18 Treasury Policy

Question 1

What is a treasury policy?

Answer 1

This covers the corporate handling of all financial matters, the generation of external and internal funds for businesses, the management of currencies and cash flows, and the complex strategies, policies and procedures of corporate finance

Question 2

Advantages of a centralised treasury policy

Answer 2

• Lower bank charges to be negotiated as overdrafts and deposits net off
• Better short-term investment opportunities due to holding more cash in one place
• Bulk borrowing can be agreed at lower interest rates than for smaller borrowings
• Currency risk management can be improved due to matching
• Greater level of expertise (hedging, transfer pricing, tax, etc.)

Question 3

Advantages of de-centralised cash management

Answer 3

• Sources of finance can be matched with local assets eg duration of local finance matched to local projects
• Greater autonomy would be possible increasing motivation of local managers
• the decentralised treasury function would be more responsive to local needs / opportunities

Question 4

Issues affecting global treasury management

When deciding where to keep cash and how much of it to keep rather than invest, the following factors should be considered:

Answer 4

• cash flow issues - currency, frequency, amount
• legal issues - remittances allowed to UK, money laundering
• political issues - restrictions on foreign ownership
• tax issues

Question 5

Treasury management (This is new)

Some tools that companies can use to access larger amounts of debt and lower interest rates are:

Answer 5

• pooling - asking the bank to pool the amounts of all its subsidiaries when considering interest levels and overdraft limits
• netting - a process in which credit balances are netted off against debit balances so that only the reduced net amounts remain due to be paid by actual currency flows (matching)

Question 6

What is multi-lateral netting

Answer 6

Table of paying division / receiving division.

Question 7

Treasury departments may also supervise arrangements designed to limit exposure to FX risk including:

Answer 7

• leading and lagging
• reinvoicing
• factoring of foreign receivables

Question 8

What is reinvoicing?

Answer 8

The reinvoicing centre acts as an intermediary between any two centres invoicing each other within a company. The reinvoicing centre can therefore net off all the company’s foreign currency transactions to minimise foreign exchange risk.

Question 9

Working capital management
What are the working caital ratios?

Answer 9

Receivables

collection period - receivables / credit sales * 365 days (use an average of opening and closing if you can, if not just closing)

Payables payment period - payables / credit purchases * 365

Inventory holding period - inventory / cost of sales * 365

Current ratio = current assets / current liabilities

Acid test - (current assets - inventories) / current liabilities

Question 10

Cash operating cycle

Answer 10

Receivables collection period + inventory holding period - payables payment period

Question 11

Factors to consider when deciding how much credit to offer to customers

Answer 11

• competitors terms
• industry norms (eg supermarkets don’t offer credit)
• finance costs (if you have high finance costs you won’t want to offer too much credit)
• attitude to risk

Question 12

Factors to consider when deciding how much inventory to hold

Answer 12

• reliability of suppliers
• predictability of customer demand
• flexibility of production staff (just in time works better if you have weekend and evening staff)
• finance costs
• other holding costs (fees, plus the longer you hold stuff the more you damage)
• attitude to risk

Question 13

What is conservative working capital management

Answer 13

holding high levels of working capital (lots of inventory, long credit to customers, quick payment to suppliers). Keeping everyone else happy!

This will help to ensure there are no stock outs and that customers and suppliers are kept happy.

However it will cause a strain on liquidity and will lead to high inventory holding costs.

Question 14

What is aggressive working capital management

Answer 14

• Means holding as little working capital as possible, potentially using a just in time inventory management system.

This will be best of liquidity bur an increased risk of stock outs and lost goodwill with customers and suppliers.

Question 15

Working capital financing - a conservative approach

Answer 15

this means financing all working capital with long term finance. This is low risk but relatively expensive.

Leads to surplus cash.

Question 16

Working capital financing - an aggressive approach

Answer 16

Financing all working capital with short term finance. This is cheaper but higher risk.