Treasury in finance is the area of a large company (e.g. General Electric) that operates its borrowing and lending operations, usually in compliance with government regulations. Its activities may include:
- investing corporate funds to achieve desired levels of interest, market risk and return;
- selling certain types of government securities such as US Treasury bonds;
- borrowing funds to meet temporary needs for cash or to take advantage of unusual opportunities; and
- arranging for transactions between different countries’ central banks or treasuries so that payments can be made without the need for currency exchange.
Why are Treasuries Separated?
Recent changes to Treasury regulations have increased the need for treasury operations to be placed in a separate, independent subsidiary. The purpose of separating treasury operations from other corporate operations is to minimize the conflicts of interest between funding decisions and investment decisions. For example, many companies borrow short-term funds to cover their day-to-day expenses while they borrow long-term money to invest in projects that are expected to generate corporate profits years into the future. If these borrowing activities are handled by the same corporate officers who decide which projects should receive corporate funding, there is a strong possibility that funds will be diverted from long-term investments in order to make needed short-term payments. The separation of treasury operations from other corporate operations can be accomplished by locating treasury in a subsidiary called the treasury department, the Finance Corporation, or some similar name. The subsidiary may be legally separate from the parent company or it may report to the chief financial officer of the larger corporation.
Other Roles of the Treasury
Treasury activities are also involved with bond issuance. A typical example is an industrial company that has decided to undertake a bond issuance to raise funds for expansion through investment in new equipment. The decision about issuing bonds is separate from deciding on how to spend the funds once they are raised.
The debt department of a large company is most often responsible for issuing bonds and arranging for their sale to investors through one or more broker dealers (Wall Street banks). The company may also finance its own debt needs by converting borrowed funds to stock, or issuing common stock.
A Treasury Department of a corporation’s global subsidiary may be responsible for arranging payments to its parent company for goods or services provided to third parties. Such transactions are widely known as “cross-border payments” and are sometimes regarded as a form of “trade financing”. For example, General Motors receives payments from its subsidiary in Argentina for the provision of auto parts to the subsidiary’s customers.
Situating Treasuries
Treasury departments of most large organizations are often located in countries other than the country that has issued the fund raising instruments that they are responsible for servicing. This is because it is sometimes more convenient for international transactions, e.g., where the U.S. company has a subsidiary in Canada and the company wishes to have a Canadian bank handle its international transactions. Treasury departments use technology such as SWIFT and Fedwire in order to manage their networks for cross-border payments, foreign exchanges, and the issuing of bonds.
Regardless of the size of your business, Fintalent’s Corporate Finance experts can help you carry out a proper assessment of your business and determine the way to set up your treasury department. While separation of the roles by citing the treasury in different locations may be possible for large corporations, it may not be practicable for smaller businesses and would therfore require the ingenuity of experts to set up the treasury with adequate safeguards to ensure funds are prudently managed and only for the purpose they were acquired.
