Treasury Basics

Question 1

Corporate Treasury

Answer 1

The department responsible for managing a company’s liquidity, funding, and financial risk.

“In our corporate treasury, we manage the company’s financial operations, including cash management, risk management, and corporate finance.”

Question 2

Cash management

Answer 2

The process of monitoring, forecasting, collecting, disbursing and investing cash in order to maintain adequate cash flow for day-to-day operations

“Effective cash management is crucial for a company because it can help maintain liquidity, reduce costs, and increase profitability.”

Question 3

Liquidity management

Answer 3

The practice of ensuring a company has sufficient access to cash in order to cover its financial obligations and operate efficiently

“Our liquidity management strategy ensures that we always have sufficient cash on hand to meet our financial obligations.”

Question 4

Cash Position

Answer 4

The amount of cash and cash equivalents held by a company at any given point in time.

“The company’s strong cash position allows it to invest in new technologies and business opportunities without relying on external financing.”

Question 5

Cash Forecasting

Answer 5

Estimating future cash inflows and outflows over a period to predict cash positions and requirements. Used to ensure adequate liquidity.

“Can you discuss the importance of cash forecasting in your company’s cash management strategy?”

Question 6

Short-term

Answer 6

Any length of time less than a year. Example: short-term liabilities.

“Our short-term financial planning focuses on managing our working capital and maintaining sufficient liquidity for our day-to-day operations.”

Question 7

Prior Day

Answer 7

The previous business day’s cash positions. Treasurers look into their cash positions on the prior day to manage liquidity and ensure there is adequate cash for business operations.

“We review the prior day report to understand our cash flow and to plan for future financial needs.”

Question 8

Current Day

Answer 8

The present business day. In times of stress, treasurers should establish real-time visibility into cash positions and establish adequate buffers to manage shortfalls.

“Our current day report provides a snapshot of our cash position and helps us make informed financial decisions.”

Question 9

Working Capital

Answer 9

The difference between a company’s current assets and current liabilities.

“The company’s working capital has increased this year, indicating a better short-term financial health and operational efficiency.”

“How does your company manage its working capital to ensure smooth operations?”

Question 10

Entity

Answer 10

A legal structure, such as a parent company or a subsidiary.

“The entity is required to disclose its financial statements to the public on a quarterly basis to maintain transparency and trust with its investors.”

Question 11

Intercompany Loans

Answer 11

Loans made between different entities within the same corporation, often used for funding or cash management.

“We manage intercompany loans to optimize the use of funds within our organization and reduce external borrowing costs.”

Question 12

Reconciliation - “recon”

Answer 12

The process of comparing two sets of records or accounts to ensure their accuracy and agreement. The goal of reconciliation is to identify and resolve any discrepancies between the two sets of data, typically involving financial transactions. This process is crucial for maintaining the integrity of financial information and ensuring that records are in balance.

“The finance department performs a monthly reconciliation of the bank statements to ensure that the company’s cash records are accurate and complete.”

Question 13

Bank to book reconciliation

Answer 13

Bank (to book) reconciliation involves comparing an individual or company’s bank statement with its own accounting records. Discrepancies may arise due to outstanding checks, deposits in transit, bank fees, or errors.

“How does your company ensure the accuracy of its financial records through bank to book recon?”

Question 14

Account reconciliation

Answer 14

Account reconciliation is a broader term that can refer to the process of verifying and adjusting the balances in various accounts, including asset, liability, and equity accounts. It ensures that the general ledger balances match subsidiary records.

“In order to ensure the accuracy of our financial records, I will be conducting an account reconciliation to compare our internal data with the monthly statements from our bank.”

Question 15

Confirmation

Answer 15

Aa formal document or statement sent to an external party to verify or confirm certain information. Confirmations play a crucial role in auditing, financial transactions, and other financial processes. Sent by banks, brokers, vendors, lenders.

“Once I receive confirmation from our bank about the wire transfer, I will update our financial records accordingly.”

Question 16

Automated Funding

Answer 16

The use of technology to automate the transfer of funds between accounts or entities.

