Corporate Treasury: What the Function Actually Does

A corporate treasury has four responsibilities and no others. The first is keeping the group able to settle every obligation on its due date. The second is arranging, servicing and repaying the funding the business has been told to carry. The third is handling the currency and interest exposures that operating decisions hand to it. The fourth is reporting the position. How much debt the business carries against equity is a financing decision, taken elsewhere.

The fastest way into this subject is a number. Start with one. A group that never once ran out of money, that held more in its bank accounts than it was overdrawn on across every single day of the year, paid Rs 0.81 crore over that year for the privilege of holding its own cash. Nobody stole it. No control failed. No rate moved against anybody. The money went out because Rs 162 crore of overdrafts at 9.5 per cent were sitting in one set of accounts while Rs 486 crore of credit balances at 3.0 per cent were sitting in another, and nothing connected them.

Worked through, it is arithmetic a school child could do. Rs 162 crore at 9.5 per cent is Rs 15.39 crore paid. Rs 486 crore at 3.0 per cent is Rs 14.58 crore earned. The difference is Rs 0.81 crore that left the group and never came back, on a set of accounts that was three times more in credit than overdrawn all year. Both rates are the group's own contracted rates with its own banks, and neither is a market rate or anybody's benchmark.

The Rs 0.81 crore is what a corporate treasury is for, and it is also a fair warning about how this subject behaves. The finding was not hiding. The finding was sitting in plain sight across eighteen bank statements that anybody could have added up. Nobody added them up. Adding them up was nobody's job. A treasury is the function whose job is the aggregate, and almost everything about the function follows from that one sentence.

The worked group here is Nirjhar Industries Limited, an invented steel and alloys maker with revenue of Rs 10,800 crore, cash of Rs 540 crore and total borrowings of Rs 4,320 crore. Girish Talwalkar is its group treasurerThe named person accountable for the whole of the treasury task across every legal entity of a group, rather than for one account or one country.. Three entities carry the business: E1 Nirjhar Industries Limited, the Indian parent, E2 Nirjhar Alloys Private Limited in India, and E3 Nirjhar Trading FZE, an overseas trading entity. Nirjhar is also counterparty C1 of Vindhya Commercial Bank Limited, equally invented, where it is the single largest exposure on that bank's books, so the same group appears from both sides of one table. Every rupee, rate, count and limit here belongs to those two invented entities and to nothing else.

One distinction carries this whole guide, and it comes before anything else. A treasury is an operating function, not a financing one. A treasury works with the balance sheet it has been handed, and its task is to make that balance sheet function on a Tuesday morning. Somebody else decided that Nirjhar would carry Rs 4,320 crore of borrowings against Rs 3,240 crore of equity. The treasury's task is that the money is actually in the right account on the day each instalment is due. A reader who holds that line will never confuse Girish Talwalkar's Rs 240 crore loan from E1 to E2 with a board's decision about how much the group should borrow in the first place, and every rule that follows is a consequence of it.

What are the four jobs, and what is deliberately not one of them?

Treasury is one of those words that expands to fill whatever space it is given. Five people in one business will give five answers, most of them describing whatever that person last sent the treasury. A closed list can be tested, and a testable list serves better. A corporate treasury makes sure the group can pay, raises and repays the funding, manages the exposures that operating creates, and reports the position, and anything offered to it that fits none of those four belongs to somebody else.

The fourth job looks like the weak one and it is not. Reporting is the only job that makes the other three checkable by anybody outside the room. The item missing from the list is the one people put in most often: how much debt the business should carry. A treasury at Nirjhar Industries Limited raises and repays what the board has told it to raise and repay. The treasury does not get a vote on the size.

Job one: how does a treasury know the group can pay?

The first job sounds too obvious to need a function. Everybody knows a business has to pay its bills. Less obvious is that paying is a question about days and accounts rather than about profit, and the two come apart more often than anybody expects. A profitable business fails on the day it cannot settle an obligation that has fallen due, and a business making a loss can go on paying for years while it still has access to cash. The word for the first quality is liquidityBeing able to settle an obligation on the day it falls due. It is a question about timing and access, not about whether the business is profitable., and it is the treasury's first responsibility.

Feel it away from a balance sheet first. A household on one salary that is comfortably ahead over a year can still be caught out by a school fee, an insurance renewal and a wedding contribution landing in the same fortnight. Nothing about the year changed. The sequence changed. The household's version of a treasury is the person who knows, on the fifteenth, that the twenty-second is going to be tight and moves something before it is. A treasury is that job, scaled.

