdings.
• %redit rating agency relations. @eep any credit rating agencies informed of the
companyAs financial results and condition, if these agencies are providing
ratings on the companyAs mar!etable debt issuances.
• an! relations. @eep the companyAs ban!ers apprised of the companyAs
financial condition and pro,ections, as well as any forthcoming changes in its
need for borrowed funds. The discussion may e#tend to the various services
13
provided by the ban!s to the company, such as loc!bo#es, wire transfers, A%&
payments, and so forth.
• IT systems. The department maintains treasury wor!stations that provide it
with information about cash holdings, pro,ections, mar!et conditions, and other
information.
• $eporting. The treasurer provides the senior management team with reports
concerning mar!et conditions, funding issues, returns on investment, cash-
related ris!s, and similar topics.
• (ergers and ac"uisitions. The department may advise on the companyAs
ac"uisition activities, and may be called upon to integrate the treasury functions
of an ac"uire.
SCOPE
1.
Scope of treasury management can be broadly classified at the following levels as
under1
? ?nit level
? 'omestic level
? International level
Unit level
At the unit level, the treasury manager7s activities encompass all other management
functions. The performance of production, mar!eting and &$' functions is dependent
upon the performance of the treasury department. The lubricant for day-to-day
functioning of a unit is money or funds and these funds are arranged by the treasury
manager. The treasury is involved in all the budgeting activities of the unit, whether
these are financial budget, costing budget, the mar!eting budget or the &$' budget.
The feedbac! available from interactions with the various departments of the company
is utilized by the treasury department to fine tune the overall performance targets of
the company within the constraints of availability of currency, cash and cash
e"uivalents.
Treasury manager also monitors the cash flows of the unit on a continual basis. It is
ensured by him that ade"uate funds are made available for day-to-day wor!ing of the
unit. In case there is genuine shortfall in cash flows, the outflows are made in an order
of priority with the more urgent payments being made first. The treasury manager has
two duties of ta!ing decisions both in the areas of cash inflows and outflows. &e has
to integrate the treasury function with with the production and mar!eting functions.
The scope of the treasury management function at the unit level can be better
described in the following routine duties of the treasury manager1
B. @eeping a trac!, on monthly, fortnightly or wee!ly basis, of all cash inflows and
outflows and their variance with budget pro,ections.
2. (aintaining a record of all receivables and payables, credit instruments, credit
sales, deposits, loans and advances etc.
#change is done through dealers in
foreign e#change regulated by the central ban! of a country. an!s are usually the
dealers apart from other specialized agencies.
0ne of the important components of the international financial system is the foreign
e#change mar!et. The various trade and commercial transactions between countries
result in receipts and payments between them. These transactions are carried out in the
currencies of the concerned countries any one of them or in a mutually agreed
common currency. >ither way, the transactions involve the conversion of one currency
to the other. The foreign e#change mar!et facilitates such operations. The demand for
goods and services from one country to another is the basis for demand for currencies
in the mar!et. Thus basically, demand for and supply of foreign currencies arises from
e#porters or importers or the public having some transactions with foreign countries.
%ompanies having an import or e#port component in their business profile have to
fre"uently deal in fore# operations. 8ore# operations in a country being supervised by
the central ban!, reference to the central ban! in one form or the other is necessary to
use foreign e#change. If the country on the whole is a net e#porter of goods and
services, it would have a surplus of foreign e#change.
>very foreign e#change transaction involves a two-way conversion ; a purchase and
sale. %onversion of domestic currency into foreign currency involves purchase of the
latter and sale of the former and vice versa. These transactions are routed through the
ban!s. The transactions ta!e the shape of either outright release of foreign currency
for meeting travel and related re"uirements or payments to outside parties in the
denominated currency via the medium of correspondent ban!s. 8or effecting payment,
following instruments are generally used1
Telegraphic transfers )TT*
A TT is a transfer of money by telegram or cable or tele# or fa# from one center to
another in a foreign currency. It is a method used by ban!s with their own codes and
correspondent relations with ban!s and abroad for transmission of funds. It involves
payment of funds on the same day, it is the "uic!est means of transmission of funds.
As there is no loss of interest or capital ris! in this mode, it en,oys the best rate for the
value of receipts.
(ail Transfers )(T*
1'
It is an order to pay cash to a third party sent by mail by a ban! to its correspondent or
branch abroad. It is issued in duplicate, one to the party buying it and the other to the
correspondent ban!. The amount is paid by the correspondent ban! to the third party
mentioned therein in the transferee country by its own che"ue or by crediting the
party7s account. As the payment is made after the mail advice is received at the other
end, which will ta!e a few days, the rate charged to the purchaser is cheaper to the
e#tent of the interest gain to the seller ban!.
'rafts and che"ues
'raft is a pay order issued by a ban! on its own branch or correspondent ban! abroad.
It is payable on sight but there is always a time lapse in the transit or in post between
the payment by the purchaser of the draft to his ban! and the receipt of the money by
the seller in the foreign center. As in the case of (T, there is ris! of loss of draft in
transit or delay in release of payment to the beneficiary and loss of interest in the
intervening period.
ills of e#change
It is an unconditional order in writing addressed by one person to another, re"uiring
the person to whom the order is addressed, to pay certain sum on demand or within a
specified time period. If it is payable on demand, it is called a sight bill. If it is payable
after a gap of some time, it is called a usance bill. Such bills can be ban!ers7 bills or
trade bills. an!ers7 bills are drawn on ban!s abroad while trade bills are made
between individual parties.
1/
TREASURY OPERATION PIC!ING T"E RIG"T MODE#
0rganisations have e#tended debates on the !ind of treasury they should have. The
common themes include services that the treasury should offer, the right size or
structure, and the right spread of management control There are many dimensions to
the structure of a treasury organisation. Two !ey dimensions ; range of services and
e#tent of centralisation of management control ; define resultant organisation models.
The relationship between organisation models and factors that influence decisions on
the right model to adopt.
There are various definitions of the word treasury. In its strictest sense, it refers to one
function1 asset liability management, especially when used in the conte#t of ban!s. In
a wider sense, treasury includes a whole range of activities encompassing various
mar!ets. A few significant activities are1
2,
Asset H liability management1
Assets and liabilities management includes the control and care of the cash assets and
liabilities of the corporation and optimizing the balance sheet structure. That means
use of short4term and long4term investment vehicles. Investment vehicles can include
commercial papers, bonds, mutual funds, certificates of deposit and savings accounts.
0f course, investment bro!er selection will depend on the investment vehicles they
can provide, their bonding, technology provided to their customers and their service
abilities.
