TREASURY MANAGEMENT LITERATURE REVIEW

2. LITERATURE REVIEW

The literature review of this report presents the state of the art of active
management of the treasury in Morocco.
It is about placing the theme in its theoretical framework to better understand its
positioning in the company, its objectives and its approach before starting to conduct
the mission in the company.
Whether public or private, large or small, Moroccan or foreign, any organization
knows that financial flows; cashing or disbursements; require a daily control.
As a result, each organization adopts cash management techniques as a primary
foundation to properly manage cash flows, forecast deficits and surpluses, maintain
growth, monitor cash inflows and disbursements, and mainly ensure solvency and
profitability for a short periodicity.
Thus each entity wants to perform in the management of its financial resources in
order to minimize the risk of financial pressures to which they may be exposed. And
so, managing its cash flow means being in constant contact with the actual and
forecast flows, both incoming and outgoing, and with its banks, so that you can make
the necessary adjustments quickly.
It is anticipation above all.

The internationalization of the company's activities has various impacts on the

cash flows associated with the various operating cycles. An exporting or importing
company experiences a new type of risk, currency risk, to the extent that the cash
flows from these transactions are denominated in a foreign currency, whose value
expressed in national currency fluctuates over time.

Companies also develop international activities by investing abroad or using

international financing. The assessment of profitability and costs must take into
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account fluctuations in the invoicing currency and the resulting currency risk.
Companies are increasingly faced with high volatility that can significantly alter their
profit margins. A foreign exchange position can lead to foreign exchange losses that
affect company margins. Therefore, managing the currency risk optimally becomes a
necessity and requires stakeholders to know the different hedging techniques.

Every company has the ambition to minimize exchange risks as much as possible.
This requires the implementation of actions that serve as a basis for better managing
the exchange rate. This entity will have the choice between hedging or not the
currency risk.
However, the currency risk still exists because it is not possible to know with certainty
today the counterpart in dirhams of future currency flows, the forecasts may prove
to be false.

This brings us to several questions:

- What is cash management and budgeting?

- Is there a precise and pre-established methodology for cash management or is it an
uncontrolled approach?
- What is the contribution of financial management in improving the workings of the
company and its internal and external relations?

- what are the factors of the currency risk and the foreign exchange currency
exposure? What are the techniques that can estimate the value of a currency in the
future?
- What are the effective internal and external currency risk hedging techniques that
companies have adopted?
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2.1. CASH MANAGEMENT

The cash position of the company corresponds to the total financial resources
available. Because when you run your business, you need to buy goods and raw
materials to produce, to carry out marketing, prospecting and communication, to
deliver products, to pay your employees, and so on.
All before billing and cashing, Cash management helps to cope with this cycle - called
the "operating cycle".

To understand the cash flow, just understand that what is in your bank account
is not equivalent to the money available in the company. Indeed, you may have
money but still have some payment deadlines (suppliers, taxes, social benefits, wages
to be paid at the end of the month ...), just as some people who must pay you but not
now ("30-day" bills for example, subsidies paid at the end of the year only ...).
All the art of cash management, therefore, is to anticipate these movements,
revenues as expenses, to be able to steer without being in the red and be out of cash
when it is necessary (Jaan Alver, 2005)
The end-period cash value is obtained thanks to this calculation (made from data
obtained, for example, via a well-constructed dashboard)

Equation 1: Cash

CASH = cash on hand + cash equivalents (corporate investments) - bank loans (overdrafts,
loans, cash facilities ...) - dues

Studying treasury management requires, for the sake of clarity, to clarify the
concepts of cash and management (applied to the treasury), and to highlight the role
of the treasurer.
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Cash management has been a crucial issue for companies since the systematisation
of the financial and monetary markets. Long regarded as a passive activity in the
company, with the imperative of security in terms of available funds, it has become
more active and is a vital function in the firm, with the mission to bring additional
profitability to the business and all the activities.
The objective is to highlight the problem that nowadays governs cash management,
to better understand its training over a period, and to grasp the keys to its
optimization