Nirjhar Industries Limited holds Rs 540 crore of cash, and its own treasury policy carries a limit its board set, TL5, requiring at least Rs 120 crore of liquidity to be held at all times. The limit leaves Rs 420 crore of headroom above the group's own floor. Both figures are the group's own internal choices, not requirements set by anybody outside it, and neither is a norm. Notice what the first job needs in order to be done at all: it needs to know where the cash actually is, today, by account, before it can say anything about whether Thursday works.

Job two: what does raising funding mean if the treasury does not choose how much?

The second job is where the confusion in this subject concentrates, so it is worth being blunt. The board of Nirjhar Industries Limited decided the group would carry Rs 4,320 crore of borrowings at an average contracted cost of 10.0 per cent. The treasury did not decide that and cannot undo it. The treasury does everything that follows: arranging the facilities, drawing on them, servicing them, repaying them, keeping the schedule of what falls due when, and telling anybody who needs to know how much room is left.

Look at one bucket of that schedule. Nirjhar carries Rs 432 crore of borrowings falling due inside year one, in bucket MP1 of its debt maturity profile. The group's annual interest cost also happens to be Rs 432 crore, being 10.0 per cent on the Rs 4,320 crore of borrowings, and the two are entirely different objects that share a number: one is principal coming due in the next twelve months, the other is the cost of carrying the whole of the debt for a year. Naming which object a number is, every single time, is not pedantry in treasury work; it is the difference between a repayment schedule and a profit and loss line.

So the second job is execution and stewardship, not choice. A useful test: if the answer to a question changes the size of the balance sheet, it is a financing decision. If it changes only whether a payment lands on time and from which facility, it is treasury.

Job three: where do the exposures a treasury manages actually come from?

The third job is the one people picture when they imagine a treasury, and the picture is usually wrong in one specific way. The exposures do not originate in the treasury. The exposures arrive there, already made, from operating decisions taken by people who were not thinking about currency at all.

Here is how it happened at Nirjhar Industries Limited. E3 Nirjhar Trading FZE, the group's overseas trading entity, agreed to buy in United States dollars (USD). Buying in dollars was a commercial decision about a supplier and a price. The moment the contract was signed, the group held a committed payable of USD 24 million falling due in 90 days, in a currency it does not earn in. The group reports in rupees. The group's own contracted rate is Rs 84.00 to the dollar, never a market rate, and at that rate the payable is Rs 201.6 crore. A 5.0 per cent adverse move on the payable is Rs 10.08 crore, and Rs 10.08 crore lands in the profit and loss account when the payable settles. An exposure sitting on an amount already contracted is called transaction exposureA currency exposure on an amount already contracted and committed, so it lands in the profit and loss account when it settles rather than only in a reserve..

Read the order in that sequence rather than the amounts. The exposure was manufactured by a purchasing decision and handed over complete. A treasury asked why an exposure exists can only ever answer that somebody signed something. The cheapest fix for most currency exposure is therefore a commercial conversation and not a treasury one. The treasury can decide how much of the movement to leave open, inside limits its own board has set: at Nirjhar the policy limit TL3 asks for at least 60.0 per cent of a committed foreign currency exposure to be hedged, so Rs 4.03 crore of the Rs 10.08 crore stays open. TL3 is the group's own internal limit, not a requirement anybody imposed on it.

One more distinction is worth naming, and naming is all it gets here. The Rs 201.6 crore payable is transaction exposure and it hits the profit and loss account. The group's Rs 288 crore net investment in E3 moves the translation reserve when the rate moves and does not touch the profit and loss account at all. Same currency, same group, two different effects, and the comparison between them is covered separately under market exposure.

Job four: what does the treasury report, and who reads it?

The fourth job is the one that gets cut first when somebody is looking for a saving, and it is the one whose loss costs the most. A treasury's daily position report is a single sheet with four fixed parts, and a version missing any one of them cannot be acted on by the person who receives it.

The four parts are: where the cash is, by account and by currency; what is committed to leave, and when; what is expected to arrive, and how confident anybody is about it; and what limit each of those three runs against. Only the third needs a forecast, and only the third carries a confidence beside it. A number with no limit beside it cannot be breached and therefore cannot be acted on. The first three parts describe a position, and the fourth turns that position into something somebody can be held to.

Who reads it? The finance director, the treasurer, whoever runs the payment run, and, in a different form and less often, the board. A short list of readers explains why reporting looks removable. Nothing breaks in the week it stops being produced. The cash still moves, the payments still go out, and for a while nobody notices. The evidence that the first three jobs are being done at all has gone. Evidence is only missed at the moment somebody asks for it, and that moment is normally the worst week of the year to be looking for it.