8or borrowing, the treasurer must first determine the period during which funding is
needed, and re"uired currency. Then the treasurer evaluates the available funding
methods, such as debt securities )commercial papers, bonds, medium term notes* and
ban! loans )either committed or uncommitted*. It is very important for the treasurer to
match maturity and currency of funds with the company7s assets. That means to
finance fi#ed assets with long4term funds )long4term loans or corporate bonds*, and
current assets with short4term tools )commercial papers, overdraft and revolving credit
facility, etc.*. That means, borrowing will include the selection of lenders and
borrowing vehicles that best serve the business and the lenders. :ust as credit
agreements will control the methods of borrowing, treasury must also develop an
investment policy that discusses the level of ris! ta!en through investments of e#cess
cash. Information systems provided by the ban!s, investment bro!ers and other cash
management providers must be integrated.
8or multinational companies the daily cash flows from operational side of the
company will result in daily balances in different currencies within different current
accounts and possibly time zones in different regions. The main challenge for treasury
management is to utilize all the accounts balances with the result to achieve the
highest possible return on invested li"uidity )or alternatively lowest possible funding
cost on debits*. %ombining the individual account balances results in several short or
long positions in different currencies. This can be achieved by automatic
21
concentration structures provided by ban!s, or by manual transfers,currency
conversions or physical swaps.
G (aturity mismatch-
G Interest rate and type mismatch- and
G %urrency mismatch.
Sales and trading1
G %urrency, interest rate, and credit products-
G (oney mar!et and long-tenure instruments- and
G 'erivative products.
$is! management
G ac! office processing, settlement, and accounting- and
G %ustomer and regulatory reporting.
0rganisation (odels1 'imensions
Any organisation can e#ercise its choice on the scope of the treasury functions it
underta!es. In doing this, it may be governed by a variety of considerations1
G It may choose to handle only those needs driven by utilitarian motives such as
li"uidity support or, on the other hand, it may consider treasury as a 9core?
organisational process and hence handle the full range of services.
G It may choose to outsource portions of the activities re"uired or it may choose to
foster these capabilities in-house.
Independently, an organisation can also decide on the e#tent of centralisation of
treasury management1
G It may be efficient to centralise bac! office processing, while the front office may
need to be decentralized to aid speedy local decision-ma!ing.
G It may be important to have a common ris! management strategy, while e#ecution
may be decentralised.
A study of common practices relating to the two !ey influencers ; the range of
activities supported and the degree of centralization or decentralisation ; at treasury
organisations globally suggests four models.
8ull Service Global
22
8ull service refers to a treasury that underta!es most, if not all, of the activities of
treasury management. Global treasury refers to one that either operates as the only
treasury for all mar!ets across the globe, or ultimately combines all regional or local
treasuries )that may e#ist due to legal or regulatory reasons* into a central treasury for
pooling ris!s, for policies or strategies, or for both these. In this sense, management of
the treasury function in this model is very much centralised. Although this model
readily lends itself to global organisations, it could also be used by local businesses
that need to access global mar!ets.
8ull Service +ocal
In this model, each treasury is a self-contained local unit dictated purely by the needs
of the local business. Thus, the treasury management function is, by and large,
decentralised. /hile this sort of treasury is usually the norm for a business with a
local or regional spread, it may be adopted for a global organisation that operates as a
collection of highly independent business units. Again, the range of services offered is
the full gamut, as described in the full service global model above.
+imited Service Global
This model is different from the full service global model in that the range of services
offered is limited. This could largely be due to the fact that certain activities are !ept
outside the purview of treasury and are handled directly by business units because the
scale of these activities is not large enough to warrant the attention of the central
treasury. >#amples are treasuries with limited or no foreign e#change trading
activities, with the e#posure being either managed directly by the concerned e#port or
import department or not managed at all. 8or those activities that are included in the
treasury in such a model, pooling is at a central level.
+imited Service +ocal
This model is a!in to having virtually little or no treasury activities, beyond local cash
and li"uidity management. These are very small decentralised treasuries where the
concerned managers may also have other responsibilities in the finance
23
RO#E AND RESPONSI$I#ITIES OF TREASURY MANAGER
The treasury manager has a larger role of coordinating the apparently routine, yet
significant activities of the firm. The activities are apparently routine because a sense
of repetition is involved in these activities. =evertheless, the activities are significant
because smooth functioning of these activities paves the way for eventual solvency
and profitability of the firm. The role and responsibilities of the treasury manager may
be described as follows1
$ole of a treasury manager
A treasury manager has a significant part to play in the overall functioning of the firm.
At any point of time he is engaged in a number of roles played. /hile the production
manager or the mar!eting manager may be involved in limited roles pertaining to their
own fields, the roles of treasury manager intermingle with and overlap other role sets.
In any business entity which is engaged in mar!eting, a treasury manager could be
performing a variety of roles. The e#pected roles to be carried out by him would be
slightly less in number in case the firm is engaged in service activity but that does not
deride the importance of treasury manager for a services organization. The treasury
manager has the following roles1
)a* 0riginating roles
The treasury manager inducts and originates system of accounting for the firm.
$outine accounting of the firm is then carried out along these established systems.
These systems are the pivot around which the functioning of the unit revolves. 8or
operations of these systems, the treasury manager compiles e#haustive operations
manual for the guidance of the users. It is e#pected that all the users shall comply with
all important disclosure re"uirements for endorsing the integrity and validity of the
systems.
)b* Supportive $oles
2.
The second role e#pected from a treasury manager is a supportive role. In this role, the
treasury manager supports the activities of other departments li!e manufacturing,
mar!eting and &$'. The support is evidenced through a meaningful and constructive
coordination with the other departments. /hile doing this, the treasury manager is
acting as an e#tended arm of the finance manager. Allocation for e#penses for every
department is made by the finance manager in the annual budget. It is the duty of
treasury manager to ensure that each department is able to spend the earmar!ed
amount sub,ect to completion of disclosure and documentation formalities.
)c* +eadership $oles
The treasury manager also has a leadership role to play. This role comes into play
during times of e#igency. An e#igency could occur during times of systems brea!-
down. 'uring such periods, the treasury manager has to ma!e alternative
arrangements for transaction processing. /hile doing this, he has to act li!e a leader
and carry the team along with him. Another e#ample of e#igency could be a situation
when the firm is face to face with a sudden and une#pected li"uidity crunch. 'uring
such an eventuality, the treasury manager has to use his ingenuity and leadership s!ills
for tiding over the crunch. These s!ills could ta!e the shape of postponing and
prioritizing payments and e#pediting recoveries.
)d* /atchdog $oles
The treasury department is the eyes and ears of the management. >very financial
transaction passes through his accounting system. As a processor of all the financial
transactions, he !eeps a watch on suspected bunglings and frauds in the firm. &e sets
an e#ample for other departments of the firm by adhering to sound accounting
practices and transparent dealings.
