Thursday, March 27, 2014

Treasury and Financial Supply Chain Flows

Treasury and Financial Supply Chain Flows

Source: The Handbook of Global Corporate Treasury

The entire process requires capital in order to run. Until the customer pays the firm, the inventory, operations and supplies need to be funded. Proceeds from sales received across locations need to collected and deposited, so that payments can be made from those or other locations for purposes of running the business. Accounts need to be maintained in these locations, perhaps in different currencies, and these accounts need to be managed. 

Trade transactions need to be funded, and documents must be prepared and used.The entire aspect needs to be planned and executed, and this forms the basis of one of treasury’s key roles, which is to handle transactions as part of cash management, managing the cash and funds of the organisation.

It is preferable to use the firm’s own money to make these payments, and hence the monies need to be moved efficiently from one location to another, making them available where they are needed. Where it is not possible to use the firm’s own cash, alternative arrangements need to be made—for example, borrowing from a local bank. Even if access to these funds becomes difficult, the firm still has to keep running—ensuring that there is money available when required ensures liquidity for the firm.

Excess cash needs to be invested securely to generate return for the firm until such time that the cash is needed. Long-term projects require capital—this needs to be arranged at the least possible cost and putting least pressure on the firm’s cash flows. The organisation needs to be creditworthy, and the financials of the firm have to be aligned to ensure that the performance is consistent with or better than expectations in order to sustain and improve the creditworthiness of the firm and hence its ability to generate liquidity and lower its cost of funding. This calls for managing the balance sheet efficiently, and with the right structure. This entire set of activities, the second of treasury’s key roles, covers managing the balance sheet and the firm’s liquidity (which is another aspect of cash management).

As the firm moves across borders, sells or buys from another country, or exposes itself to other counterparties and undertakes financial transactions, it exposes itself to risk or uncertainty that the business and financial objectives will not be met because of a change in some factors—perhaps market movements, defaults of trade partners or banks, or internal errors. The management of these risks forms the third of treasury’s primary roles.


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