Chapter 1 Introduction: the treasury’s role in managing working capital
more generally available to the treasurer,
as technology collates data on future
sales and projected production levels.
By accessing this data, the treasurer is
able to gain visibility of activity, trends and
projections throughout the whole financial
supply chain. Armed with this information,
the treasury department is now able to
take a much more proactive approach
towards managing working capital within
the company.
In an environment in which all companies
are under pressure to use their working
capital as efficiently as possible, the ability
of the treasury department to use its
skills to support the whole organisation is
increasingly welcome.The central importance of trade
One example of the way the treasurer’s
role has expanded is in support of trade.
Companies exist to sell their products or
services to somebody else. The treasurer’s
primary responsibility is to ensure the
company has sufficient cash to finance the
production of the goods to be sold or the
services to be provided. Converting these
sales into cash is another central task, with
the treasurer key to the process of recycling
that cash back into the business. This cash
is then available to be used to buy the
raw materials or finished products which
will become next week’s sales. Again, the
treasurer is central to the process, in this
case, of ensuring suppliers are paid and
ensuring the production of the next cycle of
goods or services can be financed.
On both sides of this equation each
company’s challenge is different. Retail
companies, for example, focus on generating
a high number of relatively low-value sales
to a relatively large number of customers,
certainly when compared say to shipbuilders,
which may make a small number of high-
cost ships every year. Yet, despite these
differences between businesses, the core
treasury function is the same: to finance the
production and the sales process until such
time as cash is received from the sale. The
timescales will vary, but the principles are
the same.Trade is domestic as well as
international
Most companies are located in the same
country as the majority of their customers.
Of the rest, some companies are primarily
export-focused and others are part of large
multinational groups that carry out a lot of
intercompany, and therefore international,
transactions. Many companies choose to try
to expand their exports, either as a means of
achieving growth, or as a way of managing
their foreign exchange risk.Order to cash
In all cases, though, these core trade
relationships represent a critical risk that the
company needs to manage. Retail companies
are always exposed to the risk that their
competitors may produce a better product, or
that their own will simply fall out of fashion.
Companies whose core business is to supply
other companies are both indirectly exposed
to the same end risk and directly exposed to
the risk that their core customers may choose
to refocus their businesses. Companies
providing services are often susceptible to
the risk that their clients may choose to do
the work in-house. Wherever a company
finds itself on the final product supply chain,
it is dependent on matters that are outside its
direct control when making a sale. Ultimately
there are two risks: that the company fails
to agree a transaction, or alternatively that,
once a transaction has been agreed, the
counterparty fails to pay the agreed price.
Managing these two core risks is central to
the business of the company.
The nature of inputs will also vary
according to the nature of the company’s
operations. Food retailers often pay their
suppliers weeks after the produce has been
bought and paid for by their own customers.
House builders, on the other hand, may have
to source and pay for raw materials months
in advance, making them reliant on external
borrowing to finance construction. Again, the
critical task is to ensure the company has
sufficient finance in place to get the products,
or services, to market or to the customer,
and access to sufficient cash to continue its
production process.