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Treasury Management and National development

Treasury Management and National development


One of the general axioms of financial economics is that finance is a catalyst for economic development because it lubricates the wheel of production in the real sector. But finance is not absolute since its existence depends on the availability of funds to procure all that are necessary to facilitate efficient production. Treasury Management as a unique and indispensable member of finance family is saddled with and strictly focused on the management of cash flows to ensure continuous liquidity and availability of funds to where and when needed for generating returns through efficient production process. Where individuals in households, corporate entities in private sectors and government establishments have access to required funds when needed to facilitate production, rapid growth and development of the nation’s economy cannot be hindered. Thus, treasury management practices provide mechanism that ensures the continuity of productive processes that accelerate economic growth and development. The focus of this paper is an in-depth analysis and examination of the concept of treasury management, its practice and operations across the globe and its role in accelerating national economic development. The paper conclude that since accumulation and use of money are indispensable in all economic activities, and that treasury deals with cash flows, it is therefore a distinct and indispensable finance function in the promotion of the growth and development of a nation’s economy.

Key words: liquidity, risk management, cash flows, investment, returns


Developments across various markets and economies of our present day world-wide is compelling the understanding and acceptance of treasury functions as synonym and an identical expression akin to wealth management. Surprising as this unfolding concept may be, it is in no way a new discovery but rather, a realization and renascence of ancient practice that assisted dukes and emperors of earliest times to manage the wealth and affluence of their kingdoms despite their incessant absence from home in quest for conquest at battlefield to expand the domains of their kingdoms. In the wisdom of those heroes of histories, treasury is not only a repository of wealth but an office with an indispensable function of overseeing the shrewd and judicious utilization of resources to prosecute further acquisition of resources through conquests- the most veritable means of wealth acquisition at that time. It was this practice that gave rise to the need for stewardship reporting which historically became the foundation upon which the modern-day preparation of audited financial reports by the accounting profession was established.

All over the world irrespective of the community, culture and traditions, wealth as socio-economic concept determines the state of well-being of the subject matter, be it individuals, corporate entities and nations. In our daily strives, agitations, engagements and involvements. the bottom line or end goal is to achieve a level of satisfactory livelihood of which accumulation of reservoir of resources constitute the largest proportion and the most time consuming of our daily activities. Wealth in its concise and broad meaning transcends riches. While the later is confined the former is open ended and all embracing. It is possible to be rich in one thing or aspect of life and yet be poor in many at the same time. An individual can be rich in knowledge but poor in idea – the proper way to channel his knowledge for productive use. He may be rich in material possession but poor in transforming these resources to income generating ventures. For some reasons beyond generally acceptable logical reasoning, a person may have access to quite a substantial amount of money, may be through a windfall of honest means, but may watch helplessly as the funds deplete to nothing without being able to account for specific future preserving source that ensure the continuous flow of benefits for which such funds was used.

In the same way a nation like Nigeria, renowned to be rich in mineral resources, human capital and substantial amount of money generated annually from export of crude oil, yet less than 20% of the country’s population live above the poverty line. Below 5% of the population of its 210 million have access to all that makes for proper standard of living. Yet we are rich in many areas but not wealthy in terms of improvement in social welfare and standard of living of the members of the public. What is conspicuously lacking is not the resource endowment in terms of natural minerals, materials or manpower and not even the lack of financial resources to fund projects that ensure national development. What has been the bane of our crippling development status throughout the more than half of a century of our existence as a politically independent and sovereign nation is proper management of our resources to ensure continuity and sustainability.

There is no gainsaying that Nigeria as a nation is almost over endowed in terms of mineral resources which have continuously been exploited, embezzled and siphoned to non-beneficial use rather than the use that could have ensure the overall welfare of its citizenry. Neither have we lagged behind in producing knowledge based skilled human resources with outstanding acumen for harnessing resources for rapid growth and development of various sectors of the economy. But, most of their innovations and research findings have been left to gather dust either in files or laboratory shelves where they are kept. Although quite unbelievable but true, some of our scientific discoveries, inventions and innovations have been stolen and released for industrial reproduction in other developed economies for the overall beneficial effect on the growth and economic well-being of their nationals. In the area of shrewd managerial abilities, policy thrust, innovations and strategic initiatives we have not been destitute of result oriented ideas but their usage to achieve the envisaged outcomes have been embarrassingly discouraging.