)e* +earning $oles
The accounting practices all over the world are in a state of constant flu# due to
evolution of new accounting concepts and technological changes. The treasury
manager accepts these changes with an open mind and adopts the changes best suited
to the organization. Simultaneously, he educates the other departments of the firm also
about the changes.
)f* Informative $oles
The treasury manager is the source of information for the top management regarding
performance of the firm vis-I-vis the budgets. 8or conveying this information, he
develops a management information system suited for the organization. This system
provides concise and timely information on all the relevant parameters which enable
the top management to ta!e decisions.
25
Apart from the above roles, the treasury manager has the under-mentioned
responsibilities which he is e#pected to shoulder along with his roles1
B. %ompliance with statutory guidelines
/hile establishing operational systems for the firm, the treasury manager has a duty to
ensure that the systems comply with all statutory and regulatory guidelines.
.articularly, he has to ta!e care of provision regarding ta#ation and other government
dues. &e must ensure that the system should be simple and not cumbersome. The
system should be transparent and it should protect the integrity of the transactions.
(oreover, it should be impersonal and capable of being operated on the basis of pre-
established guidelines. It should be fle#ible also to incorporate any subse"uent
changes in accounting and ta#ation norms.
2. >"ual treatment to all departments
/hile playing the supportive role, the treasury manager has a responsibility of
professionalism and impartiality. In accepting the demands for e#penditure from
various departments, the treasury manager has to ensure that the role is carried out
without any undue favour or bias. &e has to !eep the interest of the organization in
mind and not to promote intra-organisation conflicts. The support that he provides
must be detached and ob,ective.
this is my project on treasury management .
Contents
INTRODUCTION .......................................................................... 2
Objectives ................................................................................. 7
FUNCTIONS AND SCOPE OF TREASURY MANAGEMENT ............ 13
FUNCTIONS .......................................................................... 13
SCOPE .................................................................................. 15
Uit !eve! ........................................................................... 15
D"#estic !eve! .................................................................. 1$
Ite%&ti"&! !eve! ............................................................. 1'
TREASURY OPERATION( PIC)ING T*E RIG*T MODE+ ................ 2,
RO+E AND RESPONSI-I+ITIES OF TREASURY MANAGER ........... 2.
TOO+S OF TREASURY MANAGEMENT ....................................... 2'
INTERNA+ TREASURY CONTRO+ ............................................... 2/
RO+E OF INFORMATION TEC*NO+OGY IN TREASURY
MANAGEMENT ......................................................................... 31
TREASURY CONTRO+ MEC*ANISM ........................................... 35
TREASURY OPERATIONS IN -AN)ING ....................................... 37
CONC+USION ........................................................................... 3'
-ibi!i"0%&123 ........................................................................... 3/
1
INTRODUCTION
Treasury management is the science of managing treasury operations of a firm.
Treasury in its literal sense refers to treasure or valuables of the Government. The
valuables are nothing but the coins and the currency which are the medium of
financial transactions in the country. In the earlier days when the level of
governmental operations was comparatively smaller, there used to be a centralized
treasury into which the revenue receipts of the government were credited and from
which the payments of the government were withdrawn. In a federal set-up, both the
central govt. and the state govts. had their treasuries for managing the inflows and
outflows of government finances.
As the size and spread of government revenues grew, it became difficult to manage the
flows of cash into a centralized treasury. The function of collecting revenues on behalf
of the government was gradually shifted to State an! of India and other nationalised
ban!s. These ban!s also started ma!ing payments on behalf of the state governments
through cash counters and through ban! accounts of various government departments.
Simultaneously with the increase in size of government revenues, the corporate sector
in India also grew manifold in operations. There were companies with multi-locational
set-up involving receipt and disbursement of cash and cash e"uivalents at more than
one places. In all such companies, the function of treasury management developed
analogous to the transfer of government treasury functions to an!s. Along with this
growth evolved the concept of profitable treasury management. The over-riding
motive was to provide a platform for transactions and little effort was made to
2
evaluate the costs and e#penses associated with managing large amount of currency,
che"ues and other li"uid instruments. Similarly, the opportunity available for ma!ing
profits from holding large li"uid funds was not recognized. ut with the arrival of
corporate treasuries, the function of treasury management was established as a
profitable venture.
Today when we spea! of treasury management, we refer to all activities involving the
management of revenues, inflows and outflows of government, ban!s and corporates
etc. It is a general concept applicable to overall fund management.
Government as the sovereign power is the fountainhead of all treasury operations. It
creates money by printing currency and minting coins. This money flows into various
channels which ta!e money to various users of currency and coinage as a medium of
e#change. Thus at the macro level, the treasury operations revolve around $eserve
an! of India. $I as a ban!er to the govt. creates the currency on behalf of the govt.
and manages public debt. It is also a ban!er to the ban!s and in this role, it controls
the credit creation of ban!s.
At the micro level the concept of treasury and its management is mirrored in small
corporate units which manage the cash flows on a daily basis. As we move from the
macro level to the micro level, the nomenclature of treasury management becomes
diffused. The terms treasury management and fund management are used almost
synonymously. %onceptually, the latter is a general term, applicable to the business
sector, while treasury management refers to the management of cash, currency and
credit of sovereign power of the country. The term currency here includes both
national currency and the foreign currencies dealt with by the government.
&istorically, the treasury of a sovereign included gold, silver and other precious metals
which were used as a medium of e#change. As a ruler, the sovereign e#ercised un-
challanged rights over all the precious metals e#tracted from the earth. The booties
earned from wars, foreign e#ploits and domestic plundering !ept on adding to the
treasure chest of the sovereign. These metals were circulated in the form of coins
which became a medium of all commercial transactions in due course, replacing the
earlier system of barter. The practice continued till the nineteenth century when paper
currency began to be issued.
$eserve an! of India manages the macro treasury management of the country. This
is done through
? Issue of %urrency notes
? 'istribution of small coins, one, two and five rupee coins and rupee notes on
behalf of the government
3
? (aintenance of currency chests.
The currency is issued by the $eserve an! of India in terms of the Indian %urrency
Act whereas the small coins and rupee coins are issued under the provisions of the
Indian %oinage Act. The provision of ade"uate supply of currency and coins is the
responsibility of the government which was at first discharged by providing currency
chests at the branches of Issue 'epartment of $I and at branches of Imperial an! of
India )which later became State an! of India*. SI carried out the business of
Government treasury and maintained the currency chests at all district head"uarters.
+ater on all the nationalized ban!s were also entrusted with the tas! of maintenance of
currency chests.
