Treasury department is entrusted with managing financial assets to maximise the returns on them. Over a period, organisations are realising that its less liquid / illiquid assets can also give returns / income besides earning income from core activities.

Forms of financial assets / advantages

    • Surplus cash / bank balances;
    • Fixed assets where funds are blocked for long-term;
    • Receivables;
        • of reputed customers;
        • covered by Letter of credit;
        • exports without Letter of credit;
        • others
    • Investment in equity shares, mutual fund units, etc. listed on stock exchanges or else;
    • Short or Long term Debt liabilities denominated in foreign currency → protecting against currency fluctuation losses;
    • Other assets and liabilities where organisation can create financial advantage or arbitrage for better returns / income in long run.

The Treasury department utilise all the above assets which are lying idle temporarily or for long duration for generating income.

Similarly, long term debts denominated in one foreign currency can be swapped into less fluctuating foreign currency OR liabilities getting protected by taking forward cover, e.g., in the year 2013, with dollor fluctuating to INR 68/-, short-term / long-term liabilities of many companies rose sharply which had not covered themselves by taking exchange cover. These companies incurred huge exchange fluctuation losses.

We are not going to discuss renting / sharing of production facilities or renting of immovable properties under the Treasury function.

Similarly, we have discussed investment of funds for long-term under “Investment” article.

Options available for conversion of less liquid / illiquid assets (examples)

    • Receivables
        • Receivables taken over by Factoring agencies with or without recourse to organisation (i.e. whether agency can recover bad debts from organisation or not);
        • Bill discounting facilities with banks;
        • Taking forward purchase contract in currency against export receivables → forward contract getting settled against export collection and organisation earning gains from currency fluctuation;
    • Evaluating interest rate of income earning vis-à-vis interest payment on liabilities → arbitraging (i.e. substituting one position with another position and still earning after a given period), e.g. realising funds @ 10% cost and paying the liabilities with interest cost @ 18% , thereby saving 8% cost on liabilities;
    • Cash / bank
        • Investment for short to medium term into :
            • Securities market (equity / debts / mutual funds / futures & options / commodities / currency, etc.)
            • fixed deposits;
        • Interest-bearing Loans & advances to other organisations;
        • Bank accounts linked with fixed deposits (FlexiDeposit bank accounts) → surplus funds in bank account automatically getting converted into fixed deposits and same liquidating automatically when shortfall in bank account.
    • Fixed Assets
        • Converting fixed assets in securities and selling securities to investors and giving the returns to them;
        • Evaluating “cash vs. lease”, “sale and lease back” options.
    • Inventory
        • Inventory on loan to other organisations;
        • Taking positions in commodities market and earning through price fluctuations.
    • Long term debts in foreign currency
        • Currency swapping (Purchasing a long-term forward contract in another stable currency → guarding against currency fluctuation of base currency in which debt is to be repaid).
    • Short-term Import liabilities
        • Purchasing forward cover in currency cover to guard against currency fluctuation.


Leverage uses the advantage of paying the margin money / instalments for purchasing the asset. All the assets are not required to be purchased at cash down or making upfront 100% payment. Options are available to buy by giving margin money or paying regular instalments. This results in the condition of leveraging.

The same principle is used in Future contracts at stock exchanges.

Let’s understand the above through an example:

Assume that we have bank balance of INR 1000 and Share of a company XYZ is available in Cash market for 100 shares @ INR 10 each & in Futures market by paying 20% margin. Therefore, either we can purchase 100 shares in Cash market OR future contract of 500 shares in Futures market by depositing INR 1000 as a margin.

But, latter position creates leverage where profit / loss would come 5 times, i.e. drop in price by INR 5 would result in loss of INR 2500 in Futures market as against INR 500 in Cash market. While we need not pay for losses in Cash market since only asset value has come down; we need to pay in Futures market irrespective of availability of funds.

Organisations use this principle in acquiring immovable assets like land, buildings, etc. and even purchase of business.

Leveraging must be backed up with assets in hand instead of borrowed money since lower adjustment in price of leveraged assets results in defaults on borrowed money and reputational / credibility risks later on.

Sub-prime crisis in US and Europe was result of over leveraging where many large bankers went bankrupt.

Functions of the Department

    • Identifying idle assets of organisation which are not giving any income or giving less income (cash / bank, receivables, inventory, fixed assets, etc.);
    • Identifying and evaluating the options available for investment (short to long term) alongwith income, risk profile, etc. OR for converting illiquid assets into liquid assets;
    • What-if risk analysis for short-term investments not getting realised into liquid funds when required;
    • Choosing the best option suiting organisation’s needs;
    • Ensuring proper documentation for securing the investments to guard against disputes;
    • Engaging professionals for financial product analysis;
    • Conducting due diligence exercise wherever required;
    • Regular tracking the investment portfolio and maximising the returns by switching to other investments when required;

Deliverables (i.e. expectations from the Department)

    • Better returns on financial assets;
    • Security of regular income and principal receiving back after redemption;
    • Strong documentation for managing disputes;
    • Transparency in transactions;
    • Close monitoring of investment positions.

Important developments in the Treasury function

    • World getting flat. More options are available in the country with foreign institutions coming in. Similarly, organisations can access overseas markets;
    • Internet trading in most of the stock exchanges available;
    • Competitive brokerage or nil brokerage for transactions;
    • Availability of professionals with global treasury experience.

Some of the Process Implementation for better Treasury function

    • Reinforcement of department’s deliverables alongwith taking manageable over-leveraging and no over-exposing the organisation’s resources;
    • Status of open positions, i.e. due dates of receipt of income & principal repayment; securities held by the organisation;
    • Income earned on investment (Investment Income / Gross investment);
    • Status of disputes.

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