What is true for us as a nation is also true for many developing and underdeveloped countries in our contemporary international society. Resources are abundant but poverty level remains unabated because corruptions thrive at the helms of government affairs. Those who are entrusted with the management of their nations’ resources fumble on the platform of selfishness submerged under the ignorance of what constitute the true management of wealth. The need for proper perspective in the management of our multifarious and richly endowed resources was the springboard of ideas that led to the emergence of treasury management as a separate function and profession. Accordingly, this paper attempt a dual interconnected review of the subject matter of its title, that is , an in-depth examination of what constitute treasury management and its role in accelerating the growth and development of a nation’s economy

Concept and historical development of Treasury Management

The underlying notion of the concept of treasury and its management emanated from the root word “treasure”. In its original usage treasure connotes wealth or riches accumulated and kept to meet contingencies and future use. To preserve the base value of such accumulated fortune at that time the stored resources are kept in articles that appreciate rather than deteriorate in value. This was the reason why the referred treasures of that time are in the form of precious metals, money, jewels, or rich materials, or other valuable things. In actual fact, all the human resources, material and precious metal of the ancient kings and emperors, which constitute what was then referred to as treasures of the respective dynasties and kingdoms were valued and exchanged in agreed unit of precious metals. The treasure house then not only store merchantable chattels that were kept under the custody of trusted officers in the royal court or the emperor’s servicemen but also records of able bodied men and sites of mineral endowment for use as the need arises. When there was conquest, the first place for plundering to take the spoils of war was the treasure house since this place was regarded as the powerhouse of the economy of the community just conquered. Whether in ascertainment and payment of tributes or penalties, treasury remains the recourse for the succor and survival of the affected community. On the other hand, when a victorious king or emperor returns from conquest at battlefield the place to keep the spoils of war most especially the precious metals and valuable records of reservoir of the resources of conquered community was the treasury. The problem of our age has been the improper administration of wealth, so that the ties of brotherhood may still bind together the rich and poor in harmonious and mutually beneficial relationship, is our failure for jettisoning timeless value of ancient wisdom that manage wealth as preservable treasure not riches as the ultimate goal of national development. The word treasure is synonymous with value. Even in our modern times, we still treasure something that we value or that has intrinsic reservoir of value. Thus, treasury management has been and would remain the strategic and innovative approach to wealth management for accelerated national development.

In literature both among academia and the practitioners, the term treasury management does not lend itself to a single definition, nevertheless, there is consensus on what should constitute its core elements. An in-depth analysis of the following definitions from different authors would illustrate their divergent views.

1. Treasury management is all about handling the banking requirements, the funding for the business and managing financial risk. It therefore incorporates raising and managing money, currency, commodity and interest rate risk management and dealing, and, in some organizations, the related areas of insurance, pensions, property and taxation (finance glossary)

2. Treasury management is a set of techniques that act on the short-term liquidity of a company, and at the same time affect those factors and processes that translate immediately into cash, with the ultimate aim of increasing the profitability of the company and improving working capital management Torre (1997)

3. The management of the organization’s investments and cash flows, its banking, money market capital transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks. Treasury management is really all about cash flow, the risks associated and optimizing performance within those risks. (CIPFA, 2009)

4. Treasury Management encompasses the management of the Council's cash flows, its banking, money market and capital market transactions, the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks.(Waveney District Council, 2012)

5. Treasury management (or treasury operations) refers to a management of an enterprise' holdings in and trading in government and corporate bonds, currencies, financial futures, options and derivatives, payment systems and the associated financial risk management. (Investors Dictionary, 2012)

6. Treasury management is the corporate handling of all financial matters, the generation of external and internal funds for business, the management of currencies and cash flows, and the complex strategies, policies, and procedures of corporate finance. (Bloomsbury Information Ltd, 2008)