2.1.1. Treasury Core Functions

A- History, Definition and Objectives

a. Historic overview

Originally, in the 1960s, the treasury function showed great discretion in the
company: it is then rare that there is a service or a manager with that name. On the
other hand, the need to entrust the supervision of banking relationships to someone
who can control the evolution of the accounts is recognized. It is, in fact, a classic
cashier function adapted to the widespread use of bank payment methods. The
treasurer is therefore first an accountant who follows the day-to-day and value date
the position of the bank accounts of the company. It confronts the internal accounting
information with the external information transmitted by the banks.
Its role enables it to compensate for the limits of traditional accounting information
that favors the notion of the date of recognition or the date of operation, while the
bank balance to be monitored is the balance in value in the accounts of the bank.
Within the company, the treasurer is dependent on the accounting department from
where he gets all the information he needs. He must ensure that there is a sufficient
positive cash to cope with the various situations. For this purpose, it must provide the
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firm sufficient credit lines to meet the needs that arise. An important moment in its
activity was the negotiation of different ceilings with its banking partners.
Controller of bank accounts, guardian of liquidity, the role of the treasurer was
until then a little static (Polak; David Robertson, 2011) He did not participate in
management decisions because he did not have a clear action strategy.
This situation will change in the early 1970s with the recognition of the principle of
"zero cash". From now on, the treasurer has a clear operational objective: to keep the
global bank balance as close as possible to zero in order to minimize the financial costs
and opportunity costs associated with balances that are respectively receivable and
payable. It is from this time that the term of cash management date since it is to make
investments or to negotiate loans adapted to the profile of the forecast balances the
company (N.K. Kwak; D. Renfro, 1989)
The treasurer negotiates credit terms with his banking partners using the same
technical language as these, especially the notion of value day.
To carry out its mission, the treasurer needs to stand out from his privileged source
of accounting information. It must develop specific information based on forecast
data.
At that time, the treasury department was granted organizational independence
within the Finance Department of the company. Therefore, the function is clearly
identified and the treasurer, in charge of the management of flows and banking
relationships, he becomes the guarantor of the solvency of the company (Polak;
Kocurek, 2007)

b. Main Objectives

The concerns of cash management differ according to the size of the company. In fact,
the head of a small company will ensure that his company is solvent against the chief
financial officer who is more concerned about the minimization of financial expenses
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and taking full advantage of the available investment opportunities. Nevertheless the
objectives of the cash management body remain the same.
that is to say: ensure liquidity, reduce the cost of banking services, improve the
financial result and above all managing financial risks.

Ensure Reduce
Liquidity banking costs

Improving Manage
financial result financial risks
Figure 1: Main objectives of treasury management

Ensuring liquidity:
The term liquidity refers here to the ability of the company to meet its deadlines.
The treasurer must make every effort to ensure that the company has at all times
sufficient resources to meet its financial commitments: pay salaries, meet suppliers
deadlines, social agencies, Tax offices and finally the banks (El Sharif, 2016)
This affair is to put in the foreground, liquidity being the basic condition for the
survival of the company. A company that does not respect its deadlines will be
declared in cessation of payments. She will have to file for bankruptcy and will
eventually be liquidated. The treasurer is the best person to follow the evolution of
the treasury because it is the first every morning to collect bank balances. It is
therefore up to him to alert his collaboraters when he notices a deterioration and, if
possible, to define the cause
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Reducing banking services costs:

The treasurer must reduce the cost of the banking services. To reduce these
costs, we think directly about negotiating.
Of course, even if it is never always the treasurer who negotiates directly with
the banker, he is the one who do all the preparatory work. He begins by making a
detailed inventory and summary of past conditions: the catalog of banking conditions.
It is then defined on the negotiating priorities, that is to say, the improvements of the
conditions who will give a maximum economy to the company. Once the conditions
are negotiated, he will control their application on a daily basis

Improving the financial result

This actually means less fees and more financial products. This actually means
less fees or more financial products. Multiple tasks contribute to the improvement of
the financial result. The treasurer will negotiate the financing conditions. For this, he
must master the calculation of the global effective rate; which is the totality of the
expenses of a loan (interests, fees, insurance, guarantee, penalties ...) ;only method
of comparison of different loans proposals. He will pay particular attention to
developing a reliable 2.3-month forecast to make the right financing or investment
decisions.

ManagIng financial risks

This is essentially the exchange rate risk and sometimes the interest rate risk.
These two cases are close to the treasurer because they constitute financial risks,
largely in the short term. The objective of currency risk management is to avoid
foreign exchange losses. It aims to freeze a foreign exchange rate guaranteeing a
merchandise margin rate between sales and purchases of goods. The treasurer, in
agreement with the sales department, will validate a foreign exchange risk
management policy. He will follow the exchange position by currency in order to set
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up the appropriate hedges. Interest rate risk management aims to freeze a borrowing
or investment rate over a future period.