“We have implemented an automated funding system to efficiently manage our cash flow and ensure funds are available when needed.”

Question 17

Regulatory Reporting

Answer 17

The process of submitting required financial information to regulatory authorities.

“Our team is diligent in maintaining accurate records for regulatory reporting to ensure compliance with financial regulations.”

Question 18

Foreign Currency (FX) Risk

Answer 18

The potential for losses due to changes in exchange rates.

“How does your company manage its FX risk given the global nature of its operations?”

Question 19

Debt Cost Optimization

Answer 19

Strategies to minimize the cost of borrowing.

“The company is focusing on debt cost optimization to reduce its borrowing costs and improve its financial performance.”

Question 20

Payment Optimization

Answer 20

Improving the efficiency of payment processes to save costs and time.

“To maximize our cash flow and minimize transaction costs, I am implementing a payment optimization strategy that will prioritize electronic payments and schedule them for specific times.”

Question 21

Financial Instrument (FI)

Answer 21

stocks, bonds, derivatives, and other securities

“Can you explain how your company uses various financial instruments in managing its treasury?”

Question 22

Hedging

Answer 22

Using financial instruments to reduce exposure to various risks, such as currency or interest rate fluctuations.

“The company uses futures contracts as a hedge against the potential increase in raw material prices.”

“Can you discuss your company’s approach to hedge accounting in the context of treasury management?”

Question 23

Multicurrency Management

Answer 23

Handling transactions and balances in multiple currencies.

“Given our global operations, effective multicurrency management is crucial. I am closely monitoring exchange rates and timing our transactions to mitigate currency risk.”

Question 24

Capital Structure

Answer 24

The mix of debt and equity financing used by a company.

“Can you discuss the current capital structure of the company and its implications for the company’s financial stability and growth?”

Question 25

Financial Risk Management

Answer 25

The practice of protecting economic value in a firm by using financial instruments to manage exposure to risk.

“Our financial risk management strategy involves diversifying our investments to reduce exposure to any single asset. This way, we can protect our organization’s financial health from market volatility.”

Question 26

Interest Rate Swap

Answer 26

A financial derivative contract in which two parties agree to exchange one stream of interest payments for another.

How does your company utilize interest rate swaps to manage its interest rate risk?

Question 27

Leverage

Answer 27

The use of various financial instruments or borrowed capital to increase the potential return of an investment.

“Can you explain the role of leverage in your company’s capital structure and its impact on the company’s financial performance?”

Question 28

Liquidity Risk

Answer 28

The risk that an entity will not be able to meet its financial obligations as they come due.

“How does your company manage its liquidity risk to ensure it can meet its short-term obligations?”

Question 29

Market Risk

Answer 29

The risk of losses in positions arising from movements in market prices. Typically includes interest rate, foreign exchange, equity and commodity risk.

“Can you discuss how your company mitigates market risk in its investment portfolio?”

Question 30

Operational Risk

Answer 30

The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.

“What measures has your company taken to minimize operational risk in its treasury operations?”

Question 31

Payment System

Answer 31

A system used to settle financial transactions through the transfer of monetary value.

“Can you explain how your company’s payment system works and what steps are taken to ensure its security and efficiency?”

Question 32

Short-term Financing

Answer 32

Loans and other forms of credit that are expected to be repaid within a year.

“How does your company approach short-term financing to meet its operational needs?”

Question 33

Treasury Bills

Answer 33

Short-term debt obligations backed by the U.S. government with a maturity of one year or less.

“Can you explain how your company uses Treasury Bills for its short-term investment needs?”

Question 34

Treasury Notes

Answer 34

Debt securities issued by the U.S. government that are intermediate (2-10 years) in terms of maturity.

Question 35

Treasury Bonds

Answer 35

Long-term (more than 10 years) debt securities issued by the U.S. Treasury.

“How does the long-term nature of Treasury Bonds fit into your company’s investment strategy?”

Question 36

Cash forecasting

Answer 36

Estimating future cash inflows and outflows to predict cash balances and needs

“Can you explain how cash forecasting is used in your company to anticipate cash inflows and outflows?”