7. Treasury management means financial management that is related to a future financial balance and cash flows of any corporation. That means that treasury management responsibilities are equal to those of financial management with the exception of inventory and non‐financial investment management, plus financial and management accounting.(Polák, and Klusáček, 2010)

8. Treasury management is the process of controlling a corporation's liquidity and financial position through the manipulation of its cash, cash equivalents, debt, and investments. It is the strategy the corporation adopts to balance cash flow, investment opportunities, and capital structure against financial risk management and future needs. (Masters 2003)

9. The process of administering to the financial assets and holdings of a business. The goal of most treasury management departments is to optimize their company's liquidity, make sound financial investments for the future with any excess cash, and reduce or enter into hedges against its financial risks.(Business Dictionary, WebFinance, Inc, 2012)

10. Treasury Management (or short-term management) represents a wide range of financial management. Treasury is an essential element and at the same time, the main restriction of the financial management of the company. Treasury reflects the decisions related to financial stability, as well as the positive and negative results of the enterprise's activity. (Dumitru and Moraru,)

11. Treasury management is based on payment and collection management, liquidity management and banking management which has now taken on a broader perspective that includes the planning of disposable treasury assets and their subsequent monitoring, a strategy for investing surpluses to obtain maximum profitability and finance deficits with minimum costs, management of interest-rate and exchange-rate risks and, finally, banking management (Charro & Ortiz, 1996; López, 2003).

12. Treasury management is the management of an organisation’s cash flows, its borrowings and its investments, the management of the associated risks and the pursuit of the optimum performance consistent with those risks. (Adedoyin and Labija, 2009)

Although approached from different perspectives, a thorough analysis of the above definitions reveals the following common elements that cut across all or most of them

· Management of cash flows in different currencies and funding requirements

· Dealing in financial products, futures and derivatives

· Involvement in capital market and corporate finance

· Management of liquidity to ensure continuity and survival of operations

· Consistent investment of funds to generate profitable returns

· Management of financial risks

· Optimizing performance consistent with associate risks

It is also noteworthy that eight of the above definitions recognized the management of financial risks as part of treasury management, while CIPFA (2009), Adedoyin and Labija (2009) and Waveney District Council (2012) specifically mentioned the fifth and seventh elements outlined above and which has become an indispensable part of treasury function of our times.

However, it is striking that all the definitions cited above are organization focus which implies that the issue of treasury can only be understood from an organizational perspective. But in reality, are treasury management (TM) concepts organization-restrictive or universal in application? If it is organizational restrictive, then everything about treasury would be an illusion, because any concept that is not capable of micro-analysis would eventually falter at the level of macro examination and application. However, if it is universal in application, then something is lacking in previous definitions which require an in-depth inquiry, Furthermore, is treasury only about cash flow or wealth management? Surely cash flow is a means by which the eventual goal of wealth maximization by TM and consequently that of firms is achieved. If then the ultimate goal of TM is to generate value that enhances the wealth of the recipient of its services, then a universally applicable definition is required. For this definition to be universally applicable, it must be situated within the entity concept. Doing so will not only allow treasury management to fulfill its wealth management function but also makes its services universal, being relevant to individual, corporate entities in private and public sectors of the economy.

In addition such definition would make treasury management a relevant function in the promotion of economic well being of a nation. In basic macroeconomic theory, national economy consist mainly of three sectors namely household (that is, individuals), private sector and public sector. In actual fact, the household is the most fundamental of the three sectors because it is the basic and indispensable part of the remaining two sectors. This is the reason why any functions that would contribute to a nation’s economic development but fails to accord household its rightful place, would end up in catastrophe of self deception. Accordingly, a working definition which attempt to fill the vacuum left by earlier definitions is given below.

Treasury management is a prudent and strategic approach to integrated management of an entity’s resources with the aim of achieving optimal utilization to achieve the most beneficial returns that ensure continuous liquidity for the settlement of every ensuing and/or spontaneous obligations, as well as investment opportunities while minimizing the associated risks of managing and investment cash and near cash assets to ensure continuous flow of economic benefits.

