Corporate Treasury: Liquidity and Working Capital Management

Functions of Corporate Treasury

Corporate Treasury is a functional division responsible for managing financial risks, liquidity, and company financing. In large corporations, the treasury operates like an internal bank.

Main functions:

• Liquidity management (cash management)
• Fundraising (funding)
• Financial risk management (FX, interest rate, commodity)
• Investing temporarily idle funds
• Managing relationships with banks
• Monitoring and optimizing working capital

Cash Management: Management of Cash Flows

Cash Pooling

Cash pooling is a system for concentrating cash from subsidiaries into a single master account of the parent company.

Physical pooling (Physical Notional):

• Actual movement of funds: subsidiaries transfer balances to the master account daily
• Centralized balance management
• The bank accrues/charges interest on a single net balance

Notional pooling:

• No actual movement of funds
• The bank calculates interest based on the net position of all group accounts
• Balances legally remain on the subsidiaries' accounts
• Popular in Europe (issues with cross-border notional pooling in the UAE)

Example: A holding company with subsidiaries in the UAE, UK, Germany, and Singapore. Without pooling: the UK subsidiary holds £5 million in excess liquidity at a 0.5% rate, Germany pays 3% on overdraft. With pooling: the net position reduces interest expenses.

Optimization of the Cash Conversion Cycle (CCC)

Cash Conversion Cycle (CCC) = DIO + DSO – DPO

Where:

• DIO (Days Inventory Outstanding) = Inventory / Cost of Goods Sold × 365
• DSO (Days Sales Outstanding) = Accounts Receivable / Revenue × 365
• DPO (Days Payable Outstanding) = Accounts Payable / Cost of Goods Sold × 365

Strategies to reduce CCC:

• Reduce DIO: inventory optimization, JIT, ABC analysis
• Reduce DSO: strict credit control, factoring, early discounts (2/10 net 30)
• Increase DPO: negotiate longer payment terms, SCF/reverse factoring for suppliers

Example of liquidity impact: Amazon has a negative CCC (−28 days in 2023). This means the company receives payments from customers faster than it pays suppliers — in effect, trade creditors finance the business.

Management of Banking Relationships

Relationship Banking: Large corporations work with 5–15 banks, allocating share of wallet proportional to service volumes.

RFP (Request for Proposal): Tender among banks for providing treasury services (cash management, FX, trade finance, custody).

KPIs for evaluating banks:

• Transaction costs
• Quality of payment system (STP rate, processing time)
• Rates on placements/borrowings
• Quality of trade finance
• Advisory capabilities

Investing Temporarily Idle Funds

Treasury manages short-term investments in accordance with the Investment Policy Statement (IPS).

Typical instruments:

• Bank deposits (overnight, term deposits)
• Money Market Funds (MMF) — diversified pool of short-term instruments
• T-bills and short-term government bonds
• Commercial paper (CP) of large corporations
• Repo agreements (REPO)

Principles:

1. Safety first (capital preservation)
2. Liquidity second (availability when needed)
3. Yield third (return — as the last priority)

UAE context: Corporations in the UAE often place funds in Islamic instruments (commodity murabaha, wakala deposits), which are structurally similar to conventional deposits but conform to Shariah.