Strategic Treasury

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How Treasury Can Set Standards and Steer the Business Treasury can expand its usefulness to the business by providing a policy manual and a cash flow funding model and using up-to-date technology to enable focus on what really matters.

How Treasury Can Set Standards and Steer the Business

How Treasury Can Set Standards and Steer the Business 

by Carosin Buitendag B.Com.MBL, Group Treasurer, DAWN Limited, Co-founder, Powerstrat and Terence Kades B.Soc.Sc.MBA PMP, CEO and Co-founder, Powerstrat. CEO Blue Wave BI Decision Tools 

The treasury is the steward of cash, and cash like oxygen, should be harnessed, not wasted, and used to support the most profitable business products, services and growth opportunities. In a literal sense we recognise the cash we hold in our hands, but when we manage cash we also manage proxy cash™ and this is what separates the professionals from the novices and where it gets interesting to demonstrate what treasurers could be.

Expand the definitions that hold treasury back

To release the opportunities for treasuries to play a wider role in support of the business, one needs to look at definitions that might be holding treasury back from creating additional value and added services. Let’s consider two obvious candidates; cash flow analysis and cash flow forecasting. 

Cash flow is often confused with cash management and this is a real issue. Fortunately it is easily resolved because it’s a matter of amending the definitions to throw light on the expanded treasury opportunities. Cash management is about managing short-term cash, typically the daily cash inflows and outflows up to a three-month forecast window. This is an extremely important view of the cash because it keeps the doors open for business. But what is this view? Mostly it’s the results, meaning that it is the daily flows extrapolated, such as cash sales, money in the various bank accounts, investments in various cash and near cash accounts, debtors and creditors due in the short term. This is a limited view because it excludes many other important parts of a funding model. 

Cash flow forecasting is another area of confusion which also relies on the view of how cash is defined. If cash is defined in a cash management sense such as cash sales, money in the various bank accounts, investments in various cash and near cash accounts, debtors and creditors due in the short term then that is what will form the basis for budgets and forecasts. While important for treasury, it is a rather narrow view of what should be included in a forecast at a higher level or longer term i.e., from 3 months to 24 months and beyond. It is important because it shows what is expected in the future, which influences many important KPIs of both operations and cash flow management. 

A funding model view of cash flow 

Let’s consider how using the elements of proxy cash can be put into practice helping the treasury to guide the business from a cash perspective. First we tag those accounts that are cash and those that are some distance from actual cash (banknotes) which we term proxy cash. Business units work with proxy cash on a daily basis, e.g., inventory, debtors, creditors, interest paid and received, Capex, intercompany debtors and creditors, intercompany financing, forex, and so on. Grouping these accounts under logical headings or categories provides the foundation of a method for a treasury manager to help business units better understand the cash implications of their business.

Our work and research over the past 25 years in both private and public sector organisations has highlighted certain critical elements in the management of cash. This is not about daily cash management. Proxy cash takes different forms because management has varying needs and perspectives. Cash can exist in many forms, from actual cash in the pocket to cash in the bank, lines of credit, loans available or owning, bonds, to inventory, debtors and creditors. We term anything that is not near cash as proxy cash. Proxy cash shows in the transaction accounting systems and is mixed with accrual type accounts. To better understand and manage the continuum of cash, we need to select valid proxy cash accounts that reflect as close in proximity to cash as possible. This is the subject of our Funding Model discussed in this article. The Funding Model categories are shown in Figure 1  [see page 2].

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