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Treasury and cash management

Owen Mavengere
IT has been a while since I sat down to write something and I am excited to be back. This is on the heels of the recent government pronouncements, which were made on June 27, 2022. This will definitely be extensively covered so I will resist the temptation to focus on that.

I will talk about something that I have realised has been a thorn in the side for several finance and treasury managers.

Definition of treasury management

The Institute of Chartered Accountants of India (ICAI) has some material, which I will use to extract the definition and most of the content of this article. Treasury management incorporates the handling of all financial matters. The two major elements of this function include:

  • Managing working capital; and
  • Managing of financial risks, e.g. exchange rate movement and interest rate movements.
  • The major objectives of treasury management are to:
  • Reduce interest charges as much as possible,
  • Manage foreign currency,
  • Minimise bank charges,
  • Maximise the return on the cash available, and
  • Mobilise and manage cash resource for key venture.

The above if not managed well can reduce profitability of an entity. Inappropriate management of the treasury function can in some extreme cases threaten the existence of an entity.

I will go back to one of my favourite lines that I first heard from a senior member of the Zimbabwe accountancy profession, who said to me that he read somewhere, likely from Greg Savage, that revenue is vanity, profit is sanity and cash flow is reality. This speaks to the importance of cash flows.

Functions of treasury departments

The treasury function in a corporate is usually the function of the finance manager, but oftentimes large corporates would have a separation even at senior level.

According to the literature from ICAI, the major responsibilities of the treasury departments revolve around funding management, cash management, banking, currency management, and corporate finance.

Funding management

The treasury function is responsible for sourcing funds for short, medium- and long-term needs. This will involve planning for both local currency and foreign currency requirements.

The treasury will determine the most appropriate source of the funds. If a borrowing is to be made, considerations are done on repayment terms, interest rates, grace periods and so on, in comparison with the expected cash flows from the business.

This will involve forecasting exchange rates and interest rates. It is on these two aspects that finance and treasury managers will face the most headaches.

First, we have the main markets for foreign currency, which is the auction market, the willing-buyer willing-seller market and the parallel market.

Second, the parallel market is the one with the quickest turnaround, because of the circumvention of controls, policies and procedures. It is, therefore, incumbent on the manager responsible to make projections on what the rates look like.

The parallel market’s lack of structure adds to its volatility. A responsible manager will not participate in this ‘grey’ market, but unfortunately it is that parallel market rate that seems to drive prices of goods and services in certain instances. Therefore even if one is ethical enough not to participate, it can be difficult to ignore when making projections.

The government’s initiatives to close the gaps between official and parallel markets will go a long way to lessen the complexities faced by the treasury function when we eventually get to the desired scenario of convergence or the complete vanishing of the parallel market.

It is difficult enough to forecast based on the official markets regardless of which economy one is in, so adding the parallel market just further complicates the process. One has to be diligent and methodical in their approach.

Cash management

This is closely related to funding management in terms of complexities. Cash management revolved around collecting cash and managing payments to the entity’s various partners.

Large organisations, as discussed below may have more complex processes around handling collections with the use of multiple bank accounts.

A key complexity around this is the management of quotations in Zimbabwean dollars (Zimdollars). This headache is for both scenarios, i.e., when the treasury manager is the supplier or the consumer.

I have seen quotes now being said to be valid for 24 or 48 hours only. It is more efficient to have a designated day or slightly more, every month when payments are made.

This will take away the need to bog down officials going through payments every other hour, particularly if three or more individuals are involved in making a payment as should the ideal scenario be for the purposes of controls.

The treasury department now has the added responsibility to manage between the time taken to process payments versus the risk of having some kind of a forecasted exchange rate being used by a supplier.

On the other hand, now switching sides and analysing as a provider of goods and services it is also important to ensure that one is paid timeously before there is any loss of value.

Once again, measures by the government to rein in inflation really become key and when we meet our targets to have minimal inflation, it will be one less headache for treasury departments.

Banking

The treasury function will focus on the banking aspects as well. The banks are a key stakeholder that a business needs to have strong relationships with.

It is interesting though, that some entities do not fully rely on their banks, particularly in the informal sector. The disadvantage is missing out on access to credit lines.

Some entities will also not bank all their receipts, especially if in foreign currency for one reason or another, an area I will stay clear of due to limitations on my knowledge and I also believe it is a separate topic altogether.

This again will pose challenges with the banks when analysis of balance sheets (statement of financial position) is done when reviewing a loan application.

It will also be important to manage bank charges by reviewing the various bankers an entity has relations with, the number of bank accounts and the general structure of how transactions are done.

A balance between controls and charges is required, particularly for organisations with operations disaggregated into various focus areas or geography.

Where there are various collection accounts with sweeping arrangements there is need to ensure that the model being utilised is the most ideal in terms of costs versus efficiency and controls.

Functions 4 and 5 are currency management and corporate finance, but I will not go into detail on these. Regarding currency management, I have touched on this briefly as foreign exchange rates are finding their way into the other aspects. I will, however, expand on this in a separate and dedicated article.

Corporate finance is a key area looking at acquisitions and divestment activities. This is a broad area which requires a separate article. Short courses on this are now being offered by various bodies and attempting to summarise it in a paragraph will not do justice.

Conclusion

It is managing rates and inflation that is the major consideration for the treasury function of most entities and this will require deliberate and focussed efforts.

Where possible, manuals need to be updated to provide guidance. I also remain hopeful that we will see the various initiatives bear fruit and there is greater stability, thus making it slightly easier for the treasury managers.

Even after it has occurred, some of the uncertainties will always remain and thus one must always be on their toes.

  • Mavengere is the technical director at the Institute of Chartered Accountants of Zimbabwe (Icaz), which is the largest and longest standing PAO in Zimbabwe, having been established on January 11, 1918, and is a body corporate incorporated under the Chartered Accountants Act (Chapter 27:02). Icaz provides leadership on the development, promotion and improvement of the accountancy profession focusing in the areas of accounting education, assurance, good governance practices and leadership and organisational excellence. — technical@icaz.org.zw or Twitter: @OwenMavengere

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