Treasury management and working capital policy

The number one function of a Treasurer is

  • Corporate finance – capital markets, trading finance and risk
  • Equity management – investor relations, mergers and divestment


Most important source long-term financing is retained earnings
  • No dilution of existing shareholders or corporate control
  • avoids issuing costs
  • management may not have to explain to shareholders why dividend are not paid


  • limits firm profits
  • reduces divident payout
  • risk of not obtaining finance at a vital stage
  • managers may regard this essentially as free capital

Analysis of Assets:

  • Fixed Assets
  • Permanent current assets
  • Fluctuating current assets
  • Matching principle: long-term finance used for long-term assets, short-term finance used for short-term assets.

Methods of Financing:

  • short-term fluctuating current assets
  • long-term for permanent current assets and financing of fixed assets
  • increased use of longterm finance lowers risk

Financing: The currency of borrowing

Union Jack plc borrows £100m to invest in the USA.

Exchanges the £100m into $150m at the exchange rate of $1.5 to the pound.

Net cash flows in subsequent years are expected to be $30m per annum.

If the exchange rate remained constant Union Jack receives £20m per year.

If the rate of exchange moved to $2 for every pound the annual cash inflow would be £15m.

The risk attached to this project can be reduced by ensuring that the liabilities are in the same currency as the income flow.

Financing: The interest rate choice

Balance to be struck between fixed and floating interest-rate borrowings

Relationships with the financial community

A planned and sustained effort to maintain mutual understanding between shareholders and the organisation. Create a detailed and up-to-date picture of who the shareholders are. High-quality flow of information to enable shareholders to better appreciate the firm and its strategy in order to sustain their commitment.

Banking relationships.
Most firms make use of the services of more than one bank.
Any one bank may not have all the requisite skills and infrastructure. Banks have a tendency to join syndicates to make large loans to firms. Some companies operate in dozens of countries.

The treasurer at a strategic level    

Decision to merge with another firm or to purchase a major business (a trade purchase) will require some assessment of the ability of the organisation to finance such activity.

Treasurer will be able to advise on,

  • the sources of finance available;
  • the optimum mixture;
  • the willingness of the financial community to support the initiative.

Disposals of subsidiaries.

Advise on the course of interest rates and exchange rates and so decisions such as whether to establish a manufacturing facility or begin a marketing campaign in another country. Total amount of borrowing a firm should aim for.

Risk Management

Reasons firms sacrifice some potential profits in order to reduce the impact of adverse events:

-It helps financial planning;
-reduce the fear of financial distress;

-some risks are not rewarded

  • Liquidity risk; cash-flow risks
  • Credit risk; not being able to get capital
  • Market risk.
  • Risk retention;
  • Risk avoidance; only take risks that generate a profit, do not take risks for no return!
  • Risk reduction – Risk transfer:
-Diversify – don’t put your eggs all in one basket
-Insure – transfer the risk to other businesses
-Hedge – such as currency and derivatives ( forwards, futures, swaps and options)
Z-Score models

Discriminatory ratios – R1 to Rn will typically feature:

  • profitability;
  • asset turnover;
  • liquidity;
  • gearing.

They will frequently be ‘variants’ of more traditional financial ratios.
A score below a certain level indicates higher risk of corporate failure.

Relaxed strategy – liquidity is well addressed but taking less risks your return on capital employed will be low
Aggressive strategy – Taking more risks they are exposed to more liquidity risk but at the same time the company would be able to have a higher capital employed
This policy is reflected upon the managers risk exposure
Overtrading situations
  • Initial under-capitalisation of future operations, the company would not have sufficient funds to continue with the project.
  • Over-expansions – did not predict the higher demand from the market for your products and services
  • Poor utilisation of working capital resources – cash lying idle is a waist and has a very relaxed debtor policy and customers have the money which should be with the company or your paying your suppliers way to fast, always utilise any payment periods suppliers give you and utilise the capital for other low risk projects.
It could also be a combination of all three and have not used the capital and leads to overtrading.
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