International Finance and Accounting Handbook

Efficient treasury operations consider every element that affects the operating
unit’s ability to collect, disburse, and manage the cash resources available to it. This
includes the whole cash cycle, from sales to the payment of trade obligations. The
following steps must be taken to minimize interest and administration costs:

1.Conserve cash resources.

2.Ensure adequate liquidity at the lowest overall cost for payments.

3.Invest surplus funds for highest return.

4.Protect operating returns from fluctuations in the foreign exchange market.

All within the constraints of maintaining good customer, bank, and supplier relations.

(b) Treasury Implementation. Implementation of treasury is a three-step process:
(1) planning; (2) processing and control; and (3) investment and financing.

(i) Planning. Cash planning is short- and long-term forecasting encompassing
everything that may affect cash flow. It requires timely collection of a great deal of
information about inflows expected from recurring and nonrecurring sources, and
about obligations that have to be met in the immediate and more distant future. The
aim is to match inflows and outflows, thus reducing dependence on borrowed funds
to meet maturing obligations. This is particularly important for organizations that are
sensitive to daily cash flow and the cost and frequency of borrowing.
Good cash organization is based directly on the time value of money and recog-
nizes that a dollar received and put to use today is worth more than a dollar tomor-
row. In practice it means maximum acceleration of inflows, stringent regulation of
outflows, and constant diversion of spare cash into profitable investment—not peri-
odically but routinely, every day, and occasionally overnight. Good cash organization
makes it normal to meet obligations with funds that were earning interest up to the
last moment before disbursement. It also means having funds ready to gain every
available advantage by prompt payment.
An integral component of the planning process is a thorough understanding of the
firm’s cash flow conversion cycle. The three components of the cycle, days payments

5.2 TREASURY MANAGEMENT 5 • 3

Exhibit 5.1. The Traditional Treasury Function of Cash Management Settlement.