Question 37

Cash pooling

Answer 37

Consolidating cash balances from multiple accounts or entities into a single account to optimize cash positions and returns

“How does your company utilize cash pooling to optimize the management of company funds?”

Question 38

Short-term investments

Answer 38

Low-risk securities purchased with excess cash and held for a short time period to generate interest income

“What types of short-term investments does your company typically engage in, and why?”

Question 39

Working capital management

Answer 39

The administration of current assets and current liabilities to ensure sufficient cash flow for daily operations

“Can you discuss the strategies your company uses for effective working capital management?”

Question 40

Operating cash flow

Answer 40

The cash generated from its core business operations, for example, building widgets and selling them.

“Our strong operating cash flow indicates that our company’s core business operations are generating sufficient cash to cover our day-to-day expenses and investments, which bodes well for our financial stability and ability to pursue growth opportunities.”

Question 41

Capital Expenditures (CAPEX)

Answer 41

Long term investments in things such as property, equipment, infrastructure, R&D. Distinguished from OPEX (Operating expenses) which are day-to-day business expenses.

“As the treasurer, I’ll need to review our upcoming capital expenditures to ensure they align with our long-term strategic objectives and maintain our competitive edge in the market.”

Question 42

Free Cash Flow (FCF)

Answer 42

FCF = Operating Cash Flow − Capital Expenditures
Indicated a company’s ability to generate cash for dividends, debt payment, and investing in growth.

“As we analyze our financial performance, it’s encouraging to see that our free cash flow has improved this quarter, indicating our ability to generate cash after accounting for necessary investments in our operations and growth initiatives.”

Question 43

Collections

Answer 43

The receipt and processing of incoming payments from customers or other debtors

“How does your company manage its collections process to ensure timely receipt of receivables?”

Question 44

Disbursements

Answer 44

The payment of money owed to vendors, employees, creditors or other payees

“Can you explain your company’s disbursements process and how it is managed to ensure efficient use of funds?”

Question 45

Payment systems

Answer 45

Mechanisms and infrastructure for transferring money to pay obligations, including checks, wires, ACH, credit cards, etc.

“Various payment systems such as checks, wires, Automated Clearing House (ACH), and Society for Worldwide Interbank Financial Telecommunication (SWIFT) are integral to the efficient operation of global financial transactions.”

Question 46

Treasury workstation

Answer 46

The older term for Treasury Management Software. Specialized software and dashboard tools to manage treasury processes, analytics, reporting and compliance

Question 47

Debt management

Answer 47

Administration of corporate debt obligations including loans, bonds and lines of credit

“How does your company approach debt management to ensure it can meet its financial obligations while still investing in growth opportunities?”

Question 48

Risk management

Answer 48

Practices to identify, assess and mitigate financial risks related to liquidity, credit, interest rates, foreign exchange, etc.

Question 49

Fraud prevention

Answer 49

Processes and controls to prevent, deter and detect various treasury-related fraud schemes

“To ensure fraud prevention, I am implementing stringent internal controls and regularly auditing our financial transactions. This will help us detect any irregularities early and take appropriate action.”

Question 50

Cash controls

Answer 50

Internal procedures to safeguard cash and prevent loss, theft or misuse of corporate funds

“Can you discuss the cash controls your company has in place to prevent fraud and ensure accurate financial reporting?”

Question 51

Bank account management (BAM)

Answer 51

Opening, closing and maintaining proper access and controls over corporate bank accounts

“How does your company manage its multiple bank accounts to optimize liquidity and minimize fees?”

Question 52

Bank relationship management

Answer 52

Establishing connections and managing interactions with banks that provide treasury services

“Can you explain how your company maintains its relationships with various banks and how it benefits your treasury operations?”

Question 53

Treasury accounting

Answer 53

Recording, reporting and compliance for treasury transactions, balances, debt, gains/losses

“How does your company handle treasury accounting and what role does it play in your overall financial strategy?”

Question 54

Netting and offsetting

Answer 54

Agreements to consolidate debits/credits between companies to reduce settlement volumes

“Can you discuss how your company uses netting and offsetting in its treasury operations to reduce transaction costs and manage cash flow more efficiently?”

