Corporate Finance, 6th Edition

Chapter 50CASH MANAGEMENT

A balancing act …

Cash 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 largely 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 impact of the different options.

Section 50.1 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 €1,000 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 €1,000 unavailable as soon as the cheque has been issued;
• A's banker, who records the €1,000 cheque when it is presented for payment by R's bank. He then debits the amount from company A's account based on this date;
• A's treasurer, for whom the €1,000 remains available until the cheque has been debited from the relevant bank account. The date of debit depends on when the cheque is cashed in by the supplier and how long ...