The basic ob,ective of !eeping the currency chests at various places in India is to
facilitate "uic! disbursement of currency and coins to far flung places and also to
facilitate remittance to ban!s. This way, the ban!s can remit surplus cash to the
currency chests located in their region and avoid transportation of cash over long
distances. Also, the ban!s can draw from the currency chests during time of need.
%urrency chests are the agents of the $eserve an! of India for !eeping custody of
currency and coins. Any deposit of currency and coins into these chests implies that
the money circulation has been curtailed to that e#tent. Similarly, any disbursal from
these chests would e#pand their supply. Thus e#pansion and contraction of currency
ta!es place on continual basis due to operation of the currency chest.
Government as a sovereign power has control on cash and currency circulated in the
country. The issue of currency and coins is based on the treasures of the government
in the form of gold and silver stoc!s which are supposed to bac! such issue. (ore
recently, government securities and their promissory notes became the basis of such
issue. In fact, the coins of gold and silver were first replaced by the paper currency on
the one hand and coins of base metals li!e copper, nic!el, bronze, zinc etc., on the
other. To supplement the available currency and to facilitate trade and business, credit
instruments came into vogue in the form of promissory notes to pay at a future date by
the trade and industry. Thus on the one hand, the government promissory notes
became the basis for coins and currency rather than precious metals li!e gold and
silver- and on the other hand, the promissory notes of trade and industry became the
source of credit instruments. These credit instruments, particularly the safest among
them such as government securities, in fact became the medium of par!ing of li"uid
funds over a period of time. Thus apart from handling cash and currency and ban!
funds, the li"uid investment in government securities and mutual funds became
another function of treasury management.
.
Treasury function is a part of the total managerial functions. (anagerial function set-
up can be classified into three broad units, viz. production function, mar!eting
function and finance function.
.roduction function pertains to the building up of capacities and generation of output.
(ar!eting function is concerned with the mar!eting of the output through
establishment of the sales and mar!eting networ!. In the finance function, the
manager is concerned with financing of inputs and outputs and management of funds
during the entire production cycle.
Availability of cash, currency and credit by the government, business and foreign
sectors is a must for macro operations of the economy. In broader terms, all financial
resources including fore# are to be made available to the micro-economic units, i.e.
the companies. Similarly, the operations at the national level involve return flow of
funds, repayment of loans, ta#es, fees etc. to the government, business and foreign
sector.
The finance function comes into play when the company is incorporated. /ith capital
restructuring, efforts are made for arriving at least cost combinations of capital for
financing of a pro,ect and forecasting for wor!ing capital. In this function, one has to
coordinate with the production and operations manager, sales or mar!eting manager
and they together constitute the mar!eting team. Apart from arranging the re"uisite
funds for commencing an activity, the finance function is also concerned with
managing the day-to-day finances of the company. /hereas arranging pro,ect funds
and wor!ing capital finance is a one-time assignment, management of funds on daily
basis is a much more astute activity re"uiring forecasting s!ills and prioritization
ability of a high order.
The inflows and outflows of funds, their coordination and synchronization and ma!ing
arrangements for meeting any gap between them is only one end of the spectrum of
finance function. The other end of the spectrum is the management of the surpluses
and ma#imization of returns from short term funds. These two ends of the spectrum
form the core of activities of the finance function. ut the handling of each of the
activities re"uires further specialization. Arranging of long-term funds is the domain
of the proper finance function but the management of funds re"uired in and arising
from the day-to-day activities of the firm is the domain of the treasury function. These
two have to be viewed together and analysed for overall assessment of financial
efficiency. So a finance manager need not have a treasury function or a treasury
manager need not be bothered with long term arrangement of funds. The finance
manager can be termed as an arranger of funds whereas the treasury manager can be
viewed as a manager of funds.
5
Treasury management has both macro and micro aspects. At the macro level, the
inflows and outflows of cash, credit and other financial instruments are the functions
of the government and the business sectors. These inflows are arranged by them as
borrowing from the public. In these sectors, the ratio of savings to investments is less
than one, i.e. the savings are inade"uate to fund the investments. &ence the need for
borrowing. They accordingly issue securities or promissory notes which are part of the
financial system. These borrowings for financial needs are met by surplus savings and
funds of the household and the foreign sector, where the ratio of savings to
investments is positive. The micro units utilize these inflows and build up their
capacities for production of output. This leads to establishment of a production system
which logically leads us to the natural conse"uence, i.e. the establishment of
distribution and consumption systems. 0nce the production, distribution and
consumption systems are in place at the micro level, the generation of surpluses at the
units begins. These surpluses are channeled bac! into the macro system as outflows
from the micro system. The inflows are the ta#es paid to the government and
repayment of loans made to the ban!s and financial institutions. These inflows into the
macro level have to be managed by the treasury managers at the macro level.
/hile arranging funds for the micro unit, the finance manger aims at optimizing the
value of his assets or wealth and minimizing the burden of his liabilities. &e may see!
to ma#imise his operational profits and see! to ma#imise the wealth of sta!eholders of
the micro unit. The basic ob,ectives are economy, efficiency and productivity of
assets. These ob,ectives can not be achieved at the one end of the finance spectrum
unless the management of funds at the other end of the spectrum, i.e. the treasury
segment is e"ually triggered by the dictums of economy, efficiency and productivity.
$
Objectives
The main function of a treasury manager is the management of funds. /hile
managing these funds, the treasury manager see!s to fulfill the under-noted ob,ectives1
Availability in right quantity
The finance manager arranges funds for the unit. It is the duty of the treasury manager
to ensure that after the funds have been arranged, these should be available in re"uired
"uantity. The term "uantity refers to the amount of funds re"uired for day to day
functioning of the unit. This "uantity is available to the firm either as e#ternal loans or
as internal generation. The loans "uantity is arranged in the form of wor!ing capital
finance.
/or!ing capital finance can be available as finance against any of the current assets,
viz. inventory or receivables. In order to ensure that the wor!ing capital finance is
available in ade"uate "uantity, the treasury manager has to maintain the desired level
of security of current assets against which the finance has been provided by the
lenders. (aintenance of the security is not a direct function of the treasury manager
because the security partly becomes available from the functioning of the production
department and partly from the mar!eting department. The production department is
responsible for manufacturing the products and !eeping trac! of the raw material,
wor!-in-process and finished goods. These items form the inventory against which the
wor!ing capital facility is provided. Similarly the mar!eting department is responsible
for selling the goods and generating account receivables. /or!ing capital finance is
also provided by the ban!s against account receivables. Thus we can say that for
maintenance of ade"uate security, the treasury manager has to coordinate with the
production and mar!eting departments. The conse"uences of ade"uate security not
being available in "uantity can be far reaching.