Question 55

Notional pooling

Answer 55

Netting intercompany loans/deposits to reduce interest costs without physically transferring cash

“Can you explain how your company uses notional pooling to manage its cash flow and optimize liquidity?”

Question 56

In-house banks

Answer 56

Centralized treasury centers that manage liquidity, payments, risk, financing for a corporation. Using in-house banks avoid transaction fees paid to real banks.

“How does your company’s in-house banking system operate, and what benefits does it provide in terms of cost savings and efficiency?”

Question 57

Payment factories

Answer 57

Consolidating payment processing through a shared service center to gain economies of scale

“Can you discuss the role of payment factories in streamlining your company’s payment processes?”

Question 58

Zero balancing accounts

Answer 58

Bank accounts that are automatically swept so the end-of-day balance is zero

“How does your company utilize zero balance accounts in its cash management strategy?”

Question 59

Lockbox services

Answer 59

A financial service provided by banks to streamline the collection of payments from customers. The process involves directing customer payments to a designated post office box (lockbox) controlled by the bank. Once the payments are received at the lockbox, the bank processes them on behalf of the company, accelerating the collection and depositing of funds.

“Can you explain how a lockbox system is used in your company to speed up the collection of receivables?”

Question 60

Treasury stress testing

Answer 60

Simulating hypothetical adverse scenarios to gauge treasury risks and preparedness

“How does your company conduct treasury stress testing, and what insights does it provide into the company’s financial resilience?”

Question 61

Cash flow at risk

Answer 61

A statistical measure of the most cash could be lost over a period under normal conditions

“We continuously monitor our cash flow at risk to ensure that potential fluctuations in cash inflows and outflows will not adversely affect our operations.”

Question 62

Basel III

Answer 62

A global regulatory standard with implications for bank capital, liquidity management and treasury operations

“In compliance with Basel III regulations, we maintain a robust capital and liquidity framework to ensure the ongoing stability of our financial operations.”

Question 63

Know your customer (KYC)

Answer 63

Regulatory due diligence process to verify client identities and prevent financial crime

“Our Know Your Customer (KYC) procedures are rigorous and thorough, helping us mitigate risk and maintain compliance with regulatory requirements.”

Question 64

Common payment fraud

Answer 64

Check fraud, business email compromise, invoice fraud and other attacks targeting treasury payments

“We have implemented stringent controls to protect against common payment fraud, ensuring the security of our transactions and the integrity of our financial systems.”

Question 65

Front office

Answer 65

The front office in treasury refers to the functions that are directly involved in managing financial transactions, risks, and relationships with external parties.

• Cash Management: Managing the organization’s cash flows, optimizing liquidity, and ensuring there is enough cash to meet operational needs.
• Debt Issuance and Management: Handling the issuance and management of debt instruments to raise capital for the organization.
• Investment Management: Managing the organization’s investments to maximize returns within acceptable risk parameters.
• Foreign Exchange (FX) and Interest Rate Risk Management: Mitigating risks associated with currency exchange rates and interest rate fluctuations.
• Relationship Management: Interacting with banks, financial institutions, and other external partners to facilitate treasury activities.

Professionals in the front office of treasury may include treasury managers, cash managers, risk managers, and relationship managers.

Question 66

Back Office

Answer 66

The back office in treasury is responsible for the operational and administrative support necessary to execute and settle financial transactions initiated by the front office.

• Settlement and Confirmation: Ensuring timely and accurate settlement of financial transactions.
• Record Keeping and Accounting: Managing financial records related to treasury transactions and ensuring accurate accounting.
• Risk Reporting: Generating reports related to market risk, credit risk, and other risk metrics for monitoring and compliance.
• Compliance and Regulatory Reporting: Ensuring that treasury activities comply with regulations and preparing necessary reports for regulatory authorities.
• Technology and Systems Support: Managing treasury management systems (TMS) and other technologies to support efficient treasury operations.

Professionals in the back office of treasury may include operations specialists, risk analysts, compliance officers, and technology support personnel.