outstanding (DPO), days of inventory outstanding (DIO), and the days sales out-
standing (DSO), are all indicators of how cash flows move through the business
process from cash to sales back to cash.^1
The cash management process involves the forecasting, timing, and management
of receipts and disbursements. With the receipts or cash inflow established, sales and
accounts receivable are forecasted. In the disbursement process, analysis is pursued
to pinpoint the timing and value of cash outflows. The inflows and outflows are
matched as accurately as possible before surpluses of either are used by the financ-
ing or investment functions. The firm’s information and control system is integral to
this process; timely information is critical for accurate planning of cash flows. The
role of information technology in treasury, either domestic or international, is likely
the single largest area of concern to treasury organizations today.
(ii) Processing and Control. Planning and organization depend heavily on timely, ac-
curate, and detailed information. The first step in matching receipts and disburse-
ments is a detailed and itemized knowledge of transactions. The next stage is to en-
sure that things happen as they should. That is control. The type of control required
depends on whether the treasury function is centralized or decentralized. The degree
of centralization is dependent on the size and complexity of the corporate structure
as well as the degree of computerization of the financial data. Whether to centralize
or decentralize is generally based on considerations such as: (1) industry characteris-
tics, type of business and cash flow; (2) corporation size, type of sale, diversification
of business, products, operating locations; (3) complexity of the firm’s organizational
structure; and (4) the corporate financial policy.
(iii) Investment and Financing. To approach an ideal cash management system, it is
necessary to devise and maintain a corporate investment policy that is the best com-
promise between yield and liquidity. In order to position funds properly, a cash man-
ager must: (1) know the amounts of incoming cash from recurring and nonrecurring
sources; (2) match cash requirements to sources of funds; (3) arrange to acquire funds
if necessary; and (4) formulate short-term investment programs for surplus funds.
The basic objective is to put all cash, over all time periods, long and short, to the best
active use. It is easy to lose sight of this overall objective because there are so many
factors in a complete treasury management program, and it is easy to become preoc-
cupied with one or two.
Once a consolidated cash position is achieved, timely decision must be made
about surplus funds and/or obligations to be met. Concerning surplus receipts, the
main criteria are the type of investments (e.g., treasury bills, foreign exchange), date
of maturity (24 hours to 6 months), and yield. With regard to disbursement require-
ments, the Treasurer must decide whether funds are to be generated from the corpo-
rate cash flow or externally sourced. The exact nature of the financial vehicle, period
of time, and interest rates must be determined.
5 • 4 INTERNATIONAL TREASURY MANAGEMENT(^1) An example of how important simple planning of cash flow needs can be is that of the United States
Postal Service. Through cash forecasting, the U.S. postal service was able to reduce average cash on hand
from $7 billion to between $1 and $2 billion in 1995. This, in conjunction with significant changes such
as allowing customers to use credit cards and electronic transfers, has resulted in a significant downsiz-
ing in the postal balance sheet, and a 1995 profit of $1.8 billion.