+et us assume that a firm has a credit facility of $s. 233 lacs provided by the ban!
against the security of inventory. It is a condition of the sanction of the loan that a
margin of 245 shall be maintained by the firm against the security at all the times. It
7
means that the firm can avail a credit facility of $s. 233 lacs only if it has a security of
around $s. 264 lacs. The security value is indicated by means of the inventory
statement or the list of debtors depending upon whether the finance has been obtained
against stoc!s or against boo! debts. This statement is provided to the ban! on
monthly basis usually. In case the statement is not given, the ban! determines
availability of credit on the basis of previous month7s statement. Thus if the statement
of inventory and boo! debts is not provided to the ban! well in time in case the value
of security is higher than the previous period, then the firm stands to lose out on the
availability of the differential amount of credit which it otherwise would have
obtained.
8rom the above illustration we can well imagine the importance of availability of
ade"uate funds for day-to-day functioning of a firm. This function is one of the
ob,ectives of treasury management. Alongside, the treasury manager has also to
ensure that the funds are ,ust ade"uate for the re"uirements, neither more nor less. In
case funds are !ept in e#cess of the re"uirement, the e#cess portion imposes an
opportunity cost over the system, i.e. the cost represented by the earnings which these
funds would have obtained instead of being left idle. Again, the ade"uacy of funds has
to be determined carefully. 8or this purpose, the cash flows for the relevant period
have to be accurately charted out. %ash flows are the actual cash flows in this case and
not the pro,ected cash flows. etween the pro,ected cash flows and the actual cash
flows, there can be a lag in terms of less realization of the pro,ected flows. Thus actual
cash flows only have to be considered while determining ade"uacy. 8urther, while
actual inflows should be ascertained, as regards outflows a margin of contingency
should be maintained to ta!e care of the uncertainties. %ash is understood here to
include both cash and ban! balances plus that portion of highly li"uid securities that
can be converted into cash within a stipulated time period.
Availability in right time
The re"uisite funds for day-to-day wor!ing of the firm should be available in time in
addition to being available in "uantity. y the term 9availability in time we mean ?
that the funds should be available at the right moment, ,ust in time so to say. The right
time is the reasonable time ta!en to procure the funds. .rocurement of funds is done
by the firm in a number of ways and this activity is a!in to the cash inflows. %ash
inflows ta!e place on account of )i* %apital receipts li!e proceeds of loans or sale of
assets )ii* $evenue receipts li!e sale proceeds of finished goods. %apital receipts are
not a daily occurrence for the firm and their realization can be anticipated well in
advance. The revenue receipts can flow in at a more random pace but with some
amount of rigorous cash flow planning, even the trend of revenue inflows can be well
anticipated. 0nce the cash flow both on the capital and revenue account has been
planned, the priority of treasury manager remains to ensure that the schedule of
'
conversion of realizations into funds ta!es place as planned. $ealisation of the capital
receipts is more related to the domain of the finance manager whereas realization of
revenue proceeds falls within the domain of the mar!eting staff. The treasury manager
has thus to coordinate the matter with both the finance manager and the mar!eting
manager in order to ensure that the realizations and receipts are converted into funds.
Timely availability of funds smoothens the operations of the firm and brings about
certainty to the "uantum of inflows that would be available at a particular point in
time. /hat is timely is a relative matter dependent upon the situation of each case.
Again the inflows have to be actual inflows at the determined time and not pro,ected
or anticipated flows. This is because the element of uncertainty has to be accorded due
consideration. In case of a firm having a large number of transactions, timely
availability of funds is e#tremely important because the e#ecution of many
transactions would be dependent upon funds position. This is relevant also for
transactions involving foreign e#change. 8or the purpose of treasury operations, we
consider foreign currencies at par with the domestic currency. It is assumed that the
regulatory mechanism for holding foreign currency and domestic currency is the same
and there is no constraint on holding or converting currencies. 8or foreign e#change
transactions, funds have to be made available for meeting many critical situations. The
treasury manager ensures that all the receipts of funds are credited to the account of
the firm well in time. Another way of ensuring timely availability of funds is to par!
short-time surplus funds in li"uid securities which can be sold conveniently and
"uic!ly to realize cash. In this way, availability can be ensured without straining other
resources.
Deployment in right quantity
:ust as procurement of funds in right "uantity is important for a treasury manager,
e"ually important is to ensure that the right "uantity of funds is deployment. y
deployment of funds, we mean earmar!ing of funds for various e#pense heads,
par!ing of short-term funds and investing surplus funds.
The e#pense heads can be capital e#penditure and revenue e#penditure. %apital
e#penditure involves allocation of funds for ac"uisition of fi#ed assets. Such
e#penditure is not a routine occurrence. The amount involved per transaction in capital
e#penditure is large and such e#penditure is usually !nown well in advance. $evenue
e#penditure on the other hand is routine e#penditure for purchase of raw materials and
ma!ing payment for utilities, wages and other miscellaneous items. The number of
transactions for revenue e#penditure is large and the amount involved per transaction
is smaller as compared to the capital e#penditure. Some items of revenue e#penditure
are in the form of cash payment but the capital e#penditure is mainly through ban!
account.
/
8or deploying the right amount of funds, the treasury manager has to !eep trac! of all
receipts of funds. Simultaneously, the time table of deployment of funds is to be
drawn up. In this time table, the payees are prioritized according to the urgency of
their payments. There are certain e#penses li!e important raw material payments,
utility payments etc. which have to be accorded top priority over others. 0ther
payments li!e payment to capital goods suppliers and financiers have also to be
arranged in the right "uantity. Apart from these payments, some e#tra funds have to be
!ept available for meeting contingencies. The sum of all these deployments ma!es the
right "uantum of funds to be deployed. %o-ordination with the purchase department is
re"uired for raw material purchases. 8or fi#ed assets ac"uisition and loan repayments,
coordination with the finance manager is needed. +iaison with administrative and
&$' staff is re"uired for deploying funds for utility and wages payments. /ithout
this type of tie-up, right "uantity of funds can not be deployed. If the deployment is
not in right "uantity, the result can either be under deployment resulting in higher cost
of funds or over deployment resulting in funds remaining idle. In case all the
re"uirements of deployment of funds have been met and procurement of funds has
been done in the right "uantity, there is a possibility that some amount of funds would
remain in surplus with the treasury department. This surplus would be in e#cess of the
contingency re"uirements and as such can be deployed further on short term or long
term basis depending upon the "uantum of funds. If the "uantum of surplus is large
enough, some amount from this can be earmar!ed for long term deployment in
investments etc. otherwise the entire surplus can be par!ed in short term securities.
