What it means
The core job is liquidity. A profitable company can still fail if it cannot pay wages or suppliers in a particular week, so treasury exists to make sure that situation never arises.
The second job is funding. Treasury arranges overdrafts, term loans, revolving credit facilities and sometimes bond issues, and it manages the covenants and reporting obligations that come attached to them.
The third job is financial risk. If a business buys in euros and sells in dollars, or borrows at a floating interest rate, treasury decides how much of that exposure to hedge using forward contracts, swaps or natural offsets such as borrowing in the same currency as its revenue.
The day to day mechanics revolve around a rolling cash forecast, typically 13 weeks at weekly detail, refreshed each week against what actually happened. Bank account structures such as cash pooling then sweep balances into a single account, so the group is not overdrawn in one place while sitting on idle cash in another.
The measure treasury teams live by is available liquidity: cash plus short-term investments plus undrawn committed facilities, less borrowing that falls due within the year. Boards usually set a minimum buffer expressed in months of operating outflows, and breaching it triggers action long before the bank account is actually empty.
In practice
Real-world examples.
Example
A seasonal toy manufacturer builds inventory from March and collects most of its cash in December. Treasury arranges a seasonal overdraft that peaks in October, sized from the 13 week forecast, rather than borrowing at that level all year.
Example
A hotel group with revenue in three currencies uses forward contracts to fix the exchange rate on its next six months of expected euro costs. The hedge does not make the group money, but it removes a variable from the budget the operations team is measured against.
Example
A construction firm discovers it is paying overdraft interest on one subsidiary's account while another subsidiary holds a large positive balance. Introducing a cash pooling arrangement nets the balances daily and removes most of the interest charge.
Think of it
“Treasury management is professional money management-ensuring cash is in the right place at the right time.
Formula
Calculation
Net Available Liquidity = Cash + Short-Term Investments + Undrawn Committed Facilities - Short-Term Debt
Liquidity Cover in months = Net Available Liquidity / Average Monthly Operating Cash Outflows
A mid-sized food producer holds $4,200,000 in current accounts and $1,800,000 in short-term deposits, and has an undrawn committed revolving facility of $3,000,000. It also has $2,500,000 of borrowing repayable within twelve months.
Net available liquidity = $4,200,000 + $1,800,000 + $3,000,000 - $2,500,000 = $6,500,000
Its average monthly operating cash outflow is $2,600,000.
Liquidity cover = $6,500,000 / $2,600,000 = 2.5 months
If board policy requires a minimum of three months of cover, the company needs $2,600,000 x 3 = $7,800,000, so it is $1,300,000 short. Treasury would respond by extending the facility, deferring capital spending or accelerating customer collections.Case study
Seen in the real world.
Grantley Foods is an invented mid-sized producer used here as an illustrative example. Its board policy required at least three months of liquidity cover, but the monthly treasury report showed net available liquidity of $6,500,000 against average monthly operating outflows of $2,600,000, giving 2.5 months.
The group treasurer took three actions rather than one. She negotiated a $1,500,000 increase to the revolving facility, deferred a $600,000 equipment purchase by a quarter, and tightened collections on the twenty largest overdue customer accounts.
In this fictional case the combined effect restored cover to just over three months within two months, without any new equity or expensive short-term borrowing. The more lasting change was that the 13 week forecast became a standing board paper, so the shortfall was visible weeks before it would previously have been noticed.
Watch out
Common mistakes.
- Confusing profit with cash, and assuming a profitable month means the company can meet its payments that month.
- Counting an uncommitted overdraft as available liquidity, when the bank can withdraw it at short notice.
- Building a cash forecast once and never comparing it with actual outcomes, which is the only way forecasting accuracy improves.
Questions
People also ask.
Is treasury management only for large companies?
No, any business with borrowings, foreign currency exposure or seasonal cash swings needs the same disciplines, even if one person does it part time.
Should a company hedge all of its currency exposure?
Rarely; most set a policy to hedge a defined proportion of expected exposure over a defined horizon, because hedging costs money and forecasts are imperfect.
What is a 13 week cash forecast?
It is a weekly view of expected receipts and payments over the next quarter, used as the main operational tool for spotting shortfalls in time to act.
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