What does one treasury actually look like in accounts, banks and payments?

Abstractions about liquidity are easy to agree with and hard to argue with, so put the real shape of the thing on the table. Nirjhar Industries Limited holds its Rs 540 crore of cash across 26 bank accounts, at 4 banks, in 3 currencies, and the group makes about 1,840 payments a month, or about 92 payments on a working day. Eighteen of those accounts belong to E1 and E2, both in India, and they are swept into a single header accountThe one account a daily sweep concentrates balances into, so that a set of separate accounts ends the day as a single position. at the end of each day. Moving cash across a border is a separate decision with its own consents, so the other eight belong to E3 and sit outside the sweep.

Sit with the counts for a moment. The counts are the reason the function exists. Twenty-six separate balances change every day. Ninety-two payments leave on an ordinary day, each with its own value date. Three currencies means three different sets of cut-off times. Nobody holds that in their head. A treasury is what a business builds when the number of moving parts passes the point where one careful person can hold the position in memory, and Nirjhar passed that point a long way back.

Notice the last part of that picture, the honest complication. Tidying twenty-six balances into one is unarguably better for the first job. Tidying also converts many small exposures to four banks into one large exposure to a single bank, and Nirjhar's own board set TL1 at Rs 180 crore for exactly that reason. The full arithmetic of sweeping, what physical concentration moves and what a notional arrangement does not move, is covered under cash pooling. The shape is what belongs here: every treasury improvement creates a new position that somebody then has to hold a limit against, and the four jobs are therefore circular rather than sequential.

Why is cash in the right total but the wrong accounts not the same as cash?

Now go back to the Rs 0.81 crore. Take the eighteen accounts of E1 and E2 before any sweep ran. Across those accounts the group held gross credit balances of Rs 486 crore and gross overdrawn balances of Rs 162 crore. Add the two together and the group was in credit by Rs 324 crore across the set, every day of the year. On any summary that showed one figure, it looked comfortable, and it was comfortable. The comfort was also expensive.

Read the two rates before the two balances. The answer sits in the rates. The group was three times more in credit than overdrawn, and the rate it paid was more than three times the rate it earned: 9.5 against 3.0. The ratio that decides whether a group earns or pays on its own cash is the ratio of the two rates, not the ratio of the two balances, and almost nobody guesses that correctly the first time. Both rates are Nirjhar Industries Limited's own contracted rates with its own banks, and neither is a market rate or a benchmark of any kind.

There is a household version of this and it is uncomfortably close. A home with a savings balance sitting quietly in one bank and a revolving card balance at another is running the same structure at a smaller scale: interest is being earned at a low rate on one side and paid at a high rate on the other, and both statements look fine on their own. Nothing in either statement is an error. The loss only exists when the two are held in one hand.

The sweep gets one line here and no more, and cash pooling holds the mechanism. Once the eighteen accounts were concentrated daily, the single net position of Rs 324 crore earned 3.0 per cent, being Rs 9.72 crore for the year, against a net cost of Rs 0.81 crore before. The swing is Rs 10.53 crore a year, and not one rupee of it came from earning a better rate on the cash. The rate the group earns is 3.0 per cent in both worlds. The whole gain came from stopping the group paying 9.5 per cent to borrow money it already had.

Does net cash positive mean this group has no borrowings?

The phrase net cash positive appeared twice above, and it is the most misread phrase in treasury work. Pin it down. Net cash positive here is a statement about a set of eighteen bank accounts and it is not a statement about the balance sheet. Across those accounts the credits of Rs 486 crore stood against overdrafts of Rs 162 crore, so the net cash positionThe single figure left after adding every credit balance and subtracting every overdrawn balance across a stated set of accounts. It says nothing about borrowings held anywhere else. was a credit of Rs 324 crore.

The business itself is nothing like cash rich. Nirjhar Industries Limited carries total borrowings of Rs 4,320 crore against cash of Rs 540 crore. The difference is net debtTotal borrowings less cash. It is a statement about what the business owes, and it says nothing at all about which account the cash is sitting in. of Rs 3,780 crore, being 2.92 times its Rs 1,296 crore of earnings before interest, tax, depreciation and amortisation. Reading the first statement as though it were the second quietly turns a leveraged steel maker into a business with no borrowings. Both sentences are true and they are about different objects. Treasury work is insistent about naming the object beside every number for exactly that reason.

Where is the point at which a group starts paying to hold its own cash?

