Treasury and working capital management

Question 1

Treasury management The majority of this chapter is brought forward knowledge from your professional
stage studies. 1.1 The role of the treasury management function

Answer 1

The role of a treasury manager is to:
 Meet corporate financial objectives
 Manage the liquid funds
 Implement the funding policies
 Manage the currency
 Corporate finance
These departments require expertise in an ever-growing financial world and can be
outsourced in order to take advantage of such expertise.

Question 2

Treasury management 1.2 Centralised vs decentralised treasury management

Answer 2

Large companies with many divisions/subsidiaries need to decide whether to have
one treasury management department, that services all of 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

Treasury management Global treasury management 2.1 International liquidity management techniques

Answer 3

1. 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

2. Netting – a process in which payments are netted off receipts, with only the
reduced balance remaining due to be paid

3, 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.

4. Multilateral netting – occurs when several companies within the same
group interact with the centralised treasury department to net off their
transactions
The 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 3

Treasury management Global treasury management Issues affecting global treasury management:

Answer 3

Issues affecting global treasury management:
 Cash flow issues
 Legal issues
 Political issues
 Tax issues

Question 4

Working capital financing

Answer 4

Working capital is the excess of current assets over current liabilities.

The volume of assets to liabilities for a company will largely depend on the nature of
the business, e.g. a manufacturing company with a long lead time from overseas
suppliers may need to hold a high level of raw materials.

There are three main approaches that a company can follow when providing finance
for the working capital.
1. An aggressive approach – relies heavily on short term finance which is risky,
and is useful for a company with a low level of current assets, such as a bakery
2. A conservative approach – relies more on long term finance which can be more
expensive, but is safer for a company with a high level of working capital, such
as a furniture manufacturer
3. A moderate approach – which provides a more balanced mix between shortand long-term finance

Getting the mix of short- and long-term finance can be vital for a business to balance
the day to day demands of working capital (liquidity) with the cost of available funds
(solvency). This mismanagement can be a factor in causing financial distress and driving the
need to re-finance. If a company is struggling for cash, this may be an area to review to ensure that cash
is not tied up within working capital for an excessive amount of time.
To help reduce working capital investment within a business:
1. Provide incentives to collect customer cash in faster e.g. discounts for early
payment
2. Outsource the debt collection to a debt factoring company
3. Delay payments to suppliers
4. Move to a more efficient inventory system so that less goods are held
5. Utilise big data techniques for better, more accurate inventory management
6 Better relationships with suppliers to promote more just in time inventory
management, or information sharing to allow inventory levels to be minimised.