Optmization of Treasury

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The Optimization of the Cash-Treasury for
Didaou Fatima-zahra
To cite this version:
Didaou Fatima-Zahra, Optimization of Cash-Treasury– Accounting and Financial Management
Université Hassan II – ENCG de Casablanca, 2016. English.
ENCG is a National Moroccan school that teaches
all sciences that are related to the economic and financial
area of the world. Its main objective for the 5 th year
students is to validate a certain number of researches
related to the projects that the students of this year
execute as a final study project. This project might be
found at the ENCG’s archive or other personal sources.
The elaboration of the project was based on the
environment of the company and the academic studies.
The project is elaborated in collaboration with the Dr.
GASSEI Karim teacher specialized in management and
guiding researches at the ENCG School.
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UNIVERSITY HASSAN II
Student of the National School of Commerce and Management
Financial Management and Accounting
OPTIMIZATION
OF CASH-
TREASURY
FOR
RESEARCH FOR THE FINAL STUDY PROJECT
PRESENTED IN PUBLIC BY
DIDAOU Fatima-Zahra
June 2016
Jury:
Mr. GASSEMI Karim:
A full professor joining the university in 2007, where he served as professor of Management and Corporate Strategy.
Dr. Gassemi Hold a PhD Degree from Pantheon Assas University and an MBA from Laval University. The recipient of
numerous professional awards, Gassemi has published dozens of articles. He is also the coauthor of book,
"Understanding the use and development of e-government platform in developing countries”. Dr. Gassemi’s recent
research focuses on Cross Cultural Management, Corporate Strategy and the Networking Performance. Dr. Gassemi
worked in the private sector as a consultant and PMO (Project Manager Officer). He conducts and deliver many
studies.
Mr.
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FOREWORD
Nor obtaining the diploma or the validation of the semester, the real success of the student is in the added
value that it reports to its academic program and to the professional field, the company.
Nor the detention of significant liquidity, nor a positive working capital fund while affecting the
profitability of the company, guarantee its safety.
The optimal cash management shows that contrary to common opinion, the objective of profitability does
not preclude the objective of liquidity.
Eventually, the profitability of funds applied is the guarantee of solvency. In the short period, the research
of the volume of the minimum assets leads to reconcile the constraints of safety and profitability.
Cash policy is based on the control of the evolution of the firm’s financial situation of the firm in all its
aspects.
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Ecole Nationale de Commerce et de Gestion de Casablanca
Beau site, B.P 2725 Ain Sebaâ, Casablanca - Maroc Tél : (+212) 5 22
66 08 52 Fax : (+212) 5 22 66 01 43
© ENCGC - 2016
Distributeur téléphonique exclusif du troisième opérateur national
IWACO – SARL : 5.000.000 DH
Lotissement LINA n°328 Sidi Maârouf – CASABLANCA
05 29 029 444 / 06 46 111 202
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Fatima-Zahra DIDAOU, student of the National School of Commerce and
Management, specialized in the Financial and Accounting Management. Studied in
the Khadija Oum al Mouminine High School, where I got my baccalaureate in the
Economic Science Management, and then integrated the HASSAN II University
where I’ve studied for two years the Economy and Management and achieved the
D.E.U.G Diplomat to attend after that the National School of Commerce and
Management known as ENCG for master in finance.
Member of the ENCATUS Club (SIFE earlier) and AGORA for great debators, and
realized a certain number of researches in the Management and Finance of
Enterprises. I’ve attended the T-MAN HOLDING as an intern to study the financial
management inside the group and inside the IWACO Company in a period of 5
months and 19 days starting from January.
Hoping that this project will be fruitful for all readers, it was destined to the students of the National School of
Commerce and Management to give them a closer look to what a company’s Cash managing means, how it’s done
and by whom. Also, to give the students a closer look to the real financial part of companies and mostly the important
side.
Bonne Lecture
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This project research is dedicated to my parents
For their endless love, support and encouragement
To DIDAOU Abdelaziz, my father
To CHOKRI Zoubida, my mother.
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ACKOWLEDGMENT
»
First and foremost, I have to thank my parents for their love and support throughout my life. Thank
you both for giving me strength to reach for the stars and chase my dreams. My sister, brothers,
and cousin Mohammed Chokri, deserve my wholehearted thanks as well.
I would like to sincerely thank my supervisor in the company Mr FENJIRO Issam (Financial
Director and Administrator), for his teaching, guidance and support throughout this study, and
especially for his confidence in me. I would also like to thank Dr. GASSEMI Karim (my guru,
academic supervisor, and teacher) for showing me the right path to make true this project,
especially for following each step of making this project true and correcting my methodology of
working. His and Mr. FENJIRO’s comments and questions were very beneficial in my completion
of the manuscript and especially at the interview time. I learned from their insight a lot. To my
supervisor Mrs. ALAOUI Amal, I was grateful for the discussion and interpretation of some results
presented in this research. Also, I would like to thank my guru, Mrs. GHAZALI Mbarka, I express
my heartfelt gratefulness for her guide and support that I believed I learned from the best. Thanks
to Mr. EL MANAR Mohammed for being helpful through the internship, thanks to Mr. BENNANI
Fahd for allowing me to have the freedom inside the company to express my needs of asking
questions and applying my knowledge.
To all my friends and classmates, to Youssef Zineddine (Ex laureate of ENCG Finance, and risk
manager at the COFACE company), thank you all for your understanding and encouragement in
my many, many moments of crisis. Your friendship makes my life a wonderful experience. I cannot
list all the names here, but you are always on my mind.
Thank you, ALLAH, for always being there for me, nothing of this would’ve been accomplished
without your guidance and help.
This research in only a beginning of my journey.
Finally, I would like to leave the remaining space in memory of my uncle Mehdi CHOUKRI, a
brilliant scholar, economic and father.
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LIST OF ACRONYMS AND ABBREVIATION
• BMCI: Banque Marocaine pour le Commerce et l’Industrie:
Moroccan Bank for Commerce and Industry
• BMCE : Banque Marocaine pour le Commerce Extérieur :
Moroccan Bank for Foreign Commerce
• AWB : Attijari Wafa Bank
• ST : Short Term
• LT : Long Term
• D.O.O: Date Of Operation
• D.O.V: Date Of Value
• T. : Turnover
• F.C: Financial Costs
• Q.I.S: Quarterly Interest Scale
• T.T.C: Toute Taxe Comprise: All taxes are included
• H.T.: Hors Taxes : Excluded Taxes
• R.O.I: Return On Equity
• D-C: Death-Center
• SIT: Seasonal Index of Turnover
• SIP: Seasonal Index of Purchases
• W.C.F: Working Capital Fund
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LIST OF TABLES AND FIGURES
Table n°1: Assessments and Liabilities
Table n°2: Company’s Balance Position
Table n°3: Working capital’s needs in the cash calculations in H.T (Excluded Taxes)
Table n°4: Documents analysis of the flows and funds
Table n°5: Composition of funds
Table n°6: The inflows charges structure
Table n°7: Classification of the Funds applied and received
Table n°8: Treasury Plan
Table n°9: Inflows of IWACO during the 2014-2015
Table n°10: Bank account movements on the D.O.O
Table n°11: Bank account on the D.O.V
Table n°12: Funding’s Distribution
Table n°13: Structure of receipts of the firm
Table n°14: Monthly sales and SIT and monthly purchases SIP
Table n°15: Impact of seasonality of the Turnover on the Balance “Clients”
Table n°16: Impact of Seasonality of the acts on the Balance “Providers”
Table n°17: Charges in the index of the stock balance
Table n°18: Monthly forecast evolution of the optimal circulating of the year 2016
Table n°19: Simulated treasury’s cash plan 2016
Table n°20: Company’s financial costs with the BU2
Table n°21: Simulated sales of the merchandises for BU2
Table n°22: Simulated purchases merchandises for BU2 and the financial Gain of supplier’s payment
Table n°23: Cash treasury’s balance of BU2
Table n°24: Treasury’s balance for the BU2
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Figure n°1: Determination of the optimal capital compromises between solvency and profitability
Figure n°2: Research’s Path Model
Figure n°3: Structure of the Company
Figure n°4: Waco’s inflows in the BMCI account in the 2015
Figure n°5: Iwaco’s inflows in the AWB account in the 2015
Figure n°6: Quarterly interest rate showing the bank account movements
Figure n°7: Estimated inflows of the treasury 2015
Figure n°8: Variation of Idle costs over periods
Figure n°9: Opportunity and overdraft’s Costs presentation
Figure n°10: Area of concentration
Figure n°11: Death-Center Turnover
Figure n°12: Death-Center of Gocom
Figure n°13: Death Center of IWACO
Figure n°14: Seasonality variation of the Working Capital
Figure n°15: IWACO’s daily balance 2016 simulated
Figure n°16: Daily Balance of BU2
Figure n°17: Daily Balance of IWACO and BU2
Figure n°18: Treasury’s issue after BU1 and BU2 merged.
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LIST OF ANNEXES
ANNEXE n°1: Figure n°2 (Model of Research)
ANNEXE n°2: Figure n°3 (Structure of the Company°
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TABLE OF CONTENTS
Foreword ........................................................................................................................................................................ 5
Author ............................................................................................................................................................................. 8
AKNOWLEDGMENTS ...................................................................................................................................................... 9
LIST OF ACRONYMS AND ABREVIATIONS .................................................................................................................... 11
LLISTS OF TABLES AND FIGURES .................................................................................................................................. 12
LIST OF ANNEXES .......................................................................................................................................................... 14
TABLE OF CONTENTS .................................................................................................................................................... 15
ABSTRACT ..................................................................................................................................................................... 19
KEY WORDS .................................................................................................................................................................. 19
GENERAL INTRODUCTION ............................................................................................................................................ 20
FIRST PART: THEORETICAL FRAMEWORK .................................................................................................................... 22
CHAPTER 1: FINANCIAL EQUILIBRIUM OF THE FIRM AND CASH-TREASURY .............................................................. 23
SECTION I: THE CONTROL OF THE FINANCIAL BALANCE ............................................................................................. 23
I. The working capital fund, indicator of the financial balance .................................................................... 23
A. The working capital fund, tool of financing the cash requirements ........................................................... 23
1. The determination of the working capital fund ..................................................................................... 23
2. The working capital fund is the measure of the trade-off between profitability and solvency ............ 24
B. The working capital fund is not a good indicator of solvency .................................................................... 25
1. The meaning of working capital fund is not a good indicator of solvency…................................................... 25
2. The limits of the meaning of the working capital fund is drawn from statistical observation ........................ 26
C. The contribution of the concept of working capital need .......................................................................... 26
1. The different conceptions of capital funds and expression of regulatory capital requirements .................... 26
2. Calculation of working capital needs ............................................................................................................... 27
II. Analysis of the liquidity of the firm by the method of ratios .................................................................... 32
A. Ratios of financial security .................................................................................................................. 32
1. The so called ‘Solvency”, or long term financial security ............................................................. 32
2. The so called “Liquidity-Ratios” ................................................................................................... 35
B. Limitation of the method of ratios in the assessment of financial security ....................................... 37
1. The limits of the descriptive value method of ratios ................................................................... 37
2. The limits of the explanatory value of the method of ratios ....................................................... 37
3. The limits of the normative value of the method of ratios .......................................................... 38
4. Limits of the predictive value of the method of ratios................................................................. 39
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SECTION II: THE CONDITIONS OF FINANCIAL EQUILIBRIUM ....................................................................................... 39
I. The prospective analysis of the variations of cash: The explanation of the financial balance ................. 40
A. The flow of fund accounting ............................................................................................................... 40
1. Historic Flows ............................................................................................................................... 40
2. The flows of operations ................................................................................................................ 41
B. Accounting flows and Cash-Flow ........................................................................................................ 41
1. The implicit assumptions of assimilation of accounting flows to cash-flows .............................. 41
2. The limits to the assimilation of accounting flows to cash-flows................................................. 42
C. The limits of analysis of the “Variations of Cash” .............................................................................. 43
1. The array of variations of cash is actually a static document ...................................................... 43
2. The array of changes in Cash is synthetic document ................................................................... 44
3. Array of financing and cash balance ............................................................................................. 44
3.1. The Method “Revenue – Expenses” ..................................................................................... 46
3.1.1. The principle of the method ..................................................................................... 46
3.1.2. Limitations of the method ........................................................................................ 48
3.2. Prediction method “Resources –Needs” .............................................................................. 49
3.2.1. Presentation of the cash flow forecast in terms of “Resources and Needs” ........... 50
3.2.2. Estimates of cash flows in terms of “Resources needs” .......................................... 51
CHAPTER 2: MONETARY INFLOWS AND CASH-TREASURY .......................................................................................... 53
SECTION I: MONETARY CASH OF THE FIRM ................................................................................................................. 53
I. Preference for liquidity and inventory management ................................................................................ 53
A. Ground for cash, and detention of liquidity ....................................................................................... 54
1. The reasons for detention of liquidity .......................................................................................... 54
2. The formalization of the monetary stock ..................................................................................... 54
3. The structure of Cash ................................................................................................................... 54
B. The essential variables involved in the determination of the optimal amount of cash ..................... 55
1. The nature, behavior and volume of the cash-flows ................................................................... 55
2. Transaction costs and revenues associated with the “Securities” .............................................. 55
3. The duration of the period of the cash flows forecast ................................................................. 56
4. Minimum critical balance of cash ................................................................................................. 56
5. The chosen safety margin ............................................................................................................ 57
C. Modelization of the company’s monetary inflows management ....................................................... 57
1. The concept of “Cash Reserve” rethink ........................................................................................ 58
1.1. The failures of analysis to prove the existence of reserves inside IWACO’s treasury ........... 58
1.2. Dsynchronization of cash flow and liquidity detention ......................................................... 59
1.3. The assumption of the unexpected and the detention of liquidity ....................................... 60
2. The treasury-cash funding using the stock management ............................................................ 61
2.1. The “Transfer Policy” as an equilibrium tool of cash-treasury: Transfer inert-agencies ....... 61
2.2. The assumption of the homogeneous nature of the funds ................................................... 62
CHAPTER 3: METHODOLOGY OF THE STUDY ............................................................................................................... 64
I. Presentation of the study .......................................................................................................................... 64
II. Data collection tools .................................................................................................................................. 67
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SECOND PART: THE PRACTICE OF THE CASH TREASURY OPTIMIZATION INSIDE IWACO’S COMPANY ..................... 69
CHAPTER 4: GENERAL PRESENTATION OF THE COMPANY IWACO ............................................................................ 70
I. Internal environment ................................................................................................................................ 70
A. Organizational structure ..................................................................................................................... 70
B. Organization and functions ................................................................................................................. 72
II. External environment ................................................................................................................................ 73
A. Company’s operating field .................................................................................................................. 73
1. Market .......................................................................................................................................... 73
2. Supplier: WANNA Corporate ........................................................................................................ 74
3. Client ............................................................................................................................................. 74
B. Dynamical competition ....................................................................................................................... 75
CHAPTER 5: THE MINIMIZATION OF THE VOLUME OF MONETARY ASSETS .............................................................. 76
SECTION I: INFLOWS GLOBAL MANAGEMENT ............................................................................................................ 76
I. The control of cash flow and cost savings ................................................................................................. 76
A. Formalization of the Idle cash ............................................................................................................. 76
1. The lack of blank balances ............................................................................................................ 76
2. The fear of the debit balances ...................................................................................................... 78
3. The importance of unused funds and its consequences .............................................................. 78
B. The unnecessary costs of the idle funds ............................................................................................. 80
1. The structure of the cost of money .............................................................................................. 80
2. Scales of interest quarterly........................................................................................................... 80
3. The assessments of costs in the traditional cash-management .................................................. 84
3.1. The analysis of the conditions of bank .................................................................................. 87
3.1.1. Expressed as a percentage of banking conditions: Rates ......................................... 87
3.2. The costs of banking services ................................................................................................. 88
3.2.1. Offer of the company to the bankers ....................................................................... 88
3.2.2. Operating account measures the company’s offer to its bankers............................ 89
SECTION II: CASH FLOW FORECASTING ....................................................................................................................... 90
I. Analysis of the Cash flows ......................................................................................................................... 90
A. Treasury-data collection system ......................................................................................................... 90
B. Knowledge of the structure of cash receipts and disbursements ...................................................... 92
1. The structure of receipts of the firm ............................................................................................ 92
2. The structure of the disbursement of IWACO .............................................................................. 93
C. The reduction of uncertainty in certain movements of funds ............................................................ 93
1. Sensitivity analysis ........................................................................................................................ 94
2. The streamlining of procedures for billing and recovering .......................................................... 95
3. The centralization of liquidity management ................................................................................ 97
II. The reasoned slowdown of the settlement of debts ................................................................................ 97
A. The rational establishment of due dates ............................................................................................ 97
B. The choice of the payment instruments ............................................................................................. 98
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CHAPTER 6: TREASURY AND FINANCIAL POLICY OF THE FIRM ................................................................................... 98
SECTION I: THE CONDITIONS OF THE COMPANY’S LIQUIDITY .................................................................................... 98
I. The management of cash flow .................................................................................................................. 98
A. Control of the formalization of cash-flows ......................................................................................... 98
1. The conditions of formalization of cash-flows ............................................................................. 98
2. The effects of investment on the cash flows.............................................................................. 101
B. Investment of cash-flows .................................................................................................................. 104
1. Cash-treasury and investment policies, BU1 and BU2 ............................................................... 104
2. Definition of the BU2 .................................................................................................................. 108
SECTION 2: EVALUATION OF FINANCIAL SITUATION OF THE FIRM .......................................................................... 108
A. Arbitration of the financial position of the cash ............................................................................................ 108
1. Creation of a new treasury: BU2’s treasury ............................................................................................ 111
2. Evaluation of the financial situation of the firm after BU2 integration .................................................. 113
3. The merging of the two treasuries; BU1 and BU2 ................................................................................... 115
B. Consequences of merging the two treasuries; BU1 and BU2 ........................................................................ 115
1. Effect of synergy ...................................................................................................................................... 115
2. Global treasury’s issue: Optimization ...................................................................................................... 116
3. Impacts of the merging ........................................................................................................................... 117
C. Recommendations ......................................................................................................................................... 117
CONCLUSION .............................................................................................................................................................. 119
BIBLIOGRAPHY ............................................................................................................................................................ 122
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ABSTRACT
Inside a world full of banking institutions, corporation, investments, brokers, dealers, providers…in a world where
everybody’s looking for making profit, conflicts takes part and impact negatively the waiting results. Each one’s trying
harder to make his own part of the cake bigger than the other, making struggles for others and taking advantage of
the minimum of opportunities, some of them realize that the main objective of all this isn’t necessarily following where
the opportunity shows or where the gain is more profitable, but more; where the flows can stay on the market for the
longest period.
The main objective of this project research is to eventually prove the point that profit can be made by a company’s
own money and still can resist the biggest crisis. Here, the result of this research is to show that the company can be
delegated to manage its inside cash flows or as called in this book “Treasury” in a simple operation called “Optimization
of the Cash-Treasury”.
KEY WORDS
Treasury, Cash-treasury, Inflows, Outflows, Liabilities, Assets, Turnover, Investment, Risk, Optimization, Arbitration,
Minimization, Maximization, Fund, Working Capital Fund, Ratio, Solvency, Liquidity, Forecast, Flows, Balance,
Securities, Value, Prediction, Variation, Resource, Needs, Estimation, Stock, Volume, Reserve, Transfer, Equilibrium,
Supplier, Provider, Interest, Funds, Savings, Cost, Idle cash, Bank, Rates, Structure, Services, Due date, Value date,
Slowdown, Debts, Loans, Credit, Debit, Cash.
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The treasury of a company can be analyzed as the global materials and resources that the company has in front of all
kind of contracted engagements. The main situation of the company’s often related to the conditions of liquidity that
the company acquires by the time, and that’s what expresses the term of “The Solvency” defined as the ability of an
economic agent to confront his debts and loans with the exact payment conditions at the due date. The optimal
management of the treasury is based on forecasting, controlling, and handling correctly the dimensions and dates of
liabilities and those of spontaneous availabilities as a result of the company’s functioning system and to procure at
the same time the optimal duration of costs and complementary availabilities that are needed. In other meaning, the
mean objective of the treasury if to make available the liquidity that the company needs at the exact time with the
minimum of costs.
The control of the turnover’s liquidity is the main objective of the “Treasury’s Policy” or “Policy of Cash”, which makes
the goal of this research that I’ve worked on inside the IWACO’s company; to define the content of such a policy and
how it works. For that, it’s required that we determine the methodological approach of the problem before
describing the means and tools of actions and the conditions of implementation to achieve optimum management.
In the finance traditions, managing the cash of a firm boils down to the two following activities:
Check the level of the Cash
Maintain the creditworthiness (Solvency)
The cash level is monitored from the study of the accounting Balance. “The Receipts” and “Treasury” refer to the
same reality. Cash is analyzed as a result of the activity. In other words, the cash flows of a business at a given time
is the difference, at this date, between:
Its working capital which is the part of the permanent capitals not absorbed by the financing of securities
and real estates and therefore available to finance the requirements related to the operating cycle.
And its needs in working capital (FDR) which is linked to the operating cycle.
On a specified date, when the working capital (FDR) is greater than the working capital needs; the cash flow or the
Cash Treasury is positive. On the contrary, if the Working Capital Fund (WCP or FDR) is insufficient cash, the Treasury
cash becomes negative. Maintaining solvency that assures the settlement of receivables results, meanwhile, from
the financial decisions taken in the short term. This action Is divided into two components:
First; the determination of a certain level of cash to jeep for reasons of transaction or suppliers’ payments,
finance and speculation.
Second; the choice of the best method of financing cash deficits that may appear.
The objective of solvency would be easily reached if the company could have a large cash liquidity position providing
a wide margin of safety and a 0.05% gain from the suppliers. Yet, any detention of currency entails costs: profitability
and solvency appear as two antagonistic terms.
Every year, thousands of companies are facing cash difficulties. The phenomenon can affect not only small and
medium-sized or even unprofitable companies. Liquidities
Each year thousands of companies are facing cash difficulties. The phenomenon can affect not only small and
medium-sized or even unprofitable companies. Liquidity difficulties grows with the evolution of modern economies.
But we can also assume that the cash management requires greater rigor on the practical level and a new approach
at the theoretical level. For a long time, in fact, the economic situation had made easier the payment of debts and
repayment of loans by companies that had got into debt. However, since 20 years cash flow problems are one of the
bottlenecks of business activity. The number of those facing "wall of money" continues to increase. Four phenomena
are in this respect to take into account.
Firstly, even if currently the cost of money is experiencing a net relaxation, gave first-order importance to
the follow-up of two accounts “receivable and suppliers” it means inter-firm trade credit.
Then, economic conditions, in particular consumption, following the oil shocks, unemployment,
technological innovations and relocations, makes the requirements of turnover’s liquidity harder to master.
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In addition, the monetary risk is always present: If inflation has no longer in recent years in our industrial
economies a devastating effect, the exchange rate risk due to the floating of currencies remains a factor of
insecurity.
Finally, the money market risks, including the risk of rate have led to the development of protection
techniques, real 'financial engineering' in the service of the cash management.
In the light of these facts it is necessary to redefine the data and objectives of an optimal management of the
Treasury. The need of this reflection is twofold:
From a practical point of view we will analyze the causes of the difficulties of cash when the company is profitable
and growing. We will not discuss the financial consequences of a reduction of the level of activity whose cause is
either a general economic crisis, or a weakening of demand for the product. In the first case, it’s a situation largely
exceeding cash-flow problems. In the second case, it is to find another market or to disappear. Genuinely, companies
that are "sick of their own cash" are generally expanding and with an important short term debt. Even when the
economic situation is positive, such companies have deadline problems that can become very serious.
A cash crisis revealed weaknesses in the management of the firm, because any act of management translates to
inputs and outputs of liquidity. We show that any cash crisis relates to one of the following two cases:
Short-term cash crises, on one hand, caused by the lack of synchronization between the inflow and outflow
of funds flows;
The structural crises of cash, on the other hand, resulting from the absence of concordance between the
overall stability of the funding and the overall period of recovery of the use of the funds.
Cash management is therefore widely beyond the short-term. It is an economic study of the financing needs of the
company and is located in the hinge of the financial problems and operating problems. Cash Treasury is not the
balance of cash flow, but the synthesis of all company policies. The cash management plays an essential role in the
life of companies.
From a theoretical point of view, then, we will highlight that optimal cash management through a systemic approach
of financial management. Cash policy is conditioned by the basic financial choices:
Choice of the structure of liabilities, or funding policy,
Choice of the structure of assets, or investment policy.
The optimum of management is defined by the close compatibility between liquidity and profitability. The short term
solvency should not depend on the detention of cash but on serious forecasts, on one hand, the behavior of the cash
flow in the short term and even in the very short term, and, secondly, the evolution of the turnover’s structure which
affects the formation of these flows. On the long term only high profitability ensures the company a volume of selffinancing
compatible with a debt policy that provides the firm with new resources. Any investment causes the
immobilization of funds but its profitability should allow for restoration of the liquidity of the firm
We will show that investment policy that generates the best overall liquidity of the company is the optimal and most
cost-effective choice. Optimal cash management is a management that maximizes both liquidity and profitability.
The management of the Treasury, i.e. the liquidity of the firm, revolves therefore around three actions:
An economic action, whose purpose is to maintain the closest bank balance of zero by control of entry and
cash flow;
A structural action, whose purpose is to control the potential for the recovery of liquidity of the assets of the
company by the mastery of allocation of the cash flows, by a fair assessment of the needs for working capital
and their adequate funding.
A monetary action, by setting up a protection against the variation in the purchasing power of the currency
and money markets risk.
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Part I: The Theoretical Framework
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A good financial situation is characterized by the ability to maintain a level of liquidity sufficient for the turnover in
order to ensure the solvency of the company. It is the result of the opposition between the liquidity of the assets and
the payment of debt. That is why one of the fundamental concerns of the financial manager is the control of the
financial equilibrium of the firm. The Working Capital Fund and the ratios are the most commonly used balance
measuring instruments. But controlling the financial balance through these instruments remains insufficient to
explain it. Also, should complete this first analysis by financial movements that led to the fund balance. This second
analysis allows to enjoy the cash position at a given time, to anticipate movements to come, and hence, have the
necessary information to where appropriate, take the necessary corrective actions.
SECTION 1: THE CONTROL OF THE FINANCIAL BALANCE.
The control of the financial balance is limited in general to the consideration of the Working Capital Fund and the
calculation of a number of ratios.
I - THE WORKING CAPITAL FUND, INDICATOR OF THE FINANCIAL BALANCE.
All the instruments of assessment of the financial situation of a firm, working capital is most often used by both the
executives of the company and its bankers. But this notion gives rise to a plurality of definitions whose vagueness is
a frequent source of ambiguity and confusion. The Working Capital Fund is part of the permanent capital which
finances the operating cycle. It expresses the "ability to cash" of the firm and appears as the source of funding of the
cash requirements.
A - THE FUND OF WORKING CAPITAL, TOOL OF FINANCING THE CASH REQUIREMENTS.
According to the basic and traditional financial balance principle. The different values of assets must always be
funded by capital remaining at the disposal of the firm for a time at least equal their life expectancy. Thus capital
constituting by definition of the long term jobs should not be financed by short-term loans might not be re-appointed
or disappearing themselves.
However this balance is fragile. Need to consolidate as a margin of safety: the Working Capital Fund.
1 - THE DETERMINATION OF THE WORKING CAPITAL FUND.
Working capital is calculated in two ways
Permanent capital on net surplus assets;
Current assets - short term (after allocation of profit) debts.
1.1 - THE REFERENCE TO PERMANENT CAPITAL.
The existence of a positive working capital means that a portion of current assets is supported by long term capital
The requirements of bearings are the part of the cyclical needs whose funding is not provided by cyclic resources but
by the Working Capital Fund, and, if the WCF is insufficient by short-term loans. The array of needs and resources
can then be written as follow in table n°1:
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ASSETS
Need in Working Capital Cash
Cash Fund (surplus)
LIABILITIES
Working Capital Cash
Cash Fund (deficit)
It follows "the fundamental relationship of cash":
CASH = WORKING CAPITAL - NEEDS IN WORKING CAPITAL FUND.
The Working Capital Fund and the working capital needs are most often positive. It may be that one or the other, or
both, are negative. Negative working capital is a need that must be financed. Negative working capital needs
compose resources for the company. If the financing needs of the operation are greater than the Working Capital
Fund, the cash flow is negative. Therefore, the fundamental relationship to write:
1.2 - THE REFERENCE TO SHORT-TERM DEBT.
