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In line with action plan of Director PBFA, this paper is intend to give birds-eye-view of the general concept of treasury and risk management and also try to derive what will be the role of the treasury and risk management division that will be established under finance department . In the following pages, the role of treasury and risk management is assed and its interaction is designed to link the activities of the division with other supporting departments, divisions and units for the successful accomplishment of its objective.

Moreover, this paper puts a guideline that will enable PBFA establish treasury and risk management division that is capable to identify probable risks with financial loss, measure the likelihood and impact and recommend alternative responsive risk response strategies . The division will also enable finance to be proactive in the provision of effective service and outline properly cascaded cash management policy and working manual with proper internal control in relation to AUC objectives.

Treasury management

Treasury is responsible for financial well-being the Africa Union Commission’s. It controls the production and distribution of the financial matters.

treasury management typically has three main areas for which it is responsible. It tracks and manages the available cash flow of the commission to make sure the bills are paid and commitments honored. It also keeps track of debt and investments of the commission.

Treasury management incorporate two concepts

1) Basic Cash collection and payment management which focus short term cash flows, forecast, bank balances and bank related relations with financial institutions and other organization, custodian of legal obligations and letter of guaranties

2) The other is Advanced cash payment that includes assets management and their risk assessment , exchange and interest rate risks

However at initial stage, it would be advisable for ACU ( PBFA) to focus on the basic treasury management level and move forward to the advanced level using some frame works, modules and support systems when capacity is built:

risk management

Risk can be initiated at any stage and for any project or activity. Every organizational activity has related risks. In an Organization risk management is not only specific unit activity but a general approach to be handle by each sector and department. Hence, Finance also think it is high time to consider an organizational structure that will implement risk management frameworks to identify risks and assess their root causes and recommend alternative risk response mechanisms for those have financial implications and loss on the organization.

Identified risks and their categories

Different organizations have issued various classifications of risks. Among them Committee of Sponsoring Organization of the tread-way commissions COSO has classified risks in to four strategic, operational, financial and hazard. Based on these categories here are listed some of the risk AUC might need to focus:

No. Identified Risks Risk category Risk rating
1 Loss of trust of partners and donors Strategic High
2 Loss of regulatory and political trends Strategic High
3 Loss of directions Strategic High
4 Failure to have good HRM structure Operational High
5 Failure to deliver product/service Operational High
6 Ineffective operational business cycle Operational High
7 Poor leadership style Operational High
8 Luck of willingness to change Operational High
9 Loss of documents Oper./ Finan High
10 Poor archive system Oper./ Finan High
11 Inefficient and utilization of skilled labor Operational High
12 Poor IT system utilization Operational High
13 Corruption Hazard High
14 Incompetence decision Hazard High
15 Theft Hazard High
16 Liquidity Financial High
17 High bank transaction cost Financial Moderate
18 Foreign exchange loss Financial Moderate
19 Wrong/incomplete performance reporting Financial High
20 Incomplete business reporting (Planning, budgeting and cost allocation etc.) Financial High

How can organization handle these risk

An organization can be guided by it corporate culture how to handle the risk as it mold managers how to behave toward risks. whether managers are risk takers or risk averters, there is a commonly applied framework which involves risk Identification, Assessment, management and monitoring. After a risk is identified the likelihood the magnitude of loss has to be measured. Considering the frequency and value of loss risk might be treated in either of risk response mechanisms to be accepted, rejected , mitigated or transferred. As an ongoing concern of business, risk management is not on time activity but need periodical monitoring. Hence treasury should be able to monitor risk fall outside acceptable risk and apply proper resolution strategy in order to use them as an opportunity again.

Liquidity management
Due to the dynamism of the operating environment of business organization, management would like to project and approach the future through forecast in order to minimize the threat (risks) and use the opportunities. Due to role of treasury becomes more forecast-based in its action.

Though AUC has never faced significant cash shortage, it is real that there was no proper cash management mechanism that enables AUC to get the benefit out of it. Hence, the Division should ensure existence of adequate optimum balance of cash to all currency types based on the cash forecast.

Currency management,
Due to large number of accounts and its operation in various countries, AUC is exposed to currency rate risk during transaction and presentation of financial reports.

Currently it is four type of currencies AUC is using (USD, EUR, ETB and GBP). All of them are designed specific activity with requirement of specific donor and partner. As a result AUC cannot use these currency when needed . Rather it has to buy from its USD USD account according to existing account set-up. This will lead AUC to currency rate loss. Hence, The Division is expected to set a pool mechanism and use these currencies to the maximum possible time or till they are needed for intended activity.

It is also equally important to establish petty cash with currency types of at cashier level. Proper controlling mechanism and Periodical replenishment order level should be maintained for each currencies.