Once the two rates are accepted as deciding the outcome, an obvious question follows that almost nobody in a business ever computes. With the credit balances held still at Rs 486 crore, how much can be overdrawn elsewhere before the group stops earning on its own cash altogether? The interest earned is fixed at Rs 14.58 crore, so the answer is whatever overdrawn balance costs exactly that much: 14.58 divided by 0.095, or Rs 153.47 crore.

Nirjhar Industries Limited was sitting at Rs 162 crore. The group had crossed the point at which it began paying to hold its own cash and had gone Rs 8.53 crore past it. Nobody in the business had ever worked out where the point was. Check the crossing against the year's result: 8.53 times 9.5 per cent is Rs 0.81 crore, and that reproduces the net cost exactly.

Move the control and watch which of the two lower panels changes character first. The balances panel stays reassuring for most of the track: a group can be a long way in credit on the totals. The interest panel flips at Rs 153.47 crore of overdrafts, when the balances still look three to one in the group's favour. The gap between the comfortable picture and the paying position is where the whole finding lives, and the gap is invisible to anybody reading a single net figure.

How does a lender or an analyst read the same group from outside?

Everything above is the view from the treasurer's desk. Two other people look at Nirjhar Industries Limited regularly and neither of them sees the Rs 0.81 crore at all. A finding of that shape does not surface somewhere else on its own.

A lender reads the group as an obligor. The lender looks at total borrowings of Rs 4,320 crore, cash of Rs 540 crore and therefore net debt of Rs 3,780 crore, or 2.92 times the Rs 1,296 crore of earnings before interest, tax, depreciation and amortisation. The lender computes interest cover of 2.00 times, being Nirjhar's earnings before interest and tax of Rs 864 crore over its Rs 432 crore of interest cost. Then it looks at when the borrowings fall due, and finds that Rs 2,160 crore of the Rs 4,320 crore, being exactly half, falls in bucket MP3 in year three. A lender's whole reading is about the size and the timing of the obligation, and not one line of it depends on which account the cash is sitting in tonight.

An analyst reads the group as a business. Profit after tax of Rs 324 crore on revenue of Rs 10,800 crore, an earnings before interest, tax, depreciation and amortisation margin of 12.0 per cent, and the same net debt figure. Notice a number that repeats here and name it every time it comes up: the group's profit after tax is Rs 324 crore, and the net position across the eighteen swept bank accounts is also Rs 324 crore. The profit and the pooled balance are two entirely different objects that happen to share a figure, and reading one as the other is the kind of error that survives three drafts of a report because it looks fine.

Here is the uncomfortable part. The Rs 0.81 crore does not appear as a line in anything either reader sees. The cost is buried inside the interest cost, where it is a rounding-scale amount against Rs 432 crore of interest on the borrowings, and it never surfaces as its own number in any published statement. A treasury finding of this shape is only ever found by somebody inside the group who was asked to add up a set of accounts nobody else adds up, and a fair summary of why the function exists at all.

Where does the treasury stop and the financing decision begin?

One line is worth carrying away. Deciding that Nirjhar Industries Limited should carry Rs 4,320 crore of borrowings against Rs 3,240 crore of equity is a financing decision. Making sure that the Rs 432 crore of principal falling due inside the year, being bucket MP1 of the maturity profile, is actually in the right account on each due date is the treasury's. The second job never gets to argue with the first, and a treasury that starts arguing with it has stopped doing the four things it exists to do.

What can a treasury not fix?

A closed list of four jobs has a second edge to it, and honest treasury work says it out loud. There are two things a treasury cannot do anything about, and pretending otherwise is how a good function loses credibility.

A treasury cannot make a business that is losing money solvent. A treasury can move cash to where it is needed, stretch a schedule, and buy weeks. None of that manufactures the earnings that pay for any of it. Every treasury action on a loss-making business buys time and none of them buys a solution, and a treasury that lets anybody believe otherwise has made the eventual conversation worse.

A treasury cannot make a refinancing wall smaller either. Nirjhar Industries Limited has Rs 2,160 crore of its Rs 4,320 crore of borrowings falling due in bucket MP3, in year three: exactly half the group's debt in a single year, and about 1.67 times a full year of its Rs 1,296 crore of earnings before interest, tax, depreciation and amortisation. Girish Talwalkar cannot shrink that. The options available two years out and the options available two months out are not the same set, so what Girish Talwalkar can do is make sure everybody who needs to know is looking at the wall now rather than in month thirty.

Both limits point the same way. A treasury converts surprises into scheduled problems. Converting surprises into scheduled problems is a smaller claim than the one people expect from the function, and it is the true one.

Where does corporate treasury stop, and what holds the rest?