Short-term li"uid securities are the Government securities and the schemes of mutual
funds. 8unds from these investments can be withdrawn at short notice period of 2;<
days as such these are a!in to cash holding or ban! balance holding.
'eployment of the right "uantity of funds can not be achieved in case the procurement
of funds has not been done in right "uantity in the first place. This is because
ultimately the inflows of funds shall be utilized for feeding the outflows on
whatsoever account. If the deployment has been done rightly, there shall be no
bottlenec!s in the funds flow of the firm. The allocation and use of funds follow each
other in a cyclical manner and both have to be done in the right "uantity for optimal
use of the funds.
Deployment at right time
A logical corollary of sourcing funds at the right time is that the funds should be
deployed at the right time. The description of the right time is a relative term and what
amount of time is appropriate varies from firm to firm. The span of time varies from a
wee! to a month in case of purchase of fi#ed assets. &owever, in wor!ing capital
1,
deployment, the range of time allowed may be "uite narrow ; say 2;< days only. The
treasury manager has to honour the outstanding commitments on wor!ing capital
account within this short span of time. .ayment for wages and utilities etc. has to be
made in time to avoid any defaults. Similarly, payment to trade creditors, domestic
and overseas, has to be made within a stipulated short period of time for avoiding
interest payments etc. /ith the advancement in accounting systems aided by
technological progress, it is now possible to send global remittances within no time.
8unds can be procured more "uic!ly than in the past, spanning the spatial barriers.
The compulsion for online deployment is all the more pressing currently.
The treasury manager see!s to prioritise the deployments according to the ease of
payment within the time horizon selected for planning deployment. 0nline payment of
funds is ensured through offsite debits from a centralized pool ban!ing account.
/here such payments are not possible, ban! drafts or pay orders are purchased to
ensure timely payment to pressing creditors. Timely disbursement ensures that the
funds are not left idle for the shortest span of time. In case the sourcing and
deployment of funds is well organized, surplus of funds shall soon start emerging
which can be deployed in short term li"uid investments.
&owever, if the inflow and outflow of funds is not evenly matched in the time
dimension, bottlenec!s and mismatch of funds are sure to emerge. Apart from causing
administrative problems and rationing of funds, such a situation also leads to increase
in cost of funds. Thus the treasury manager see!s to avoid such situations. Timely
deployment of funds is a well planned activity re"uiring intra-organisation co-
ordination and liaison with ban!s and financial institutions apart from fore# dealers.
Profiting from availability and deployment
0ne of the prime ob,ectives of a treasury manager is to ensure timely
procurement of right amount of funds and timely deployment of right amount of
funds. This ob,ective results in administrative smoothening and paves way for easier
achievement of performance targets of the firm. (odern day treasury manager has
another ob,ective, which is to profit from such sourcing and deployment. .rofit from
this function is derived as under1
Sourcing of funds at the right time and in right "uantity is a result of realization of
debtors and financing of borrowings. $ealisation of debtors in time has a direct impact
upon profitability of the firm through decrease in cost of holding debtors. 8inancing of
borrowings is a capital structure decision but the actual availment of these borrowings
is the domain of the treasury manager. Ade"uate and timely utilization of the
borrowed funds results in the avoidance of strain on other sources of funds.
11
0nce the funds have been sourced in correct measure, the deployment adds further to
the profitability of the firm it has been done in tandem with the pace of sourcing.
%orrect deployment ensures that there is no unnecessary accumulation of funds in the
firm at any point in time. =eeds of every department are met as per schedule. This
action results in avoidance of special and e#traordinary costs, interests and the li!e.
/ith costs being in control, surplus funds emerge from the system which are deployed
profitably either as long term investments or as short-term par!ing tools. oth ways,
the net result for the firm is an addition to profits.
12
FUNCTIONS AND SCOPE OF TREASURY MANAGEMENT
FUNCTIONS
• %ash forecasting. %ompile information from around the company to create an
ongoing cash forecast. This information may come from the accounting
records, the budget, capital budget, board minutes )for dividend payments* and
even the %>0 )for e#penditures related to ac"uisitions and divestitures*.
• /or!ing capital monitoring. $eview the corporate policies related to wor!ing
capital, and model their impact on cash flows. 8or e#ample, looser credit
results in a larger investment in accounts receivable, which consumes cash.
• %ash concentration. %reate a system for funneling cash into a centralized
investment account, from which cash can be most effectively invested. This
may involve the use of notional pooling or cash sweeps.
• Investments. ?se the corporate investment policy for allocating e#cess cash to
various types of investments, depending on their rates of return and how
"uic!ly they can be converted into cash.
• Grant credit. Issue credit to customers, which involves management of the
policy under which credit terms are granted.
• 8und raising. 'etermine when additional cash is needed, and raise funds
through the ac"uisition of debt, sale of stoc!, or changes in company policies
that impact the amount of wor!ing capital re"uired to run the business.
• $is! management. ?se various hedging and netting strategies to reduce ris!
related to changes in asset values, interest rates, and foreign currency holdings.
• %redit rating agency relations. @eep any credit rating agencies informed of the
companyAs financial results and condition, if these agencies are providing
ratings on the companyAs mar!etable debt issuances.
• an! relations. @eep the companyAs ban!ers apprised of the companyAs
financial condition and pro,ections, as well as any forthcoming changes in its
need for borrowed funds. The discussion may e#tend to the various services
13
provided by the ban!s to the company, such as loc!bo#es, wire transfers, A%&
payments, and so forth.
• IT systems. The department maintains treasury wor!stations that provide it
with information about cash holdings, pro,ections, mar!et conditions, and other
information.
• $eporting. The treasurer provides the senior management team with reports
concerning mar!et conditions, funding issues, returns on investment, cash-
related ris!s, and similar topics.
• (ergers and ac"uisitions. The department may advise on the companyAs
ac"uisition activities, and may be called upon to integrate the treasury functions
of an ac"uire.
SCOPE
1.
Scope of treasury management can be broadly classified at the following levels as
under1
? ?nit level
? 'omestic level
? International level
Unit level
At the unit level, the treasury manager7s activities encompass all other management
functions. The performance of production, mar!eting and &$' functions is dependent
upon the performance of the treasury department. The lubricant for day-to-day
functioning of a unit is money or funds and these funds are arranged by the treasury
manager. The treasury is involved in all the budgeting activities of the unit, whether
these are financial budget, costing budget, the mar!eting budget or the &$' budget.
The feedbac! available from interactions with the various departments of the company
is utilized by the treasury department to fine tune the overall performance targets of
the company within the constraints of availability of currency, cash and cash
e"uivalents.