This is a working definition and would definitely attract comments from practitioners and academicians in near future. The proof and justification of this definition would be the main focus of the discourse in an article titled “Rethinking Treasury Management” scheduled to appear in the next edition of this journal “The Treasury Managers”.

Treasury Management functions

The early concern of treasury management activities was mainly focused on the conversion of collections into cash, that is, the management of cash flows. According to Dixit (2008), the major function of treasury has historically been to plan, organize and control cash and borrowings so as to optimize interest and currency flows, and minimize the cost of funds. Historically, treasuries have focused their organizational form and manpower needs on the labor-intensive process of collections Putra (2009). At that time organizations’ treasury departments devoted significant resources to the conversion of collections into cash, a constant substitution of one liquid current asset into pure cash. This functional role was passive and reacted to the cash flows which were created by the business; treasury’s role was quite clearly that of an overhead body for funding and settlement. There was no expectation of value-added activity from the treasury organization.

The modern view of treasury management functions is a much more proactive management of the entire business process which now incorporates the management of the cash flows, investment and associated risks to optimize resource utilization which create firm value. Efficient treasury operation considers every element that affects the operating unit’s ability to collect, disburse, and manage the cash resources available to it. This includes the whole cash cycle, from sales to the payment of trade obligations. Thus, the modern view of treasury extends beyond funding to the full gamut of working capital management, including collections and concentration accounts, debt restructuring, financial risk management, to integrating data systems into the production processes of the firm. (Putra, 2009)

A survey which was conducted on major companies in some developed countries towards the end of 2008 included a review of the advertisement for 140 treasury jobs. The outcome of the study identified three areas which now constitute the core elements of treasury practices in modern economies. The three broad areas into which modern treasury functions can in principle be classified as revealed by the survey according to Degenhart (2009), are:

· Core functions (functions which can be found in every company)

· Marginal functions (activities which are extremely company-specific and/or only form part of the treasury in selected cases),

· Functions, marginal sectors and interfaces to other organizational units or tasks which, whilst being important to the treasury, do not normally form part of the treasurer’s role.- performed in exceptional circumstances

Each of these broad classifications of treasury management functions has the following components each of which is a specific responsibility.

Core functions of the treasury

· Cash management

· Liquidity planning and control

· Management of interest, currency and commodity risks

· Procurement of finance and financial investments

· Contacts with banks and rating agencies

· Corporate finance

Marginal functions of the treasury

· Finance controlling

· Project and export finance

· Pension schemes and pension funds

· Investor Relations

· Mergers and acquisitions

Functions performed by treasury in exceptional circumstances:

· Insurance

· Debtor management

· Collection/dunning

· Law

· Taxation

A cursory review of the above should underscore the fact that, the modern view of treasury extends beyond funding to the full gamut of working capital management, including collections and concentration accounts, debt restructuring, financial risk management, to integrating data systems into the production processes of the firm. There is now the general awareness of the evolving and continuously expanding but uniquely indispensable role of treasury management in the operation of every organization of our modern economy. In actual fact treasury management promotes the existence and continuity of value adding activities in the operating life of firms of whatever size and operating scope, and in whichever market it operates. Underlying each function is the strategic and innovative management of liquidity. Treasury function which is the exclusive preserve of treasury management deals solely with money which is the bottom-line of every business activity and indispensable element of all economic activities. Money is the sole underlying element of cash flows which is the life blood of every entrepreneurial activity. It is not for advertorial gimmick that CNN launched and has sustained for almost two decades its major international daily business review under the title of “Money matters”. Treasury management is the repository of the techniques and tools required for effective management of flow of money in every organization in both private and public sectors and consequently the indispensable vitalizing activator of a nation’s economic development.