WORKING CAPITAL = WORKING CAPITAL NEEDS +/- CASH
The justification for the Working Capital Fund, as an indicator of the gap between current assets and short-term
liabilities is based on the thesis of the automatic liquidation of debts in the short term. According to this thesis, the
accumulated stocks to confront seasonal demands are fully funded by the short term loans. The use of these
'temporary' stocks will cause cash flow that become available for the reimbursement of these loans. The idea of
'automatic liquidation' has been extended to the whole of the surplus of the values of working capital term debt. In
other words, capital circulating 'temporary' would be funded by the immediate liabilities and the 'remaining'
circulating capital through ongoing resources: The Working Capital Fund.
The Working Capital Fund is therefore a margin of safety: it corresponds to the losses that can undergo a company
unless it is required to sell a portion of its assets or borrowing. In the absence of this margin, the deflation of shortterm
loans resulting from a cause, for example, of a momentary decrease in activity, plunges the company into a
crisis of cash by putting in a State of cessation of payments.
2 - THE WORKING CAPITAL FUND IS THE MEASURE OF THE TRADE-OFF BETWEEN PROFITABILITY AND SOLVENCY.
The decrease in working capital leads to an increase in the profitability of the company but at the same time an
increase in the risk of insolvency and vice versa.
2.1 - AN INCREASE OF PROFITABILITY.
At an equal amount, loans in the medium and long term are generally more expensive than short-term loans. Indeed:
On the one hand, interest paid on long-term loans are generally higher than those paid on short-term loans.
On the other hand, the rigidity of long-term borrowing makes their jobs more expensive than those in the
short term. In addition, the ratio "results / Capital" will be higher.
2.2 - AN INCREASE OF THE RISK OF INSOLVENCY.
The company increases its risk when it increases its short-term funding commitments in the long term. In the event
of non-renewal of short-term loans, the importance of its cash-flow problems will be proportional to the share of the
short-term in its resources. The cost of the risk of insolvency can range from the high price of requested assistance
of extreme urgency until the bankruptcy.
B - THE WORKING CAPITAL FUND IS NOT A GOOD INDICATOR OF SOLVENCY.
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Experience and observation prove that one cannot make no serious value judgment on the creditworthiness of a
company to the only consideration of its working capital.
1 - THE MEANING OF WORKING CAPITAL LIMITS FROM THE EXPERIENCE.
Nor the volume or composition, nor the meaning of the working capital fund variation indicate with certainty the
liquidity of the company.
1.1 - VOLUME OF THE WORKING CAPITAL FUND AND CASH.
While a well-balanced financial structure, i.e. representing a positive working capital fund, is usually an index of good
management, a presumption of difficulties arises from imbalance mixed with fixed assets greater than permanent
resources. In fact, the level of the Working Capital Fund largely depends on the way in which the assets is managed.
Very fleshed out, it can mean that assets are not sufficiently renewed and capital assets are excessive, reflecting an
underutilization of permanent capital. Conversely, the narrowness of the Working Capital Fund may sometimes
explained by the very particular nature of certain business activity. The amount of the Working Capital Fund is thus
determined by the characteristics of the cycle of exploitation and management which strongly influence the level of
the working capital needs. As a general rule, over the duration of the operating cycle is long, as these needs are high
and more fund bearing found in the balance sheet must be important.
A company with a high working capital is not necessarily an easy cash treasury if its working capital needs are most
important. Conversely, a company with a low, or even negative working capital, is not necessarily a tight cash
treasury.
1.2 - COMPOSITION OF THE WORKING CAPITAL FUND AND CASH.
The banker is concerned to the relative proportion of equity and terms of debts. The vulnerability of a company
grows with the importance of its debt. More the firm is indebted more abilities of additional debt are limited, ceteris
paribus. This is why calculating its own capital is recommended. The Working Capital Fund is equal to the difference
between equity and net fixed assets and indicates the degree of financial independence of the firm. But a positive
own Working Capital Fund may also imply that the firm is unable to finance its operating using only borrowed
resources cycle, and therefore has a more restricted room for maneuver to finance its investment cycle.
To finance its investments a company cannot and must not rely only on itself. It would judge favorably companies
that invest little and unfavorably dynamic companies. However, if the bankers more often advise the use of mediumterm
and long-term financing, they recommend in order to preserve the solvency of the company, a certain balance
in the Working Capital Fund.
A unanimously accepted empirical rule specifies that foreign long-term capital should not exceed balance sheet the
equity.
1.3 - CHANGES IN WORKING CAPITAL AND CASH.
One might be tempted to judge favorably a company whose capital increases and unfavorably the one that it
decreases. However, working capital of a company may drop without that the situation it deteriorates. This may
simply mean that the company has invested without external assistance through its bloated cash. Conversely, the
swelling of the Working Capital Fund may reflect the formation of idle cash. Therefore to analyze the underlying
factors of such movements to interpret wisely.
2 - THE LIMITS TO THE MEANING OF THE WORKING CAPITAL FUND IS DRAWN FROM STATISTICAL OBSERVATION.
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Statistical observation confirms the reduced scope of the concept of working capital as a criterion of solvency and
more generally financial equilibrium of the firm.
2.1 - THE LINK BETWEEN THE VALUE OF THE WORKING CAPITAL FUND AND THE SECTOR OF ACTIVITY PROVES TO
BE FAIRLY LOOSE.
This observation occurs both in the work of MADER than in those of the “Caisse Nationale des Marchés de l’Etat”.
Certainly, the Working Capital Fund appears different on average from one sector to another, but within a single
industry the dispersion of values remains very strong (from 53% to 187%). Cannot therefore speak of a 'normal'
working for a specific sector capital.
2.2. THE WORKING CAPITAL FUND ALSO VARIES WITH THE SIZE OF THE COMPANY, VALUED BY THE TURNOVER.
However it is impossible to identify a link between the growth of the firm and the Working Capital Fund. In any sector
we notice regardless of the size of the company, measured by turnover, a growth or a continuous decrease in working
capital.
The limits of the concept of working capital as an indicator of balance can be understood as follows: working
capital reveals the importance and the composition of the stable financial tools that the company affected
to finance the operating cycle.
It is therefore clear that the amount of the working capital of a company varies with its sector of activity and its sales
business but also from one company to another. The financing of the operation and growth is a matter of choice to
each contractor.
Face to comparable constraints (operating cycle, growth, markets, banking system, etc.) makers respond in a
personal and original manner. Therefore, it cannot be said a priori by a simple calculation if such working capital is
sufficient or not because needs vary according to turnover, the economic circumstances of the time, the nature of
the activity, and in the same branch of activity according to the commercial policy of the leaders. The study of the
cash of a firm therefore implies the joint study of the working capital and working capital needs Fund
C - THE CONTRIBUTION OF THE CONCEPT OF WORKING CAPITAL NEEDS.
At the inadequacy of the notion of 'found' working capital in the balance sheet, financial analysts have sought to
determine the "optimum" amount of permanent funds to the regular functioning of the company.
1 - THE DIFFERENT CONCEPTIONS OF CAPITAL FUNDS AND EXPRESSION OF REGULATORY CAPITAL REQUIREMENTS.
The evolution of the designs demonstrates progress in the assessment of regulatory capital.
1.1 – THE TOTAL WORKING CAPITAL, OR GROSS WORKING CAPITAL.
It is the widest concept since it encompasses all of the current assets. From the point of view of the liquidity of the
firm, total working capital measures the importance of resources requires the company to finance all of its operating
expenses when it has no possibility of recourse to short-term credit. In addition, to ensure the finance of its
operations the company has short-term capital that him are made by its customers (instalments), its suppliers,
various and its bankers. In front of and the inadequacy of this conception of operating needs, it introduces the
concept of "exposure".
1.2 - THE INVENTORY TOOL STOCK
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Whereas part of stocks was practically incompressible and in fact was also indispensable to the company than its
industrial assets, it came to argue that the working capital fund should be sufficient to finance this minimum stock
called from "exposure" or “Inventory tool stock” or “Stock-Outil” in French. This note is based although partial.
Indeed, there is nothing limiting the analysis to only stocks; It is set in the same way a position 'customers-tool',
'debtors divers tools or “Diverse Inventory Tool Stock”, etc. In other words, the working capital fund should cover a
fraction, or even all, of circulating assets either incompressible or permanent.
1.3 - The Working Capital Funds
Needs in working capital of a company represent working capital necessary for this company so that taking into
account the needs and resources related to the operation, the cash is not negative. The cycle of operating a business,
in fact, generates both (stocks, credit-clients, etc.) needs and resources (credit-suppliers etc...). Comparing these
needs and resources, it determines the volume of the funds needed to ensure the proper functioning of the company.
2 - Calculation of working capital needs.
The proposed methods can be grouped into three categories:
Mathematical methods based on the optimization of the couple "security-profitability."
Banking methods that use the balance sheet (Accounting);
The methods of calculation from the operating account, or “methods of Accountants” or “Expert-Accounting
Methods”
2.1 - Mathematical calculation of the optimum of the Working Capital Fund:
This calculation can be approached in three ways:
(a) The theoretical optimal working capital fund will be the one for which the marginal profitability and the marginal
cost of the corresponding insolvency risk will be equal. Thus, a reduction in working capital will result in:
An increase in the profitability obtained by overriding the short term to long term;
And by an increase in the cost of the risk of insolvency.
In fact this calculation has only a very limited operational scope:
First, it seems very difficult, if not impossible, to assign practice of subjective probabilities and the specific
costs to the different possibilities of having cash difficulties.
Then this method is that an indirect reference to the needs of operation (in the assessment of the risk), then
the level of the working capital fund depends on the importance and the nature of these needs;
Finally, the substitution of loans long-term by a short term ones leads not necessarily an improvement in
profitability: the real cost of short-term bank loans is closely dependent on their use (here again we must
know the nature of the needs).
(b) The theoretical optimal working capital fund depends on two contradictory costs: the cost of debt, C1, and the
cost of additional short-term loans requested emergency, C2.
The function of the total cost of a certain level of working capital, C = C1 + C2 is represented by Figure 1 following:
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Figure n°1: Determination of optimal capital compromise between solvency and profitability.
The C function passes through a minimum when its derivative with respect to the Working Capital Fund is zero. This
method of calculation is thus similar to the previous. The same criticism can be formulated in its regard.
(c) Optimize the use of the Working Capital Fund.
This approach is original to the extent that it reverses the terms of problem (1). The selected objective is maximization
of benefit based on a constraint, the Fund available bearing or 'cash '. In these circumstances, for example if the
production function is represented by:
C = 20 + 5 (x)
(Total cost = fixed costs + unit variable costs multiply by the quantity produced), and the available capital funds and
150 maximum production will be:
150 = 20 + 5(x)
x = 26 units
If it is assumed that the unit selling price is 10, and that the revenue (or turnover) function has the form:
R = 10 (x)
The maximum benefit allowed by the available working capital fund will be:
P = R - C = 10 x - (20 + 5 x) or P = 110 (1)
The marginal benefit will represent the maximum price that can pay the company for additional funds required for
the production of one unit more.
As can be seen, the interest of this model lies in its didactical value. It has the merit to describe the relationships
between the operational needs and the Working Capital Fund. But it seems devoid of practical interest because the
simplifying assumptions on which it is based, as well as elsewhere, because the methodology adopted. We can take
the same approach in the context of 'mathematically' more complex situations:
When functions are not linear (the cost equation becomes
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C = ax² + bx + c
When the demand and costs are uncertain (introduction of probability distributions relating to the
application and costs);
When the firm decided to stockpile;
When the firm produces two products, or more...
This model, the same interests and the same limitations are attached only to the above. Operationally no decisive
progress was actually performed.
2.2- BANK METHOD OF CALCULATION OF THE WORKING CAPITAL FUND REQUIREMENT.
Having outlined the principles of the method we show its limits.
(a) THE PRINCIPLES OF THE METHOD.
The value of the needs in working capital of a company on a fixed date is equal to the difference between the amount
of its cyclical needs and its cyclic resources:
Working capital needs = cyclical needs - cyclic resources
The difficulty of calculating is, on the one hand, the distinction that must be between the posts at the bottom of the
balance sheet that are directly related to the operating cycle and those who are not, and, secondly, in various
adjustments to made indispensable by the abnormal considered position value. Thus, a post from the bottom of the
balance sheet will be included in the calculation of working capital needs if it has the following characteristics:
-It renews itself cyclically.
-It is related to the operation of the business cycle;
-It corresponds to a normal activity of the company.
In light of these remarks the bottom of the balance sheet is as follows in table n°2:
Table n°2: Company’s composition of balance
NEEDS
I. CYSLICAL NEEDS :
II.
RESSOURCES
CYCLICAL Resources
-Values of operating: normal stock.
-Customers.
-Notes receivable: part not available immediately
(effects to more than 3 months).
-Various and regularization accounts: claims related to
the cycle manufacturing (payments tax, VAT to be
recovered).
-Suppliers and notes payable: share of debts to
suppliers of materials and goods whose duration is
normal.
-Various and regularization accounts: part of the cyclerelated
debts
- Manufacture-sale purchase (provision for tax on
companies, VAT payable, payroll...) whose duration is
normal.
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III.
Cash Needs
IV.
Resources cash
– Receivable: part available immediately.
-Securities. -Values of operation: hand voluntarily
surplus stock.
-Various and regularization accounts: claims not related
to the cycle manufacture-sale (advance to third parties).
-Cash and banks.
– Banks and funding agencies.
- Notes payable: mobilized credits, suppliers of capital
(share of debts of which the duration is abnormal).
-Various and regularization accounts: share of debts
related to the purchase, manufacture and sale cycle and
whose duration is abnormal, and debts not related to
this cycle (advances of others...)
b) LIMITATIONS OF THE METHOD.
The calculation of the needs in working capital from the balance sheet accounts has three essential defects. This
method does not allow to know the variations of the needs in working capital during the operating cycle. It gives the
date of preparation of the balance sheet the value of the needs. In addition, it seems very difficult to split the value
'normal' and 'abnormal' value of a balance sheet item. Finally, it is neither logical nor appropriate to make
adjustments of accounts in such a calculation. At wanting to "file the abnormal" one loses sight of the reality of the
operating cycle.
Anyway even a mean value of working capital needs remains insufficient data to resolve the problem of liquidity;
and, the following method is no exception to this last criticism.
2.3- THE METHOD OF CALCULATION OF WORKING CAPITAL REQUIREMENTS, KNOWN AS 'METHODS OF
ACCOUNTANTS'.
This method evaluates the needs not in absolute terms but in number of days of sales.
(a) PRINCIPLES OF THE PROCEDURE.
All positions of assets and current liabilities are characterized by two variables:
Time of rotation of the account (or "time to flow", noted TE), on the one hand,
And its ratio of structure, i.e. his report to turnover (or "weighting factor", noted PO), on the other hand.
Therefore, to assess the needs in working capital must be:
Calculate the time of rotation of each of the positions which constitute the values of bearing, TE;
Calculate structure ratios in each of these positions, PO;
Finally, express each item in days of sale, TE x PO.
We calculate the timing flows in days, by dividing the value of the position considered on the balance sheet by the
daily average amount of the corresponding operation flow (stocks and purchases, customers and sales, etc...). For
example, suppose that the average stock for the exercise of such society amounted to 3000; its average daily
purchases to be 100, and the average daily sales of 125; that finally the ' clients ' and 'suppliers' in the balance sheet
amounted respectively to 6250 and 6000. Yields:
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The “Stocks” flow time:
Average Stock
=
3000
Daily Purchase 100
30
Flow time of the “Customers” position:
Customers
=
6250
Daily Sales 125
Flow time of the “Providers” position:
=
50
Suppliers 6000
Daily Purchase
=
100
=
60
Weighting is the amount of the corresponding position from the operating account for 1 F of Sales H.T
The Stocks position:
The Customers position:
Purchase
=
100
= 0.80
Sales H.T 125
Sales T.T.C
=
150
= 1.20
Sales H.T 125
The Suppliers Position:
Sales T.T.C
=
120
= 0.96
Sales H.T 125
The calculation table needs cash for working capital, expressed in days of turnover excluding taxes, will be as follows:
Table n°3: Working Capital’s needs in cash calculated in H.T.
POSTES
T.E P.O Value of needs in the Working
(days) (Coeff.) Capital
Assets Liabilities
Stocks 30 0.80 24
Costumers 50 1.20 60
Suppliers 60 0.96 57.6
Total 24 57.6
Final Balance 26.4
The balance, 26.4 days, represents the amount of the needs in working
capital expressed in number of days Sales H.T.
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) LIMITATIONS OF THE METHOD.
This method leads to significant results when using mean values for the year in question, and not the values from the
balance sheet. Indeed, does not represent that the particular situation of the day of the preparation of the balance
sheet, but in no case a
Average. In other words, it would be risky and dangerous to interpret a result based on values extracted from the
balance sheet. But the main criticism that can be made is that this calculation assumes a perfectly regular activity
over time. However, even without mentioning the firms the seasonal operation, all companies are experiencing
fluctuating more or less pronounced, more or less regular cycle.
Changes in sales and purchases have the effect to oscillate the working capital needs. Therefore, this method
provides no knowledge of the evolution of the real needs for working capital. Therefore, it does not operate an
efficient distribution of the views of the solvency between bearing (or permanent resources for the financing of the
operating cycle) and 'passive cash' (or short dull of cash resources).
If real working capital of the company is equal to its average requirements, excesses cash at certain times,
interspersed with shortcomings at other times of the year occur. Even where these fluctuations would be provided
through a cash budget, it is unlikely that the financing of the operating cycle is optimum. Without perfect knowledge
of changes in the needs during the operating cycle, this optimum we repeat, cannot be achieved. Funding cannot be
considered, nor be found ignoring the nature and evolution of the particular need to which it relates; the actual cost
will not be more in these conditions, appreciated.
II - ANALYSIS OF THE LIQUIDITY OF THE FIRM BY THE METHOD OF RATIOS.
The ratios method provides a second category of instruments for measuring the financial balance.
The cash of a firm, i.e. its security situation, depends on inputs and outputs of funds from the transformation of the
elements of assets and liabilities. The confrontation of the liquidity of jobs and the chargeability of the resources is a
series of indices for assessing the financial balance. However, the ratios method has a number of limitations that hold
both its fundamental principles, and how to use it.
A - RATIOS OF FINANCIAL SECURITY.
Traditionally, there are the ratios of long-term financial security, or ratios so-called "solvency" and the ratios of
financial security in the short term, or so-called "liquidity" ratios.
1 - THE SO-CALLED RATIOS "SOLVENCY", OR LONG-TERM FINANCIAL SECURITY.
Solvency is here understood as the ability of a company to pay its debts in the medium and long term.
From this point of view, a company is solvent if its assets are greater than its debt; in other words, if it’s net position
is positive. Although very general and does not allow to give a measure of immediate capacity of regulation, this
definition is useful for identifying the degree of third parties including Bankers Trust, to the firm.
In this regard, it uses three types of ratios: working capital ratios, ratios of financial autonomy and the General
solvency ratio.
1.1 - WORKING CAPITAL RATIOS.
They are numerous and complement each other.
Ratio:
CURRENT ASSETS / SHORT TERM DEBTS
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It indicates to what extent the realizable assets within one year cover debt maturing in one year at the most. Greater
than 1, it reveals the existence of net working capital. It is therefore an indicator of safety.
It is often supplemented by the following ratio:
Ratio: NET WORKING CAPITAL - CURRENT ASSETS
Which shows the share of common needs financed from the resources of a certain nature of stability. Its complement
to 1 evaluates the external resources (suppliers, State, bankers, etc.). The company will in principle solvent until
losses, or sustainable asset, risks to which working capital assets do not reach the value of the ratio.
These two ratios are interpreted in the same way as the Working Capital Fund. A low value can mean the approach
to serious cash-flow problems, unless the company benefits as is the case of trading Affairs, lengthy delays on the
part of suppliers compared to inventories and receivables with rapid rotation. Conversely, a too high ratio when the
operating cycle does not, perhaps index too large or poorly employed stable resource base which weigh on the
profitability of the business.
A third ratio with a meaning close to the above must be cited. He compares the net funds to stocks:
FUND NET WORKING CAPITAL / STOCKS
Depending on whether the net funds more or less covers stocks, the enterprise funds more or less feasible and
available values using its short-term debts. Some bankers use the following rating: 100% fine 66 50% pretty much
mediocre 33% dangerous 0% situation of liquidity.
In this regard, it uses three types of ratios: working capital ratios, ratios of financial autonomy and the General
solvency ratio.
1.2 - WORKING CAPITAL RATIOS.
They are numerous and complement each other.
Ratio:
CURRENT ASSETS / SHORT TERM DEBTS
It indicates to what extent the realizable assets within one year cover debt maturing in one year at the most. Greater
than 1, it reveals the existence of net working capital. It is therefore an indicator of safety. It is often supplemented
by the ratio:
NET WORKING CAPITAL / ASSETS CIRCULATING
Which shows the share of common needs financed from the resources of a certain nature of stability. Its complement
to 1 evaluates the external resources (suppliers, State, bankers, etc.).
The company will in principle solvent until losses, or sustainable asset, risks to which working capital assets do not
reach the value of the ratio.
These two ratios are interpreted in the same way as the Working Capital Fund. A low value can mean the approach
to serious cash-flow problems, unless the company benefits as is the case of trading Affairs, lengthy delays on the
part of providers compared to inventories and receivables with rapid rotation. Conversely, a too high ratio when the
operating cycle does not, perhaps index too large or poorly employed stable resource base which weigh on the
profitability of the business.
A third ratio with a meaning close to the one above must be cited. It compares the net funds to stocks:
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FUND NET WORKING CAPITAL / STOCKS
Depending on whether the net funds more or less covers stocks, the enterprise funds more or less feasible and
available values using its short-term debts. Some bankers use the following rating:
- 100% fine
- 66 50% pretty much mediocre
- 33% dangerous
- 0% winding-up situation
The Ratio of the Financial Autonomy:
The objective is to find to what extent the company is dependent on its creditors. The structure of liabilities and the
importance of self-sufficiency are good indicators of solvency of the company.
Debt, said, must balance risk and profitability.
The Ratio:
EQUITY / LIABILITIES
Commonly referred to as 'financial autonomy ratio' is even better that it is higher. The lack of equity is often the
source of cash flow for the company. Bankers require traditionally as:
EQUITY / CAPITAL
It is not, in principle, less than 50%. Indeed, at the bottom of this threshold, they consider the company as vulnerable
as too dependent on third parties. On the contrary, a high value indicates the existence of a potential debt.
Sometimes used to express the same idea, the ratio:
To 1 below, the solvency of the firm is compromised.
EQUITY - DEBT TO MEDIUM AND LONG TERM
But it is not enough to maintain a certain ratio between equity capital and borrowed; It must at the same time that
the resources released by the operation to deal normally with loads of debt. In this regard, the ratio:
CASH / CURRENT LIABILITIES
Measures the power of the company to "ignore" its creditors.
Similarly, the ratio
MEDIUM AND LONG TERM FINANCIAL DEBTS / CASH FLOW
Gives the number of exercises necessary to repay financial liabilities through operating resources, ceteris paribus.
The previous ratios may be complete by:
TURNOVER / TOTAL LIABILITIES
That provides another approach of the solvency of the company and by:
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RESULTS + FINANCIAL INTERESTS / FINANCIAL INTERESTS
Which allows to calculate the capacity of the firm to face, each fiscal year, and the consequences of its policy of debt.
A nearby ratio of above:
NET RESULTS + FINANCIAL EXPENSES (MT AND LT) / EQUITY + DEBT (MT AND LT)
Evaluates the weight of debt which can compromise the profitability but also the solvency of the company.
Finally, include the ratio:
NET DEBT - TURNOVER INCLUSIVE OF TAX
That shows if the company uses all the possibilities of credit which it can benefit. In particular, the contractor may
deem it is found to be short of cash, he has managed to take advantage of its ability to borrow for its bankers Fund
which he missed.
1.3- THE GENERAL SOLVENCY RATIO.
It is expressed by the relation:
ASSETS TOTAL / TOTAL DEBT
And joined the concept of "net position". It is above all an indicator of liquidation that interests especially the banker.
2 - THE SO-CALLED "LIQUIDITY RATIOS» (FINANCIAL SECURITY IN THE SHORT TERM).
The liquidity of a company shall be understood as its ability to fulfil in a timely manner, its commitments in the short
term using its operating resources. We will not return to the said ratio "of General liquidity", or "working capital
fund", already cited:
ASSETS OF ROLLING / BEARING ASSETS
Short-term liabilities contains elements of variable liquidity. Thus stocks are considered much less liquid than
receivables; also uses the said ratio "of cash":
VALUES ACHIEVABLE AND AVAILABLE - SHORT TERM DEBTS
That excludes the operation values. Less than 1, it indicates the possibility of future Cash-Flow difficulties. This ratio
can be improved if we know the calendar of deadlines:
AVAILABLE + REALIZABLE VALUES ON N DAYS / PAYMENTS ON (N) DAYS
It takes the name of "ratio of cash at maturity. It is much more significant than the first.
However the scope of these last three ratios is very limited because of their static nature. Indeed, they cannot
account for the commitments to be born. In addition, the structure of the operating cycle affects the value of such
ratios: for example the ratio of cash to a supermarket will be weak without this indicates cash difficulties. Finally,
their evolution over time will be not more interesting insofar as the balance sheet is a snapshot of the operating
cycle.
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The liquidity of a company is a temporal phenomenon: the cash receipts and disbursements ranged in time. «Kinetic»
ratios reflect this factor. They measure the rotation of the main components of the operating cycle: stocks,
customers, suppliers. With regard to inventories, calculate the following ratios:
For an industrial company the rotation of raw stock is expressed by:
AVERAGE STOCK OF MATERIALS OF THE YEAR / MATERIALS CONSUMED OF THE YEAR
By multiplying the result by 360, we get the number of days during which the stock covers the needs. Such a ratio
appropriate to determine the rotation of current products.
When the rotation of products, it is the result of the ratio:
AVERAGE STOCK OF FINISHED PRODUCTS VALUED AT COST PRICE / YEAR COST OF PRODUCTS SOLD IN
THE YEAR
Multiplied by 360, it gives the average time in days, necessary for the marketing of finished products. This ratio is an
index of potential ease of cash to the extent, in fact, where it indicates the time required for the stock turns into
receivables, and, therefore, in availability. Its meaning is much more reliable in the case of commercial enterprises
than in the case of industrial enterprises. A breakdown of costs by nature is always difficult to achieve. Moreover, it
will only sometimes the ratio:
AVERAGE INVENTORY AT COST / TURNOVER H.T.
The finished product sold gives rise to claims that the time limit for processing cash is provided by the ratio:
CLAIMS AGAINST CUSTOMERS OF YEAR-END 360 X / ANNUAL SALES INCLUSIVE OF TAX (T.T.C)
That can occur in a more refined way as follows:
(CLAIMS / TURNOVER INCLUSIVE OF TAX OF THE LAST QUARTER)
X 90 (D)
The comparison of the period of Regulation granted to customers at the time of credit grant providers to get an idea
on the cash position.
The item 'suppliers' turnover ratio will be calculated in the same way:
Or even better:
(VENDORS + NOTES PAYABLE / PURCHASES INCLUSIVE TAXES) X 360 J.
(SUPPLIERS (VENDORS) + NOTES TO PAY) / PURCHASES INCLUSIVE TAXES OF LAST QUARTER
The cash balance is a perfect 'harmony' between rotation of stocks, clients’ debts and suppliers’ debts, ceteris
paribus (1). Inside this company, they complement this list by the calculation of other kinetic ratios such as:
That indicates the potential for liquidity on equity,
ANNUAL SALES H.T / EQUITY
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ANNUAL SALES H.T / NET FIXED ASSETS And
ANNUAL SALES H.T / ASSETS OF BEARING WHICH ARE INTERPRETED IN A SIMILAR WAY.
However, the balance sheet where you pull the data necessary for the construction of all of these ratios is a static
document that mask changes in activity that may occur during the period. This observation led us to discuss the
limitations of ratios.
B - LIMITATIONS OF THE METHOD OF THE RATIOS IN THE ASSESSMENT OF FINANCIAL SECURITY.
In France, the method of ratios is very widely used. Known precautions to be taken during calculations:
Rules for evaluating the positions laid down in advance; -do compare really comparable activities;
Calculations always at the same dates;
Take into account in the interpretation of currency depreciation.
