TREASURY AND  CASH MANAGEMENT ESSENTIALS

TREASURY AND CORPORATE STRATEGY

Business strategy and financial strategy together form corporate strategy. Financial strategy depends on the business strategy – but business strategy is enabled or constrained by the financial strategies that are available.

Figure 1: Corporate strategy

Corporate strategy Business and financial strategy

What do we invest in, how do we fund those investments and how do we manage the risk of our choices?

These questions are central to the development of business strategy and to the financial criteria for investing. It is essential that the investments will earn enough to cover the cost of funding them and to compensate for the risks involved.

Treasury plays a key role in determining the organization’s financial strategy, working out how to finance the business strategy and how to manage the risks that follow from this. It sets out what is possible financially, at what cost and with what risks as the business and the environment evolve.

Corporate funding

An organization needs capital to fund its present assets, its planned future development (including an allowance for opportunistic investment) and to absorb the cash-flow effects of responding to unexpected shocks (whether internal or external).

There are three primary sources of funding: the use of an organization’s own cash reserves generated from accumulated surpluses; loans; and equity.

Equity is the best shock-absorber, as it places few demands on the organization’s various cash flows. Debt funding via a loan involves compulsory interest and the eventual repayment of the amount borrowed, either from the business’s cash flow or from new funding raised via debt or equity.

Other funding strategies that businesses can deploy include asset-based financing, leasing and working-capital financing.

Key questions to consider – Start the dialog

In raising funds, consider:

  • To which types of funding and fund-providers does your organization have access?
  • Should additional finance be raised as equity, debt or a combination of the two?
  • Does what is being invested in lend itself to asset-based finance in other words; could it be rented or leased and at what cost?
  • Are there other existing assets that could be financed more easily, releasing funds for the new investment?
Strategic and financial risk management

The risk management system covers the providers of funds against risks.

Key questions to consider – Start the dialog

In raising funds, consider:

  • Are the risks from the actual investment acceptable, when compared to the business to which it contributes?
  • Is the cash-flow impact of servicing and repaying (equity aside) the funding and any associated conditions (such as covenants and default wording) both acceptable to and manageable by the organization and those who provide its funding?
  • Is the overall business risk, including the total funding and cash-flow risks, acceptable to and manageable by the organization and the fund-providers?

Getting ahead – The management accountant's perspective

Management accountants should be aware of the range of possible risks and how they might be mitigated in evaluating the financial feasibility of strategic options, covering a range of realistic scenarios. Examples might include risks arising from movements in interest rates, foreign exchange rates, commodity prices and inflation. If, for example, a plan cannot be funded in its current form, the treasury function should suggest modifications to the plan or phasing it in over a longer period.

Some risks will be managed through structural decisions about the business. For example, the location of new plant may affect currency exposures, access to finance or the security of supply for input commodities. Other factors, such as sourcing decisions and flexibility in the sourcing of materials, components or finished goods, will also affect how risk is managed.

Other risks will not be subject to such structural solutions, but may be addressed through contract negotiation. For example, the pricing formulae in contracts may permit adjustments for changes in interest rates, exchange rates or commodity prices. Other risks will be accepted, monitored and managed.


Financing guidelines and policies

Overall guidelines for financing and for managing financial risk are derived from the financial strategy. These then set the approach to funding, managing currency and interest rate risks, investing surplus funds, setting counterparty limits and more. Such guidelines therefore ultimately enable the creation of treasury policies.

Key questions to consider – Start the dialog

In raising funds, consider:

  • Are your financial strategies integrated with your business strategy?
  • Are your treasury objectives clearly defined and aligned with your organization’s objectives?
  • Do your treasury policies accurately reflect those objectives and address any risks to reaching them?

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