As an organization enlarges its operations, the demands on corporate treasury departments are subject to constant change with increasing demand from shareholders for companies to demonstrate how financial resources and risks are managed. And as observed by Ernst and Young (2010), the requirements for increased transparency and control have led to a global trend towards centralization of treasury activities. In addition, treasurers need to cope with the growing complexity of financial instruments, ever more volatile financial markets and the introduction of new regulations and accounting practices. Treasury operations typically centralize responsibilities to improve visibility and control of cash flows and risks. The greater the centralization is often dependent on support of standardized processes and technology not only in treasury but wider finance organization Deviations on central vs. regional treasury models are often a result of business complexity, technology and geographic scale. (Degenhart, 2009). As organizations evolve, the treasury and finance function typically moves from a decentralized cash, funding, and operations department to a coordinated and strategic value centre. This evolution is particularly relevant as organizations embrace global markets and evaluate the need

for consolidated and cost-efficient treasury and finance activities. When fully embraced, the treasury transformation process broadly addresses treasury resources, organizational structures, systems, processes, tax, and governance. (KPMG, 2008)

The operations of treasury management functions have assumed greater complexity in the way of recent global financial crisis. These complexities are further accentuated by the ongoing but yet unresolved debt crisis of many countries in the European Union. The elevation of liquidity management to a boardroom-level issue in many organizations has resulted in a greater focus on the role of treasury and has made it imperative that the treasurer has comprehensive access to real-time information regarding all of a corporate transactions and cash positions (de Resseguier, 2009). It is now a common knowledge at the international financial centres across the globe that many leading financial institutions are seeking to strengthen liquidity strategies, though, some find systems integration and reliable data as constraining factors. The proliferation of centralization of treasury functions is gaining ground and the aim has been to facilitate efficient risk management and improve oversight and controls that support a portfolio view of risks to the business. For multinational companies the daily cash flows from operational side of the company will result in daily balances in different currencies within different current accounts and possibly time zones in different regions. The main challenge for treasury management is to utilize all the account balances with the result to achieve the highest possible return on invested liquidity (or alternatively lowest possible funding cost on debits). Combining the individual account balances results in several short or long positions in different currencies. This can be achieved by

automatic concentration structures provided by banks, or by manual transfers, currency conversions or physical swaps.

Global evidence of treasury management functions in economic development.

National economies

The recognition and demands for the role of treasury management in national economic development through prudent and strategic management of government finances by the officially recognized Treasury unit was not of recent development. In the study conducted for IMF in 1995 by Teresa Ter-Minassian, Pedro P. Parente, and Pedro Martinez-Mendez, the researchers observed that financial management within the government includes various activities: formulation of fiscal policy, budget preparation, budget execution, management of financial operations, accounting and auditing and evaluation. Within this broad financial management function, the Treasury function is to achieve the set of specific objectives mentioned above. It covers the following activities:

i. Cash management;

ii. Management of government bank accounts;

iii. Financial planning and forecasting of cash flows;

iv. Public debt management;

v. Administration of foreign grants and counterpart funds from international aid;

vi. Financial assets management.(Ter-Minassian, Parente and Martinez-Mendez, 1995)

In countries where there are official recognition for the involvement of Treasury in the management of the national economies the following have been their assigned role, responsibilities and achievements.

US Department of Treasury

The basic functions of the Department of the Treasury include:

• Economic, international economic and fiscal policy

• Government accounting, cash, and debt management

• Promulgation and enforcement of tax and tariff laws

• Assessment and collection of internal revenue

• Production of coin and currency

• Supervision of national banks and thrifts

Since its establishment by the Act of US First Congress on September 2, 1789, Department of Treasury in United States of America has been responsible and deeply involved in the promotion of the economic development of the nation which today is regarded as the No 1 economy in the whole world of more than 150 sovereign nations. Most of its recent achievements that exemplify the role of treasury management in national development are given below:-

· Treasury promotes economic growth through policies to support job creation, investment, and economic stability. Treasury also oversees the production of coins and currency, the disbursement of payments to the public, revenue collection, and the funds to run the federal government.

· Treasury reaches out to businesses large and small, across a range of industries and regions, to articulate the benefits of Treasury’s policies and programs, and to directly engage on the Administration’s agenda for supporting business growth and job creation.

· Treasury oversees a number of programs designed to help ensure that small businesses have access to the credit they need to grow and thrive and to create jobs in local communities across the United States.

· Treasury oversees a number of programs designed to help ensure that small businesses have access to the credit they need to grow and thrive and to create jobs in local communities across the United States of America.