It is also known that a ratio taken individually presents only little interest. These are usually comparative studies of
'batteries' of ratios which are realized:
Considering the evolution of the results in time or compared with other undertakings;
By comparing ratios-goals, means of the same industry ratios, or ratios-standards.
However, an analysis of the financial equilibrium in terms of ratios is facing a series of difficulties that restrict the
scope. These difficulties arise at the level of the functions that it claims assume: description, explanation, and
standard, forecast.
1 - THE LIMITS OF THE DESCRIPTIVE VALUE METHOD OF RATIOS.
Ratios reflect only imperfectly the economic reality. We have already pointed out, they have defects in the balance
sheet where you pull information critical to their development: asset turnover, debts in the short term, customers,
suppliers, etc. The balance sheet describes the turnover of the company at any given time and can account for
changes in activity during the year. It does not even represent a middle state but a particular State of the conduct of
the operation. This defect is less sensitive in the case where the company has a fairly regular activity. But are there
many companies experiencing no period peak or by their slowdown? The realization of a monthly balance sheet
redressing this problem. But such work is not within the reach of all companies
In addition, the balance sheet is a document that adds monetary units to different purchasing power. In periods of
significant changes in the value of the currency, the ratios lose much of their meaning. Finally, the assessment is
before all a tax account, and one can wonder about the economic value of the information it gives.
2 - THE LIMITS OF THE EXPLANATORY VALUE OF THE METHOD OF RATIOS.
The interpretation of ratios is always difficult because the obtained reports show what happened, and not why. In
addition, changes in the value of a ratio is likely to come either from the variation of the numerator or the
denominator; the same value ratios represent frequently situations economically or financially very dissimilar, or, on
the other hand, the change in the value of a ratio may occur although the gap between its constituent elements
remained constant. Where the idea of group ratios according to a certain logic which would facilitate their
interpretation.
Pyramid analysis is a technique for the study of the causes of the evolution of a determined situation. The principle
of this type of analysis is to introduce the interdependence of the results brought by the ratios and lead to an
explanation beyond the simple observation. Such an approach is an interesting way to use the method of the ratios.
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It should be noted that the chain of causality is not clear: the number and nature of the selected relationships remain
quite arbitrary; they vary also from one author to another.
3 - THE LIMITS OF THE NORMATIVE VALUE OF THE METHOD OF RATIOS.
In order to make a judgment on the management of a company, it is convenient to dispose of reference standards.
Among the many possibilities for the development of standards, the financial analyst uses most commonly either
professional standards or standards «models».
3.1 - THE REFERENCE TO PROFESSIONAL STANDARDS.
The calculation of professional standards is the fact, either large companies with a service of documentation and
studies, Federations or unions, either from private, public and parasternal bodies, or even spreadsheets plants.
These studies are from larger or smaller samples of firms engaged in the same business. Within each sector of activity
are calculated average reports for the whole sector, as well as by family of companies (or subsector). At these average
ratios will be compared to the enterprise in question ratios. It is not so for the latter to set goal value of such average
ratio, but rather to seek an explanation of the observed differences.
At the present moment, as a result, the company has a mass of valuable information on the performance of
competing firms (concurrent) or other firms from the same group (T-mantis, MATHE…). By confrontation, the
contractor can highlight some shortcomings of management that do not appear in simple individual analysis. This
may be the case, for example, of the progressive emergence of a fiscal imbalance likely to jeopardize the safety of
the firm within months, or most certainly in the years to come.
However, may be from this type of references identify financial principles fundamental and, consequently, a course
of action? We risk not take reality for the optimum?
3.2 - THE REFERENCE TO STANDARD MODELS OF MANAGEMENT.
Some specialized agencies have implemented "statistical processing chains" that allow to build 'business models'
characterized by a battery of ratios. The method consists in the establishment of ratios-types that reflect the 'average'
situation of the sector of activity. Indeed, each type ratio represents an average calculated from the ratios of a
number of companies forming a representative sample.
These models constructed for the set of a profession are an interesting reference for the company. The ratios of the
company are reported to standard ratios in the sector of activity; calculate and report:
R = RATIO OF THE COMPANY / RATIO- TYPE
The position of the undertaking is synthesized by the sum of the ratios obtained; each of them is assigned a weight
that takes into account the importance attached to each of the criteria. The situation of the firm is considered
satisfactory if the end result is higher than 100%.
This method has, however, a great deal of arbitrariness in its development:
Arbitrariness in the choice of the characteristic ratios of a situation (in our example, the solvency of the
company),
Arbitrary in the choice of weights, and, therefore, arbitrary in the judgment on the company.
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4 - LIMITS THE PREDICTIVE VALUE OF THE METHOD OF RATIOS.
Some authors have questioned whether ratios could not be used as predictive tools. Two research was primarily
conducted.
Firstly, on the difficulties of cash forecasting;
And secondly, on the prediction of bankruptcy of enterprises.
4.1 - RESEARCH ON THE FORECAST OF CASH DIFFICULTIES.
The sample of selected companies was divided into two groups: on the one hand, companies having cash flow for a
certain period ("bad companies"), and, on the other hand, companies did not have difficulty during this same period
("good companies"). From the financial statements of companies established prior to the period under review, the
authors have attempted to discern what the ratios were different from a group of companies to another. The results
were not conclusive. For a large number of companies studied the considered ratios did not foresee any difficulties
of cash.
4.2 - RESEARCH ON THE PREDICTION OF BANKRUPTCY OF ENTERPRISES.
The study involved a sample of 83 industrial enterprises that had gone bankrupt during the period 1946-1965, and
33 companies who had experienced financial difficulty. Twenty-two ratios were calculated from financial statements
of 5 years preceding the bankruptcy of "bad companies". However, the predictive ability of this combination of ratios
declined very quickly as soon as it was to predict the bankruptcy in more than a year. In other words, this analysis
noted bankruptcy more that she did. Other studies have been carried out (3), but it does not seem that the use of
ratios as a tool for forecasting gave great satisfaction.
Handle cash using the ratios method does not seem to lead to clear conclusions. In these circumstances, decisionmaking
is difficult. Ultimately, all the criticism that can be made against it come back to say that the method places
the company in liquidation situations. It disregards the dynamic aspect of the operation and in particular the cash
management.
SECTION 2: THE CONDITIONS OF FINANCIAL EQUILIBRIUM.
Analysis of financial transactions that led to the fund balance allows to enjoy the cash position at a time given to
anticipate the flow of funds to come, and, therefore, to have sufficient information to initiate any corrective actions.
To define the conditions of the financial balance, the managers of the company will have to attempt a detailed
reconstruction of the movements of flow of cash receipts and disbursements through the firm or likely to occur
during the reporting period. From this reconstruction or the anticipation of changes in cash, they will be able to
exercise permanent surveillance of the periodic adjustment entries and cash induced by the operation of the business
However a full record of the movement of cash is difficult to achieve because of the multiplicity of payment and
recovery operations. In addition, such work would be awkward because of the profusion of raw and indiscriminate
information that it would bring in. Also, traditionally, it’s preferred to use an indirect analysis of changes in cash
through the global flows affecting the elements of the turnover of the firm. Indeed, any recipe or any expenditure
affects the volume or the composition of the assets or the liabilities. The variation of elements of assets and liabilities
between the beginning and the end of a period is a consequence of the movements of flow of funds during this
period. An analysis of these movements of funds will show where the contractor decided to commit capital, reduce
its investments, to obtain additional capital, reduce its debts...The turnover of the company will be the trace of these
movements of funds that pass through the Fund. In other words, the study of heritage mutations to trace cash, and
variations in these terms to understand the current situation of cash or to anticipate its future location. The analysis
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therefore behave both in a retrospective perspective and from a forward-looking perspective. The following synoptic
table consolidates the various financial documents that are reached:
Financial and accounting
records
'direct' Impact of the flow of funds
on the heritage of the firm (jobs and
long-term resources)
"indirect" Impact of the flow
of funds on the heritage of the
firm (operating cycle)
Retrospective records
Prospective Documents
Balance Sheet – Table of funding
(or in’s and out’s) profit and loss
Income Statements
account
Documents de synthèse :
Tableau des variations d’encaisse
Plan funding
Operating Budget
(or investment)
Synthesis Documents:
cash (annual)
Budget forecast (monthly) cash Positions
Balance-Sheet Forecast
Forecasted Income Statements
TABLE n° 4: Documents analysis of flows of funds.
I - THE RETROSPECTIVE ANALYSIS OF THE VARIATIONS OF CASH: THE EXPLANATION OF THE FINANCIAL BALANCE.
The fact that a company continues to exist is proof that financial balance has been achieved so far. This finding does
not, however, to assess the conditions in which the credit has been provided. Admits so commonly a double interest
in an ex-post variation of cash consideration:
Firstly, it is the instrument of an explanatory study of the movements of funds passed;
On the other hand, it provides a means of control of the forward-looking management of cash.
Financial analysis known at the present time, reconstruct variations in cash in a real summary table of cash from the
General accounting data.
A - THE FLOW OF FUND ACCOUNTING.
The General Ledger are two types of accounts:
The "balance" accounts, or accounts heritage,
The "accounts", or accounts operating, and therefore, two types of flows:
1. The economic stream,
2. Operation flows.
1 - HISTORIC FLOWS.
The turnover flows correspond to movements of funds affecting the balance sheet items. Their identification and
their measurement are carried out by the comparison of various successive balance sheets. In this regard, we divide
heritage flows into two categories:
1. 1 ° 'jobs' carried out by the company during the period under review; they correspond either to the assets
increases, decreases in liabilities.
2. 2 ° 'resources' obtained by the company during the same period; They include either increases in liabilities
or decreases of assets
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This opposition led to the establishment of an array of jobs and resources, or "Table of funding". The role of this
financial document is to allow the control of financing of the firm conditions. In its most simplified form, the table of
funding is reduced to a differential review and is as follows in Table n°5, Composition of Funds:
2 - THE FLOW OF OPERATIONS.
FUNDS APPLIED
FUNDS RECEIVED
Increase the Assets’ Account Increase the Liabilities Account
Decrease the Liabilities Account Decrease the Assets’ Account
Table n°5: Composition of Funds
Financial flows of exploitation arise from the operating cycle, i.e., procurement transformation and flow operations.
These flows are grouped in the statements of income into two headings: the charges and income for the period
The accounting distinction between heritage and streams of exploitation should not lose sight of the close
relationship between these two types of movements. Indeed:
1. Flows generated by the operating cycle cause variation in current assets and liabilities positions in the short
term.
2. "Allocations to depreciations and Provisions" link also exploitation and heritage.
3. Finally, the operating result reached by the confrontation of flows of loads and products represents:
An increase of the heritage of the firm, if it is positive;
Either a loss of substance heritage, if it is negative.
General Accounting therefore allows a synthetic reconstruction of movements of economic flows and operation feed,
using the table of funding, and the statements of income. In these circumstances the 'table of changes in cash will be
as follows:
OUTFLOWS
INFLOWS
Increase of Assets’ Accounts Increase of Liabilities Account
Funding Table
Decrease of liabilities’ Accounts Decrease of assets’ Account
Income Account Charges Revenue
TABLE 6: Table of the INFLOWS’ changes Structure
Means in other terms, that is a simple approximation table of funding and the statements of income of the period
considered. To what extent this analysis in terms of accounting flow helps to explain variations registered at the level
of the cash position of the company.
B - ACCOUNTING FLOW AND CASH FLOW.
The table of changes in cash assimilated accounting flows to cash flows. This assimilation is based on a number of
implicit assumptions and faces a number of limitations.
1 - THE IMPLICIT ASSUMPTIONS OF ASSIMILATION OF ACCOUNTING FLOWS TO CASH FLOWS.
These assumptions are six in number:
1 - Any increase in assets (excluding cash) involves a disbursement.
2 - Any decrease in liabilities involves a disbursement.
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3 - Any increase in liability involves a cash receipt.
4 - Any decrease in assets involves a cash receipt.
5 - Any charge involves a disbursement.
6 - Any product involves a cash receipt.
But these implicit assumptions are patently unrealistic.
2 - THE LIMITS TO THE ASSIMILATION OF ACCOUNTING FLOWS TO CASH FLOWS.
The causes of the gap between accounting and cash flows result from the implicit assumptions. There are three:
Firstly, the flows recorded by the General Ledger do not match all transactions between the company and its
environment.
Then there is regulation time.
Finally, the various results that a company may release its operations do not necessarily cause body
movements.
2.1 - FLOW ACCOUNTING AND MONETARY EXCHANGE WITH THIRD PARTIES.
Flows recorded by the General Ledger are not all exchanges between the company and its environment. A job or a
load do not necessarily give rise to a disbursement; similarly, a resource or a product do translate not always by a
cash receipt.
(a) Funds applied and Funds received do not necessarily correspond to cash receipt and disbursement flows.
The changes that affect the balance sheet of a company can have two origins: they may be the result, in the first
place, of transactions between the company and a third part (customers, suppliers, bankers, etc.). In this case, Funds
Applied (such as acquisition of assets, debts, etc.) and Funds Received (such as capital increase by contribution of
money, credits, etc.) necessarily imply INFLOWS and OUTFLOWS. Secondly, the variations of certain balance sheet
items may only be the result of a game of accounting entries. Funds Applied and Received have therefore no direct
monetary consideration: it is the case of depreciation operations, establishment of provisions, revaluation of assets,
etc. These resources result from accounting flows and non-misleading no cash flow that would alter the amount of
cash.
(b) Expenses and products do not necessarily correspond to cash receipt and disbursement flows.
Can be distinguished in this regard, the cash flows of operating non-monetary operation flows. In the case of
depreciation, for example, credited to income allocations give rise to no disbursement.
2.3 - TAKING INTO ACCOUNT DELAYS IN REGULATION.
The reconstruction of the movements of cash requires taking account of shifts between flow of operations and cash
flows related to the phenomenon of credit (credit to debtors and credit by creditors). Thus to calculate the amount
of the cash receipts on sales, for example, can use the following procedure:
SALES FOR THE YEAR,
+ Receipts on sales from the previous year,
- Credits granted on sales of this fiscal year and not yet expired at the end of the latter.
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It will similarly be to calculate the amount of the disbursements on purchases:
PURCHASES OF FISCAL,
+ Disbursements on purchases from the previous year,
- Credits obtained on purchases this fiscal year and not yet expired at the end of the latter.
The same technique is valid for any stream operating with a period of regulation.
2.4 - RESULTS AND FUND MOVEMENTS.
Operating income that comes from the comparison between loads and products of the year does not imply a specific
cash flow. On the other hand, other elements of the income statement reflected cash transactions by the company,
including outside the scope of its current operations:
Grants received off-farm, income taxes, etc. Accounting information is therefore sufficient to replenish the cash flow
through the company, on condition however a few corrections, to go from accounting flows to cash flows.
The difficulties traditionally described in the assessment of cash movements which we have just resumed remain
despite everything technical. They can be largely mitigated, we have seen, by easy to make corrections. It is possible
then, to set a rigorous process for establishing an array of variations of realistic cash from conventional accounting
documents. It is not the same with other more fundamental difficulties which limit the table of changes in cash in his
role as indicator ex post conditions of realization of the balance of cash.
C - THE LIMITS OF ANALYSIS OF THE "VARIATIONS OF CASH”.
The inadequacies of the 'table of changes in cash’ as an indicator of the evolution of the cash flows through the
company is due to its very nature. One may wonder, indeed, how a document static and synthetic can account for a
phenomenon such as cash flow, composite and dynamic by nature.
1 - THE ARRAY OF VARIATIONS OF CASH IS ACTUALLY A STATIC DOCUMENT.
Contrary to what one might think, this document is not truly kinetic, and still less dynamic. It merely, as the result
account, save the aggregate value over a given period, two sets of flows: the outputs and inputs of funds. The balance
indicates the variation of cash for the period. Knowing the value and the causes of the increase or decrease of cash
from its initial level is ultimately quite poor teaching. Because, although knowing the nature and the value of
responsible for the movements of cash flows, nothing is known about the reality of their behavior: speed, rhythm,
flow, composition, and timeline. Without perfect knowledge of the respective conduct of the flows of entries and
exits of funds in time, one cannot truly appreciate the way in which the balance of cash has been provided during
the period.
Therefore, from the point of view of the cash management, it seems not appropriate and efficient aggregate flows
to learn a lesson on their behavior towards the financial equilibrium of the firm. It would be much more interesting
and operational, to identify exactly how the recipes are presented (or arise) against expenditures at the time. Might
think that adopting a time scale more reduced (e.g. month), it would have "of extremely close States of the heritage
of the company" which would lead to "a very fine analysis of historic flows" and on a statement "almost continuous
evolution of cash ' (1). This remark seems unsatisfactory for two reasons
Firstly, such calculations performed monthly can present serious practical difficulties of implementation.
Relatively few companies have at their disposal for as short a period necessary accounting documents
(balance sheet, statements of income, let alone table of funding). In addition, the timeline for completion
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may reduce the value of this work. Finally, the cost of construction of the table of changes in cash is not to
neglect.
Secondly, it should be noted that it seems hardly possible to descend to the bottom of a month. However, in
30 days cash can go through different situations. This method will never provide a detailed analytical
information and accurate actual cash movements.
2 - THE ARRAY OF CHANGES IN CASH IS A SYNTHETIC DOCUMENT.
The user may also go further than it’s possible for him in breaking down the basic accounts, it will never reach the
knowledge of the actual movement of cash. In this area, it does not seem possible to make the economy of an
analytical and chronological of cash flow statement. As we shall see, this is the only way towards a master's degree
in the economic balance of the cash flow. On the other hand, jobs and resources table can be an instrument of
interesting control at the level of the cash management.
3 - ARRAY OF FINANCING AND CASH BALANCE.
By definition, jobs and resources table is the tool of the realization of the investment and financing plan. It ensures
that no distortion has occurred between the capital growth and the terms of its funding: it is the variation of working
capital which is at the center of the analysis. However we have shown the link between working capital and cash:
Therefore:
Cash = working capital - needs for working capital.
Change in cash balance = (+) change in working capital (-) change in working capital needs.
The Funds Applied and Received Table can be broken down into two parts:
FUNDS APPLIED
FUNDS RECEIVED
I – Fixed Funds Applied of the Exercise II - Ressources de financement de l’exercice :
- Permanent Assets
-Auto finance
- Loans and Securities
- Transfer of assets
- Loans’ Repayment
- Loans
(+) Change in Working Capital (-)
(= II – I)
III – Circulating Funds Applied
- Operating values
- Realizable Values
IV – Short term Funds Received
Long-term Debts
(+) Funds’ changes (-)
(Bank Credit) = (II + IV) - ( I + III) (Bank Loan)
(+) Changes in Operating capital Requirements
(-) (= IV - III)
Table n°7: Classification of Funds Applied and Received
Variation of the Working Capital Fund provides both the balance of jobs and resources of the two parts of the table.
Cash balance depends not only on the balance of flows of exploitation but also of the financial structure of the
company. The table of funding highlights therefore, ex-post, the conditions under which the financial balance for a
given period is carried out. It allows to know the nature and the value.
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However, this document synthesizes that variations aggregated on a space of time. It does not reveal how the
financial balance has been maintained throughout the period. In other words, how they covered the assets’ needs.
Indeed, their coverage depends on the importance of the Fund bearing and the possibilities of short-term debt, i.e.
of the policy of investment and financing of the firm. The difficulties of approach to the movement of cash and
changes in working capital needs will appear in predictive analysis of cash flows.
1 - THE ANTICIPATION OF THE CONDITIONS FOR THE FINANCIAL BALANCE: CASH FLOW FORECASTING.
The traditional techniques of management planning provide, from the consolidation of forecast of cash flows,
financing plans and budgets of cash. The procedure which leads to the assessment of cash forecasting involves three
essential steps:
1 ° the first stage presents turnover expected movements.
This evolution is traced in a funding plan which includes:
In 'planned jobs', assets increases and decreases in liabilities;
In 'Predicted Funds Applied', liability increases and decreases of assets.
He translated the management constraints and choices of the contracted entrepreneur concerning both the
operation and development of the company. From these forward-looking changes and taking into account the
balance at beginning of period, establishing the forecast supply balance, instrument of control. It allows to compare
the financial situation envisaged at the end of the baseline period. An audit of the whole is possible through the cash:
It is calculated in the forecast supply balance by difference between the Working Capital Fund and the
forecasted working capital requirements;
It appears clearly in the financing plans, as can realize in the following document
Treasury
Treasury
Years 20… 20… 20… 20.. Total
Investment Program………………..………………..………………………..
Last year Investment program product………………..………………
Diverse charges………………..………………..………………..………………
Extra need of funds………………..………………..………………………….
Reconstitution of working capital fund………………..……………….
Due date of Loan………………..………………..………………..…………….
Due date of Other loans………………..………………..……………………
Dividends distribution………………..………………..……………………….
Reimbursement of loan………………..………………..…………………….
Total Needs
Increase in Turnover………………..………………..………………………..
New associates’ funds………………..………………..………………………
Diverse resources………………..………………..…………………………….
Self-financing before distribution………………..………………………
Working capital funds………………..………………..………………………
Short term loans………………..………………..………………..…………….
Other long term loans ………………………………..……………………….
Total Resources
Difference
Accumulated Difference
Table n°8: Treasury’s Plan
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2 ° the second step focuses on the anticipation of the flow of operations for the coming year:
Loads,
Products,
Forecast operating income.
These flows are grouped in 'operating budgets. From these data the "provisional result account' is constructed of the
reporting period.
3 ° the last stage of the predictive analysis led to the consolidation of forecast cash flow in "Cash Budget".
In reality, the adjustment of revenues and expenditures at the lowest cost requires a genuine “estimated cash
device”. Movements of funds that affect availability are the result of a company given or received by the company.
These commitments are generally classified under two headings:
1. Commitments off-operation:
*Firstly, investment, the origin of acquisition expenses, and,
*On the other hand, the financial transactions which include essentially financing transactions, repayment
of loans and payment of dividends.
2. Commitments of exploitation: from the normal and common activity company, originally of revenue and
operating expenses.
The cash budget is over a given period, generally the month and year, the anticipation of the movement which may
modify the cash position. There are two types of conventional and complementary methods for the preparation of
the cash flow forecast:
Method “recipes – expenditure”,
The method “resources – needs”.
3.1 - THE METHOD “REVENUE – EXPENSES”.
Simple in principle, it is more difficult to implement.
3.1.1- THE PRINCIPLE OF THE METHOD.
As its name implies, this method consists of a comprehensive census entries and liquidity outflows. Then arise the
problem of the census period and forecast technique.
1 - DETERMINATION OF THE HORIZON AND NO CASH FORECASTING.
Practitioners call:
'Horizon', the overall period of anticipation, and,
«No», the subdivision of the horizon.
The cash-flow forecasts generally cover a year, with a not monthly. Sometimes they are on a shorter term. But to
ensure the financial balance for the coming months does not offsets that arise inevitably between the inputs and
outputs daily Fund. Very short-term forecasts are to coincide payment options and regulations to operate.
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The cash has then for each day (or week, etc.) and by account, expenditure to be carried out and the recipes to make.
Experience shows that very few companies are in as fine forecast entries and cash. Indeed, such rigor and such details
in the analysis of revenues and expenditures require an administrative organization of seizure and treatment of
unique information relating to the movement of funds, dissociated from the classical book recording.
2 - THE DEVELOPMENT OF THE CASH FLOW FORECAST.
An undertaking given or received by the company does result in a cash flow only after a certain period of time. Provide
the amount and the date of the movement of cash therefore represents a twofold problem. The establishment of
the forecast data is discussed in two complementary ways:
Budgetary accounting, and
Accrual of liabilities.
(a) BUDGETARY ACCOUNTS:
The estimates are based on assumptions of activity and therefore present a random character.
1 ° THE FORECAST REVENUE:
They are essentially original sales receipt. For retail business that sells cash forecast revenue is equal to that of sales.
In the case of businesses that sell on credit, a statistical analysis to determine the spread of cash receipts from sales
of the period. With regard to sale on command, usually accompanied by payment by instalment, forecast revenue
occurs at two levels. The firm orders, should refer to the manufacturing schedule in order to set the dates of different
maturities. Planned orders, to establish a theoretical schedule, with all the inaccuracies that entails. Other receipts
have various sources:
Accessories operating revenues;
Field exploitation operations;
Financial transactions.
Their spread in time depends on the terms of the contracts, the activity of the company, or its strategy. It supports
some approximation due to their relative importance.
2 ° THE FORECAST SPENDING:
Prediction of disbursements is more difficult because of the wide variety of loads. The relationship between the
commitment of expenditure and the corresponding disbursement varies depending on the nature of the load. In this
regard, expenditures are classified into four categories:
Spending on purchases of goods,
Expenditures on normal operating expenses,
Expenditure on financial operations
On investments.
Prediction of supply-related disbursements can be difficult due to the uncertainty that sometimes prevails on the
period of delivery or billing. In this case the problem can be solved if you have a past experience, by an approach
similar to that of the forecast revenue. The forecast spending on normal operating expenses is made from their
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grouping by nature. In principle the frequency and the time limit for payment are well known. Quite often, there
remains uncertainty as to the amount that can be still quite close. The forecast of expenditure on financial and
investment operations stems from the financing plan. The liabilities accounting complete this approach.
(b) ACCRUAL OF LIABILITIES:
Accounting for commitments is intended to allow adjustment of budget estimates. It is based on achievements: the
commitments received or given. It reveals from the source, variances between budgeted or revenue incurred or
budgeted spending and expenditures
Non-operation movements are not fix. Any company is able to identify all born commitments and their impact on
cash flow accurately. Movements of farms, on the contrary, are analyzed globally, comparing the development over
time of the commitments of expenditure and revenue from a common date.
Two parameters influence the movements of availability:
The amount of the commitment,
The time between the birth of commitment and its transformation into cash.
These information are only averages but resulting from the comparison between commitments and payments
actually made. The same analysis is performed for cash receipts. We will then search for "equalities between money
supply" regardless of conduct specific to each elementary operation constituting those 'masses '. Also has interest in
the continuation of the analysis, to seek the causes of the dispersion of individual behavior around these averages to
avoid errors of forecasts. The gap analysis allows any time corrective actions necessary to ensure the solvency of the
firm.
The method of forecast revenues-expenses, despite his great interest does not fully satisfaction.
3.1.2 - LIMITATIONS OF THE METHOD.
Experience shows that this method has major shortcomings. We will make in this regard four remarks.
1 - THE CASH FLOW FORECASTS ARE UNCERTAIN.
But this uncertainty does not have the same nature as it's more or less distant horizon data.
(a) THE DATA IN THE VERY SHORT TERM:
Most operations that result in a movement of cash are already involved. As a result, the Treasurer may theoretically
have all necessary information. In fact, it will have that mass of information. First, because the internal information
of a business system is generally not organized so all this mass information arrive. Then, it can appear to the eyes of
those responsible for the cost of the transmission of the information is disproportionate to the gain (or the economy)
expected a certain forecast. It should be noted that the improvement of the input of information is the condition first
the realization of good cash flow forecast
In addition, the cost of a bad cash management can be as compromise or at least strongly affects the profitability of
the firm. Anyway, the use of certain statistical forecasting techniques can replace when necessary, expensive looking
for additional information about committed transactions.
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(b) SHORT-TERM DATA:
Beyond the very short term (one month) the income-expenditure method proves quite coarse. Indeed, the
information for these flows are not always available. Operations that will result in cash receipts and disbursements
in the coming months may not have been still incurred. Yet the knowledge of potential imbalances is indispensable.
The Treasurer will be able to intervene to modify as appropriate, the date of commitment of operations to adjust
input stream and output stream. Similarly the bank credits may be obtained in favorable terms if they are applications
several months in advance.
Beyond the very short term (one month) the income-expenditure method proves quite coarse. Indeed, the
information for these flows are not always available. Operations that will result in cash receipts and disbursements
in the coming months may not have been still incurred. Yet the knowledge of potential imbalances is indispensable.
The Treasurer will be able to intervene to modify as appropriate, the date of commitment of operations to adjust
input stream and output stream. Similarly the bank credits may be obtained in favorable terms if they are applications
several months in advance.
The resources-needs method, which we'll talk about, is better suited to such an analysis. It indeed makes it possible
to explain the causes of variation in cash. The analysis in terms of revenue-expenditure then finds its justification in
the framework predetermined by the resource-needs method.
