Cash management deals with liquidity management, payments and collections, and electronic banking, which are complementary areas. Liquidity management involves forecasting short-term and long-term fund requirements, arranging for financing, investing surpluses and maintaining a proper balance between assets and liabilities. The objective is to provide the required cash at minimum cost. Electronic banking, electronic lockboxes and electronic bank statements all are used to optimize liquidity. To forecast cash requirements, a detailed analysis of payments and collections also needs to be undertaken. As such, payments and collections are integral to liquidity management.
Illustrative problems in liquidity management are summarized below:
Bank account management - A large corporation can have a number of bank accounts spread across the globe. In this case, even obtaining a bank balance may take days.
Bank reconciliations - Bank accounts need to be reconciled with the cash account to get a handle on cash transactions.
Payment and collections processing - The schedule of payments and collections should be available for understanding future cash in and outflows. For multinational corporations, such data has to be collected from subsidiaries and consolidated for analysis.
Cash forecasts - These include forecasts for subsidiaries and different units, and need to be consolidated into a central forecast. Time periods, such as short-term vs long-term, need to be specified. Cash forecasting models need to be developed and vetted. These different forecasts can come in different file formats, and currency adjustments may be required. Also, cash flows may have to be appropriately classified; for example, committed, uncommitted, budgeted or financial.
Global problems - Managing cash across various countries can pose problems, such as regulatory considerations, taxes, regional banking standards for minimum cash and vehicles available for investments and financing.
Investment and Debt Management
Investment and debt management deals with investments in marketable securities, issuance debt and security instruments, and sale and redemption of these instruments. These activities require access to stock market information, money markets, fixed-income securities markets, foreign exchange rates and derivatives. The treasurer also needs a view of market positions, ability to track, check and complete transactions, and back-end connections to the accounting system. Accounting standards such as Financial Accounting Standard (FAS) 133, FAS 138 and IAS 39, which provide authoritative guidance for measurement and valuation of transactions in these areas, need to be supported by accounting and treasury systems.
Financial Risk Management
Risk management involves assessing liquidity, credit, interest rate, currency and stock market risks. Liquidity risk is the risk that the corporation will not be able to meet its short-term or long-term commitments. Assessing this risk is part of liquidity management.
Treasury policy often specifies applicable credit rating criteria for third parties while investing in cash assets or making derivative contracts. Credit risk deals with the creditworthiness of business partners and, in the case of international transactions, may also include analysis of country risks. Interest rate risk deals with changes in the interest rate and interest margins and the consequent effects on financing costs, returns on investments and valuations of investments or debt. These changes need to be monitored and appropriate corrective actions need to be taken to minimize the risk. Currency risk is a risk that an organization’s operations or an investment’s value will be affected by changes in currency exchange rates. Currency risks are important for companies that derive revenues from other countries, since adverse changes in currency values can affect the bottom line. Currency and interest rate risks can be managed using different on- or off-balances sheet hedging strategies such as forwards, futures, swaps and trading strategies, among other things. Stock market risk is the risk that the market value will fluctuate and the portfolio of stocks held by the corporation will decline in value.
Investor Relationship
Treasury functions may also include dealing with current and prospective investors and providing them with relevant and reliable information.
Web-Based Tools and Technologies for Treasury Functions
These treasury functions have changed due to Web-based tools and technologies. The pace of change is uneven; several years ago e-treasury or virtual treasury was projected to be a fait accompli for corporations. The penetration of Web-based tools has been slow; however, promised functionalities have begun to appear in most ERP packages. Independent vendors also are providing services such as electronic banking and trading market software. There is a profusion of software in this area, and most of the ERP vendors offer Web-based functionalities to a varying degree. To understand these functionalities, a Web-based treasury tool, eTreasury, and SAP CFM module.
The software that manages the treasury functions, especially debt/investment and risk management, must deal with different activities — trading, back-office record keeping and accounting. Trading activities involve buying and selling of debt and security instruments. For risk management purposes, treasury often uses financial instruments such as options, futures, swaps and derivatives. As such, the trading activities involve evaluating offers, contracts, order, confirmation of orders and settlements of transactions. This front end must have access to debt, security and foreign exchange markets, and should receive information in real time. Back-office record-keeping activities involve completing the paperwork or electronic document work for purchases and sales of financial instruments, tracking various contracts, and maintaining historical and current data for all transactions. The accounting function includes recording all financial transactions in accordance with the GAAP, particularly FAS 133 and 138 in the U.S. and IAS 39 for countries following the IAS.
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