Chapter 1 Introduction: the treasury’s role in managing working capital
Linking trade to the working
capital cycleTraditionally, trade finance has been seen
as a discrete tool, used by some exporting
companies to finance and support sales into
foreign markets and by some importers to
finance or pay for the purchase of goods.
With the development of technology and the
integration of the treasury department within
the company as a whole, trade finance tools
can now be used to finance parts of every
stage in the working capital cycle.
For the treasurer, the core of any
financing decision is whether it helps to
reduce the company’s reliance on external
borrowing overall, to diversify the sources of
external borrowing on which the company
can draw, or to achieve better pricing. In
some circumstances, depending on the
company’s cash position, using trade finance
could result in a greater cash surplus being
available for reinvestment or to be returned
to shareholders in the form of a dividend
payment or a share buyback.
At the same time, the company as a
whole, together with the finance team, will
look to trade finance techniques as a way to
reduce or manage some of the transaction
risks associated with appropriate sales, such
as performance risk, bank risk, country risk
and counterparty credit risk.
Together, this focus on both cash and risk
will allow the company to use its working
capital more efficiently, generating spare
capacity which might allow the company to
expand into new markets, invest in research
and development or simply reduce the cost
of its products to its customers.
There are other ways in which the
treasurer’s skills can be used to improve
efficiency within the company as a whole.
Financial risk management is a central
treasury task. This involves identifying
and quantifying exposure to financial risk
before deciding how best to manage such
exposure. These risk management skills can
be used in other areas of the business at all
three stages of the working capital cycle.
In the order to cash process, the treasurer’srisk management skills can help the
company’s sales force to evaluate the credit
risk associated with potential and existing
customers. For example, when seeking to
close a sale, risk management techniques can
be used to evaluate creditworthiness before
offering a payment discount or an extension
of credit terms. If a sale is arranged such
that payment is due in a foreign currency, the
treasurer’s foreign exchange risk management
skills can help to ensure the appropriate
exchange rate is quoted, or hedge identified,
before a price is agreed. In the case of a
company providing a service, a schedule of
payments may be agreed to help to minimise
the counterparty risk.
In the purchase to pay process, the
company’s production process is only
as strong as the financial strength of its
suppliers. The treasurer can help the
procurement department to evaluate
potential and existing suppliers to avoid a
disruption to production in the event that a
supplier ceases trading. This support can
include working with the supplier by offering
some form of supply chain finance.
In the order to delivery process, the
treasurer can also work to ensure that
resources are used efficiently and that
sufficient finance is available. Treasurers
can build a more detailed understanding
of the financial costs of the production
process by calculating the cost of each
input throughout the development and
production phases. A clearer understanding
of costs can help the operations department
identify where efficiencies need to be made.
For example, these calculations can help
the company to decide whether to install
new machinery or implement a whole new
production process.
Involving the treasurer in such activities
throughout the business will allow the
company to operate more efficiently. At
the same time, because the treasurer will
have access to greater levels of information
about a wider range of activities, the finance
director will have greater visibility, and
therefore the means to exert greater control
over the business as a whole.