Corporate Finance, 4th Edition

Chapter 49Managing cash flows

A balancing act …

Cash flow management is the traditional role of the treasury function. It handles cash inflows and outflows, as well as intra-group fund transfers. With the development of information systems, this function is usually automated. As a result, the treasurer merely designs or chooses a model, and then supervises the day-to-day operations. Nonetheless, we need to take a closer look at the basic mechanics of the treasury function to understand the relevance and the impact of the different options.

Sections 49.1 and 49.2 explain the basic concepts of cash flow management, as well as its main tools. These factors are common to both small companies and multinational groups. Conversely, the cash pooling units described in Section 49.3 remain the sole preserve of groups.

Section 49.1 The basics

1/ Value dating

From the treasurer's standpoint, the balance of cash flows is not the same as that recorded in the company's accounts or that shown on a bank statement. An example can illustrate these differences.

Example A, a company headquartered in Amsterdam, issues a cheque for €1000 on 15 April to its supplier R in Rotterdam. Three different people will record the same amount, but not necessarily on the same date:

• A's accountant, for whom the issue of the cheque theoretically makes the sum of €1000 unavailable as soon as the cheque has been issued;
• A's banker, who records the €1000 cheque when it is presented for payment by R's bank. He then ...