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(^222) Financial Management
Cash Management in a Group of Companies
Within a group of companies it is often considered desirable for cash to be managed by
a central department which will:
l Gather in all surplus funds from the various companies and redistribute them
in accordance with the investment opportunities which best serve the group
objectives;
l Dictate the dividend distributions of the subsidiary companies to ensure that funds
are retained where they are needed within the group;
l Arrange the investment outside the business of funds which are temporarily surplus
to group needs;
l Negotiate centrally any bank overdraft facilities, and the raising of new long-term
capital.
With regard to internal investment it sometimes appears that priority is given to
projects from those companies which are already profitable (since they are able
to show better incremental returns than those which are currently less successful);
and it is argued that the loss-making companies may well have the greater need for
operations.
In relation to overdraft facilities, the argument for Group central negotiation is that only
one banker (or a lead banker) will be involved who will be well informed on the whole
of the groupís activities, and that all the resources of the group will be available as
security. This does, however, put the whole group at risk if credit facilities are reduced.
If the various companies have a good local relationship with the banks they have used
individually in the past, it can happen that the total of locally negotiated overdrafts is
greater than could have been obtained centrally. While the withdrawal of one facility
still leaves the other companies untouched.
The payment of creditor accounts centrally is easier to arrange, though it may involve
delays in payment if involves first to be approved by local offices. Whether centralised
purchasing is beneficial will depend on whether the advantages of standardised
specifications and the negotiation of build discounts are offset by a loss of specialised
purchasing skills for a diverse range of products and by delays in the procurement of
urgently needed supplies.
The majority of the foregoing comments will apply equally to a single company having
divisional profit centre in scattered locations.