Certtf Study Session 4 Exercises

Front 1

Describe the primary objectives of treasury

Back 1

Primary aim is a support role for the underlying business, protecting financial health of the business by:

1) ensuring sufficient cash is available to meet current & future liabilities

2) ensuring that business activities are funded in the most appropriate and cost-effective manner

3) identifying, analysing and mitigating financial risks which could erode financial strength

4) encouraging a culture of sound financial practice

Front 2

Liquidity management is fundamentally important for treasurers.

Identify two liquidity management activities that an organisation's treasury department would commonly be expected to manage

Back 2

Liquidity management activities commonly include:

1) assessing business liquidity requirements, including the production of cash forecasts with input from business units

2) ensuring there are sufficient borrowing facilities in place or cash and liquid resources to meet all future cash requirements, incl. a reasonable estimate of unforseen future requirements

Front 3

a) give an example of when treasury could make an important contribution to a business decision on whether or not to begin marketing the company's products in a new market

b) describe three other areas where treasury can potentially help improve business performance

Back 3

a) by evaluating the financial risks involved. E.g. cash flow forecast may look healthy but treasury can test how it would be impacted if say the value of the currency in the export country were to fall by 10%

b) other areas:

1) pricing decisions (esp. foreign currency)

2) financial risk management ('whole picture' across all business units)

3) bank relationships (reduce bank charges, improve service)

Front 4

Describe the key aspects of the business that it is advisable for the treasurer to understand

Back 4

1) how the business works in order to produce its goods and services

2) supplier and customer profiles

3) major markets and competitors within those markets

4) sensitivity of purchase and sales prices, and the number of units sold, to changes in market prices (e.g. exchange rates, interest rates, commodity prices)

5) other risks and uncertainties affecting business performance

6) local banking arrangements

7) local sources of borrowings

8) planned future developments (e.g. new markets, new products)

9) country profiles for business units located in a foreign country

Front 5

Describe the information that the treasurer should understand about the operation of a business unit when assessing how much short-term funding it is likely to require in the next 12 months.

Back 5

Treasury should understand how money is generated and spent by the operating unit and the factors that influence the extent and timing of these cash flows. Treasury needs to collect data from operating units on forecast future cash flows on a regular basis. It also needs to understand the likely reliability of that data. Treasury should liaise closely with operating units so that it is aware of delays and other changes to forecast future chash flows. Treasury can then arrange sufficient funding for the business to meet its changing requirements.

Front 6

Explain the key differences in the pricing of a transaction undertaken by a company with a strong relationship with a bank, and one conducted with a bank under a transactional approach.

Back 6

Under a relationship approach, the bank will make sure that, overall, the business obtained from a customer is profitable. It is the overall returns that are important to the bank and therefore it is not necessary for every single transaction to be profitable. Under a transactional approach, each transaction is priced independently and there is no strong concept of loyalty to a given bank. Each transaction must therefore be profitable to the bank in order for the bank to agree to proceed with the transaction.

Front 7

Explain what is meant by a 'trigger event' and why this is important to the treasurer.

Back 7

A 'trigger event' is where a change in borrower's credit rating results in a breach of a debt covenant, or negatively impacts another provision within debt documentation. This is important for the treasurer as the lender could become entitled to demand immediate repayment of the loan. In some circumstances this could result in the borrower becoming insolvent.