Chapter 7 Treasury and working capital management.

Question 1

1.1 The role of the treasury management function

Answer 1

The role of a treasury manager is to:
- Meet the corporate financial objectives
- Manage the liquid funds
- Implement the funding policies
- Management the currency
- Corporate finance

Question 2

1.2 Centralised vs decentralised treasury management

Answer 2

Large companies need to decide whether to have one treasury management department, that services all the company, or whether to allow each division to have the individual control. Advantages of a centralised department:
- Avoids a mix of cash surpluses and overdrafts in different accounts
- Facilitates bulk cash flows, so that lower bank charges can be negotiated
- Larger volumes are available to invest, opening up more investment opportunities
- Foreign currency risk management is improved, allowing the process of matching to be more useful
- A specialised department will employ more expertise
- Less money will be required to be held for day-to-day transactions
- Focus will be on achieving higher profits through good cash management
- Standardised practices are easier to implement
Disadvantages of a centralised department:
- Local knowledge is not utilised when raising the finance
- Autonomy is restricted for the managers of the subsidiaries
- Requests for finance may be slower to be raised, a decentralised system is often more responsive

Question 3

2.1 Global treasury management

Answer 3

Issues affecting global treasury management include cash flow issues, legal issues, political issues and tax issues.
International liquidity management techniques include:
- Pooling: asking the bank to pool the amounts of its subsidiaries when considering interest levels and overdraft limits. It requires all of the group companies maintaining accounts at the same bank
- Netting: a process in which payments are netted off receipts, with only the reduced balance remaining due to be paid
o Bilateral netting: only two companies, within the same group are involved. The lower amount is deducted from the higher amount and the difference remaining to be paid
o Multilateral netting: occurs when several companies within the same group interact with the centralised treasury department to net off their transactions
Multilateral netting: process involves establishing a base currency to record all intra-group transactions. The central treasury department will then record the amounts payable/receivable to settle transactions.
It reduces the need for money to be transferred for each intra-group transaction but requires strict controls to be in place. In addition, there are restrictions of netting in some countries as it can be seen as a tax avoidance scheme.

Question 4

3.1 Working capital financing

Answer 4

Working capital is the excess of current assets over current liabilities. The volume will depend on the nature of the business. There are three main approaches that a company can follow when providing finance for the working capital:
- Aggressive approach: depend on short term finance which is risky, but useful for a company with low levels of current assets
- Conservative approach: relies on long term finance which can be expensive. Safer for companies with high levels of working capital
- Moderate approach: balance between short and long-term finance
Mismanagement can be a factor in causing financial distress and driving the need to re-finance. To help reduce working capital investment within a business:
- Provide incentives to collet customer cash in faster
- Outsource the debt collection to a debt factoring company
- Delay payments to suppliers
- Move to a more efficient inventory system so that less goods are held
- Utilise big data techniques for better, more accurate inventory management
- Better relationships with suppliers to promote more just in time inventory management, or information sharing to allow inventory levels to be minimised