These investment and financing decisions must be viewed in terms of financial
risk, flexibility, and opportunity cost. Financial risk measures the ability of the firm
to meet future debt service obligations. Flexibility is the company’s ability to alter a
course of action in order to meet future unspecified financial requirements in an un-
defined financial market. In today’s quick changing economic conditions, opportu-
nity cost is an uncompromising yardstick, that is, the maximum profit that could have
been obtained had cash been applied to some other use.
Although adequate for the time, the disassociation between the two functions—the
lack of a theoretical or managerial linkage between asset management and funding
strategy, and the lack of a general financial strategy focus for the firm—have proven
inadequate for the modern multinational.
(c) Modern Treasury. Whereas the traditional treasury activities focused solely on
the conversion of collections into cash, the modern view of treasury is a much more
proactive management of the entire business process, the management of the cash
flows which createfirm value. This is an assertive managerial approach akin to a
view of the firm as a statement of cash flows. An indirect statement of cash flows di-
vides the cash flows of the firm into three distinct areas: operating cash flows,in-
vesting cash flows, andfinancing cash flows. This singular document captures the
essence of the modern cash management cum treasury management activities.
- Operating cash flowsare those arising from the true business line. In an indirect
statement of cash flows, this is net income from operations plus depreciation
less net additions to net working capital (current asset changes less current lia-
bility changes). The principal source of cash for investing in long-lived assets is
from operations.
The fundamental requirement for creating corporate value is by making good
investment in long-lived assets. When firms do not generate enough cash inter-
nally—through their operations, they either cut investment more drastically than
their competitors do or they are forced to turn to external markets for the requi-
site funding (financing cash flows). The effective management of the company’s
operating cash flows is called working capital management. - Investing cash flowsarise from the capital investment analysis and acquisition
needs of the firm. Firms evaluating new capital asset acquisitions (capital budg-
eting), mergers, or other independent business unit valuations (much of which
historically was out-sourced to the investment banking sector) are conducted
within this functional treasury area. - Financing cash flowsare those arising from the funding of the firm. Funding de-
cisions such as debt issuance, form, maturity structure, restructuring, and divi-
dend policies would all fall within the analytical and management capabilities
of this treasury function.
The statement of cash flow highlights the modern view of the treasurer as a work-
ing capital manager. The modern view of treasury extends beyond funding to the full
gamut of working capital management, including collections and concentration ac-
counts, debt restructuring, financial risk management, to integrating data systems
into the production processes of the firm. Working capital is the money invested by
the business in those things—products, services—which are to be sold, and includes
5.2 TREASURY MANAGEMENT 5 • 5