2. FORECASTING BEGINS WITH A BETTER CAPTURE OF INFORMATION.
Only an appropriate organization may allow the Treasurer to gather information essential to good forecasts.
Moreover, anyone in the company whose actions or decisions have an impact on the inputs or outputs of funds must
be sensitized to the problems of cash. It is to this extent that it will effectively contribute to the improvement of the
input of information
3 - THE TRACKING OF CASH FLOWS MUST BE HELD IN 'VALUE DATE '.
The movement of bank accounts follow special rules should know. There is always a lag between the date of the
transaction and the date of registration of the transaction to the account by the Bank (discounts after their effective
date and before withdrawals are entered). Ignore the day of value system is to expose to heavy financial loads:
unnecessary interest, financing of a fictional overdraft, occult idle cash cost.
4 - 'REVENUE-EXPENDITURE' PREDICTION METHOD CAN LEAD TO AN OPTIMUM FINANCING OF CASH
REQUIREMENTS.
Optimum financing is an effective funding directed at the lowest cost. For this it must be adapted to the nature,
volume and duration of the needs. However, the traditional method of forecast revenue-expenditure leads neither
to the knowledge of the daily variation of the bank balance, so the cash requirements in the very short term, nor to
the knowledge of needs of bearing, so short-term cash
3.2 - PREDICTION METHOD 'RESOURCES-NEEDS '.
Cash flow forecasts are obtained by a projection in time equation:
Cash = working capital fund - working capital needs.
Forecast changes in cash will therefore appear as the difference between projected changes in working capital and
planned changes in working capital needs.
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The advantage of this method is to explain the causes of variation in cash which are to be found in the Working
Capital Fund, themselves conditioned by changes in the operation of the undertaking.
3.2.1 - PRESENTATION OF THE CASH FLOW FORECAST IN TERMS OF 'RESOURCES AND NEEDS'.
Short-term cash forecasts are generally presented in one of the three following forms:
Estimated Balance
Adjusted earnings
Variation of working capital.
These three possible presentations use the same forward-looking information; either variation estimated.
G = gross fixed assets,
S = stocks,
R = realizable customers (third party receivables and short term loans).
C = cash,
Cp = capital permanent (capital, reserves and long-term loans),
D = depreciation,
ST = short-term debt (third-party accounts payable and short-term borrowings),
F = profits,
1 – ESTIMATE:
i.e., the estimate and the projected income statement data
The presentation takes the following form:
Or, what amounts to the same,
G + S + R + C = Cp + D + ST + F
(G - D) + S + R + C = Cp + ST + f
Should be to estimate as accurately as possible the movements of each workstation for the next (month or year)
period. The Cash is obtained by difference.
2 - ADJUSTED INCOME:
The relationship becomes:
3 - The variation of the Working Capital Fund.
This time the relationship is written:
And highlights the change in working capital:
C = F + D + ST + Cp - (G + S + R)
C = F + D + Cp - G - (S + R - ST)
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These three presentations are well only one and the same method of approach to the cash flow forecast in terms of
resources and jobs. The value of this method obviously lies in the method of calculation of the movements of the
elements of the heritage.
3.2.2 - ESTIMATES OF CASH FLOW IN TERMS OF 'RESOURCE NEEDS.
The problem may be considered in two ways:
Either, the extrapolation of the commitments passed; although, again, the estimation of future working capital
requirements.
1 - THE EXTRAPOLATION OF THE ACTUAL COMMITMENTS.
This approach is the easiest to follow natural route but is limited in scope.
(a) THE PRINCIPLE:
It is to analyze the impact of revenues and expenditures on the elements of the heritage. Knowing the past, operating
and non-operating, commitments on draws up accounts of outcome of the coming months.
From these result accounts estimates and informed about the terms of payment as a whole, it is developing a cash
budget in terms of expenditure and revenue. It is possible to draw up an estimate for the month to come, and hence
calculate the movement of working capital needs and possibly that of the Working Capital Fund, justifying the final
cash position.
(b) THE SCOPE OF EXTRAPOLATION OF THE COMMITMENTS:
Taking into account the various methods of payment commonly used, it is hardly possible to predict a significant cash
beyond the second coming month position. Therefore, this procedure cannot be validly applied in the case of
companies having a fairly regular activity if you want to anticipate the financial balance in the coming months. Any
change in operating conditions may be taken into consideration that in the realization of the commitments. However,
few companies are able to predict accurately the commitments coming due to the large number of factors which
give rise to and modulate the cash flows transiting by the company: competition, economic situation, social climate,
price, etc. This explains the inaccuracy of thus established forecasts for the balance of cash beyond 30 to 60 days,
and even sometimes below, if the time between commitment and corresponding cash movement is short.
In this regard, it would seem much more efficient, rather than "guess" the appearance of speculative money flows,
estimated using statistical methods and simulation future working capital requirements.
2 - ESTIMATE OF FUTURE WORKING CAPITAL REQUIREMENTS:
Knowledge says changes in cash and flows that cause has no meaning that daily and value date. The tools are:
accounting for commitments and taking account of the conditions of Bank.
The aim is: control of the flow of inputs and outputs of funds, in order to minimize the cash and financing at the
lowest cost lack of irreducible synchronization between receipts and disbursements. To the - beyond the very short
term cash flow is impossible and unnecessary. Indeed, what matters then, resides in the apprehension of the heritage
movement, and in particular items that fluctuate according to the pace and nature of cycle operation, or even
according to the situation: the active and the passive circulating; or working capital needs. The evolution of the
working capital needs, in light of available working capital, is empower themselves to an optimal choice of the
financial structure of the firm, in a monetary environment national and international given.
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The nature and duration of the funding must correspond exactly to the nature and the duration of the need to
finance. Hence the need to be able to measure:
Firstly, the needs permanent financing (fixed assets and current assets), as well as the needs transitional
(current assets mainly);
And secondly, the stability of the financial resources available to the firm (equity and external competition
of all origins).
Insofar as the contractor will be able to adjust to each other, it reconciles the objectives, required until there as
antagonistic, solvency and profitability.
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Manage cash consists, in the traditional design, on determining the amount of cash to hold at the beginning of the
period which, taking into account the revenue and expenditure of the global businesses that the company exercises,
will be necessary for the implementation of the budget. Theoretical solutions to this question found in the literature,
are many and varied. This is explained by the relative ease with which one can model optimization problems, thanks
to the existence of mathematical tools of investigation already in use also. In this case, the authors have transposed
the logic of analysis of the inventory control, quantitative analysis of the Keynesian approach of 'preference for
liquidity.
This problem is equivalent to setting the conflict between, on the one hand, excessive cash that involves an
opportunity cost, and, on the other hand, insufficient cash resulting in a cost of insolvency. However, although
appealing intellectually, this approach is based on a number of explicit and implicit assumptions that practice
business is not checked. Maintaining important liquidity goes against the objective of cost-effectiveness insofar as
the funds tied up in liquid assets have in general no, or very low profitability. In addition, a plentiful cash cannot be
in any case, contrary to what was long stated, as the guarantee of financial security of a company, i.e. nor as a
guarantee of its solvency, nor as the insurance of its autonomy.
The security of a business depends above all on the cash flow released that it is capable of secreting, or if one prefers
its potential to restore liquidity. Its profitability is therefore the necessary condition for its security. But we will see
that this condition is not sufficient. Solvency and profitability do oppose no more long term in the short term.
The company must exercise a tight administrative control to manage its cash flow. The synchronization of the cash
flows and the choice of day to day financing, on the one hand ensures the solvency of the firm and on the other to
improve its profitability. Indeed control of cash forecasting, financing in the short term, as well as the coordination
of banking to aim at the reduction of monetary assets to zero. This is what we will show in the three sections that
follow.
In other words, a company that has permanently cash void or fluctuating slightly around zero can be considered, in
the first analysis, financially well managed. This means, all other things being equal, as makers:
Master cash flows
Effectively reallocate cash flow released in profitable jobs,
Enjoy more than just their funding needs,
Negotiate the best terms of Bank.
I’ll try to show in this part that by minimizing the volume of monetary assets, the company reconciles the objectives
of security and profitability. This goal will be achieved in conditions of liquidity and profitability by an extensive
improvement of cash forecasting.
SECTION 1: MONETARY CASH FROM THE FIRM.
The company’s business activity must keep a certain "stock of currency", to deal with all moment to the expenses
that it must or wish to achieve.
I - PREFERENCE FOR LIQUIDITY AND INVENTORY MANAGEMENT.
If we could predict the future perfectly, and disbursements were synchronized to the receipts, it would be
unnecessary to provide a pool of means of Exchange.
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A - Grounds for cash, and the formalization of a monetary stock.
1 - THE REASONS FOR DETENTION OF LIQUIDITY.
Expressed in terms of financial management these reasons can be defined as follows:
1. The transaction pattern meets the daily needs of funds, in order to address the professional exchanges
caused by the cycle of exploitation (supply, production and marketing expenses), and the payment of
financial charges, taxes and dividends.
2. The precautionary reason justifies the cash intended to deal with the unpredictable expenses such as those
resulting from fires, accidents, trial, decrease of activity, etc.
3. The reason for funding is the reason for the accumulation of funds to undertake a major expense, such as an
investment.
4. The reason for speculation, finally, responds to the concern to take advantage of a momentary advantage
(advantageous investment, the market, information requirements, etc.).
These cash requirements will be all the less important that the forecast of flows will be less uncertain. Similarly, the
ability to borrow at any time also reduces the need to keep cash. Finally, we know that it is not useful to keep all of
the cash in the form of immediate cash. A party may be held in the form of "investment securities".
The Keynesian approach of the preference for liquidity is now widely adopted by financial companies. Hold a stock
of currency to ensure against the lack of synchronization between the inflow and outflow of funds flows.
2 - THE FORMALIZATION OF THE MONETARY STOCK.
It is precisely because these flows are naturally purchase that the company must provide a pool of means of
Exchange. The origin may be the result of a phenomenon or event known, random, or ignored by the Treasurer. In
those circumstances it must be able to have funds at the appropriate time to respond to different types of stress
resulting:
Either, commercial or industrial operations which he did not control,
Either of financial transactions which it has not always control.
The Treasurer will organize its intervention from three forms of cash:
Immediate availability,
Securities of investment
Bank credit in the short term.
3 - THE STRUCTURE OF CASH.
The composition of the cash depends on the grounds for detention of liquidity. In this regard we note that a portion
of the cash to a character of 'reserves' and it has three main destinations: to face big spending some to be carried
out in the immediate future (pattern of funding), enable the company to benefit from the investments (basis of
speculation), and respond to unpredictable expenses (reason for caution) without delay.
"Transaction" cash is more difficult to grasp. Indeed, if meant by 'transactions' series of financial flows generated by
current operations, it must be admitted that the nature of these transactions varies one firm to another. It is the
financial officer responsibility the task of defining the concept of "transaction" on the basis of its own goals. In fact,
the limit is not as sharp between the different types of balances economic literature can be implied. The idea of
'reserve' is present in the pattern of transaction.
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Anyway many authors have developed models of management relating to so-called 'transaction' cash, either to socalled
cash of "precaution". Cash transaction is directly attached to the operations of the operating cycle, while cash's
caution is justified by unforeseen and significant expenses having a character of protection against depreciation,
losses and risks.
B - THE ESSENTIAL VARIABLES INVOLVED IN THE DETERMINATION OF THE OPTIMAL AMOUNT OF CASH.
We examine successively the following five decision factors:
The nature, behavior and the volume of cash flows.
Revenues and transaction costs, related to the securities.
The length of the cash flow’s forecast period.
The value of the minimum balance critical cash.
The cost of breakdown of cash.
1- THE NATURE, BEHAVIOR AND VOLUME OF THE CASH FLOWS.
A portion of the cash flows for the budgeted period is the result of decisions taken by officials of the firm during this
period; another part is generated by decisions taken during previous periods. Naturally the Treasurer will honor all
expenses incurred by the managers within their budget, even though cash must fall below zero. There is a category
of cash on which the Treasurer has no control. Similarly, payments of claims by the customers, as well as sales in cash
during the period, represent receipts on which the Treasurer has no power.
Such financial flows correspond to a type of transactions to which the attitude of the Treasurer is purely passive. On
the other hand, two sets of transactions are normally controlled by the head of the Treasury. These are, firstly, shortterm
loans and their repayment, and the purchase and sale of securities. Therefore, at the level of cash INFLOWS,
we can distinguish three kinds of financial transactions:
Loans’ reimbursement and repayment of short-term funds;
Purchases and sales of securities;
All other transactions.
The first two are controllable by the financial controller; the third, on the other hand, is sustained and sometimes
even random. Consequently four groups of financial transactions will play on the level of INFLOW cash:
Loans and repayments of funds lent to short term (non-random flow);
Purchases and sales of securities (non-random flow);
Other random transactions;
Other transactions.
The first two groups will be tools for balance between the hands of the Treasurer.
2 - TRANSACTION COSTS AND REVENUES ASSOCIATED WITH THE "SECURITIES".
Treasurer who behaves rationally, is expected to invest its funds that are Free of any sort of engagements in the form
of "investment securities" (or even in the form of escrow account in Bank). These values should have the
characteristic to be bought and sold quite quickly and quite easily, and a probability of low loss. Transaction costs
relating to the purchase and sale of the securities represent a small percentage of the amount of the transaction. But
these costs can be higher than gross income whereas, especially if the period of detention of the security is short. In
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addition, these costs become very important accumulated over several periods. The securities revenue is eventually,
either it was an interest or dividend, increased or decreased of the added or minced value realized on the sold
security.
3 - THE DURATION OF THE PERIOD OF THE CASH FLOW FORECAST.
Banks ask daily accounts to their customers on the status of their bank balances. Interest expense, for example, apply
every day. It does not seem possible, obviously, to change this state of affairs. Also, predictive analysis of the situation
of cash must be daily and conducted value dates. The timing of the debt structure has a fundamental importance
in this regard. So if we succeed to concentrate cash on some days, revenues will remain only random flows. And, if
you can know the probability distribution of income over the period of time that separates two liquidity outflows, it
can extend the forecast period. A longer forecast period allows to reduce the time devoted to the analysis of the cash
position in reducing the frequency of labor, and therefore, the administrative costs...
4 - MINIMUM CRITICAL BALANCE OF CASH.
It is the value of the cash below which the cost of "cash break" begins to run.
1 - The value of the minimum balance is critical.
This value is theoretically zero. Many entrepreneurs while significantly above zero. Four essential reasons for this
behavior:
a) The fear of the overdraft.
The fear of the overdraft encourages the Treasurer to maintain a minimum cash positive. Is requires no always
enough if the detention of idle funds is not more expensive than any discovered him.
b) The requirements of the banker.
It is in the interest of the banker to get as strong as possible the deposit accounts. This provides, effectively, a mass
of resources which he can benefit by placing them in the very short term money market for example. Understandably
so that the quality of the services that a bank can offer a company (loans, credits, etc.) will depend on the average
minimum balance of account it holds.
c) The reasons for "reservations" we have already analyzed).
d) The negligence of people in charge when they ignore to form idle cash which then is a sign of over-funding of
the activity.
The Company should add a fifth reason: "minimum liquidity clause.
All these reasons are all the more critical that the company has several bank accounts.
2 - Failure to observe the critical minimum engages costs.
There are two ways to break this minimum and therefore to show breakdown of cash costs.
(a) In the first place, the balance may actually fall below the critical minimum. In this case the incurred expenses
may be twofold:
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Either they consist on interest or other financial costs to the amount of the loan intended to restore the
minimum cash;
Or, if the Bank grants overdraft, charges will be formed by financial charges which evaluation is set by the
banking regulation.
(b) The critical minimum is not respected, in the second place, if the Treasurer decides to postpone the payment
of overdue debts. In this case the costs come from renunciation of any discounts (cash discount, or on invoice),
and of a possible deterioration of the solvency of the company reputation.
5 - THE CHOSEN SAFETY MARGIN.
There is a relationship between the cost of breakdown of cash and the level of cash on hand at the beginning of
period. More the initial cash inflow is important more the cost of failure is low: firstly, because the probability of
being overdrawn decreases, then, because the amount likely overdraft is lowest. In addition, this safety margin
should be even higher that the dispersion of the probability distribution of expected net cash flows will be strong.
One sees immediately that this margin affects the profitability of the company. Preserved in the form of cash funds
have only a low return or not return at all. In addition, the firm supports the financial burden associated with
resources forming the counterpart of this cash.
The choice of a margin of safety depends on arbitration that will make the leaders between risk and profitability.
C – MODELIZATION OF THE COMPANY’S MONETARY INFLOWS MANAGEMENT.
The companies’ cash can be speculated to a monetary stock whose level depends on a number of variables. As in the
determination of the optimum volume of a stock of goods, two contradictory objectives guide the decision maker:
profitability and safety.
Searching for a better profitability led the Treasurer to minimize its cash. However, a certain amount of cash is
necessary to the survival of the company. The establishment of the optimum volume of cash is based on comparison
of the costs associated with each of the two objectives
The cost of breakdown of cash, on the one hand, which breaks down into:
Loss of purchasing opportunities,
Loss of the 0.05% gain for the company;
Obligation to borrow at high rates (Loans),
Deterioration of the credit of the company,
Possible insolvency,
Affects the company’s reputation for the bankers;
Etc.
And, on the other hand, the cost of bloated cash which includes:
The waiver to possible profits and remuneration,
Vulnerability to monetary erosion and, where applicable, the exchange rate.
The assessment of these costs, and consequently, the optimal level of cash corresponding to the minimum of these
costs is difficult to achieve. Indeed, most of them depend on the opportunities available to the company. More
difficult, perhaps, is to maintain the cash at its optimum level because of the large number of variables, sometimes
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andom, involved, and determine the cash receipts and disbursements. Based on these considerations many models
were built by the company’s financial managers: The Director of the Financial Direction and the Treasurer, to
determine the optimal amount of cash to hold and define its management.
If these management of cash effort are always the same fundamental objective (ensuring better safety for the
greatest possible profitability), they differ on many points: the choice of the simplifying assumptions of real business
inside the company, the use of the mathematical tools of investigation, etc. No monetary cash management model
retains all the decision factors we have previously analyzed. The inaccuracy of responses bring these models precisely
depends on the translation of data in transaction and their treatment.
The limits of the management of cash in terms of stocks.
All models responded only imperfectly to the questions posed by the resolution of the cash flow problems. Of course,
at the level of concepts and their formulation their contribution is not negligible. They have, indeed, highlighted a
number of relations, procedures, treatments and investigative tools useful in the decision-making. Thus, the cost of
idle funds and the cost of failure of cash provide two guides effective management for the Treasurer. Similarly,
optimization, simulation, and probability are other instruments at the disposal of the person in charge. However,
each model ignores some important aspects of liquidity management and focuses on others who do not fully
replicate reality. In addition, they have never been the subject sufficiently rigorous experimental verifications.
Derived from reflections on the "theory of the demand for money by firms", they are ultimately as "simple analytical
curiosities."
The analogy with inventory management models remains very limited both to explain the rational training of cash
Stock
Cash only to describe the rational realization of the financing of the cash
Supply. We will try to show the shortcomings of these management models in two respects:
That the concept of cash liquidity
And that of the financing of the cash
1 - THE CONCEPT OF 'CASH-RESERVE' RETHINK.
The increasing sophistication of the models is accompanied by the gradual replacement of the objective "optimal
financing" than "the optimal cash.
First, no empirical assay was able to demonstrate the existence of a cash incorporated for reasons of "reserve". Then
the practice business teaches that there are other means of protection against liquidity difficulties.
1.1. THE FAILURES OF ANALYSIS TO PROVE THE EXISTENCE OF RESERVES INSIDE IWACO’S TREASURY
All the analyzing work inside the treasury tend to show that the level of cash is function of the rate of interest and
the volume of transactions. More specifically, the demand for money would vary inversely to the rate of interest and
would be subject to economies of scale.
1 - The nature of the project research on the demand for money.
While I was making this project inside the company, I tried to analyze the typology of work that is done inside the
treasury department and compare it with all the academic knowledge that I have learned, then I came to the the
conclusion that many sectorial studies attempted to prove the existence of economies of scale in the detention of
liquidity as well as its relationship to the rate of interest.
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(a) Economies of scale in the detention of liquidity.
By adopting an approach in terms of inventory management could think a priori, for any industrial area studied, the
variance of fluctuations in the level of cash should tend to increase less than proportionally to the volume of sales,
and thus to strengthen the presumption of economies of scale. In fact the results are quite heterogeneous and cannot
draw any conclusion.
b) The rate of interest and the detention of liquidity.
Most statistical studies find an elasticity of the demand for money from the interest rate. Despite this fact, which
could infer that the detention of balances is the result of rational choice, they cannot explain the formation of cash
totally or partly non - voluntary. According to how the INFLOWS and CASH is managed inside the treasury
department, the detention of cash is a much more complex phenomenon that the empirical and theoretical research
don’t assume
2 – THE COMPLEXITY OF CASH INFLOWS CONCEPT
The failure of the work to demonstrate the existence of a rational behavior in determining the level of cash is not
enough to make us reject the analysis in terms of stocks. Indeed, the models claim that define changes in the volume
of the freely chosen portion of the cash. However, certain balances do not result from the economic calculation;
these are:
The balances resulting from the inertia of the Treasurer;
The cash coming from the imperfect synchronization of receipts and expenditures;
The balances that exist because money can be spent, or that there are Free of engagements;
'Institutional' balances, such as the minimum deposit kept with banks.
Many factors determine therefore the formation of cash. And even as regards cash 'voluntary', although other
strategic elements that those retained in the models, will affect the detention of liquidity (banking costs, inflation,
exchange rate risk, etc.) It is therefore the normative value of the models that should be assessed in the light of habits
and cash management practices, but also possible improvements possible. In fact, the practice business shows that
the dis-synchronization of flows (transaction on the one hand pattern), and the risk of unforeseen expenses
(precautionary pattern) on the other hand, can be compensated by different measures of detention of cash.
1.2- DESYNCHRONIZATION OF CASH FLOW AND LIQUIDITY DETENTION.
The hypothesis of the company which retains a certain amount of money immediately available to deal with all
instant expenditure that it must or wish to achieve at any given time must be reconsidered. Although at first glance
it may be tempting to consider the cash flow of a business as a stock of goods, the logic of the cash management is
another. The confusion stems from improper comparison that some authors have made between the cash of a firm
management and the management of the stock of currency of a financial institution.
As it was mentioned at the beginning of this project; the company “IWACO” built another financial part of its
activities. This activity’s mission is to handle the Cash exchange inside the country in a legal frame called “CASH-
PLUS”.
For the treasury department, the management of this activity requires a certain separation between the cash-flows
available inside the company’s Treasury. So for example, a post office is required to pay to view, to the subscribers
whom are registered in this office, the amount of bank chrges that are presented. It is same for a bank deposit, or a
company’s savings. For the CASH-PLUS activity, at the beginning of each day, this represents a potential request for
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cash; and therefore, must be a stock to meet withdrawals of the day. This cash is well comparable to a stock of goods.
But extending this idea in terms of cash management is abusive.
1 - Control of cash flow.
If systematic efforts are underway to obtain the highest possible synchronization between revenue and expenditure,
the detention of cash loses its interest. The key to such a policy is the close control of the timing of receipts and
payments. Effective objective is therefore not to maintain an optimum wheel of cash, but predict the size and date
of the movements of funds resulting from the activity of the firm, in necessary influence the occurrence and procure
possibly, on time and at the lowest cost, additional availability.
For almost all of the possible cases of management, the company IWACO’s cash flows are largely predictable. So the
volume and maturity of many large transactions are under the direct control decision centers (financial management,
control and management of audit...). Other transactions are the normal accomplishments of past commitments. And
even, in the case of truly random, it is usually possible to reattach them to some moves at least partially known or
systematic. Searching for an optimum volume of liquidity to hold at the beginning of period, on the other hand, away
from the maker of one of the fundamental aspects of a genuine policy of cash: the control of the flow of funds.
If the traditional approach to value, on a purely theoretical level the intuitive reasons that sometimes push some
companies to hold cash, it does not represent necessarily the most rational, and in any case the most effective
attitude. It confuses what is (or believed to be), with which it should be. Therefore, insurance may be a sufficient tool
to predict the cash inflows.
1.3 - THE ASSUMPTION OF THE UNEXPECTED AND THE DETENTION OF LIQUIDITY.
Pointing out that presumably, could limit the importance of precautionary cash, and therefore to reduce the cost of
detention of liquidity by resorting to insurance. However the risk management takes in businesses, a place more
increasingly important and contributes to the achievement of the security objective. Insurance is the last link in this
strategy of risk.
Insurance is an operation by which "the insured" is promising, for a fee, "premium", by 'insurer' compensation, in
the event of occurrence of a risk defined in advance. But if insurance unloads the firm from the financial
consequences of random events of costs, does neither totally nor free. Its role is not to support "the risk", but risks.
Insurance changes the risk from an inknown object into an assured object. Indeed:
Firstly, it transfers to another, 'the insurer', the potential financial burden of risk, which is then the subject
of a collective and not individual apprehension;
On the other hand, it enables the company to integrate the "stabilized" cost of risk in the cost price of the
production.
It is up to the Manager to weigh the consequences on the life of the company of the realization of such or such risk.
The final purpose of insurance is to transform a possible disaster in constant charge of exploitation. It is therefore
appropriate to cover the risks which can be:
Either cause a crisis of cash;
Either create an operating loss;
Either compromise the profitability of investments.
The manager is in all ways called to manage a modest amount of INFLOWS CASH coming from the result of the
company’s cash situations. The role of the "head of the risk and insurance management" is to search what are the
risks to which the company may have to face, analyze and evaluate them financially, and then is avoid, reduce,
eliminate if possible, possibly to transfer them to a third part.
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Type of
Risk
Analyze
the Risk
Evaluate
the Risk
Itercept
the Risk
Reduce
the Risk
Eliminate
the Risk
Eliminate
the Risk
After determining the residual risk, it considers that the company is not able to assume it, he (Treasury manager)
decides to ensure that risk by adequate coverage. Indifference, negligence or distrust of insurance can result in
serious financial difficulties, and even lead to bankruptcy in the event of major disaster. The insurance is undoubtedly
a financial burden for the company. But the cost of the insurance is relatively low compared to the guarantees and
benefits it offers. A disaster such as a fire is still very expensive by the induced financial consequences. Insurance
changes the risk in some reduced cost; It prevents the creation of expensive idle cash and ultimately will prove to be
insufficient in a claim; It allows to limit expenditures for prevention whenever possible; it compensates the lack of
financial resources of the small and medium enterprises; It is a factor of improvement of profitability and liquidity of
the firm.
Statistically impossible to measure, voluntary cash is no longer justified if the company strives to synchronize the
inputs and outputs of funds, and if the protection against the risk is through prevention and insurance. In addition, it
is difficult to see in the light of experience, how a company would retain a voluntary excess cash while it is in debt
with its banks: it would maintain an idle cash 'funded' by a short-term high-cost credit. With respect to non-voluntary
cash, should define the actions to take to reduce.
2 – THE TREASURY-CASH FUNDING USING THE STOCK MANAGEMENT.
In this regard, two a priori underlie these models:
Transfer (cash - securities) as essential means of financing policy;
And the homogeneity of the nature of the funds.
It is appropriate to assess the limits.
2.1 - THE “TRANSFER POLICY” AS AN EQUILIBRIUM TOOL OF CASH-TREASURY: TRANSFER INTER-AGENCIES
In this way of managing the cash in terms of inventory management transfer policy has an essential role. It is the
preferred means of deficits and pay off the cash surplus. In any case it is not in reality the central role given to it by
the models. This policy is neither always possible nor always profitable. For IWACO, such a policy is usually possible
only on periods longer than one month, or in some cases, when the Product is needed in a specific area while it is
ignored in another one and the company can’t make another call for the mother company to send the product; in
one hand it costs money and takes time. In addition, it is profitable only under certain conditions. It is necessary:
That a large volume of flow through the company;
That the investment period is long enough OR profitable enough.
However, even when it is not systematic, a policy of investment of surpluses has its place in the cash management.
The choice of the placement of the cash surplus should be based on the net cash flow profile. But the cash
management is not limited to establish a transfer policy. It must, on the one hand, to provide the cash requirements,
and, on the other hand, to find the best financing of these needs. As further to now, the company has addressed the
first aspect of the cash policy that we define very briefly. As to the second aspect, it has been also used according to
the typology of the need as we’ll explain it:
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2.2 - THE ASSUMPTION OF THE HOMOGENEOUS NATURE OF THE FUNDS.