Treasury manager also monitors the cash flows of the unit on a continual basis. It is
ensured by him that ade"uate funds are made available for day-to-day wor!ing of the
unit. In case there is genuine shortfall in cash flows, the outflows are made in an order
of priority with the more urgent payments being made first. The treasury manager has
two duties of ta!ing decisions both in the areas of cash inflows and outflows. &e has
to integrate the treasury function with with the production and mar!eting functions.
The scope of the treasury management function at the unit level can be better
described in the following routine duties of the treasury manager1
B. @eeping a trac!, on monthly, fortnightly or wee!ly basis, of all cash inflows and
outflows and their variance with budget pro,ections.
2. (aintaining a record of all receivables and payables, credit instruments, credit
sales, deposits, loans and advances etc.
#change is done through dealers in
foreign e#change regulated by the central ban! of a country. an!s are usually the
dealers apart from other specialized agencies.
0ne of the important components of the international financial system is the foreign
e#change mar!et. The various trade and commercial transactions between countries
result in receipts and payments between them. These transactions are carried out in the
currencies of the concerned countries any one of them or in a mutually agreed
common currency. >ither way, the transactions involve the conversion of one currency
to the other. The foreign e#change mar!et facilitates such operations. The demand for
goods and services from one country to another is the basis for demand for currencies
in the mar!et. Thus basically, demand for and supply of foreign currencies arises from
e#porters or importers or the public having some transactions with foreign countries.
%ompanies having an import or e#port component in their business profile have to
fre"uently deal in fore# operations. 8ore# operations in a country being supervised by
the central ban!, reference to the central ban! in one form or the other is necessary to
use foreign e#change. If the country on the whole is a net e#porter of goods and
services, it would have a surplus of foreign e#change.
>very foreign e#change transaction involves a two-way conversion ; a purchase and
sale. %onversion of domestic currency into foreign currency involves purchase of the
latter and sale of the former and vice versa. These transactions are routed through the
ban!s. The transactions ta!e the shape of either outright release of foreign currency
for meeting travel and related re"uirements or payments to outside parties in the
denominated currency via the medium of correspondent ban!s. 8or effecting payment,
following instruments are generally used1
Telegraphic transfers )TT*
A TT is a transfer of money by telegram or cable or tele# or fa# from one center to
another in a foreign currency. It is a method used by ban!s with their own codes and
correspondent relations with ban!s and abroad for transmission of funds. It involves
payment of funds on the same day, it is the "uic!est means of transmission of funds.
As there is no loss of interest or capital ris! in this mode, it en,oys the best rate for the
value of receipts.
(ail Transfers )(T*
1'
It is an order to pay cash to a third party sent by mail by a ban! to its correspondent or
branch abroad. It is issued in duplicate, one to the party buying it and the other to the
correspondent ban!. The amount is paid by the correspondent ban! to the third party
mentioned therein in the transferee country by its own che"ue or by crediting the
party7s account. As the payment is made after the mail advice is received at the other
end, which will ta!e a few days, the rate charged to the purchaser is cheaper to the
e#tent of the interest gain to the seller ban!.
'rafts and che"ues
'raft is a pay order issued by a ban! on its own branch or correspondent ban! abroad.
It is payable on sight but there is always a time lapse in the transit or in post between
the payment by the purchaser of the draft to his ban! and the receipt of the money by
the seller in the foreign center. As in the case of (T, there is ris! of loss of draft in
transit or delay in release of payment to the beneficiary and loss of interest in the
intervening period.
ills of e#change
It is an unconditional order in writing addressed by one person to another, re"uiring
the person to whom the order is addressed, to pay certain sum on demand or within a
specified time period. If it is payable on demand, it is called a sight bill. If it is payable
after a gap of some time, it is called a usance bill. Such bills can be ban!ers7 bills or
trade bills. an!ers7 bills are drawn on ban!s abroad while trade bills are made
between individual parties.
1/
TREASURY OPERATION PIC!ING T"E RIG"T MODE#
0rganisations have e#tended debates on the !ind of treasury they should have. The
common themes include services that the treasury should offer, the right size or
structure, and the right spread of management control There are many dimensions to
the structure of a treasury organisation. Two !ey dimensions ; range of services and
e#tent of centralisation of management control ; define resultant organisation models.
The relationship between organisation models and factors that influence decisions on
the right model to adopt.
There are various definitions of the word treasury. In its strictest sense, it refers to one
function1 asset liability management, especially when used in the conte#t of ban!s. In
a wider sense, treasury includes a whole range of activities encompassing various
mar!ets. A few significant activities are1
2,
Asset H liability management1
Assets and liabilities management includes the control and care of the cash assets and
liabilities of the corporation and optimizing the balance sheet structure. That means
use of short4term and long4term investment vehicles. Investment vehicles can include
commercial papers, bonds, mutual funds, certificates of deposit and savings accounts.
0f course, investment bro!er selection will depend on the investment vehicles they
can provide, their bonding, technology provided to their customers and their service
abilities.
8or borrowing, the treasurer must first determine the period during which funding is
needed, and re"uired currency. Then the treasurer evaluates the available funding
methods, such as debt securities )commercial papers, bonds, medium term notes* and
ban! loans )either committed or uncommitted*. It is very important for the treasurer to
match maturity and currency of funds with the company7s assets. That means to
finance fi#ed assets with long4term funds )long4term loans or corporate bonds*, and
current assets with short4term tools )commercial papers, overdraft and revolving credit
facility, etc.*. That means, borrowing will include the selection of lenders and
borrowing vehicles that best serve the business and the lenders. :ust as credit
agreements will control the methods of borrowing, treasury must also develop an
investment policy that discusses the level of ris! ta!en through investments of e#cess
cash. Information systems provided by the ban!s, investment bro!ers and other cash
management providers must be integrated.
8or multinational companies the daily cash flows from operational side of the
company will result in daily balances in different currencies within different current
accounts and possibly time zones in different regions. The main challenge for treasury
management is to utilize all the accounts balances with the result to achieve the
highest possible return on invested li"uidity )or alternatively lowest possible funding
cost on debits*. %ombining the individual account balances results in several short or
long positions in different currencies. This can be achieved by automatic
21
concentration structures provided by ban!s, or by manual transfers,currency
conversions or physical swaps.
G (aturity mismatch-
G Interest rate and type mismatch- and
G %urrency mismatch.
Sales and trading1
G %urrency, interest rate, and credit products-
G (oney mar!et and long-tenure instruments- and
G 'erivative products.
$is! management
G ac! office processing, settlement, and accounting- and
G %ustomer and regulatory reporting.