B- Main functions

a. Cash Management

The treasurer is in charge of liquidity management; this is his traditional role.

he is in charge of the respect of the solvency of the company. Through his presence,
he is the guarantor of the solvency of the firm regarding the General Direction which
delegates to him this vital responsibility, and concerning the financial and banking
partners with whom he does business and financing and who expect to see the terms
of the contracts respected. The solvency constraint is managed in the long term and
in the short term.
The solvency constraint is also managed on a day-to-day basis. It is at this level that
the treasurer is responsible for ensuring that there is sufficient cash to meet the
payments to which the company is committed. This cash management can not be
static given the importance to cope with disbursement flows, forecasting, modifying
and shifting cash flows. Cash management places the treasurer in a central position
in the company's complex cash flow network.
The optimization of liquidity management involves the posting of two principles of
action that are essential:

zero cash balance

The principle of zero cash, is a rule of good management. It means that the
treasurer must avoid the appearance of cash surpluses that involve opportunity costs,
such as deficits which, if they can not be filled by the use of bank overdraft, mean the
inability to cope planned payments (Polak; Kocurek, 2007)
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Figure 2: Zero cash Balance Account

Centralized cash flow management

The accumulation by a central authority of the power to make cash flow
decisions for all levels of a multifaceted company or conglomerate. The intent is to
achieve greater control of intracompany cash balances. The expected ability to
control subsidiary surpluses is expected to lead to reducing the need to cover cash
shortages with short-term loans. (Polak, Ivan Klusacek, 2010)
Thus, a surplus positive cash somewhere, can cohabit with negative cash, inducing
unnecessary financial costs elsewhere. This principle of cash unity is crucial for large
companies and groups. It involves, for example, a centralization of cash management
between the subsidiaries and the parent company.
b. Financial risk management

Financial risk management has emerged more recently. These are essentially
foreign exchange risks and interest rate risks. It is not the mission of the corporate
treasurer to manage all economic risks. These can not be totally eliminated since it is
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in the vocation of the company to assume the risk of the activity (Polak; Ivan Klusacek,
2010)
The principles of action that guide the management of financial risks in the
company are less clearly formalized than those guiding liquidity management. The
generally accepted idea is to avoid or cover "excessive" financial risks, that is to say
those that could threaten the survival of the company. The principle of action is
therefore to cover foreign financial risks. From an economic point of view, the
reflection must remain open.
Reducing risks means increasing costs. The principle of insurance reminds that the
hedge means additional financial expenses. One of the treasurer's roles is to minimize
those financial expenses (Daren R. Roberts, 2010) Accepting a certain amount of
financial risk can be justified if the costs of a hedge give way to expectations of
financial profits. Here appears the dilemma of the utility of uncovered financial
positions - in other words speculative - whose interest is to save costs or generate
products.
Such a matter underlines the increasingly operational role of the treasury
function. Formerly a functional department, it was necessary to the treasurer to limit
as much as possible its costs . Today, the company's cash can be a cost control center
in the same way as a commercial establishment or a production unit. It can generate
revenues: financial income from the investment of cash, profits from unhedged
financial risks,…
It is impossible to imagine that the entire treasury department becomes an
autonomous profit center in the company. Certain activities can be operationalized:
the management of exchange risks, the optimization of indebtedness, the
management of structural surpluses can possibly be the subject of budgetary
procedures.
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The concept of profit center refers to a coherent organizational unit that can
exercise some control over most of the factors that condition its activity. This is not
the case with the cash management business of the company .
The cash flow structure is the translation of the economic and financial activity of the
company; the treasurer can only note the existence of this network of flows on which
he only plays at the margin by shifting them in time or by resorting to additional flows.
The role of treasury in the company largely corresponds to a functional activity that
is solvency (The Association of Corporate Treasurer, 2009)

C- The banking environment

a. The value date

Value dates are the actual debit or credit dates of the bank account. They are
the ones that determine the actual balance of the bank account (s). Their importance
is considerable since the financial charges and the interest charged are determined
from the balances in value.
The value dates are generally different from the dates of operation, that is to say the
dates on which the movements are initiated. The difference between dates of
operation and dates of value benefits in almost all cases to the bank. In this way,
collections are credited in value after the transaction date, and disbursements are
debited in value before the transaction date. This mechanism is initially justified by
the existence of technical deadlines linked to bank payment circuits. It is true that it
takes some time to administratively handle the flow of funds within the banking
system. However, the purpose of the value dates, beyond the technical constraints,
is to provide the opportunity for a supplement of remuneration to the banks
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b. Calendar day and Business day

The difference between the transaction dates and the value dates is expressed
in number of days. It is still necessary to specify what types of days this is because
banking practice distinguishes between calendar days and working days.
The calendar days are the actual days of the week, from Monday to Sunday. There
are 365 (or 366) a year. The debit movements of an account are determined on the
basis of calendar days. A debit transaction carried out on the monday value j-2
calendar, will be debited in the bank book the previous Saturday.

