money spent on the purchase of materials, the processing of goods, and the overhead
incurred for the period that the goods are being processed. In fact, business itself rep-
resents the investment of cash.^2 The business therefore recycles cash, turning it into
goods, labor, and overhead, so that it can cycle back into cash. The more time it takes
to complete the cash-revenue cycle, and the more working capital that is invested
during this period, the greater the financing costs and the lower the profits of the
firm.^3
Working capital management is therefore the management and funding of a phys-
ical/financial process. Mechanically, working capital management is the conversion
of:
Contract Manufacture Booking/AR Settlement
|––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––>
Cash Materials Work-in-progress Final goods Shipping Cash
Although traditionally described as the cash conversion cycle, modern treasury
management requires that the activities described here in the cycle of cash to sales to
cash be simultaneously managed with the short-term funding cycle on the right hand
side of the balance sheet. This integration of asset and liability management in the
context of maximizing value-enhanced sales of the business line is the emerging
challenge to treasury as a strategic business partner.
This emerging strategic role is a departure from traditional resource commitment
in the treasury organization. The traditional functions of treasury have expanded to
three with the addition of strategic value; the three treasury activities today are ad-
ministrative, transaction, and strategic. The administrative activityof treasury, the
record keeping and financial statement contribution, has been greatly reduced in re-
cent years by the reengineering of business and financial processes, the redefinition
of what data and financial records are essentially needed for record keeping of the
past and for record/plankeeping for the future, and the introduction of technology
which eliminates much of the work. Transactions activity, the time, manpower, and
other resources devoted to the processing and completion of managerial treasury ac-
tivities on an ongoing basis, is also seeing substantial reduction as a result of the in-
tegration of technology into the financial process. It is the third treasury activity, the
strategic function, which is as yet the most undeveloped, yet most promising in pro-
viding additional value to the firm.
As illustrated in Exhibit 5.2, administration was the consuming activity in treas-
ury in the recent past. Currently, the introduction of technology for the documenta-
tion of treasury activities has resulted in a significant reduction in administrative ac-
tivity burdens, but transaction activity has not been as successfully computerized. A
contributing factor to the current dominance of transaction activity has been the ex-
pansion of risk management activities of all kinds—foreign exchange, interest, and
commodity prices—which in times past was not widespread. The challenge for the
5 • 6 INTERNATIONAL TREASURY MANAGEMENT(^2) The concept that a business is basically the investment of cash is highlighted by the Ethnic Chinese
expression for investment which roughly translates the concept of “investment” as “cash which is
asleep;” the problem is always the reconversion of an investment back into cash (waking it up).
(^3) One example of this in practice is American Standard, a U.S.-based multinational which has estab-
lished a goal of zero net working capital in order to minimize the size of its balance sheet and reduce cap-
ital needs to the bare minimum.