0rganisation (odels1 'imensions
Any organisation can e#ercise its choice on the scope of the treasury functions it
underta!es. In doing this, it may be governed by a variety of considerations1
G It may choose to handle only those needs driven by utilitarian motives such as
li"uidity support or, on the other hand, it may consider treasury as a 9core?
organisational process and hence handle the full range of services.
G It may choose to outsource portions of the activities re"uired or it may choose to
foster these capabilities in-house.
Independently, an organisation can also decide on the e#tent of centralisation of
treasury management1
G It may be efficient to centralise bac! office processing, while the front office may
need to be decentralized to aid speedy local decision-ma!ing.
G It may be important to have a common ris! management strategy, while e#ecution
may be decentralised.
A study of common practices relating to the two !ey influencers ; the range of
activities supported and the degree of centralization or decentralisation ; at treasury
organisations globally suggests four models.
8ull Service Global
22
8ull service refers to a treasury that underta!es most, if not all, of the activities of
treasury management. Global treasury refers to one that either operates as the only
treasury for all mar!ets across the globe, or ultimately combines all regional or local
treasuries )that may e#ist due to legal or regulatory reasons* into a central treasury for
pooling ris!s, for policies or strategies, or for both these. In this sense, management of
the treasury function in this model is very much centralised. Although this model
readily lends itself to global organisations, it could also be used by local businesses
that need to access global mar!ets.
8ull Service +ocal
In this model, each treasury is a self-contained local unit dictated purely by the needs
of the local business. Thus, the treasury management function is, by and large,
decentralised. /hile this sort of treasury is usually the norm for a business with a
local or regional spread, it may be adopted for a global organisation that operates as a
collection of highly independent business units. Again, the range of services offered is
the full gamut, as described in the full service global model above.
+imited Service Global
This model is different from the full service global model in that the range of services
offered is limited. This could largely be due to the fact that certain activities are !ept
outside the purview of treasury and are handled directly by business units because the
scale of these activities is not large enough to warrant the attention of the central
treasury. >#amples are treasuries with limited or no foreign e#change trading
activities, with the e#posure being either managed directly by the concerned e#port or
import department or not managed at all. 8or those activities that are included in the
treasury in such a model, pooling is at a central level.
+imited Service +ocal
This model is a!in to having virtually little or no treasury activities, beyond local cash
and li"uidity management. These are very small decentralised treasuries where the
concerned managers may also have other responsibilities in the finance
23
RO#E AND RESPONSI$I#ITIES OF TREASURY MANAGER
The treasury manager has a larger role of coordinating the apparently routine, yet
significant activities of the firm. The activities are apparently routine because a sense
of repetition is involved in these activities. =evertheless, the activities are significant
because smooth functioning of these activities paves the way for eventual solvency
and profitability of the firm. The role and responsibilities of the treasury manager may
be described as follows1
$ole of a treasury manager
A treasury manager has a significant part to play in the overall functioning of the firm.
At any point of time he is engaged in a number of roles played. /hile the production
manager or the mar!eting manager may be involved in limited roles pertaining to their
own fields, the roles of treasury manager intermingle with and overlap other role sets.
In any business entity which is engaged in mar!eting, a treasury manager could be
performing a variety of roles. The e#pected roles to be carried out by him would be
slightly less in number in case the firm is engaged in service activity but that does not
deride the importance of treasury manager for a services organization. The treasury
manager has the following roles1
)a* 0riginating roles
The treasury manager inducts and originates system of accounting for the firm.
$outine accounting of the firm is then carried out along these established systems.
These systems are the pivot around which the functioning of the unit revolves. 8or
operations of these systems, the treasury manager compiles e#haustive operations
manual for the guidance of the users. It is e#pected that all the users shall comply with
all important disclosure re"uirements for endorsing the integrity and validity of the
systems.
)b* Supportive $oles
2.
The second role e#pected from a treasury manager is a supportive role. In this role, the
treasury manager supports the activities of other departments li!e manufacturing,
mar!eting and &$'. The support is evidenced through a meaningful and constructive
coordination with the other departments. /hile doing this, the treasury manager is
acting as an e#tended arm of the finance manager. Allocation for e#penses for every
department is made by the finance manager in the annual budget. It is the duty of
treasury manager to ensure that each department is able to spend the earmar!ed
amount sub,ect to completion of disclosure and documentation formalities.
)c* +eadership $oles
The treasury manager also has a leadership role to play. This role comes into play
during times of e#igency. An e#igency could occur during times of systems brea!-
down. 'uring such periods, the treasury manager has to ma!e alternative
arrangements for transaction processing. /hile doing this, he has to act li!e a leader
and carry the team along with him. Another e#ample of e#igency could be a situation
when the firm is face to face with a sudden and une#pected li"uidity crunch. 'uring
such an eventuality, the treasury manager has to use his ingenuity and leadership s!ills
for tiding over the crunch. These s!ills could ta!e the shape of postponing and
prioritizing payments and e#pediting recoveries.
)d* /atchdog $oles
The treasury department is the eyes and ears of the management. >very financial
transaction passes through his accounting system. As a processor of all the financial
transactions, he !eeps a watch on suspected bunglings and frauds in the firm. &e sets
an e#ample for other departments of the firm by adhering to sound accounting
practices and transparent dealings.
)e* +earning $oles
The accounting practices all over the world are in a state of constant flu# due to
evolution of new accounting concepts and technological changes. The treasury
manager accepts these changes with an open mind and adopts the changes best suited
to the organization. Simultaneously, he educates the other departments of the firm also
about the changes.
)f* Informative $oles
The treasury manager is the source of information for the top management regarding
performance of the firm vis-I-vis the budgets. 8or conveying this information, he
develops a management information system suited for the organization. This system
provides concise and timely information on all the relevant parameters which enable
the top management to ta!e decisions.
25
Apart from the above roles, the treasury manager has the under-mentioned
responsibilities which he is e#pected to shoulder along with his roles1
B. %ompliance with statutory guidelines
/hile establishing operational systems for the firm, the treasury manager has a duty to
ensure that the systems comply with all statutory and regulatory guidelines.
.articularly, he has to ta!e care of provision regarding ta#ation and other government
dues. &e must ensure that the system should be simple and not cumbersome. The
system should be transparent and it should protect the integrity of the transactions.
(oreover, it should be impersonal and capable of being operated on the basis of pre-
established guidelines. It should be fle#ible also to incorporate any subse"uent
changes in accounting and ta#ation norms.
2. >"ual treatment to all departments
/hile playing the supportive role, the treasury manager has a responsibility of
professionalism and impartiality. In accepting the demands for e#penditure from
various departments, the treasury manager has to ensure that the role is carried out
without any undue favour or bias. &e has to !eep the interest of the organization in
mind and not to promote intra-organisation conflicts. The support that he provides
must be detached and ob,ective.