All the management tools consider cash flow composed of units of "means of Exchange" that they equate to a good
hardware units. The fundamental consequence is that manage the cash of a firm is to maintain a stock of currency
to ensure the continuity of the flow of funds that passes through the company. Optimization models are essentially
interested in the variation in the level of cash; to a certain extent, simulation models seek to assess the flows that
contribute to the formation of this cash. All of these models focus and overlook the nature of these flows, or more
accurately, consider it implicitly homogeneous. In other words it ignores their causes and their flow mechanisms.
This leads to extract cash from its context management and to reduce:
Either, to a policy of transfer cash-securities
Or a caricatured financing policy.
The nature of flows is not homogeneous: it depends on their origin and their destination, but also the length of the
period of observation and the currency with which they have been evaluated. As many variables whose knowledge
is the first condition of the conduct of a genuine policy of Treasury, i.e. optimal adaptation between needs and
financial means, gage solvency. Indeed, this adaptation means the control of the flow of funds and the efficient use
of banking services; shares depends on the nature of the flow.
1 - The nature of flows and adaptation between needs and financial means.
No model is highlighting two seizure of cash flow levels:
Firstly, the variation of the bank balance,
Secondly, the movements of the cycle of exploitation (or circulating capital).
Almost all models are concerned only with changes in the bank balance, without however providing a satisfactory
approach. Some simulation models tend to confuse the two movements of IWACO’S TREASURY. For the treasurer,
the control of these two operations remains on maintaining the “CASH-POOLING” of the company’s accounts.
However, the needs in these two cases are different, and therefore involve a specific funding. Indeed, the structure
of the money market is such that any source of funds cannot finance any need. It is even certain types of competition
strictly tailored to the nature of the action. Revenues of the company are not composed of homogeneous units: their
structure should condition their employment in order to protect - and even improve - the potential of liquidity of the
firm’s turnover.
2 - The nature of the flows and cash treasury movements.
Statistical models, as opposed to mathematical models, insist on the importance of the estimates. But they consider
these flows as data. Now, admittedly, the possibility of acting on their behavior, and, therefore, to try the
synchronization of input and output flows. Naturally, a perfect master assumes a thorough understanding of the
nature of cash flows. We will try to draw procedures for reflection and work useful to policy-makers in this field,
student including:
We have seen that it is necessary to think of the transfer policy. Regards financing policy, we will see later, that it
cannot be reduced to the simple needs-means confrontation: the needs as the means have specific characteristics
which must be considered in order to compare them. For example the export credits:
The causes of the movements of cash.
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They may have originated an investment, a commitment to operate given or received, a bank credit, etc. In all cases
the flow will be a particular behavior that should be identified.
It is to analyze:
Techniques of movements.
Means of payment (case, , bills, transfers, etc.) insofar as they influence the movement of the flow; rules of
movements of funds Bank registration (dates of value);
The habits of partners (customers, suppliers, etc.);
Time of flow of funds (the ' float');
The assessment of movements.
The purchasing power of the currency instability alters the value of the movements. In this regard on account of its
variation over time (inflation) and space (exchange rate risk).
The frequency of movements.
It will distinguish the movements 'permanent' (final as an investment, or repetitive as a business expense-related),
and the 'transitional' (at sporadic or seasonal nature) movements, i.e. cyclically activity.
3 - The nature of flows and the use of banking services.
Any monetary problems such as management of the Treasury of the company is dependent on the institutional factor
that constitutes the banking system. Financial institutions ensure the flow of funds between companies of groups. In
addition, they have a fundamental role in financing the activity of firms acting as sponsors, lenders, or 'relay'
temporary. It has been said that the cash management was closely subject to the quality of Bank-enterprise relations.
Still need to know and use the services that one is entitled to expect of its bank.
At best, it will never go beyond a fair compensation of the net gains that the firm allows him to achieve. To be able
to enjoy the services rendered and the need to negotiate, the contractor must, therefore, assess the gains from cash
flow passing through the Bank
The analogy with inventory management models is therefore facing serious difficulties. First, we notice that the
management methods used inside the company are not as easy to implement their simplifying assumptions of reality
could leave it hoped. This is due to the fact - analytical strength set apart - that they do not correspond to the concerns
of the Treasury’s manager. The transfer policy does not have this central role, and the choice of a short-term funding
is based on serious forecast. Then, the employee approach which consists in extracting cash from the rest of the life
of the company management, if it is attractive and convenient in terms of analysis remains not less perfectly arbitrary
and dangerous.
Indeed, managers believe implicitly that a balance exists between the flows, and simply offer to make profitable the
management in determining what should be retained in the form of cash, and what it takes place. Also, they reduce
the cash management optimization of a species-titles by appropriate transfers stock. This policy is based on the idea
that "it is prepared to sacrifice profits to have a better liquidity situation."
On the other side, we will attach to demonstrate that a policy that makes every effort, to achieve sync stream inputs
and outputs of funds, improves both liquidity and profitability.
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But then, a systematic approach to the problem is necessary. Indeed, all of the shares in the company have
consequences in terms of cash; and conversely the cash may be a constraint on its activities. This set of elements
interacting is a real system. In other words the problem of cash must be addressed comprehensively. The cash
management modeling, instead, is just a simplification of reality: it defines isolated financial relationships and
describes therefore only a part of all that represents 'the cash system '. Lack of models is undoubtedly the fact to
have been composed before any critical analysis of the 'cash-system '.
Cash management is:
On the one hand, to predict and control cash flow;
Secondly, to search and use the means to achieve a balance between these flows.
This action led to two levels:
On the level of the movements of the bank balance,
On the level of the working capital fluctuations.
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I. PRESENTATION OF THE ANALYSIS MODEL
In this chapter, it is necessary to present the model that was elaborated and pre-studied in order to reach the main
goal of optimizing a treasury, and for our case, the IWACO’s treasury. The construction of this model allows us to
identify the weakness and the strength of the company in many sides of its cash flows but also to make few
propositions and recommendations of how to solve the financial difficulties and about its optimization.
In this chapter, we will also reserve space to declare the manuals and ways with which we could’ve collect the
necessary data for our study from the inside and the outside.
Like announced KHOURY (1999: 164), “There are so many models of financial analysis as there are analysts and
analysis concerns almost. The idea that it is important to remember is that any financial analysis must be structured
on the basis of its purpose no matter the model.” There isn’t then anything such as a “Universal” model convenient
to a certain financial situation of a firm, nor to its cash management. The model that we’re proposing here, describes
the steps that we’ve followed to achieve the optimization of the IWACO’s treasury. From what’s previous, the model
that we’re proposing is in the next page in the figure n°2, Research’s Path:
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II.
DATA COLLECTION TOOLS
For what is a financial resource, this analysis is more specified in the banking sources from an angle where the
company deals with bankers and financial institutions to manage the overdraft and the loans seeing that they both
represent the main source in finding funds for the company.
1. ACCOUNTING DEPARTMENT:
Accounting service is considered as one of the most important resources for the company seeing that they are the
first people to have the legal justifications of having funds, spending funds and possible spending. The accounting
service as it’s in mutual contact with the treasury, its role is to provide any illegal transaction of the company. As
for their function, they’re responsible on doing the daily follow of the financial flows in the company’s bank
accounts and treasury, therefore, their mutual contact with the cash manager is based on verifying either the
transaction have been done on the right time with the exact amount of cash in the appropriate bank account and
then inform immediately the treasury department.
2. TREASURY DEPARTMENT:
The Treasury is on the top of the financial sources for this study or analysis, seeing that they have the main role in
gathering all the financial information about the existence of flows inside the company and for how long these flows
could stay stable. As a treasury department; their main function is to analysis the daily fluctuations and variations
of the financial flows of the company in order to justify the balance at the end of the day. Usually this operation of
following the daily transaction and cash flows, depends mostly on the relation and information that this department
gets from the purchasing department seeing that the main activity of this company is the distribution, and the main
profit is managed or realized by buying the most of the company’s products and goods and sell them on the market.
The treasury department is responsible also on the elaboration of the forecast financial study of the company,
which allows them to have the first idea and prediction about the amount of the flows that the company might
have by the end of the month or even the day. This elaboration gives the department the priority of controlling the
extra funds or the deficit is existed according to the financial administration decision. Therefore, this department
is considered as the main source of knowing the nature and variability of the flows inside the company and
therefore control these flows.
3. THE FINANCIAL ADMINISTRATION:
The financial Direction is mostly directed by the global direction or the DG as they call it. Its main role is to contribute
in the analysis of the financial situation of the company or most, managing the cash flows of the company in a way
that they get to be managed, controlled, optimized and well organized in the short term as for the long term. This
direction was a first source information for my study seeing that they are the head of the treasury department that
allowed me to have the exact information on the treasury and the cash flows. The gathered information from this
direction were a source of elaborating the analysis and study of the direction of the forecast (global scenarios that
could be elaborated).
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4. THE PURCHASING DEPARTMENT:
The purchasing department was useful for this study in too many ways. The general contribution was on the level
of gathering information on the sets and basis of working for this company, in other terms, how does the company
make profit from selling. This department was basically the key for making this study an exact one for the company
seeing that the financial decision was taken by the financial direction, but then the translation of these decision
have been taken and done by this department on the real field. Therefore, the purchasing department represents
for sure a first source of the company.
Generally, the collection of information for this study could’ve be done on too many levels and from too many
departments but it all depends on how long and large this study could’ve be taken. Yet, from my point of view and
because of the study should be done in a straight and direct way to achieve exactly how the optimization of a
treasury could be done, It was based on fore major sources of fore major departments: Financial Direction, Treasury
(Cash-Management), Accounting and Purchasing department.
CONCLUSION OF THE FIRST PART:
Reading from books and all this literature allowed us to make our own point of view of the situation of this
company’s treasury and to know all the objectives and mains to know how to optimize the cash inside the company.
And also, this first part gives us an idea on how to manage the cash flows of the company by controlling the treasury
of the firm without changing the main stable variables of the company, or going through a new loan or line credit.
We’ve learned from this reading also that to manage a firm’s treasury doesn’t mean only managing the external
flows that a company can have from doing its activity of buying and selling but also by taking control of the inside
flows of the company that are most of the time forgotten, not well managed or else.
More than that, we’ve got enlightened by this reading to know the right path to follow during the practical analysis
in order to achieve the optimization of the treasury.
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Part II: The Practice of the Cash-
Treasury Optimization inside
IWACO’s Company
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In this country, Morocco, the telecommunication market is dominated by three major operators; Maroctelecom,
Meditel and recently INWI. These three operators share the Moroccan field and share it between a dominator and a
follower, for the current moment, Maroctelecom controls most of this field, followed by Meditel and now INWI. Yet,
this division is not a long term position of the classification. Recently, INWI started to dominate the field and taking
old part of Maroctelecom or Meditel, all that measurement was based on the accurate situation and strategies that
INWI makes in order to battle the competition. As any other company that works in the telecommunication field,
INWI has at its side fore major distributer to which INWI contributes the mission of distributing the products and
services. Each distributer belongs to its own group or holding and share the same producer that is INWI.
IWACO’s a company that belongs to the T-MAN HOLDING, located in SIDI MAAROUF near to
CASANEARSHORE. As a telecommunication service distributer, its main activity is based on commercializing
the products and services that INWI produces.
I. INTERNAL ENVIRONNMENT:
A. Organizational Structure
The following Diagram represents the structure of IWACO’s organization and position of each department
in the company’s structure presented in the following figure n° 3, Structure of the company:
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B. Organization and function
1. Management Control:
Right after the general direction, this department’s main role maintains in the fact that they manage the
global management of this company. Further than that, they verify for each department the way they
manage the company’s activity with what is contributed for them as tasks, and then, a global report is sent
to the GD to make them aware of the facts about this firm’s management structure in order to keep an eye
open on all departments.
2. Inspection and Audit:
Unlike what the MC, this department’s job is to verify if the work procedures are done correctly or not,
thou, not all departments are related to this one but mostly those that are in constant contact with the
field and the operational services. Again, a global report is sent after finishing the inspection and sent to
the GD.
3. Purchase & Logistic Direction:
As a company that deals with daily arrives of merchandises and goods, this department’s main role is to
supervise these arrivals according to the physical and financial estates. In order to make this task happen,
this department is in daily contact with the exploitation and logistic purchase services. Each services is
responsible on a side of the management of these merchandises from the arrival until the payment.
4. Financial & Administrative Direction:
As the most important department, the financial administration controls the cash flows of the company
and manages the way of distributing the inflows in the company’s bank. Generally, the global decision about
the company’s Cash is made and taken in this department.
5. B to C:
The B to C department is the commercial part of small clients or as they call them; Grossest and Franchise.
These to client are considered the main and principal segment that the company obtain on the market and
with which the company make most of the profit. Adding to these two, there is also other activities that
the company created and made them their own regular clients too.
6. B to B:
The B to B is the Business to Business, where the company guarantees the big head clients that make major
turnover for the company. They represents the commercial department of the company.
7. Marketing & Communication:
As a distributer of the INWI Company, very often, the marketing decision come from the producer and be
executed by IWACO (and other competitors). Therefore, this department is directly related to the INWI
marketing service, yet, when in the special events, IWACO organize its own events and merchandize them
in cooperation with the commercial service.
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8. Development:
Currently, this department is absent, seeing that the company work in the name of the group “T-MAN
HOLDING”, and on the other side, works in the name of the producer INWI.
9. Microsoft Activity:
In order to reserve the company’s information, this part will not be discussed during this research.
10. S.A.V Activity:
Is nothing more than the sales administration of the company.
II.
EXTERNAL ENVIRONMENT:
A. Company’s operating field
1. Market
The company operates in the telecommunication market. This market is known as the most profitable
market on which all companies take parts either as clients or sponsors or suppliers, and most of them are
clients.
Morocco benefits from having one of the most advanced telecommunications markets in Africa. The sector
is efficiently managed by an independent regulator, and developments within the market segments are
often used as a model in other countries.
With an effectively competitive mobile sector, Morocco also has one of the highest penetration rates in the
region. The three mobile network operators have become the main internet service providers through their
networks, which are expected to be upgraded with LTE technology by the end of 2014 following the auction
of suitable spectrum.
Vivendi’s sale of its 53% stake in MT in late 2013 to Etisalat is expected to introduce a new dynamic to a
company which has been obliged to reduce the number of employees in recent years in a bid to cut
operating costs.
The fixed-line market remains underdeveloped despite the launch of a second and third network operator
to compete with Maroc Telecom. Fixed-line penetration has fallen since 2010 while the number of lines is
expected to fall to about 2.9 million by the end of 2014. This reflects consumers’ preference for mobile
services.
A similar trend is seen in the broadband market, where the dominance of Maroc telecom’s ADSL service
has waned dramatically in recent years. Having once accounted for over 90% of the market, by the end of
2013 ADSL represented only 15% of internet subscribers, with 3G representing almost 85%. Nevertheless,
fixed-line infrastructure is being upgraded as part of the government’s ten-year National Broadband Plan
which aims to provide fixed or mobile broadband access to the entire population by 2022.
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Some Market highlights:
Majority stake in Maroc Telecom sold to Etisalat;
Commercial LTE services expected in late 2014 or early 2015;
New terabit international fiber optic cable lands;
Fixed-mobile convergence strengthens;
Mobile broadband accounting for 85% of all internet connections;
National Broadband Plan 2012-2022;
Mobile subscriptions continue to grow at 8%.
2. Suppliers: WANA Corporate
Initially founded by Karim Zaz, Maroc Connect started marketing its Internet services representing the
brand Wanadoo, using the name Wana for a few years. The company was later controlled by the Moroccan
conglomerate ONA, with the Zain of Kuwait holding about 32% of equity since 2009. Following an
agreement with the consortium Kuwaiti Zain / Ajial, 2.85 billion were invested in exchange for 32% of the
new company. On February 24, 2010, the former ONA WANA brand was given a face-lift, change of name,
corporate identity and strategy.
Internet:
Initially, in order to avoid the high cost of wiring and installations and to quickly serve the commercial
market, INWI used Last Mile Wireless Delivery Systems) to provide internet connection to the market.
Claims to have EDGE and 2G coverage in 45% of the country, with prepaid and contract After Sales 200DH
(18 €) 1MG.
Mobile phones:
The service was started on February 7, 2007 breaking a record of subscriptions to its services: 24000 in one
day. With about 2 million customers, is the third operator with 3G license. With an offer of "Tic Tac" INWI
introduced per second billing from the first second. Furthermore, the rate is only 0.07 cents per second for
all operators and at any time. The prepaid BlackBerry services in the SIM card to 20 dirhams, or access to
MSN Messenger 5 dirhams per hour are all exclusive INWI.
Branches:
More than 50.000 in all Morocco.
3. Clients
IWACO as a delegated distributor for INWI knows as WANA CORPORATE earlier, is fixing the eyes on the
typology of clients that INWI has studied. In first beginnings, the clients were the small customers and
particular clients, and by the time goes, the zone took a bigger size to gather Small and Big companies.
The segments of clients are divided into types; the small clients are represented in the grossest and the
franchise, that usually play the role of intermediate between the producer and the final clients, yet, they
also form a type of clients. But the final clients also represents themselves in the area of the company’s
environment from a side where the producer and the distributer has the possibility of doing the direct
selling as the indirect (through distributers). And then, there are the big and small companies, these clients
are considered as the most important clients since they represent the biggest part of the turnover.
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B. Dynamical competition
While the Moroccan telecoms market remains under-saturated, its three mobile operators have
experienced robust growth in recent years, both at home and abroad. Meditel, which received a mobile
license in 2000, is the kingdom's first private operator, holding 36.69% of the market. While the company
performed strongly last year, registering a 17% growth in client base (to 7.4m) over the first three quarters
of 2008, it began to falter as consumer spending slowed, resulting in a 1% annual increase in turnover for
Q2 2009. Meditel's focus on lower-income markets impacted their average revenue per user, which fell by
16%, but the resulting expansion of the customer base helped drive up the country's mobile penetration
rate from 65.7% in 2007 to 74% in 2008. Meditel's biggest competitor is Maroc Telecom, holding 60.71% of
the market. A former state monopoly now controlled by French entertainment giant Vivendi, Maroc
Telecom is one of the region's fastest-growing multinational telecoms operators, actively pursuing
expansion across northwest Africa, including Gabon, Mauritania and Burkina Faso. MT has announced plans
to create a fibre-optic network connecting the Moroccan cities Laâyoune and Dakhla to Nouadhibou, which
would ultimately be extended to other North African countries.
Meditel and MT operated a duopoly until 2008, when the state regulator Agence Nationale de
Réglementation des Télécommunications waved in Wana, owned by Morocco's Omnium Nord Africain.
Though holding a tiny share (2.6%) of the voice market, this new player has captured a majority of
the 3G market (69.11%). Total subscribers for this new technology increased 527% in 2008. Earlier this year,
Wana sold a 31% stake for €228m to the partnership of two Kuwaiticompanies, mobile operator Zain and
Al Ajial Investment Fund Holding, to help finance the roll out of its 15-year 2G GSM network at the end of
2009. Moroccans pay a very high rate for Internet access but the connection is slower than dial-up. This is
because Moroccan consumers are not protected, nor do they know that Americans pay half the rate and
receive high speed internet access.
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SECTION 1: INFLOWS GLOBAL MANAGEMENT
Excess cash translates into cash idle source of opportunity costs. Moreover, sleeping money involves financial costs.
It is financed by funds that have a cost to the company. When cash is on deficit, is generally filled by bank credits.
Manage its cash flow is to strive to make the balances of the company in each store also nearby zero as possible. As
for the company, IWACO’s considered a first distributer for the INWI mobile operator, for which activity, the company
benefits from two credit lines, one in the BMCE bank and another one in AWB bank; yet the problem arrives when
the company compares the INFLOWS stocked in the two banks and come out with the conclusion that the banks
which benefits from the more than 50% of the IWACO’s turnover is the same bank that offers less credit in the
company’s bank account , For this purpose the financial manager must:
Firstly, detect and remove all waste through better knowledge of cash flows;
Secondly, assess the conditions granted by the banks to the company and enter into any new negotiations.
I- The control of cash flow and cost savings.
Treasurers few know precisely the value and the behavior of the cash flows. This ignorance leads to the formalization
of idle cash hardly noticeable at first sight. The company supports "the unnecessary cost of money who sleeps” by
the fear of the “Overdraft” or the Credit Line. These funds are at the origin of a huge waste of financial expenses. To
improve the management of its cash in the short term, the company shall keep accounts "in value dates.
A - FORMALIZATION OF IDLE CASH.
The bank balances too approximate knowledge coupled with the fear of the debit balance causes the formalization
of idle cash.
1 - THE LACK OF BANK BALANCES.
Banking movement’s accounts held by the company 'in dates of operation" mask the existence of funds unused cash
and transit ("float"), generating costs.
1.1 - Accounting is held "in dates of operation”.
Indeed, the Treasurer records in its books variations bank balances at their date of posting and not of occurrence.
Thus in the case of a supplier paid by check, the check issued a given day will be counted in spending at its date of
issuance. In fact, the Bank will discharge the company’s account unless two days pass after presenting the check to
the bank 'two days of Bank": this is the value of the transaction date. Furthermore, usually the creditor doesn’t
present immediately this check for collection; this will increase the gap between the trade date and the value date;
yet, for the IWACO case, the suppliers present immediately the check for discharge in banks and then same do them.
The Treasurer of the company therefore tends to underestimate constantly balance Bank. The first phenomenon led
to "oversize" its use of bank financing and let develop idle cash. The importance of the "float" exacerbates this
situation.
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1.2 - The existence and the importance of the "float".
We understand, from what has just been said, that the "float" represents all of the funds in transit. They are indeed
at the company, but cannot be used because they are temporarily stuck in the banking system during the recovery
process.
Figure n° 4, shows the formation of the "float".
The amount of the "float" can be calculated in the following way; either:
F the amount of float,
T the recovery time means (for the debtor or creditor) in days,
CA annual turnover,
F = T x (CA / 365)
In percentage of the Turnover:
F = (T / 365) x 100
For example, if the time of the average recovering is up to 8 days:
F = (8 / 365) x 100
Equals to 2.19 % of the Turnover.
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2 - THE FEAR OF THE DEBIT BALANCE.
A second generator cause of unused funds lies in the attitude of the company with regard to the overdraft. Fear of
the overdraft is for these companies to three main reasons:
The fear of being forced to use the more expensive short-term credit because it’s the quicker;
The fear of antagonizing his banker by this unexpected funding requirement;
The fear, ultimately giving birth to rumors about the financial soundness of the firm.
These concerns are so vivid that they grow to stop after have mobilized them, of large cash surplus. This behavior is
sometimes erected in the company where retain permanently a bank balance very much positive. In any case, it is a
sign of poor control of cash: the person in charge will cover, as a security, well beyond its real needs, it cannot assess
with rigor. In these circumstances it is for the company to borrow money from his bank and to put free part at its
disposal. In addition to the shortfall, in opportunity cost, these bank balances cost weighted average rate of the
capital, or "cost of capital".
3 - THE IMPORTANCE OF UNUSED FUNDS AND ITS CONSEQUENCES.
Any unspent funds affect the profitability of the firm. In addition, they do not represent a sufficient guarantee of
solvency.
1 - Statistical Evaluation of unused funds.
This is to give an order of magnitude of the phenomenon in terms of proper idle cash as the "float".
a) Assessment of idle cash.
We can appreciate the importance of the sums of money on the company’s account, "banks and postal check", and
therefore unnecessarily financed, by examining the value of this position on the balance sheet synthetic and
summary of the accounting data of IWACO subject to the regime of the actual profit.
Can also measure the importance of unnecessarily funded funds by looking at the balance sheets of major French
banks of deposit, under the heading in the passive: "accounts of enterprises. Table 10 below, brings together the
accounts of the company, contained liability side of the balance sheet of the Bank of the company. These idle
balances properly say, ads "float". The percentage presents the amount of the account from the global amount of
inflows that the company had in its inflows. The BMCE is not officially activated. The following table gives example
of the company’s Inflows during 2014-2015, Table n°9: Inflows of IWACO during 2014-15
PERIOD AWB BMCI BMCE
January – 2014 0,00 DH 1 198 960,66 DH Not Yet
February – 2014 184 572,00 DH 1 688 230,79 DH Not Yet
March – 2014 0,00 DH 3 836 491,74 DH Not Yet
April – 2014 0,00 DH 2 721 775,26 DH Not Yet
Mai – 2014 0,00 DH 2 016 630,32 DH Not Yet
June – 2014 0,00 DH 1 277 555,14 DH Not Yet
July – 2014 0,00 DH 669 941,79 DH Not Yet
August – 2014 0,00 DH 2396 546,75 DH Not Yet
September – 2014 0,00 DH 2 159 968,79 DH Not Yet
October – 2014 0,00 DH 1 817 837,55 DH Not Yet
November – 2014 0,00 DH 957 697,73 DH Not Yet
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December – 2014 0,00 DH 1 599 918,69 DH Not Yet
January – 2015 1 225 382,50 DH 1 934 877,27 DH Not Yet
February – 2015 0,00 DH 1 832 762,91 DH Not Yet
March – 2015 0,00 DH 1 784 262,03 DH Not Yet
April – 2015 37 711 489,31 DH 1 908 717,17 DH Not Yet
Mai – 2015 5 600 000,00 DH 1 589 353,22 DH Not Yet
June – 2015 0,00 DH 1 647 097,19 DH Not Yet
July – 2015 250 000,00 DH 2 411 563,82 DH Not Yet
August – 2015 0,00 DH 3 264 040,43 DH Not Yet
September – 2015 0,00 DH 1 761 230,68 DH Not Yet
October – 2015 0,00 DH 4 387 229,87 DH Not Yet
November – 2015 0,00 DH 1 344 279,52 DH Not Yet
December – 2015 0,00 DH 1 553 395,28 DH Not Yet
b) Assessments of the « float ».
In our country the average time of recovery of funds is of the order of 7 calendar days.
2 - Unused funds affect the profitability of the firm without ensuring the solvency.
It is obvious that for a given benefit, the volume of cash is important and more the profitability of the company is
low. Added to this is the value of the "float" which, although not recorded, inflates the volume of unused funds,
and thus decreases the real rate of return. Thus, by 2015, the company being subject to the regime of the actual
profit had total assets of 906 385 876, 60 million dirhams. With a rate of return largely exceeds 15%.
In fact, the real rate of return, taking into account the "float", was to:
F = 7 x (906 385 876, 60 / 365) = 17 382 742, 84
Therefore, the main objective of evaluating the “float” of a company, is to evaluate how fast the money of the
company circulate inside and outside the market. Nevertheless, we often take for granted having liquidity inside the
company as a symbol of security, profitability and solvency. Yet, having money stocked just like that inside the
company’s treasury is the same messing opportunities of recycling these money inside a good business running
outside in the market.
The evaluation of the market is same as evaluating the market’s opportunities for making profit. Although, this
evaluation wouldn’t be compatible to this project if it wasn’t gathered with the company’s money study and
evaluation. Though, gathering both means that the company is a positive situation to catch the god opportunities
that the market can give and be aware of the positivity and negativity of the market, and it is for this specific reason
that we’re going to study the costs that the “Sleeping money” could take on charge on the next paragraph.
Finally, as we mentioned earlier, note that the existence of a positive cash cannot be regarded as the pledge of the
solvency of the firm. Indeed, the concept of cash is a static, while the liquidity of a business depends on the conditions
in which the availability and liabilities will arise the relation to each other in time. Cash management is essentially
dynamic and requires an analysis in terms of flow. It is the potential to restore liquidity of the firm, determined by its
profitability and solvency, which is the only guarantor of its solvency and to its security.
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B - THE UNNECESSARY COST OF IDLE FUNDS.
So therefore, the manager (financial manager or treasury manager) is obliged to leave too many funds without
employment as a result of the difficulties they have to control cash flows. So to assess the cost of this behavior.
1 - THE STRUCTURE OF THE COST OF MONEY.
The study of the composition of financial expenses lets us know to what extent they can be compressed.
1 - The composition of financial expenses.
Financial expenses in the short term can be broken down into two parts.
a) The first and most important, stems from the cost of the Bank loans needed to fill the shortage of cash resulting
from the lag in time between revenue and expenditure.