Required foreign currency level will be maintained as per the forecast of cash flow while the rest can be hedged or sold to the currency required. Currency can be sold and/or purchased to establish the required level of amount

The required currency can be decided by director finance and can be amended through time based on the demand.

Investment management,
Idle cash can be generated at AUC level as a residual amounts from its operation budgets contribution, earlier payment of contribution of assessments and voluntary contribution of partners or donors . It is also current practice that, such idle cash is kept in MMDA account which is risk free but very low and almost nil return due to unplanned withdrawals.

Hence the decision is expected to take control of such idle cash and manage them in different investment portfolio through centralization and pooling system. It also expected to facilitate earlier collection mechanism of assessed contribution and funds of collaboration programs and manage them till duet date of the desired activities .

The types of investments and their maturity will be decided by Director finance based on the rate or return (interest rate), cash flow requirement and the liability profile of AUC.

Investment will be also linked to the credibility of the financial institutions where investment is made. Consistent credit rating measurement should be used to evaluate the Investment institutions.

Bank relation management
According to the current policy though it is DCP and/or BCP that able to open and close accounts, it should be upon the recommendation of Director PBFA and initiation of the division. it will also negotiate their term and condition and notify the Bank of any restrictions on the operation of any such accounts

Currently AUC has 91 bank account which makes it difficult for managing these accounts . finance does not have clue why and how some of them are opened. Cash is left disbursed all over the accounts makes it difficult to manage cash and AUC could get proper investment return. It also worth mention finance has assign number of staffs to manage the reconciliation.

Accounts should be opened when it is convinced after assessment.

I addition to managing the existing accounts, the division also need to correspond with banks in relation to facilitation of overdraft on some of the accounts, investments interest rate, duration of maturity and volume of investment. It also require to facilitate utilization and installation of proper settlement systems and the interface of data.

Limit of authority on payments of accounts or cards will be set in related to the rules and regulation of AUC and communicated to banks and concerned departments. Banks also should be informed about undelivered disbarments/payments which are deducted at the AUC’s bank account

Imp-rest risk
Treasury unit is expected to minimize cash carrying risks related to AUC, and finance officers through utilization of various instruments such as: Credit agreements, Corporate credit cards, universally accepted credit cards, traveler cheques,

Interactions

Interact with finical division about payments on the pipe line as inputs of the forecast

Interact with procurement and travel unit about obligation of AUC of suppliers, credit agreements, form of payments of such arrangements. letter of guarantees issued on behalf of supplier for the advance payments made should be inclusive under this interaction

Interact with regional and or liaison offices about their subventions, bank accounting openings and service types provided by correspondent banks, their petty cash.

Interact with banks or other financial institutions or agencies in relation to investment portfolios type, their maturity, rate of return, etc

Interact with insurance staffs to identify periodical life insurance premium payments and reimbursements, life insurance payments
Interact with pension unit bout periodical contributions and its reimbursement.

Interact with strategic department about resources to be mobilized and the memorandum of understanding arises to understand the partnership agreement and donor’s requirement.

Interact with budget division in relation to program and regular budgets, supplement budgets members contribution, time framed schedule of the programs, projects and activities

Interact with program managers to get list of well-organized and time framed activities with corresponding financial commitment toward each programs and project.
Interact with payroll staffs to project the expected staff benefits and payroll

The role of Treasury and risk management division

Monitor daily cash flow and ensure that adequate liquidity is provided and issue three months cash forecast report bimonthly

Recommend investment portfolios based on the forecasted cash requirements and issue monthly investment portfolio report.

Ensure funds are invested in the correct portfolio after proper assessment of the portfolios and investment agencies

Manage foreign currency requirements and establish petty cash and their replenishment order level.

Produce letter of report to the bank with updated panel of signatories and the term of operation the designated accounts together with specimen signatures in respect of such account(s)

Facilitate utilization of online banking payment system at headquarter level.

Facilitate utilization of over draft to some of the accounts

Manage cash at bank and on hand at cashier level, regional and liaison office level

Evaluate bank transaction costs (interest and exchange rate)

Facilitate electronic payment system and recommend and mange utilization of credit cards and corporate travel cards.

Ensure proper settlement electronic payments and data interface

Ensure proper custodianship of bank guarantees, cheques, traveller cheques, corporate credit/debit cards

Facilitate automatic data interface of bank statements for reconciliation

Involve and display treasury management expertise on the process of establishing of partnership agreements

Ensure cash is transferred to the proper account of the beneficiaries

Facilitate earlier collection of member states and voluntary contribution

Compile receivable reports by age and recommend provision for collectability to Dir. PBFA

Etc

Recommended structure

The structural arrangement of the division considered at Head of Division level as its activity require the direct involvement of Director PBFA. Moreover, being under the director PBFA will strengthen the accomplishment of it objectives’. Hence the structured is designed as follows.