What is Corporate Cash Management?

The Importance of Corporate Cash Management

Corporate cash management is also known as corporate treasury management which is the process of collecting and managing cash flows for a company. An essential part of corporate finance operations, corporate cash management is usually overseen by in-house staff or an external service provider.

While some businesses prefer to outsource cash management duties to a third party service provider, other businesses use in-house staff members including business managers, chief financial officers, and corporate treasurers.

Corporate cash management includes managing a large variety of cash flows simultaneously. Cash management considers short term payments due and managing cash for future payment obligations.

Cash management executives are responsible for managing cash flows and risk management processes on a daily, weekly, monthly, quarterly, and annual basis. These processes include cash management strategies, stability analysis, and any other cash related responsibilities.

Fundamental metrics used for corporate cash management are the balance sheet, income statement, and cash flow statement. The balance sheet is a snapshot of a business's assets and liabilities at the time the sheet was created. The income statement is used to view business profitability during a select period of time.

A cash flow statement reconciles the other two statements, which makes it a very powerful risk management and corporate finance management tool. The cash flow statement comprehensively displays all cash flows including accounts payable and received.

Additional information listed on a cash flow statement includes investments, financing, and any other cash inflows or outflows. The bottom line objective of a cash flow statement is to report how much working capital a company has, or in other words, how much cash is immediately accessible to a company.

Working capital is the total of a business's current assets minus its current liabilities. Businesses aim to have current asset balances that are greater than current liability balances.

Cash management and risk management are complicated by some common misconceptions. For example, bottom line profits can be negative even if a business has positive cash flows.

Due to the complexity of corporate finance processes, designated corporate cash management executives including corporate treasurers are crucial for business profitability and success.

The Role of a Corporate Treasurer

the role of a corporate treasurer 1603483320 6061

A corporate treasurer is a risk management professional who is in charge of a wide range of corporate finance activities. The corporate treasurer role was previously a part of the accounting department but over time has become its own unique department.

Corporate treasurers are responsible for risk management and monitoring changes in credit, currency, commodities, operations, and interest rates. Common risks that corporate treasurers must manage include-

1. Liquidity- Liquidity management involves managing cash with the overall objective of completing payment obligations. If liquidity management is not properly performed, a company risks becoming insolvent, which can result in bankruptcy and business closure.

Corporate treasurers must manage both business revenue and expenditure, paying careful attention to cash flow and working capital available. An additional source of concern for liquidity management is the accesibility of funds from banks or other third party reserves.

2. Currency- Currency risk management includes transaction risk and translation risk. Transaction risk occurs when profits from foreign sales are converted into home currencies.

Translation risk affects corporate finance reporting when a foreign subsidiaries assets and liabilities change when converted to a sole home currency. Conversion risk management focuses on how currency moves affect company share prices.

Corporate treasurers must be aware of how conversions appear to investors and analysts. For example, if the value of a consolidated foreign asset or profit drops because of currency conversion, the company share price may also drop.

A difficult currency risk management issue occurs when two companies competing for the same sale have different currencies. One currency will necessarily be more favorable to the purchaser than the other.

An example would be two countries trying to make a sale to a Japanese importer. A tactical resolution to remain competitive would be relocation of manufacturing facilities to decrease costs, but such a drastic decision would need to be made collaboratively with corporate treasurers and senior management.

3. Interest- Corporate treasurers must be vigilant towards interest rate risk management including the decision to borrow money at variable interest rates. If variable interest rates shoot up unexpectedly, a corporate cash liquidity management crisis may occur.

Even a short term inability to make interest payments due to cash flow deficits can majorly impact future credit eligibility. The ability for corporate treasurers to negotiate lower interest rates or even find a lender can become increasingly more difficult if interest rate risk management techniques fail.

4. Credit- Credit risk management is crucial to avoid losing any surplus corporate finance assets that are invested to earn interest. Corporate treasurers must make sure to vet issuing or insuring securities for their ability to pay on time and in full.

Must-Read Content