This part of financial costs is virtually inevitable and incompressible, at least in the short term, since the head of the
Treasury cannot influence, or received commitments and conditions of sale (loans to customers), or commitments
given and the conditions of purchases (loans granted by suppliers). He therefore suffered the decisions taken
previously by other officials, and is forced to bear them. The case is not uncommon a Treasurer where, without
immediate availability, in the need to cover an urgent regulation which would not be notified. He will have to appeal
to the more expensive solutions because the fastest.
b) The second part of the financial costs, though generally less important, is far from negligible in many companies
and comes from the mode of use of bank credit in the short term.
Unlike the previous this part of the financial costs can be, perfectly in principle at least, reduced to zero. Indeed, it
essentially stems from the quality of short-term forecasts: receipts and disbursements on the one hand, and the
effectiveness of the rules of choice of financial assistance, on the other hand.
Any credit balance can mean two things:
Either the company, at a given date has overstated its expenses or underestimated its revenues, and that,
therefore, it has mobilized through the discount more claims than it needed;
Or that the company has financed its cash requirements properly assessed by unsuitable paper: for
example she covered a need for 20 days with 30-day paper.
On the other hand, a debit balance can also mean two things:
Either that the firm, at a given date, underestimated its expenses or overestimated its revenues, and
therefore has not sufficiently expected;
Either that it has financed its cash requirements with too short paper. This is the case for example of the
company which would have filled a need for 20 days with 15 days paper: it would otherwise, I5 days later in
front of a deficit of 5 days, not 'fundable' in the best of cases, only by overdraft.
2 - Reduction of financial costs in the short term.
To reduce financial expenses need to know their origins and ensure the possibility and desirability of the action.
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(a) Four sources of costs can be identified:
1. The company knows in principle fairly badly of banking conditions: interest rate, real cost of credit application
clauses that accompany a loan (days of values, Bank Charges, various commissions, etc.).
2. The underutilization of banking services: the company ignores generally all services that can offer him his
bank.
3. The poor coordination of banking activities: the company owns several bank accounts, more precisely in AWB
and the BMCI and soon BMCE.
The Treasurer can’t know at any moment and simultaneously the status of each account where the appearance of
frequent setbacks in the management of entries and exits of funds that are the cause of unnecessary financial costs.
Moreover, the costs in some cases, multiply. For example the existence of the overdraft commission can greatly
increase the “Bank Charges”, where the company has several bankers. So let us analyze that the company is located
in the following situation:
Its account at the Bank AWB has accused a tip of 30 million dirhams of discovered in the month; his account at Bank
BMCI, a hint of 3 million; his account Bank BMCE, a peak of 8 million. The overdraft commission therefore amounts
to:
(30 + 3 + 8) x 1/20 % = 205 DH.
While a single banker would have retained the tip of 30 million, which would have increased the overdraft
commission to:
(30) 1/20% = 150 DH.
4. The company, finally, suffers the consequences of financial flows. : The passive attitude of the firm results
from the accounting practice that class products and charges by nature. However, the uncertainty of the
movement of flows does not depend on nature of his case, but downtown decision that generated it and the
means used. For good control randomness, it is necessary to think in terms of "means of regulation" (cash,
check, promissory notes, bills of Exchange, currencies, etc.).
In middle of all these dull, the cash management problem can be solved only by:
Improved knowledge of cash receipts and disbursements in value date;
A decrease of the financial needs by reforms on procedures of receipts and disbursements in order to reduce
the "float";
Suppression of idle cash by blocking funds in paid accounts, or even investment (production capacity) or
financial participation;
A constant search for the financing best suited method to the needs (avoid unnecessary or insufficient
mobilization);
Perfect knowledge of Bank conditions that should always be able to discuss.
(b) In practice, there are two simple but reliable criteria for judging the possibility of compressing the financial costs
in the short term. First, check that financial costs do not exceed 1% of the total turnover. Then ensure that the daily
bank balance of the company in each of its banks does not fluctuate too strongly around zero.
This is not to reduce "at all costs" financial costs to 1% of the turnover, but wonder if the gain is worth the cost.
Indeed, below this threshold, it is likely that economies of Bank Charges compensate rationalization of the cash
management costs. Sometimes the company is in-between 1 and 2% uncertainty. If we took for example the year
2015; the achieved Turnover was around 814 490 004, 7 DH and the Financial Costs were equal to: 9 634 318.4 DH.
As we take these data as a base we’ll have:
(9 634 31, 70 DH / 814 490 004, 70 DH) = 1%
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However, when the company found in a report "financial charges on turnover" exceeding 2%, at this stage it is not
necessarily a cash flow difficulties. Therefore the Treasurer may have other immediate concerns than to reduce
financial costs. It is mainly the case of the company with cash "broad", without maturity problem.
Yet, a rationalization of the management of the cash to take advantage of this situation, by increasing the profitability
of funds. Indeed, an improvement in the cash flow forecast can meet the triple question:
Do you want to place Cash?
How much cash can we place?
For how long?
What form (temporary or permanent employment)?
In the case of the company where it is very 'tight' cash where it is important first of all to deal with deadlines, the
problem is quite different. An improvement in the cash flow forecast will naturally to identify better the financial
needs and prevent time his banker's difficult passages.
The study of financial expenses does not alone diagnose the nature and the importance of liquidity difficulties.
Moreover, it must consider fluctuations of bank balances.
1 ° the fluctuations of bank balances.
The daily bank balance of a business in each of its banks should not fluctuate too strongly around zero. Fluctuations
of bank balances come from a bad estimate inputs and outputs of funds, i.e. cash flow forecast absent or incorrect,
or mistakes in the choice of short-term funding, or two both as is the most common case. «Quarterly interest scales»
a business banks allow, on the one hand, to appreciate the quality of the forecast cash, and on the other hand, to
assess the waste of financial expenses.
2 - SCALES OF INTEREST QUARTERLY.
Should specify the nature of this instrument poorly known even for companies, before being able to appreciate its
use
1 - Nature of the 'quarterly interest scales.
Called 'quarterly interest scales', a table prepared by the Bank on which were likely bank balances classified by value
date. As its name suggests, this table is established by quarter, and to calculate interest expense as well as various
commissions due, if any, by the company to its bank. The company which refer to quarterly interest scales,
information on the fluctuation of its bank accounts, can evaluate its possible waste of bank charges, and finally will
appreciate the more or less good coordination of its operations with banks.
2 - The interpretation of the quarterly interest scales.
Representing changes in bank balances by curves, can more easily assess the effectiveness of the cash management.
(a) Trace the graph of daily balances as they appear in the books of the company (date of operation) and on the
scales of interest (dated value). This work is done for each Bank and by quarter. In the first following figure, figure
n°5: Iwaco’s inflows in the BMCI Account during 2015. And the next figure n°6: IWACO’s inflows in the AXB account
during 2015
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20 000 000,00 DH
Figure n°5: INFLOWS OF THE COMPANY YEAR 2015 / BMCI BANK
10 000 000,00 DH
0,00 DH
CHEQUES EFFETS Effets/Encaissement Effets/Escompte
* Espèce Siége * VERSEMENT AGENCES * Espèce déplacé : GROSSISTES * Espèce déplacé : DRC
* Espèce déplacé : CARAVANES * Espèce déplacé : FRANCHISES *VIR Grand Compte *VIR Etranger
*Autres VIR Rachat SICAV AUTRES
50 000 000,00 DH
Figure n°6: INFLOWS OF THE COMPANY YEAR 2015 / AWB BANK
0,00 DH
Janv.-15 Févr.-15 Mars-15 Avr.-15 Mai-15 Juin-15 Juil.-15 Août-15 Sept.-15 Oct.-15 Nov.-15 Déc.-15
CHEQUES EFFETS Effets/Encaissement
Effets/Escompte ESPECE * Espèce Siége
* VERSEMENT AGENCES * Espèce déplacé : GROSSISTES * Espèce déplacé : DRC
* Espèce déplacé : CARAVANES * Espèce déplacé : FRANCHISES VIREMENTS
*VIR Grand Compte *VIR Etranger *Autres VIR
These two previous charts give example of the kind of presentations that the treasurer make to analyze the
company’s financial cash flows and banks’ balances.
(b) The approximation of curves of the scales of interest allows three observations:
1 ° the approximate knowledge of bank balances leads to errors of financial management. The gap between the date
of operation curve and the curve in value date comes from what the Treasurer reason in date of operation and banker
in value date. Thus, the Treasurer is brought permanently to underestimate or overestimate the true value of the
accounts of the company. Thus it overstates or understates its financial needs, and so its use of funds. In other words,
it ignores both the real discovered that it uses and the existence of idle cash. Referring to the scales of interest
curves, the head of the Treasury can measure the degree of accuracy of its knowledge of the movement of the bank
balances of its undertaking.
2 ° The poor coordination of banking results in unnecessary costs. A comparative analysis of the curves of the scales
of interest of the various banks of a firm can appear simultaneously deficits in some banks and surpluses in others.
The Treasurer has therefore in this case by ignorance of the amount of its availability on the day the day, paid
unnecessary costs: it has at the same time supported the cost of an overdraft and funded surpluses.
3 ° Funding and investment decisions can be optimized.
The establishment of scales of interest forecast allows three fundamental improvements from the point of view of
the cash management:
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First, to assess more than just the financial needs and, thus, save Bank Charges by an optimal choice of shortterm
financing;
Then, in the case of structurally credit companies over a long duration, to establish the possibilities of
blocking of funds in volume and duration, in the most appropriate jobs;
Finally, in the case of companies structurally debtor for the coming period, to measure the lack of permanent
capital.
The problem for the company now is to assess the cost of its mismanagement of cash.
3 - THE ASSESSMENT OF COSTS IN THE TRADITIONAL CASH MANAGEMENT.
By ignorance of the amounts actually available, the company has paid unnecessary costs because it has supported
one discovered and funded from surpluses. In addition, through the days of value formed the "float". Float and idle
cash create chances for more costs.
1) - Evaluation of unnecessarily paid charges.
The minimum amount of “Bank Charges”* can save by improving cash management can be calculated as follows. It
totals for all banks and on throughout the year, the value of the balances on the one hand, and the value of receivable
balances, on the other hand. Each result is affected by its cost: the rate of discount for balances; the difference
between overdraft rates and rates of discount for debit balances.
TOTAL COST =
∑ TOTAL CREDITOR X (THE DISCOUNT RATE / 36.000) +
∑ TOTAL DEBTOR (THE OVERDRAFT RATE – THE DISCOUNT RATE) +
∑ 1/20% X
(STRONGEST OVERDRAFT OF THE MONTH USING A UNSUFFISANT DISCOUNT) –
(STRONGEST OVERDRAFT THAT DOESN’T AVOID STRICT MANAGEMENT)
Yet, this formulate is still considered as theoretical on the realistic field of companies and financial management; the
reason behind, is that the company’s financing condition are too different to be managed by such a complex
formulate, from another side, the activities of the company are too sensitive to any fluctuation of flows or time, for
that, the management goes with a simple arbitrage that the company does when they compare between the financial
costs paid on the behalf of the loan lines in few banks that they contracted, and the amount of financial profit that
they make from paying their suppliers in cash. Therefore, the company works on covering the financial costs of the
bank overdraft. And it works as the following example:
In the BMCI and AWB accounts, the company has in total 33.000.000 DHS of Overdraft. While the company makes
0.5% of the cash paid amount to the supplier INWI (that is considered as the main supplier of the company since it
represents 99% of the company’s turnover
The company gains in the financial costs: 0.5% of the paid amount (when it’s Cash). And they pay 5.35% of financial
costs when they use the Permanent Overdraft (authorized). Knowing that the 0.5% is a daily rate, the annual rate
will be equals to 6%, and the daily rate that the company use to pays its costs will be then: 5.35%
Annual Rate = Daily Rate x 12. And Daily rate = Annual rate / 12.
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Therefore; when the company realize an investment of buying 33.000.000 DHS of goods from the company INWI or
WANA as called, they face two situation:
33.000.000 DHS x 5.35% = 1 765 500 / 360 days = 4 909.167 DHS.
Yet, the company could pay with the same amount paid in cash:
33.000.000 DHS x 0.5% = 165 000 DHS
We could realize from this calculation that with 4 909.167 DHS that the company pay using the overdraft, it could
gain at the same day: 165 000 DHS if they pay in cash. A financial revenue equals to:
= 160 090.83 DHS (165 000 DHS – 4 909.167 DHS)
By this way, the company gets to cover the financial costs paid when the company pays using the overdraft.
As a financial decision, we could’ve take this decision by comparing the annual rates that the company gets from
paying in cash to the supplier or from paying by overdraft.
Balances total and the total of the balances are calculated from the scales of quarterly interest that can provide on
request, the banks of the enterprise in question. This assessment of the minimum amount of paid unnecessarily,
bank charges form the calls the following remarks:
The first term assumes that any credit balance results from an excessive discount. However this is not always
true: there can be an "overfunding" permanent capital, or credit providers, compared to the capital fixed and
capital needs circulating, as in the previous example.
The second term assumes that any debtor balance comes from a funding challenge that leads to expect
enough discount. The company often experiences periods where their discount opportunities are limited. In
addition, it can be a sign of a financially too weak or inadequate. The reason behind this for the company is
that, the majority of funds are deposited in a certain bank account, while the company does not benefit from
all financial advantages of the company. Therefore, the company required often to increase the amount of
the authorized overdraft seeing that most of the Turnover is deposited inside this bank account.
The calculation of the third term is made difficult by the assessment of the second member. However, it can
fix the minimum value: at a minimum, for a company using an overdraft constant throughout the year, the
commission of 1/20 is 0.60% of the total amount of the overdraft.
Despite its limitations, this formula has no other ambition than to quickly assess whether a more detailed analysis of
the management of the enterprise in question is necessary.
Added to this waste of bank charges is an opportunity cost.
The reducing process of the company’s costs is based on the daily following that the company apply based on the
daily report that they receive from their banks, BMCI, AWB, or BMCE. Therefore, there’s an example of the bank
sheet related to the company’s movements received every morning and analyzed by the treasurer:
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DATE OF
OPERATION
Table n°10: Bank account movements in the D.O.O
OPERATIONS DEBIT CREDIT
« APPARENT »
BALANCE
30 / 01 CASH POOLING 4000 + 4000
31 / 01 Versement Espèce 2000
Idem Emmission de chèques 2000 + 4000
01 / 02 Avis de Debit (échéance de 31/1) 4000 0
02 / 02 Remise à l’escompte 1980 + 1980
03 / 02 Émission de chèques 1500 + 480
Table n°11 : Bank account movement in the D.O.V
VALUE DATE OPERATIONS DEBIT CREDIT
« Real »
BALANCE
30 / 01 Règlement des traites 4000 - 4000
01 / 01 Virement de compte à compte 4000 0
01 / 02 Versement en espèces 2000 + 2000
03 / 02 Remise à l’escompte 1980
Idem Règlement de chèques (présentés le 5/02) 1000 + 2980
Figure n°7: Quarterly Interest Rate showing the bank account movement
While a balance of + 4,000 appears for two days in the account "Bank" of the company, an ignored overdraft formed
January 30: the transfer of 30 January was made too late. However the cash from 31st of the same month and the
discount of 2 February release could be delayed. If the company had sufficient knowledge of forecasting movements
his bank balance, it could adjust with discernment the inputs and outputs of funds and avoid both discovered and
surpluses. Thus can we say a cash management based on a value date accounting manages to an optimum, because
it ensures the liquidity and safety of the firm while improving profitability.
It’s all about these conditions of Bank, their implementing rules and their negotiation that we’ll be analyzed in this
next chapter.
2) Negotiate the terms and conditions of Bank.
When talking about the banking conditions, it is not only the ones related to the interest rates of the different types
of short-term credit or placed in escrow account balances, but a number of clauses whose content and the
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implementing rules are poorly known for the company. The Treasurer who ignores or neglects the conditions of Bank
can neither predict nor control the cost of its management and solvency of the case. There is no mandatory clause:
apart from the current interest rates everything is negotiable in terms of Bank between the head of company and its
bankers.
3.1. The analysis of the conditions of bank.
Bank conditions can be grouped into four types: those that are expressed in rates; those that are denominated in
days; those that are evaluated in franc; those, finally, that correspond to special benefits
3.1.1 - EXPRESSED AS A PERCENTAGE OF BANKING CONDITIONS: RATES.
Most of these clauses are not editable.
1 - The mode for setting the rates.
The prize money depends on its cost for the Bank.
(a) The determination of the basic rate.
Banks derive their resources of three origins mainly:
Deposits at sight
Of the mobilization of effects from the Bank of France
And, finally, money market.
Each resource has a specific cost that depends, for the first time, charges collection and management of the deposits
for the second, the rate discount practiced by the Central Bank, and for the third, the law of supply and demand.
From these multiple costs be calculated a weighted average rate for the whole of the profession in which are
subsequently applied a factor to take into account overhead and profit margin. You then reach a "base rate". The
rate of each type of credit is obtained by multiplying the basic rate by a coefficient which varies according to each of
the techniques of credit risk. Is obtained for each credit formula applicable minimum rate. Of course, every company
wants to apply the minimum rate.
(b) The rate applicable to each company.
The Bank applies, where appropriate, at the minimum rate increase which the magnitude is directly related to the
assessment of the risk presented by a certain client.
In practice, the cost of credit is the inverse function of the size of the company. But large companies are not always
those that pose the lowest risk. Also this system has been temperate, insofar as the interest rate depends on the
judgment that deals the Bank with his client. These rates are generally little changed. It is not the same conditions
for their application.
The real reason behind evaluating the cash for the company by managing the bank flows compared to the company’s
flows, resists in the fact that the company and bank works based on two different calendars. Usually banks work five
day on 7 of the week, from Monday till Friday. And in these days the company doesn’t work permanently all the days
in a full way. Some days the company work half day which we call them “Jour non Ouvré” or “Non-Opened Days” in
which the company works half days, or when they work all the day we call it “Jour Ouvré” or “Opened Day”.
Therefore, the treasurer should be always aware of these days so that the equilibrium between the inflows and the
outflows stays always on the right level. As the previous table and graphic show, the appropriate management and
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the good following system of the company’ accounts inside the bank get for the treasurer a plus value that allows for
the treasurer to work on extra cash or Idle cash as previously explained when it comes to paying the supplier earlier
or on cash to have the financial advantage aside. For that, the company’s relations are based on the bank’s account
and the way they are managed.
The fact that a small change or difference between the days of the inflows and outflows could influence the whole
system of the company, a small space of negotiation is allowed between the company and its banks. Although, the
negotiation is not allowed for all kind and types of companies more that it’s allowed only for few ones that make
profit on the field or make high movement on the market. A process like that, is not easy to make, especially when
the company such as IWACO; a distributer of other company. The reason behind, is that the company gain more
profit than the contracted called (commission) when they get to pay on the right time by cash, and to make that
possible to happen, they get their management on a high level but too risky and sensitive for any kind of movement.
But then. The financial managers are quiet to be asked on the WHY than the HOW.
Negotiating with banks new extra lines obliged the company to make more profit and to show on the market field
stronger and solid. Yet, to make such a thing possible to happened is by moving inside the bank’s account all cash
that the company needs, but then such a decision should be taken based on the financial studied well before getting
into the negotiating with the banker.
3.2 - THE COSTS OF BANKING SERVICES.
It is necessary that each bank is remunerated according to the reality of the services it renders to the company in its
cash management. A global balance of transactions between the company and each of its bankers is the way to
ensure that the balance is reasonable for both interested parties.
3.2.1 - OFFER OF THE COMPANY TO THE BANKERS.
There are two ways to work with banks:
The company deals with each separately, pulling the best out of competition.
Alternatively, the company forms around it a kind of "club" of banks complying with certain standards, with
which it develops together its financial policy, which is the case for the IWACO Company.
The first solution does not expect a lot of the banking system, particularly in times of hardship. On the other hand,
the second solution provides more effective support to company.
The 'Bank pool' is considered to be a group of banks familiar with the company and its problems that under the
umbrella of a 'leader', offers a range of served as wide as possible at all times. Here virtually, the company works
both with a 'pool' and banks 'non pool ". Moreover, the entry or exit of a partner is always possible depending on the
services that it can or can no longer make to society. Similarly, the relative shares of each bank inside the pool remain
not fixed once and for all, but change for the same reason. The assignment of operations between banks BMCI,
bmce Bank and AWB's 'pool' and 'outside pool can be two systems:
Assignment to each bank a percentage of corporate (movements of flow) costs, or,
Allocation to each store a percentage of revenues for the company (credit movements).
From the point of view of cash these two systems are equivalent, because ultimately the expense movements are
always equal income movements, and vice versa.
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Regardless of the method chosen, it has yet to define the key of transactions between banks. Therefore, the Chief
Financial Officer must, for each store (BU1’s or BU2’s), compare the services rendered to the benefits that removed
the Bank from its relationship with the company. According to the nature and volume of the movements of the Bank
will be naturally different. The company will better measure what to expect from its banks that it would know what
it offers. Therefore comparison and negotiation of Bank conditions necessarily through the evaluation of the benefit
that removes every banker of its activities with the company. To monitor the level of remuneration of each store,
the Chief Financial Officer will establish a "trading account".
3.2.2 - OPERATING ACCOUNT MEASURES THE COMPANY'S OFFER TO ITS BANKERS.
This account determines the balance of the transactions between the company and each of its bankers. After setting
out the general outline of the establishment of such an account of operation.
1 - Theoretical establishment of the banks-to-business transactions operating account.
This account is established from the journal of Bank, excerpts, scales of theoretical banking conditions and quarterly
interest.
(a) The preliminary operations there are five:
1. Inventory and analysis of the existing conditions in effect.
2. Assessment of the realized movements (or realize).
3. Determination of the number of operations actually resulting in charge handling fees incurred by the banker
(treatment manual or automated operations).
4. Average calculation of the credit balance reporting period (sum of balances divided by the number of days
in the period).
5. The inventory of all the fees paid to the banker during the same period (bank charges of discounted, bank
charges on financial notes, interest expense, commission of movements, etc.).
(b) The establishment of the account itself.
The essence is not to quantify the exact cost of an operation (manipulation of a check, bank transfer or other...), no
more than to precisely assess the average cost of the Bank's resources, but to reach a mutual agreement to a
reasonable compromise to get an idea of the profit margin of the Bank and monitor future developments. This
assessment can be made by only three assumptions:
The cost of a transaction for the Bank (cashing of a check, issuance of a transfer,...);
Average cost of capital for the Bank (cost of a ready franc);
The average interest rate applied to the uses of funds (average selling price).
From these assumptions the construction of operating account becomes possible:
Side of the revenue of the Bank, it includes all charges, charges various fixed, as well as income resulting from
the float from the days of value and those corresponding to the re-use of the balances of the company;
On the side of the expenditure incurred by the Bank, found the costs of financing of appropriations used by
the company (discount, discovered, etc.) as well as expenses arising from the processing of transactions
(cashing check transfer, etc.).
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The total balance of transactions between the company and each of its bankers said the gain (or loss) that latter
derive. This is the starting point for the negotiation of Bank conditions.
2 - Practical preparation of transactions undertaken banks operating account.
SECTION 2: CASH FLOW FORECASTING
The forecast of revenue and expenditure is to determine variations in the bank balance and therefore needs or
potential financial surpluses in the very short term. This forecast allows to draw a "cash line" in value date thus
defining actions to be taken on the basis of the objective "zero-cash. The maintenance of a balance person in different
banks is the way to minimize financial costs while ensuring the solvency of the firm.
In practice this policy develops in two stages:
Is, on the one hand, the development and implementation of a system of analysis of cash receipts and
disbursements dated value. The Treasurer thus determine the importance and duration of possible financial
needs. It ensures, in addition, the solvency of the firm;
It is, on the other hand, action on regulation and recovery procedures to reduce the needs or surplus funding
in the short term. The Treasurer 'smooth cash flow curve", and improves by the fact even the profitability of
the company.
I. ANALYSIS OF CASH FLOW.
The company must take a 'daily tracking card' by Bank. A daily tracking sheet is an array of situation in value which
includes the expected revenue and expenditure broken down by mode of regulation for the days to come. Familiar
with the movement of funds, the Treasurer is able to take financing decisions or optimal investment, but also to
consider procedural reforms handing thus questioned the spontaneous conduct of operations.
Implement such a monitoring system, to solve three problems:
Systematically capture information,
know the structure of cash receipts and disbursements,
Reduce the risks that weigh in the short term on the inputs and outputs of funds.
A – Treasury-Data collection system
The quality of the predictions depends to a large extent by the quality of the input information. To receive revenue
and costs in the coming days will result in vast majority of previous decisions. These decisions are generally known
by some in the company: the Treasurer may therefore know them; the problem is to inform. Officials of the company
whose actions or decisions directly translates into disbursements or of receipts can provide a relatively certain
information. The Treasurer must therefore require their production estimates of cash flows, or, put in the main
services a "corresponding - treasurer" responsible for collecting the information
In addition to traditional accounting will be developed some specific to the cash management documents.
Movements of funds may give rise to a presentation based on their behavior (fixed or variable), their periodicity, or
their importance. They can also be summarized by mode of regulation, by period of regulation or place of payment.
Similarly, it will be much more effective to post in value date. The system can only work if standards have been
established to characterize each stream according to the criteria of analysis concerning.
Thus the movement of cash will be divided into four classes:-movements are known to some, including the
completion date and the amount (for example, the payment of wages generally); -the uncertain movements on their
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date, but whose amount is known (e.g. operations by check); -movements uncertain as to their amount, but whose
date is known (payment of VAT for example); -the uncertain movements as their date and their amount, finally (for
example, the transfer of assets). Appropriate then to quantify this classification, and to deduce the implementation
of an information system.
Thus the movement of cash will be divided into four classes:
Movements are known to some, including the completion date and the amount (for example, the payment
of wages generally);
The uncertain movements on their date, but whose amount is known (e.g. operations by check);
Movements uncertain as to their amount, but whose date is known (payment of VAT for example);
The uncertain movements as their date and their amount, finally (for example, the transfer of assets).
It is appropriate then to quantify this classification, and to deduce the implementation of an information system.
Ainsi les mouvements de liquidités seront répartis en quatre classes :
les mouvements certains, dont la date de réalisation et le montant sont connus (par exemple le versement
des salaires généralement) ;
les mouvements incertains quant à leur date, mais dont le montant est connu (par exemple les opérations
par chèques) ;
les mouvements incertains quant à leur montant, mais dont la date est connue (le paiement de la T.V.A. par
exemple) ;
les mouvements incertains quant à leur date et à leur montant, enfin (par exemple la cession d’actif).
Il conviendra alors de quantifier cette classification, et d’en déduire l’implantation d’un système d’information.
Une méthode de la gestion de la trésorerie » appliqué au sein de la trésorerie a porté sur le classement les postes «
dépenses » d'une entreprise. L'analyse a été faite en considérant comme fixe :
An amount that varies in an interval defined by more or less 3% around the average for the period;
A date that fits in a range defined by plus or minus two days around the average date. This method
manages the following findings (see table below):
Table 12: Funding’s distribution
Date Amount Fix Amount Variable Amount Total
Fix Date 20% 50% 70%
Variable Date 0% 30% 30%
Total 20% 80% 100%
The implementation of the cash management-specific information processing methods allows the Treasurer to make
efficient decisions. In addition, it makes possible the use of statistical forecasting methods. However, the control of
the effectiveness of the designed information system is necessary. The control documents used are essentially
comparison charts between the movements of entry and exit of funds planned and carried out; documents prepared
in day to day and value date
The Treasury curve is the synthesis of the cash control document. Discrepancies between forecasts and work to
assess the quality of each circuit and each source of information. Here’s an example of the 2016’s estimated treasury,
based on the forecasted losses:
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F I G U R E N ° 8 : E E S T I M AT E D I N F LO W S O F T R E A S U RY 2 0 1 5
0,25
0,2
0,15
0,1
0,05
0
-0,05
-0,1
B - KNOWLEDGE OF THE STRUCTURE OF CASH RECEIPTS AND DISBURSEMENTS.
The development of the Treasury curve is based on intimate knowledge of cash receipts and disbursements of the
company structure.
1-THE STRUCTURE OF RECEIPTS OF THE FIRM.
Knowledge of the structure of cash provides us with a first series of causes of variations in the cash balance.
