Chapter 50
FINANCIAL MANAGEMENT : Managing cash flows

treasurer’s job is to perform the following tasks:

  • forecast trends in the credit and debit balances of the company’s accounts;
  • keep dormant funds to a minimum;
  • invest excess cash as efficiently as possible;
  • finance borrowing requirements as cheaply as possible.

Cash balances for treasury purposes are not the same as the balances shown in a company’s accounts or the accounting balance of its assets held by the bank. In particular, treasurers must take account of value dating. The value date is the date from which a credited amount accrues interest when paid into an interest-bearing account or becomes available when paid into a demand account.

The aim of the cash budget is to determine the amount and duration of cash requirements and surpluses. The cash budget shows all the receipts and all the disbursements that the business expects to collect or make. Day-to-day forecasting, which takes into account value dating, requires paying considerable attention to the payment methods used. Forecasts are more reliable when the treasurer has the initiative both for setting up a payment and carrying out the fund transfer.

Account balancing is the final stage in the liquidity management process. It eliminates the additional costs derived from differences between borrowing and investment rates. Lastly, optimised cash management entails the acceleration of the collection process and the exten- sion of suppliers’ payment deadlines.

Cash pooling – the centralisation of subsidiaries’ account balances within a group – is com- parable to the process of balancing all of a subsidiary’s accounts. Pooling is generally backed up by an integrated information system and a group-wide agreement concerning banking terms and conditions. At the international level, regulatory difficulties concerning some cross-border transfers prevent the direct balancing of subsidiaries’ accounts. Instead, the initial pooling process is carried out by a local bank in each country, and then the resulting balances are pooled by an international banking group.

The corporate treasurer’s first concern when investing cash is liquidity. The treasurer’s second concern – security – is thus closely linked to the first. Security is measured in terms of the risk on the interest and principal. Products that can be used can be split between products with a secondary market (interest-bearing current accounts, Treasury bills, money-market funds, commercial papers, etc.) or without (time deposit, repos, etc.).