Page 284 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Functions of Treasury Department

1. Cash management: The efficient collection and payment of cash both inside the group and
to third parties is the function of the treasury department. The involvement of the
department with the details of receivables and payables will be a matter of policy. There
may be complete centralization within a group treasury or the treasury may simply
advise subsidiaries and divisions on policy (collection/payment periods, discounts, etc.,).
Any position between these two extremes would be possible. Treasury will normally
manage surplus funds in an investment portfolio. Investment policy will consider future
heads for liquid funds and acceptable levels of risk as determined by company policy.
2. Currency management: The treasury department manages the foreign currency risk
exposure of the company. In a large multinational company (MNC), the first step will
usually be set off intragroup indebtedness. The use of matching receipts and payments in
the same currency will save transaction costs. Treasury might advise on the currency to be
used when invoicing overseas sales. The treasury will manage any net exchange exposures
in accordance with company policy. If risks are to be minimized, then forward contracts
can be used either to buy or sell currency forward.

3. Funding management: The treasury department is responsible for planning and sourcing
the company’s short, medium and long-term cash needs. The treasury department will
also participate in the decision on capital structure and forecast future interest and foreign
currency rates.
4. Banking: It is important that a company maintains a good relationship with its bankers.
Treasury department carries out negotiations with bankers and acts as the initial point of
contact with them. Short-term finance can come in the form of bank loans or through the
sale of commercial paper in the money market.
5. Corporate finance: The treasury department is involved in both acquisition and divestment
activities within the group. In addition, it will often have responsibility for investor
relations. The latter activity has assumed increased importance in markets where share
price performance is regarded as crucial and may affect the company’s ability to undertake
acquisition activity or, if the price falls drastically, the lender it vulnerable to a hostile bid.

Self Assessment

Fill in the blanks:
11. Treasury will normally manage ……………funds in an investment portfolio.

12. Treasury advise on the ………………to be used when invoicing overseas sales.

13.5 The Cash Conversion Cycle

Central to short-term financial management is an understanding of the term ‘Cash Conversion
Cycle’.
We have discussed in the earlier unit that operating cycle encompasses two major short-term
asset categories: inventory and accounts receivable. It is measured by summing the average age
of inventories and average collection period.
However, the process of producing and selling a product also includes purchase of production
inputs (raw materials) an account, which results in accounts payables. Accounts payable reduce
the number of days a firm’s resources are tied up in operating cycle. The time it takes to pay the
accounts payable, measured in days is the average payment period.

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