A relatively simple technique derived from processes Markov and applied inside the company, 'analysis by age of the
receivables', significantly improves the quality of projected cash. At one point is conceded a certain percentage of
receivables arising from past sales. For example, examination of the source of the receipts recorded during the last
five periods allows us to draw the following table: To reserve the confidentiality of the firm, these are approximately
the numbers achieved by the company in similar periods
PERIOD TO WHICH THE SALES GIVING RISE TO
PAYMENT, OCCURRED
Table n°13: Structure of receipts of the firm
PERIOD DURING WHICH THE PAYMENT OCCURS
1 2 3 4 5
1 30 39 25 20 10
2 - 27 40 25 20
3 - - 30 35 23
4 - - - 23 37
5 - - - - 30
In each box figure the percentage of the turnover achieved in the period i (line number) and cashed in the period j
(column number). Thus the receipts for the period 5 come from:
10% of the Turnover at the first period
20% of the Turnover in the second period;
23% of the Turnover in the third period;
37% of the Turnover in the fourth period;
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30% of the Turnover in the fifth period.
Using a mass of large enough information collected from the historical events of the firm, it becomes possible:
First, to determine the average percentage of the turnover of a period i, cashed a period j;
Then project this outcome in the future considering that these percentages represent validly probable share
of the turnover of a period coming k that will be earned during each of the periods that follow k.
Thus was able to establish that, on average, receipts consequential to the turnover of a period n are spread as
follows:
And so at this same time, we get to know the average of Turnover that the company achieve each period.
2 - THE STRUCTURE OF THE DISBURSEMENT OF THE IWACO.
Fixed charges generally pose no particular problem of prediction: they are known with certainty. Variable costs, on
the contrary, are difficult to assess. However using the statistical technique of "correlation", a significant
improvement in the prediction of disbursements is possible. By definition the varying loads depend on the level of
activity of the firm. There is thus a connection between variable costs and turnover of the same period than the
correlation allows to quantify. Graphic representation of the phenomenon occurs very classically on a system of
perpendicular axes, relating to any category of expenditure considered, observed monthly, and on the other the
turnover, also monthly, corresponding. If the various points are grouped around a line, called 'straight regression',
there is a correlation between the two variables and this correlation is linear.
The highlight of a close relationship between two variables to express one of these variables depending on the other.
Accordingly, if one knows the evolution of one it can foresee the evolution of the other. Gold turnover level forecasts
prove to be accurate enough in the short term. Thus, it becomes possible to estimate expenditure from the forecast
turnover when a significant relationship could be established.
If this calculation is always possible, some remarks are however required. First such an analysis requires the collection
of important statistical series; that does not generally raise problems. Then, it should be noted that it is essential to
revise periodically used coefficients which lose their meaning over time. Finally, a thorough study of the operating
cycle must assess the temporal shifts, if they exist, between variables, in order to identify the closest possible.
The study of the structure of the inputs and outputs of funds is still insufficient to allow the Treasurer Forecast curve
of cash value date. Both in what concerns income than expenses there are independent uncertainties in the
Organization of the company, its activity and its conditions of Bank. These uncertainties are related to the behavior
of customers, suppliers and in General of third parties. However, using classical statistical methods can significantly
reduce the uncertainties that exist in this area.
C - THE REDUCTION OF UNCERTAINTY IN CERTAIN MOVEMENTS OF FUNDS.
The most often encountered uncertainties concern the date of realization of the movement. Thus there is mainly
following hesitation:
On the side of revenues, the company knows the total amount of invoices giving rise to a cash payment but does not
necessarily know the dates to which customers are actually going to pay. In the same way it ignores always or almost
dates which will return the treaties sent to acceptance or promissory notes issued by clients.
On the side of spending, it's the cashing of the check by creditors which is random. A cheque issued today is hosted
by its beneficiary in x days.
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Regardless of the type of uncertainty facing the Treasurer, he will always find in the statistical arsenal the adequate
methodology, or classic, is more elaborate. But the Manager must ask itself if it is important to know the actual date
of the expenditure or the upcoming recipe today.
1 - SENSITIVITY ANALYSIS.
It comes to know if knowledge of the date of completion of an undertaking would change how either the decision to
be taken today. A "sensitivity analysis" allows to know if an optimal decision is affected by an interval of uncertainty
related to the value of a parameter of the template. If the optimal decision is sensitive to extreme values of the
parameter should be approaching the exact value of the random factor. In all cases it should be to balance the cost
of obtaining more accurate information and the profits or savings it is hoped to remove.
Two characteristic examples of many situations experienced by corporate treasurers will allow us to illustrate this.
1.1 - Analysis of relative sensitivity to the cashing of checks issued.
This example deals with the impact of uncertainty as to the date of receipt of a check issued on the decision to supply
timely bank account. So a company that goes or comes to issue a check in favor of one of its creditors has two possible
attitudes: either supply his bank account in an amount equal to the value of the cheque, or wait for overdraft notice
to complete the transfer.
The cost of the first solution can be expressed simply as a function of the form y = an x. In effect, if the amount of the
cheque is 100 SFR and the average interest on the 10% market rate the opportunity cost of idle cash thus formed is:
C = 33.000.000 (1+5.35%) / 360 = 96570.83333 DHS
Where x is the number of days between the issuance of the cheque for his collection (admit that x ranges from 0 to
30 days). The graph below illustrates this feature:
10
8
6
4
2
0
10 20 30
Figure n°9: The variations of Idle cash’s Costs over periods
The second solution at the fixed costs proven as followed: The Company while waiting the overdraft of 33.000.000
DHS, supports by the gaming of Value dates and deadlines of 6 to 10 days of financial costs. If we considered an
average or 7 days at 14%:
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OVERDRAFT’S COSTS = [33.000.000 DHS (1 + 0.07) /360] x 7 = 2.08
Next graphical presentation highlights the opportunity cost and the cost of the resulting overdraft of uncertainty as
to the date of receipt of a checks issued. Immediately we see the need for sharing between the checks cashed in 7
days to come and others. Which implies an approximate knowledge of the habits of cashing checks by creditors of
the firm.
10
8
Cost of Opportunity
Cost of the Overdraft
6
4
2
0
7 10 20 30
Figure n°10: Opportunity and Overdraft costs’ graphical presentation
The first category of check control the concomitant supply of bank account. On the other hand, for those presented
for payment beyond one week it is cheaper to wait the overdraft. If this second category is important, the Treasurer
will have no doubt same interest in further analysis later. In the example, if he knows that the creditor will collect
the check around the twentieth day, it may practically cancel the cost of the overdraft. Managed to reduce the costs
of overdraft related to the cashing of the checks after 7 days of issuance, it will then address the case of checks of
the first category.
2 - THE STREAMLINING OF PROCEDURES FOR BILLING AND RECOVERING
We often encounter companies whose receivables from customers are greater than their net fixed assets. But while
investment operations are carried out meticulously, delays in payment are made without any calculation of
profitability. Now, if the duration of loans to customers is difficult if not impossible to reduce, at least companies
should restrict to the minimum delays caused by poor organization. This action should be at two levels:
The Organization of customer credit,
The Organization of credit-customer service.
2.1 - The Organization of the customer credit.
IWACO should measure the risk taken by granting payment facilities to be able to protect itself. It must also strive
to accelerate the recovery of funds. Finally, it must organize a customer credit control.
a) Measure of risk 'credit-customer
The taken risk with each client assessment is carried out either with the help of organizations external specialized, or
from publications. These external agencies are of three types:
Services companies specializing in the measurement of risk,
Banks of the client (although they do not always have interest to point out the weaknesses of their client in
order to avoid filing for the bankruptcy) and the Bank of Morocco;
Professional associations, and chambers of Commerce.
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Analyses from publications of assessments can also be interesting (sheets DAFSA; Minutes of the General meetings;
Grafts of the courts of commerce in France; official newspapers in Belgium), especially if there are professional
standards such as those published by the Central of the balance sheets of the Bank of France.
b) The reduction of the administrative deadlines for recovery
The aim is to shorten the period that elapses between the sale and the time of the company’s receiving funds. Any
delay costs money for the company: fees are equal to the product of the amount of the invoices by the cost of capital,
during the days of waiting, all stages of the deed of sale must be considered, including two:
1 ° - The reduction of “the submission for payment’s deadlines
It is common to see that sometimes more than one month elapses between submission of a check by a client and
the flow of his account. To shorten this period should be to establish a 'selection of mail-regulation' procedure upon
arrival in order to appropriate hand over payment titles to the Bank the same day. We can go up to send a courier -
even by air - seek a check when the amount is worth. Generally avoid transfers of titles of amount by the postal
circuit. Mail losses are relatively rare, but they exist. Add that the reduction of the time limits for submission for
payment implies a concomitant decrease of the accounting recording time.
However at IWACO, effective tool to make such an easy to run is the "Cash Pooling"; It facilitates the transfer if cash
from one company to another knowing that the two belong to the same group.
2 ° - The reduction of the deadlines for cashing.
It may result from a Bank-business negotiation, and is based on techniques developed in the Moroccan commercial
banks. With regard to the case of IWACO society, involving generally three core banks: La Banque Populaire, BMCI,
and Attijari Wafa Bank.
«Area concentration» system: The Company has a number important distribution center has an interest to
group them in strategic areas of recovery. Customers of a specific area are invited to send their payments to
the center of recovery of this area that drop them off at the local bank of the company. The recovery of funds
has accelerated since the securities received in each area are generally earned on the accounts of the banks
of the region. Surplus funds are transferred from local banks to a Bank of centralization.
Area
Concentration
Distributer n°1
Distributer n°2
Distributer n°3
Distributer n°4
Figure n°11: Area of Concentration
"Lock-box" system: it is a refinement of the system above where the company asks customers to send their
regulations not to a recovery center, but a box mailing. Each regional bank notes titles several times per day
and credits on the behalf of the company. Checks are sent to banks related to. At the same time the company
receives a credit notice and documents reproduction. This system accelerates the receipts of several days
and releases the undertaking of the work of handling of checks
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3 ° - The Customer-Loan Control
Control of customer credit is an activity that can be separate in practice of debt collection operations. The 'balancecustomer'
is the essential document. Established for each client allows to control the importance of reliance, to
ensure that the ceiling is not exceeded. «Schedule of customer receivables», meanwhile, resumed each claim a client
and allows its control. This document reveals the possible delays to the date of payment. A system of "automatic
raises" must be organized in order to combat such delays. Beyond a certain period, or a certain amount of debt the
Treasurer will send individualized reminders, if necessary even it call the defaulting debtor.
2.1 - The Organization of "credit-client.
A company always has advantage, regardless of its size, to arrange a specific 'credit-customer '. Commercial and
financial share responsibility for this activity. It is together that they must establish credit limits by customer and by
way of regulation. Thus, on the one hand the commercial service can streamline its business strategy, and on the
other hand financial officer can accurately assess the investment in this type of need in working capital. This last
point should be noted: a procedure of investment demand should be organized in the case of a change in the terms
of settlement with a client.
3 - THE CENTRALISATION OF LIQUIDITY MANAGEMENT.
Complementary techniques to streamline the procedures for billing and collection, centralization of the management
of the company's cash flow appears as a necessity. Indeed, give financial autonomy to each geographic or productive
unit leads to the multiplication of idle balances, funds transfer and administrative and financial costs.
Decentralization in this field led by lengthening of the circuits and waste time.
It is for this reason that the company has adopted a system of management of the cash very centralized. A central
bank account is fed daily by transfers of all revenue collected (AWB) the day before by different accounts of the subcenters
(franchises, wholesalers, agencies, deposits etc.), even if it has an autonomy of management. The bank
account of each center is thus brought back permanently to zero. To pay local expenses, accounts of secondary
centers are in turn fed to the nearest penny according to specific needs and payment authorization by Headquarters.
Before addressing this second point, should quickly describe a last method to shorten the delays. This company has
daily telephone contact with its bankers. It can thus knowing its position or having received or given such information
guide its action. We meet at the present time of many cases where there is a permanent link between the company
and those of its banks - telematics. At any time can therefore be obtained a detailed statement of operations that
could modify the cash position. This is all the more useful as many bank accounts. This system permits to remove the
time elapsing between the moment where a cash (or disbursement) is done to the Bank and its notification to the
company.
II - THE REASONED SLOWDOWN OF THE SETTLEMENT OF DEBTS.
It is not systematically delay the payment of debts at the risk of tainting the reputation of the firm, but the dates of
deadlines in a timely manner.
A - THE RATIONAL ESTABLISHMENT OF DUE DATES.
It is admitted that revenues and expenses are unevenly distributed over time. But rarely the chance to compensate
timely disbursements by inflows. Any company is experiencing periods of negative cash that staffing in the best of
cases by bank credit.
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These cash difficulties due to the lack of synchronization between the revenue and expenditure are accentuated
because of the concentration of the maturities on a very brief, very often at the end of month. If due date used to
set suppliers coincides with the date of payment of wages and VAT, the imbalance of the cash will be further
delivered. Two companies of the same kind and the same volume of activity which must regulate wages and V.A.T.
at month-end will have needs quite different funds as providers deadline lies for one 30, and the other 10
To reduce these fluctuations in need of liquidity, the Treasurer therefore spread payments. In other words:
Chooses as the settlement date of the expenditure which he has control of execution, a distant date that
outputs mandatory funds (salaries, VAT, taxes, etc.),
And distribute regulations suppliers’ receivables on the basis of the movement of cash receipts.
The dates of settlement of suppliers must therefore be laid down taking into account other spending and revenue.
In order to maximize cash, debts must be honored at their maturity date, neither before nor after. The question
arises whether one has interest in paying more sooner to take advantage of a cash discount. It is difficult to give a
general response, practices vary greatly according to the various branches of activities and situations. However we
describe the approach of the analysis to follow, from a concrete example.
If we supposed that a 2% discount is given if the payment is made within 10 days of the billing or the full amount is
due within 30 days. The cost of the waiver of the cash discount is:
(0.02 / 0.98) x (360 / 20) = 36.73%
The discount, must be that the alternative use of funds corresponding to the amount of the debt is paid at a rate
higher than 36% year for the duration of the "onerous" credit (20 days in the example). It remains to select the
instrument of payment
B - THE CHOICE OF THE PAYMENT INSTRUMENT.
The retained payment instrument must possess three qualities for the company when it’s debtor:
First, allow sprawl of payments, i.e. to avoid the pointed output and important liquidity, still expensive;
Allow then the limitation of the formalization of outstanding floating ("float"), also expensive;
Finally, enable to remove waste that are idle cash
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Profitability is the guarantee of the credit term. In other words the fundamental financial choices - investments and
their funding - condition the liquidity of the company.
SECTION 1: THE CONDITIONS OF THE COMPANY’S LIQUIDITY.
Any personnel responsible for the enterprise must be aware of the implications of its activity on the cash position of
the company, it belongs to the Directorate General of:
Promote the formation of cash flow and controlling its use;
Maintain the potential for reconstruction of the liquidity of the firm.
I - THE MANAGEMENT OF CASH FLOW.
Cash flow that passes through the company determines the potency of man oeuvre of the firm to provided,
however, that the contractor controls the training and assignment.
A - CONTROL OF THE FORMALIZATION OF THE CASH FLOWS.
This control is based on the knowledge of the conditions of formalization of the stream as well as knowledge of the
effects of investment on the cash flow.
1 - THE CONDITIONS OF FORMALIZATION OF CASH FLOW.
The investment is the source of revenues for the firm. Gold investment decisions are conditioned by:
The importance of the funds committed in the operating cycle.
Changes in the liquidity of the company
1.1 - The importance of the funds committed in the operating cycle.
The company has from its creation of a mass of capital to finance fixed assets and the values of working capital
necessary for its operation. The share of funds at all times throughout the life of the firm operating cycle limit its
future investment opportunities and therefore its future income. This action is exercised through two means has
any case to obtain monetary availabilities:
Self-financing, with one hand,
The foreign financing.
(a) Restrictions on the formation of savings, i.e. the ability to self-finance.
All things being equal elsewhere (production capacity not used in full, and, sufficient demand to absorb production),
the cash flow of a period is limited by the volume of circulating capital that the company can stop. Indeed, this "cash
constraint" determines the importance of the figure of business so the result of operation and the possibilities of
self-financing of the coming period. As a result, the investment is reduced accordingly. For example, if the company
can affect only that 150 to the financing of circulating capital, C = 20 + 5 x is the function of production, the maximum
production will be 26 units, and, taking into account the income R = 10 x function, the maximum cash flow allowed
by the available working capital fund will be:
If the company gave 150 as the Capital capacity; we would write the function of Distribution as followed:
F (D) C = 20 + 5x
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There we’ll have as a maximum of the company’s Distribution capacity:
Max (D) 150 = 20 + 5x
Where:
X = 26 Unit
And with considering that Revenue takes this form:
R = 10x
The Cash-Flows will be equals to:
CF = R – C = 10x – (20 + 5x)
CF = 110
X = 26 Unit
b) The limitation of funding possibilities by external resources.
Usually bankers get to be motivated for business when the company's situation is under a good working capital fund,
because on the one hand it must normally have a healthy cash flow, and secondly because it resists the best in
adversity. We have seen here inside IWACO that in reality this criterion is seriously flawed and that the banker will
always prompt the rationale justifications for the reimbursement of any competition sought by the provision of a
capital plan and of a cash plan.
Thus, the possibilities of the company for having loans depend on its forecasting cash. Yet, the evolution of the cash
position also determines its debt capacity.
1.2 - Changes in the liquidity of the firm.
Investment decisions are influenced by changes in the liquidity of the companies. Fears of a cash crisis, even
temporary, can often impede investment. However, the existence of significant liquidity could lead the contractor to
take any opportunity to invest.
(a) The adverse effect.
The adverse effect of this relationship has been highlighted in the preparation of the financial statements that allow
the company to analyze its financial situation present or forecast. The main causes of imbalance of cash are the
rigidity of selling prices and especially the increase in operating expenses.
It would seem that there is a parallel evolution between changes in the percentage of businesses who believe that
their cash has become more difficult and the number of those who have delayed their investment expenditures.
Besides the essential tool used to improve the State of the treasuries is precisely slowing spending in fixed assets
(investment orders) and capital circulating (purchases, production costs, staff costs).
Reverse evolution is less clear-cut. Analysis of the financial situation of the company. On the other hand, reveals the
existence of a relationship of cause and effect between improvement of the cash and the decrease of short-term
debt. Also, one may wonder to what extent this reduction in debt does not correspond to an increase in own funds
locked in circulating capital. Anyway the favorable effect of the appearance of liquidity on the decision to invest is
certain.
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(b) The Positive Effect.
Swelling of cash usually causes a reflex of investment. It may be that the presence of liquidity creates from scratch
the decision to invest, or allows investments. The contractor may seems to grasp all possible investment
opportunities, once its cash situation is evolving favorably.
2 - THE EFFECTS OF INVESTMENT ON THE CASH FLOW.
Any investment is a potential source of revenue and profits that will swell the flow of cash available to the company.
2.1 - The effects of investment on the income of the firm.
The investment increases the production capacity of the firm, and, all other things being equal, its production and
turnover.
This increase is less proportional because it is always a part of the investment that is intended to cover the
depreciation of the capital assets. The template 'benefit-cost-volume', or neutral, leads to the operating leverage
effect that provides the foundations for a policy of investment designed not only based on the imperative of
profitability, but also on the basis of imperative of liquidity. You can refine by proposing a neutral to cash more
directly linked to the cash position of the company.
(a) Operational leverage and cash flow value.
If we admit the three situations of IWACO as follows:
The company is fully automated to a higher fixed costs. Thanks to this automation variable costs increase slowly. The
importance of overhead costs is that the company reached neutral to a higher activity than TENOR and GOCOM.
Figure n°12 : Death-Center of Tenor
Figure n°13 : Death-Center of Gocom
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However, once IWACO achieved neutral (dead
center), it sees its cash flow increase faster than
those of the other two companies.
(b) Death-point of cash and risk of insolvency.
Figure n°14 : Death-Center of IWACO
All fixed costs of a business do not correspond to
outputs of Fund; same as a share of income may stay
a while in the form of credit-clients. Thus,
depreciation expense are not output cases. The
following chart shows for example that if on the total
amount of the fixed costs, 30 000, represent
allocations to amortization of cash neutral is located
at a level of production of 12 500 units.
Figure n°14 : Death-Center of IWACO
Neutral of cash does not replace a cash budget but can appreciate the risks of insolvency arising from the operation.
Thus, the company would have a volume of fixed costs as it would suffer losses in period of low activity but would
realize significant benefits during periods of high activity where it can be solvent during these losses, as long as the
outputs «fixed» cash are small enough to allow the company to cross the dead point of cash or as we call it “Dead
Center” or “Neutral”. Therefore, the assessment of the risk of insolvency by neutral of cash indicates a business
conditions to achieve greater benefits (and therefore a higher cash flow), is automating and increasing its leverage
effect without running the danger of a cash crisis.
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2.2 - The influence of investment on the cash flows through depreciation.
In theory; the depreciation is a privileged tool to finance the company's expansion. Specifically it is the most
important of the two sources of self-financing, the second being the undistributed profits. Any new investment will
contribute to grow cash flow available to the company through additional appropriations to depreciation.
(a) Tax depreciation and cash flow.
Depreciation is an element of taxes’ cash flows, and can therefore be used to finance investments. However, it can
be shown that the practice of ‘depreciation” allows the company to have a monetary mass replacement of technical
capital needs.
Representing an investment of price P, in 10 years in a linear fashion, and value depreciable residual zero at the end
of the tenth year. If revenues are sufficient, the available money supply will be:
P/10 during the second year, 2P/10 during the third…etc., 9/10 for the tenth.
These funds may be used for any use in fixed capital or circulating. Everything happens as if the company "could
borrow from itself" an amount equal to:
Apart from any consideration of updating, the money available to the firm for 10 years will be:
P/10 + 2 P/10 + 3 P/10 +... + 9 P/10 = 4, 5 P.
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(b) The improvement of profitability is a Cash Generator
Investment should improve the profitability of the firm and thus the liquidity term. The report 'ROI' (return on
investment) reveals the cause of changes in cash flow:
Change to margin, and
Speed of investment.
Therefore, the equation is written like this:
ROI = ((BENEFIT / TURNOVER) X (TURNOVER / INVESTMENT (ASSETS))
Finally, note that the simple growth of the turnover may be beneficial where the company can use even temporarily
surplus liquidity on an interim basis at its disposal.
These phenomena occur regardless of the size of the company. But in the group T-man Holding and like any other
group of companies, the distribution of dividends comes further inflate the available cash flow.
c) Self-Financing in the Group of Company IWACO / T - MAN HOLDING.
The distribution of dividends is a source of liquidity at the level of a group. Indeed self-financing of a parent
corporation not only his only activity results but also distributions of profits that its subsidiaries were granted to him.
In a group of companies there is a 'facelift' dividends at the end of each fiscal year. It may be interesting to 'govern
the distribution of dividends' so that the desired sum is the place wanted at the time.
Once formed, the cash flow is immediately reinvested in various jobs for a shorter or longer period. Any misallocation
translates into reduced the profitability but also by cash flow at more or less short term. It is therefore for the
company to control this "permanent investment's cash flow.
B. INVESTMENT OF CASH FLOWS
1. Cash-Treasury and Investment Policies, BU1 and BU2
1.1 The influence of the firm’s activity on the circulated capital
Few companies escape a variation seasonal or cyclical activity. For IWACO, this translates either cash in the narrow,
or sometimes by a bloated cash. Seeing the typology, amount and variations, the company with very large annual
variations in the activity benefits from effective banking support campaign credits as was explained earlier. Yet, the
company when it handles these simulated variations, they have interest to study variations in the mass of circulating
capital to better manage their financial resources and avoid any difficulty cash. Understanding fluctuations in
circulating capital, is to know the evolution over time of the elements that make it up. These elements evolve as the
case may be, either according to seasonality of activity (as measured by the monthly variations of turnover), or
depending on the seasonality of supply (measured by the monthly pace of purchases).
For that, it is recommended to calculate the seasonality of the sales and the purchase and then assess their impact
on the different components of the circulating capital. These indices can be calculated as follows:
*The sales seasonality Index:
TSI = [(Turnover x 12 / Annual Turnover)]
*The Purchasing Seasonality Index
PSI = [(Monthly Purchase x 12 / Annual Purchasing)]
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There are thus two sets of 12 monthly indices which can refine the accuracy taking the average over several
months. The analysis of their impact on the volume of circulating capital will be analyzed for 2016 year. The
company has fixed the following conditions for both providers and clients:
‣ Clients: 30% pay in cash, 10% at 30 days end of month, 60% at 60 days end of month.
‣ Suppliers: 50% are paid in 15 days, 33% at 30 days end of month and 17% in 45 days end of month.
‣ The provisional figures sales and purchases for the next 12 months, contained in table 32 below, to
calculate necessary seasonal indices:
Months Jan Feb. Mar. Apr. May Juin Juil. Aug. Sept. Oct. Nov. Dec. TOTAL AVERAGE
Sales
(millions 2,4 1,7 2,45 2,1 2 1,7 2,5 2,15 2,1 2,45 2 2 25,55 2,13
of DH)
SIT 13,53 9,58 13,81 11,84 11,27 9,58 14,09 12,12 11,84 13,81 11,27 11,27
Purchase
(million 0 0 15 0 8 8 4 8 11 8 8 8 78 6,5
de DH)
SIP 0,00 0,00 27,69 0,00 14,77 14,77 7,38 14,77 20,31 14,77 14,77 14,77
Table n° 14: Monthly sales and seasonal indices of turnover (SIT); Monthly
purchases and Seasonal Indices of Purchases (SIP).
We assume that the circulating capital consists of three elements: credit customer, supplier credit and
stock of goods.
Let’s calculate the impact of seasonal variation of activity on the 'Credit-clients' (next figure) position:
MONTHS
SIT
PAYMENT
Cash 30 Days 60 Days
TOTAL
INFLOWS
CREDIT BALANCE
ACCUMULATION
Jan. 1,13 0,34 - - - - - - -
Feb 0,8 0,24 0,11 - - - - - -
Mar 1,15 0,35 0,08 0,68 2,25 - -1,10 -1,10 -
Apr 0,99 0,30 0,12 0,48 1,88 - -0,89 -1,99 -
May 0,94 0,28 0,10 0,69 2,01 - -1,07 -3,06 -
Jun 0,8 0,24 0,09 0,59 1,73 - -0,93 -3,99 -
Jul 1,17 0,35 0,08 0,56 2,17 - -1,00 -4,99 -
Aug 1,01 0,30 0,12 0,48 1,91 - -0,90 -5,89 -
Sep 0,99 0,30 0,10 0,70 2,09 - -1,10 -6,99 -
Oct 1,15 0,35 0,10 0,61 2,20 - -1,05 -8,04 -
Nov 0,94 0,28 0,12 0,59 1,93 - -0,99 -9,03 -
Dec 0,94 0,28 0,09 0,69 2,01 - -1,07 -10,09 -
Jan - - 0,09 0,56 - - - - -
Feb - - - 0,56 - - - - -
Table 15: Impact of seasonality of turnover on the balance 'clients '.
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Let’s calculate the impact of the seasonal variation in the supply on the «credits-supplier» (next figure)
position:
Months PSI
PAYMENT
Total Inflows Credit Balance Accumulation
15 Days 30 Days 45 Days
Jan. 0,00 0,00 - - - - - - -
Feb 0 0,00 0,00 - - - - - -
Mar 2,31 1,16 0,00 0,00 3,47 - -1,16 -1,16 -
Apr 0 0,00 0,76 0,00 0,76 - -0,76 -1,92 -
May 1,23 0,62 0,00 0,39 2,24 - -1,01 -2,93 -
Jun 1,23 0,62 0,41 0,00 2,25 - -1,02 -3,95 -
Jul 0,62 0,31 0,41 0,21 1,55 - -0,93 -4,87 -
Aug 1,23 0,62 0,20 0,21 2,26 - -1,03 -5,90 -
Sep 1,69 0,85 0,41 0,11 3,05 - -1,36 -7,26 -
Oct 1,23 0,62 0,56 0,21 2,61 - -1,38 -8,64 -
Nov 1,23 0,62 0,41 0,29 2,54 - -1,31 -9,95 -
Dec 1,23 0,62 0,41 0,21 2,46 - -1,23 -11,18 -
Jan - - 0,41 0,21 - - - - -
Feb - - - 0,21 - - - - -
Table 16: Impact of seasonality of the acts on the balance providers.
