As firms have expanded the global scope of their operations, and as global finan-
cial markets have increased their pace and volatility, the complexity of international
treasury has expanded exponentially. Globalization, combined with the expanding
scope of business reengineering, including the financial functions of the firm, have
placed new demands on treasury to add value to the business. Many working in the
field of treasury management today might argue that it is an area of significantly un-
derdeveloped potential; the treasury function in many firms today is often under-
staffed and underinvested. To use the business parlance of the day, the treasury which
is not keeping pace with the best practices of the day may be leaving a lot of money
on the table.
This chapter provides a detailed overview of the principle purpose and practices
ofinternational treasury management. Although it is increasingly difficult to differ-
entiate international from domestic treasury, understanding the unique responsibili-
ties and challenges presented by multinational operations for treasury management is
our primary goal. After explaining the basic dimensions of treasury in practice, we
focus on the two areas of most general application: multinational cash management
and multinational currency management. Throughout this chapter we suggest main-
taining a classical financial focus: Cash flow is king.
5.2 TREASURY MANAGEMENT. The treasury function of the firm might well be
best explained in the context of its issue of identification, cash flow. Treasury opera-
tions have traditionally focused on two dimensions of business, the settlement of cash
flows associated with sales, and the funding of the firm’s general operations. This is
in essence a balance sheet focus. A more comprehensive treasury organization has,
however, evolved in the past decade in which the focus of management activity has
followed the economic factors which drive firm value, corporate-wide cash flow. This
modern treasury organization focuses on a different financial statement, the statement
of cash flows, and is now in the process of adapting to the complex environment and
cash flows of the global business.
(a) Traditional Treasury. Treasuries have historically focused their organizational
form and manpower needs on the labor-intensive process of collections. As illus-
trated in Exhibit 5.1, the organization devoted significant resources to the conversion
of collections into cash, a constant substitution of one liquid current asset into pure
cash. This functional role was passive and reacted to the cash flows which were cre-
ated by the business; treasury’s role was quite clearly that of an overhead body for
funding and settlement. There was no expectation of value-added activity from the
treasury organization.
In addition to the basic cash management settlement function, treasury was
charged with the funding of the firm. This meant that treasury would plan for and
gain access to the funds necessary for the continued growth of the firm. Treasuries
therefore worked closely with banking institutions and other credit-granting organi-
zations which would create and maintain adequate access to affordable funding. Cap-
ital structure goals were basically the maintenance of a maturity match, the balanc-
ing of maturity of the useful life of assets with the funding of the individual
obligations. An aggressive treasury organizationwas one which managed the matu-
rity of the debt portfolio for interest expense—accepting repricing and refunding
risks along the way—in the hopes of any competitive advantages which might accrue
to the firm through lower capital costs.
5 • 2 INTERNATIONAL TREASURY MANAGEMENT