Treasury Management
Core Treasury Operations and Strategy
Treasury management focuses on cash management, liquidity management, capital structure, and working capital optimization. Candidates must understand cash flow forecasting (direct and indirect methods), cash positioning (daily cash concentration), short-term investing (money market instruments), and debt management (credit lines, commercial paper). You should also know key performance indicators (KPIs) such as days sales outstanding (DSO), days payables outstanding (DPO), and the cash conversion cycle (CCC).
Traps in questions:
- Confusing cash flow forecasting methods: direct method uses cash receipts/disbursements; indirect starts with net income and adjusts for non-cash items.
- Assuming commercial paper is risk-free; it carries credit risk and rollover risk.
- Overlooking payment terms impact on working capital; extending DPO improves cash but may strain supplier relations.
- Mixing up liquidity (ability to meet short-term obligations) with solvency (long-term viability).
Worked example / rule of thumb: Calculate the CCC: DSO + DIO – DPO. If DSO=45, DIO=30, DPO=60, CCC=15 days. Rule of thumb: Reduce CCC by negotiating shorter DSO (faster collections) or longer DPO (slower payments), but balance with supplier relationships. Invest excess cash in money market instruments with maturities matching cash needs; avoid locking up funds needed for operations.
Key Points
- Direct method forecasts cash receipts/payments; indirect starts with net income.
- Commercial paper carries credit and rollover risk.
- CCC = DSO + DIO – DPO; lower is better.
- Liquidity is short-term; solvency is long-term.
- Invest excess cash in instruments matching liquidity needs.