Calculate the impact of seasonal variations in activity and supply on the stock of goods
Month
Purchases of the Sales of the month with
month (1)
p.c = 80% (2)
(1) - (2) Starting Stock Accumulated
Jan. 0,00 0,90 -0,90 - -0,90
Feb 0,00 0,64 -0,64 - -1,54
Mar 2,31 0,92 1,39 - -0,15
Apr 0,00 0,79 -0,79 - -0,94
May 1,23 0,75 0,48 - -0,47
Jun 1,23 0,64 0,59 - 0,12
Jul 0,62 0,94 -0,32 - -0,19
Aug 1,23 0,81 0,42 - 0,23
Sep 1,69 0,79 0,90 - 1,13
Oct 1,23 0,92 0,31 - 1,44
Nov 1,23 0,75 0,48 - 1,92
Dec 1,23 0,75 0,48 - 2,39
Table 17: Changes in the index of the stock balance.
The fluctuations in the volume of stock are the result of changes in the flows of entries (purchases) and the stream
output (sales). Therefore the stock balance can be obtained in the absence of permanent inventory by the
following calculation:
*p.c: Purchases Capacity
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S = The starting stock (possibly)
+ Purchases of the month
- Month expressed at the purchase price sales.
Let’s assume that the margin is 20% of the selling price.
The next figure summarizes these results and gives the forecast evolution of the capital circulating for the year
2016.
Balance Jan. Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average
Stocks -0,9 -1,54 -0,15 -0,94 -0,47 0,12 -0,19 0,23 1,13 1,44 1,92 2,39 0,25
- - - -
0 0 -1,1 -1,99 -3,06 -3,99 -4,99 -5,89
Clients
6,99 8,04 9,03 10,09
-4,60
- - - -
0 0 -1,16 -1,92 -2,93 -3,95 -4,87 -5,9
Suppliers
7,26 8,64 9,95 11,18
-4,81
Working
Capital
-0,9 -1,54 -0,21 -0,87 -0,34 0,16 -0,07 0,22 0,86 0,84 1 1,3 0,04
Table 18: Monthly Forecast Evolution of capital circulating for the year 2016.
This next chart, reproduces fluctuations of the mass of capital circulating in the fiscal year 2016.
1,5
1
0,5
0
-0,5
-1
-1,5
1 2 3 4 5 6 7 8 9 10 11 12
Seasonal Variation of Working
Capital
The average of Working
Capital
-2
Figure 15: Seasonal variation of the Working Capital
This presentation of the problem of circulating capital investment allows a double simulation: first on the
components of circulating capital, then on the forecast monthly turnover.
So can we determine the volume of the funds to invest in capital flowing to cope with expansion. Then, given its own
financial possibilities, those of the monetary and financial markets, the company can determine the pace of growth
it can assume and the rate of inflation that it can bear. Finally, this method of analysis of the evolution of the
circulating capital during the operating cycle reveals: on one hand, the amount of permanent capital, the amount
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and duration of the necessary transitional capital. Indeed, the fixed part of the circulating capital must be financed
by stable resources; and the variable part requires funding for its duration.
2 – DEFINITION OF THE BU1 AND THE BU2:
Since the existence of the company on the market, they used to be distributer of one telecommunication operator
that is INWI or WANA CORPORATE earlier. Since then, all type of transaction and commercial businesses were related
to this only supplier for two reasons, for being the other supplier full from having new distributers, and two, the
contract that has been signed by the two part was clear in the fact that any distributer of WANA CO. has no right to
add an extra supplier to his pocket especially the competition.
From that time until now, IWACO based all their investments and profits on the BU1. But then when the activity
started to flow up a bit, and like any other company, they decided to add an extra investor or producer to which
they’ll play the same role of being a distributer that is BU2. These fact gather the definition and analysis of the
IWACO’s nature in the telecommunication market. To conserve the confidentiality of the company to its inside
information, the BU1 and BU1 will be used as the two nick names given to the two suppliers.
SECTION 2: EVALUATION OF THE CASH TREASURY’S SITUATION OF THE FIRM:
A. ARBITRATION OF THE FINANCIAL POSITION OF THE COMPANY
The company’s investment policy is related to the legal conditions that relate the whole firm to the suppliers. The
fact behind is that each supplier avoids competition through though the contracted distributer, for that, the decisions
related to the investment part are most often tight or limited to small activities or even more, activities presented in
the market under the suppliers’ image.
The existence of INWI as an official supplier and provider was for quite a long time. The only supplier, and the over
than 80% of the company’s turnover, that made the firm’s life and surviving key of the market depends on that
supplier. For a different fact and actions, this decision of keeping it the only one was on the best regard of the
company’s financial return and on the other side; reputation on the market as the third operator.
The company’s financial situation depends on the sales that the company realizes from selling the INWI’s products,
either the High-Tech. products or the telecommunication service. In fact, financial situation is represented as the
cash treasury of the company that is managed through the financial direction or the company’s Treasurer. The
following chart will represent the form and definition of the Cash flows inside the firm.
Table 19: Simulated Treasury’s Cash plan 2016
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This chart is reserved to make clear the composition of the company’s turnover and how it’s formalized. As explained
in the previous chapters, the company makes profit from selling high-technologies product and telecommunication
services. Although, this financial equilibrium is the result of a financial study, therefore, we’ll work on explaining the
financial composition of this capital:
Used Overdraft
Days
Starting Balance
Turnover
Inflows
WANA Commission
Exploitation Charges
INWI Purchases
INWI Purchases : Cash
Final Balance
Interest Amount
Cash Gain
Overdraft : Credit Line
The company contracts loans’ lines from banks or as we call it
the overdrafts with which they execute their activities. As it
was mentioned in the previous chapters, this operation of
buying products from the supplier by loans makes the
company pay extra financial charges on a rate of 5.35% of
interests’ rate, and the amount of these financial charges is
calculated on the Final Balance.
The final balance is calculated on the inflows minus the
outflows. The inflows are generally the Turnover, WANA
Commissions, and all the incomes that the company makes
from the activity (sales and all…). The outflows are the
exploitation charges (taxes, added value, salaries, CNSS…),
INWI purchases; which is the major part and essential one of
the company’s activity, it allows the
Company to have 0.5% gained cash on the paid amount of these purchases, otherwise the company pays 5.35% of
the amount as financial charges that are interest, and under a credit line (overdraft) of 33.000.000 DHS in both
contracted banks of the company. Knowing that the bank doesn’t work on vacation nor in the weekends, which leads
to conclude that the company pas sometimes extra charges for the unworked days.
The graphical presentation of the balance allows to the financial manager to analyze the situation of the overdraft’s
consumption for the company. The result is, more the company uses the overdraft to cover its charges the more it
gains financial advantages from banks and vice versa. The disadvantage is when the company doesn’t used the whole
overdraft during a transaction in a month or less means that the company is supporting extra financial charges for
no reason. The thing is, each time the company tries to maximize the consumption of the overdraft for more than
once in a month, and the result is that the company realizes more profit than it could do in normal cases. This
following chart will show us the situation of the company’s financial flows using the company’s bank overdraft.
5 000 000,00 DH
0,00 DH
-5 000 000,00 DH
-10 000 000,00 DH
-15 000 000,00 DH
-20 000 000,00 DH
-25 000 000,00 DH
-30 000 000,00 DH
-35 000 000,00 DH
-40 000 000,00 DH
Figure 16: IWACO'S DAILY BALANCE
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After many simulations of making the company consume the global overdraft each time, this chart represents the
final result of how the company’s financial flows and balance would be like. A full consummation of the overdraft,
remembering that the company can use the overdraft to pay the supplier in Cash and then do a sort of arbitration
between the gained cash and the financial flows. Still, the company has gaps in January, June, July, October,
December, where they can increase the amount of cash and INWI purchases. The fact is that the company faces new
investment opportunities, but before jumping into ant new business, the company has to verify if the company
manages its current cash treasury or not, and the key to do the perfect evaluation is by controlling and managing the
financial charges or cash gain gathered from the payment of the supplier.
Based on the previous table; the company’s financial costs’ situation was represented as followed:
Table n°20 : Company’s Fianancial
Costs with BU1
The financial analysis of this results shows that the company, according to the 2016 elaborated simulation, was able
to make an annual financial product up to 3 063 945,03 DHS with 1 190 383,84 DHS of financial costs paid as an
interest amount for the both the contracted banks. Yet, the financial challenge for the firm is to have the biggest part
of the paid amount paid in Cash; which in this case is represented in 66% of cash and 34% using the overdraft. The
right definition of this division is that both are held into the same treasury with different rates; cash money on 0.5%
financial gain and 5.35% interest rate for the overdraft, which leaves the company with beneficial margin that allows
it to cover the financial charges and make profit at the same time.
The elaborated simulation could take many forms, and all depends on how much the company looks for covering the
financial charges, squeeze the overdraft line, use the global amount of the credit line in other terms, and make
financial profit. The goal behind paying in cash is so that the company could gain 0.5% of the paid amount, but also
it would allow the firm to have the ability of negotiating the INWI’s line of purchases or the “Objective” as we call it
using the firm’s terms, and in the other hand, gain rate points in the suppliers’ classification of the distributers.
Bank, firm and financial direction, take the responsibility of the controlling and managing the company’s financial
flows, but the only obstacle in this game is that the company doesn’t get the authority over the bank’s decision to
increase or decrease the overdraft line, so the only way to make it happen is to represent at the best position the
company’s Cash-Plan and increase the company’s financial image in front of the banks. Such a decision of negotiating
the overdraft line, either to increase, decrease or to close definitely the account is often related to the company’s
realized inflows or outflows; where using the inflows is to prove the amount of cash deposits that the company realize
inside the company’s bank account or the outflows to show how the company use the bank’s overdraft line to pay
the charges. All in all, the arbitration between the lines obliged the company to maximize at the best the consumption
of the overdraft line in one hand and on the other hand to minimize the costs that the company face or to increase
the use of the overdraft during the week, month or year in order to show to the bank that the overdraft of the bank
account is not enough to cover all the company’s charges.
The company faced a new opportunity of investing, and as it’s known, every opportunity of investing comes with the
chances of paying double or extra charges, the thing that requires for the company to elaborate a financial study
before implanting any new financial flows inside the company, for that, the company added a new treasury
independent of the other but based on the financial current situation of the company. The new investment of the
company wouldn’t make the company stable financially only, but it could also break the trust with banks if the
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operation wasn’t beneficial enough for the company. As it looks, the impact of having this new investment inside the
company wouldn’t let the company’s financial flows as they look inside the treasury, but they would also change
forma when extra flows are added to the account. Therefore, the first step to evaluate the company’s new
investment chance was to evaluate its treasury, but before doing that, we had to create an independent cashtreasury
for its own and analyze the financial impact of it inside the firm.
1. Creation of a new treasury: BU2’s treasury
The new investment of the company will be named as BU2, and in this chapter we will analyze the financial situation
of the BU2 treasury cash without integrating the BU1 (original activity) in it. The following chapter will have the
important details of creating the new treasury of the BU2.
Table n°21: Simulated sales of merchandises for BU2
Since BU2 is adding a commercial activity for IWACO, the treasury was based on few major variables that would give
the certain estimated results in case the treasury was stable.
a. Estimated purchases:
Based on the company’s financial situation and ability of selling, the amounts of this treasury were generated
according to the contracted condition with the BU2 supplier for what concerns Quantities, Qualities, Duration,
Delivery and Overdraft line. Therefore, the result of the estimated amount were as represented in an estimated
amount between 8.000.000.000 DHS and 15.000.000.000 DHS =.
b. Months:
The months, or the deadlines of buying products depends usually on the contract and negotiated condition of the
BU2 supplier, but generally, we based our study on the whole month’s average.
c. Amount T.T.C:
This amount isn’t different than the one in the first point. The difference is that the first one’s based on estimated
contracted conditions, and the second one concerns the personalized amount of the product during the month,
basically, this one is decided a day before the start of the month less or more.
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d. Clients’ modalities:
This case concerns the condition of payment that the firm IWACO discuss with its clients in order to have the cash
available before the deadline of paying the BU2 supplier. Also, in order to get the attraction of clients and to facility
the profit for the firm, the payment wasn’t decided in one shot but more like many shots, reserving the minimum
amount in the short period in order to facility the transactions for the company.
30% on the same day, not more than 24 hours.
10% in ten days in order to reserve to trust with clients and to insure the financial liquidity inside the
firm.
60% and the reason behind is to eliminate the pressure on the clients and in other hand to insure the
company’s liquidity on the exact date before paying the big supplier; BU2 supplier.
e. Beneficial margin:
Like with any supplier, a beneficial margin is reserve for the distributers that work on selling the mother company’s
products, and the reason behind is that the prices are usually different and not similar in order to avoid the
destruction between supplier and client.
For what is related to the supplier’s payment modalities, the condition are different but still related to the one of
clients. The following chart will represent the conditions contracted with the BU2 supplier:
Table n°22: Simulated purchases merchandises for BU2 and the financial Gain of supplier’s payment
Similar conditions of the clients but different in terms of date and period. The criteria of these condition are based
on being in earlier date than the one contracted with clients, the fact that the company should have liquidity before
the deadlines of paying the suppliers. Therefore the contracted conditions were like following:
a. Amount T.T.C.:
These amounts are generally fixed a month before selling to clients, and so that the company could have the
merchandise a month before the day f selling it.
b. Supplier modalities:
The basis of restructuring the data inside this angle of the operation is so that the company could have liquidity
reserved in the cash-treasury of the company.
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50% is paid to the supplier 14 days after buying the merchandises
33% is paid in 30 days.
17% is paid in a month and two weeks.
c. Financial gain:
The new contracted supplier “BU2”, allows the company to collect a financial margin if the paid amount were paid
in cash also, but this time, the gain is 3 types:
1.5% if the company paid in cash in 14 days after buying the products
1% if the company paid in case in 33 days after buying
0.5% if the company paid in 45 days
The second step after elaborating the basic conditions of the company, we’re required to elaborate a financial
situation or a plan treasury of the BU2 activity, and the result is as followed:
Table n°23: Cash Treasury Balance of BU2
This chart is a sample of the treasury balance that we could have at the end of elaborating the cash treasury of BU2,
and the calculation were based on the two previous tables. Yet, this final balance should give an approximate image
of the company in order to have an idea of the real estate of the company’s financial estate, therefore, the following
chart is a graphical presentation of the final balance of the BU2 treasury in order to evaluate its financial situation
inside the company. In the next paragraph we’ll work on analyzing the financial situation of the company’s new
treasury BU2.
2. Evaluation of the financial situation of the firm after BU2
Add to the elaboration of the final balance, the evaluation of the company’s new treasury must be evaluated using
the financial charges that the company pays for the overdraft that allows it to have the purchases in first place, and
then resolving the difference between the financial charges and the profit.
15 000 000,00 DH
10 000 000,00 DH
5 000 000,00 DH
0,00 DH
-5 000 000,00 DH
-10 000 000,00 DH
Figure n°17: Daily Balance of BU2
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The cash treasury of BU2 shows a strong variation of the balance; which refers to the stabilization of the same
objective that BU2 required for the company and to the same estimated charges, and also, shows the reliance that
exists between the company and its supplier. Therefore, for what is the financial charges or as called the interest
rates, the amount was generated as followed:
Table n°24: Treasury’s balance for BU2
This figure represents a sample of how the interest charges look like on the BU2 cash treasury, with an amount of
7 408, 29 DHS the company generated a high rate interest for the new business.
The major question that we’re supposed to be asking is wither the company can support that amount of cash on
every transaction knowing that they already have others on the scales interest rate for the first activity? Usually, the
two activities are similar with each one’s effect on the other, which leads to discover the effect of one treasury on
another after merging both in the company. Thus, the management of cash at this timing would be executed the
same way it has been done all the previous year, but instead of controlling one cash-policy we’ll manage both, or
make it one big policy with 2 different suppliers; after all, the principle has stood the same, but the only change in
this would be the execution of this charges on the field knowing that instead of having one financial cost on the
operation of transaction or other, we’ll have two, and instead of paying two banks we’ll be in front of three banks,
but the simulation’s major role is to give the optimal and rational image of perfect treasury that make the company
gather the both suppliers under the same treasury cash management without losing the financial advantages that
are given on both activities. The next paragraph will clarify more this operation of merging and its impact on the
company’s financial situation.
3. The merging of the two treasuries, BU1 and BU2:
After having the first graphic of IWACO’s financial situation without merging the both treasuries, where we noticed
that the company could’ve achieved the most optimized situation in which they managed the use of the overdraft
over the whole year 2016 (estimated), this merging, means the extra add of a new treasury on a new one would have
definitely an effect (positive or negative) on the original treasury and on the use of the overdraft over the year.
The merging was by adding the new condition of BU2 in the original treasury of the company with the same
company’s financial situation. This operation was done by adding the purchases and sales amount of the company
BU2 supplier to the original treasury plan, and then the evaluation was based on final balance that the company
could get from the operation of merging. The following graphic is the representation of this new financial balance
based on the merging operation:
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Figure n°18: Daly Balance of IWACO and BU2
5 000 000,00 DH
0,00 DH
-5 000 000,00 DH
-10 000 000,00 DH
-15 000 000,00 DH
-20 000 000,00 DH
-25 000 000,00 DH
-30 000 000,00 DH
-35 000 000,00 DH
-40 000 000,00 DH
-45 000 000,00 DH
-50 000 000,00 DH
As we could see, the treasury after having more than 8 months overused the overdraft, now the company achieved
only two times full use of the overdraft, which means that the first effect of the merging operation is the extra
space of using cash or overdraft.
B. CONSEQUENCES OF MERGING THE TWO TREASURIES; BU1 AND BU2
1. Effect of synergy
The merging of the two suppliers in the same treasury has, indeed impacted the company’s financial situation and
therefore their decisions. Although, the financial environment on which the company appears force the it to behave
according to the final statement that the company presents for the high authorities in order to keep a certain balance
outside the firm, especially with the existence of other competitors on the market. The high rate on which this
company is active is up to 5.35% of the interest rate, and the interests are the most valuable charges that the
company calculates before jumping into any kind of business.
The cash treasury manager has a first role in the control and optimization of the financial charges. In order to have
an insider equilibrium of the company, the company’s often called to make the contracted banks of the company
satisfied of the company’s financial situation. In the previous chapter, we’ve seen how the bank charges are
calculated and how they’re important for the bank’s accounts. As a first recall, these charges are maintained in a high
level of the calculations that is divided into two part: the first one back to the used overdraft; an amount of cash that
the bank allows the company to use in order to make its casual activities ON and also to maintain the security level
of staying alive on the market, although, the company up grade sometime this overdraft in order to expand its activity
or to maintain the financial equilibrium inside the company with the given amount of purchases of the first supplier
BU1. The charges of this overdraft are established based on a rate of 5.35% interest rate, and the challenge of the
company’s financial administration is to completely use the overdraft; in one, hand that allows the company to
maintain its profit from purchases with every transaction, and from the other hand, more the company use totally
the overdraft the more it guaranty chances of negotiating the up-grade of the overdraft line. Second level is related
to the cash money; as it’s known for the company, one the financial policies that give the company opportunities to
gain financial advantages is that when the company buys from the supplier purchases and pay it on the due time in
cash, it gains 0.5% of the paid amount; means that if the company paid 20.000.000 DHS of cash, 100.000 DHS of this
amount stays at the company’s treasury, while if they pay it using the overdraft, the company get to pay 2 972.22
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DHS and by that we realize that the company is able to cover the financial charges of the overdraft if they get to pay
the amount in cash.
After merging the new treasury with the old one, this equilibrium situation of the company changes its behaviors and
fact; a sort of synergy appears when the two treasuries gather one financial policy. The synergy between the two
treasuries appears when we re-calculate the two financial charges of the both treasuries. The BU1 treasury has a
financial costs of almost 1 873 561.19 DHS, although, with the integration of the new treasury BU2, this amount will
increase seeing that the company will need an extra overdraft line so that the company could make transactions. In
fact, the extra charges of this new supplier will be supported on the behalf of the old activity of the company but in
return, a financial gain will be added to the company’s account.
2. Global treasury’s issue: Optimization
The previous chapters explained how the company confronts two financial facts in order to make new treasury inside
the company active and well managed. Though, this integration of each treasury inside the company’s financial
treasury requires from the company a high level of cash management in a way that the company would manage
both; he banks and suppliers.
IWACO contracts two banks for managing the original activity; BU1, two banks to manage the company’s cash flows
outside and inside bank accounts (cash or overdraft). Also, the financial gain the company realizes from its supplier
should be manage in a way that both the banks and the supplier stay a financial equilibrium without disturbing the
company’s financial stability. The following chart explains how the company’s situation in front of this situation:
Figure n°19: Treasury’s Issue after BU1 and BU2 merged
The company, in order to solve the optimization problem of treasury, is called to establish a certain financial strategy
that could realize the equilibrium inside the company. When the other bank was added to the company’s accounts;
a specific account for the BU2, extra charges were added for the company, and so the company has to make an
arbitration between the two treasuries.
An extra analysis shows that after comparing the two companies’ treasuries, we could notice that with BU2 added;
the company was able to realize some extra profit and have space for more purchases and overdraft lines. Although,
the arbitration in this term is based on the decision that the company will make to compare between the purchases
between suppliers BU1 or BU2, and that is how the company could optimize its treasury.
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Regarding the previous chapters, and the explanations of how the company could financially optimize its treasury,
such an operation doesn’t fixe a situation without leaving impacts behind. Therefore, the next chapter will explain in
details the impacts of the optimization of the treasury and the merging operation.
3. Impacts of the merging BU1 and BU2:
Like any other company, a financial situation has a negative impact as it has a positive one. In this case, the company
faces both impacts and each one with its own way of resolving it:
a. Positive Impacts:
Overdrawn the company: The addition of a new supplier of the company put it a situation of full use
of the overdraft which is beneficial for the company in case of up grading the overdraft line and it
helps in the bank negotiations for extra funds.
Alleviate the cash treasury: A side the exhaustion of the overdraft, the company gets space for having
more purchases transaction with the supplier and then more profit.
Dis-balance of the financial situation of charges: The increase of the financial charges in the BU2
account is make on the behalf of the new supplier account BU2 which is called: Synergy
Increase bank charges: Instead of creating a new bank account and then support the financial
charges, the company merge it with the old activity and then reduce the financial charges
b. Negative Impact:
The balance dependencies: The cash’s treasury management requires for the company to make a
certain reliance between the daily balances of the year, which means, that in one exceptional
situation of purchases, the company get the threat of misbalancing the whole year balance, and this
dependency is the basis of work for the company’s effectiveness on the field.
C. RECOMMENDATIONS:
In this chapter, we try to make few suggestions of how the company could solve the negative impacts of the merging
operations of BU1 and BU2. The recommendation are as follow:
1. Arbitration between the BU1 and the BU2 purchases: When the company realizes a certain
space for having more and extra purchases chances and increases the overdraft line, this
opportunities should be taken as an occasion for arbitrating between the BU1buying
products and the BU2 ones. Usually, such a decision is taken based on the market’s situation;
prices, tendencies, consumption, reputation, value…etc. where the company chose the one
with the most important advantages.
2. Increase the BU1 overdraft: The Company can have the chance of negotiating the overdraft
in order to increase it for a higher level. Yet, this step as much as is important, it is impossible
or extremely unreachable, because the green light of making such a negotiation with the
banks is limited and related to the Board of the company.
3. Negotiate the supplier’s overdraft: This decision is basically related to the second one, where
the company is able to make such a decision only if the bank allowed them the increase their
overdraft, but when it is not possible, the company could face more dangerous financial
cases and supports extra financial charges that could overdrawn the company into a deep
loss.
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CONCLUSION OF THE SECOND PART:
The objective of this study was to help the company to minimize its charges and maximize its financial gain, based on
the financial facts of the company, adding a new investor of the company or a new supplier changes for the company
all the financial facts and equilibrium. For that, analyzing the cash treasury of the company refers to the fact that
treasury controls all the financial flows inside the company and outside with banks, therefore, any sort of optimizing
the treasury wouldn’t leave behind an extra effects that could influence negatively or positively the company’s cash
flows.
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THE CONCLUSION
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When the company is able to predict with certainty its timelines in a way that it corresponds exactly to its forecast
of receipts, the Treasury management may be optimal. Indeed, the costs could be reduced to a minimum since it will
not need to hold liquid assets low performance - cash-, or have means of long-term financing exceeding those which
are essential - the Working Capital Fund. However, the forecasts are in reality, uncertain. Combining with forecasts
of cash a probability, managers can estimate the risk of technical insolvency and deduce a safety margin. This safety
margin is composed of a steering wheel of cash and a positive working capital fund. The value of the Working Capital
Fund and the level of cash are interdependent. A company that finances all its current assets net of the liabilities by
long-term capital less will need cash if it had financed with short-term credit.
The choice of the means of financing of current assets and the share of liquid to maintain assets are closely linked.
As well as in theory. The volume of permanent funds for the financing of current assets affects the liquidity of the
company: working capital is the expression of this liquidity. However, over the restraint of funds is important and
less the deal is profitable, ceteris paribus. Similarly, more detained cash is strong and more company's security is
guaranteed, but the return on assets is weakened even. The objective of the financial manager is therefore to define
a balance between liquidity and profitability.
Also, to increase the margin of safety of the company, it can only increase the proportion of its cash, or extending
the maturity of its debt. These two actions affect the profitability of the company. This vision’s resulted in the level
of the cash management to find an optimum balance guarantee of solvency. Financial balance, on the one hand,
between jobs and the resources of the Working Capital Fund is the essential criterion of analysis. Monetary balance,
on the other hand, between input and output of cash flows whose cash is the warranty.
In fact, the problem of the cash management arises in other words. Contrary to common opinion the objective of
profitability does not preclude the maintenance of liquidity. The optimum lies in the joint improving the security and
profit, which represents the contents of the policy's cash. Cash policy combines the constraints of safety and
profitability by minimizing the volume of monetary assets. A company whose cash fluctuates continuously slightly
around zero indicates, all other things being equal, than those responsible:
The good management of Cash-Flows
Integrate with efficiency the profitable stable funds applied
Evaluate with exactitude the needs of financing
Best negotiation of bank’s conditions
We have shown that without disappearing totally uncertainty receipts and disbursements can be significantly
reduced and is no longer warranted, at any rate, the detention of a "mattress" of liquidity. Knowledge of the behavior
of the cash flows that pass through the undertaking, i.e. changes in the bank balance, is above all a problem of
information. The search for this information is available to all firms.
The bank loans of “Repairs” for urgencies; short term and small amount, correct the mistakes taken on the level of
the predictions related to the synchronization of the Inflows and Outflows of funds. The rational uses of these loans
need a special attention in a way that they could be adapted to the needs of the company, in addition of the
conditions of the bank account.
Cash policy, moreover, confirms that profitability is the pledge of liquidity for a certain due term. The cash balance is
unstable. The business daily questioned its solvency. Such small business that hires a framework "too expensive" will
adversely affect its liquidity. Such other average firm will file its balance sheet for having accepted a too ambitious
contract, in the view of its possibilities. Such large firm will be absorbed to have exaggerated the use of suppliercredit.
The deadline is daily. We have tried to show that the control of this situation is not only by the control of changes in
the bank balance but also monitoring of the operative events for cash flows:
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Investment and its financing,
Training and the allocation of cash flow
Control the variation of the value of the currency.
We therefore meet the objectives of the financial function:
Ensure the collection of the resources needed for the operation and development of the firm
Control the allocation of funds and
Results policy
The imperative of profitability originates from the cost of holding capital. Any applied fund, regardless of the nature,
fixed or circulating involves immobilization of funds, own or borrowed for a shorter or longer duration. Thou, any
capital funds has costs: explicit costs whenever the company needs to service the corresponding capital providers
and opportunity costs to the product that the company could have made the alternative employment. The
entrepreneurial activity therefore has meaning only if it earns its jobs sufficient resources to cover its costs. In other
words, profitability is the condition of the liquidity of the company. Profitability and liquidity vary in the same
direction.
The detention of significant liquidity, not more than a positive working capital, is not a guarantee of safety. Being
insolvent means controlling all aspects of the evolution of the financial position and results in a simultaneous
maximizing profitability. Thus the optimal cash management businesses leads to the synthesis of all the financial
problems facing the firm. This global view of financial activity leads to a system approach to cash.
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THE BIBLIOGRAPHY
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BOOKS:
http://tel.archives-ouvertes.fr: Cash Optimization of Jean-Claude Juhel
“La Finance d’Entreprise”, Company’s Finance of BELKAHIA Rachid and OUDAD Hassan
INTERNAL RESOURCES:
Company’s documents related to the financial situation of the company from different departments:
Financial Direction
Accounting
Treasury
Purchases
Logistics
Central Distribution Deposit
Management Control
EXTERNAL RESOURCES:
Telecommunication Market Rapport of 2015, 2014 and 2012
ANRT Financial Report of the Telecommunication market
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