Figure 3: Calendar Day

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Bank working days are days when the bank actually works, that is, in general, from
Monday to Friday. Saturdays, Sundays, public holidays and bank holidays are
excluded. The credit transactions of an account are often - but not always - expressed
in business days. Thus, a cheque issued on Thursday, value 2 working days, will be
credited in value the following Monday on the account of the company.

Figure 4: Business Day (Working day)

It should be noted that a delay of 5 working days corresponds in fact to 7 calendar

days (except in the case of additional holidays). The explanation is that the number of
working days in the year is much lower than the number of calendar days: there are
approximately 1.4 calendar days for 1 business day. This means that when negotiating
banking terms applied to a sales transaction, it is better for the company to obtain a
deadline for the release of funds, which is expressed in calendar days rather than in
working days ( for a given lag in dates).
c. Cut-off times

The Cut-Off is the time of the banking day from which an operation is charged to the
next day.
This time has a direct impact on the determination of value dates. It applies to
physical cash, check or commercial bills, and also to electronic transfers,…
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A regular check-out time for banks is 11H00 or 12H00. This means that a check handed
over on a Monday at 10:30 J + 1 value will be credited on the following Tuesday.
However, the same check given at 12:30 will be credited on Wednesday.
The deadline for the transmission of transfer / withdrawal orders or the receipt of
cash / disbursement transactions is important because the issue is an extra day.
Beyond the cut-off time, the payment transaction is deemed to have been received
the next business day. Orders received on Saturdays or Sundays are always carried
forward to the next business day.

D- Determination of treasury
a. Woking Capital (WC) And Working Capital Requirements (WCR)

Working Capital (WC)

Net working capital (WC) is the difference between a company’s current assets and
current liabilities. A positive net working capital indicates a company has sufficient
funds to meet its current financial obligations and invest in other activities. It is the
foundation of the principle of financial equilibrium. Its determination gives a precise
indication of the allocation of the resources of the enterprise (Grablowsky, W.1999)
The working capital (WC) formula is:

Working Capital = Current Assets – Current Liabilities

OR
Working Capital = Cash and Cash Equivalents + Marketable Investments + Trade Accounts
Receivable + Inventory – Trade Accounts Payable
Equation 2: Working Capital

Positive net working capital indicates a surplus of permanent resources made

available to the business after financing fixed assets and which can be used to finance
the operating cycle
On the other hand, a negative net working capital means that acyclic capital is not
sufficient to finance acyclic assets and that these are partly financed by short-term
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resources, in that way the company must take into account: increase its social capital,
build up reserves, borrow in the long term to clean up its bad situation....
Working Capital Requirements (WCR)
WCR is the balance between the portion of current assets and the portion of current
liabilities which are directly and exclusively associated with the operating cycle
(Loneux, 2004) Also it represents the funds necessary to run the daily operations.

Working Capital Requirement = Inventory + Accounts receivable - Accounts payable

Equation 3: WCR

The Balance Sheet can be viewed as a dialogue between WC and WCR.

WC asks : How much I bring to the operating cycle

WCR answers : How much I need for the operating cycle

b. Net Cash position (NCP)

Mathematically, the Net Cash is expressed as the difference between the Net Working
Capital (NWC) and the Working Capital Requirement (WCR) or between a company’s
current assets and current liabilities on its balance sheet.

NCP = NWC – WCR

OR
NCP = Current Assets - Current liabilities
Equation 4: Net Cash Position

Positiv NCP:
If Net Cash is positive, this means that the Net Working Capital is greater than the
Working Capital Requirements; in other words, it shows that the company has a
surplus of liquidity. Nevertheless, this excess liquidity, if it is too high, is a sign of
mismanagement or bad investment. In fact, managing the net cash position seriously
means effectively managing the NWC and the WCR.
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Negativ NCP:
On the other hand, negative cash means that the company is obliged to resort to
short-term bank overdraft or bank credit.
This can also be released by the ratio: NWC / WCR and when it is greater than 1, this
ratio indicates a positive net cash position and when it is less than 1, it indicates a
negative net cash position.
c. Ratios

Liquidity Ratios
It is the ability of a company to meet its short-term debts.
To do this we distinguish:

Current Ratio Acid Test

 Current ratio

The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay
off its short-term liabilities with its current assets. The current ratio is an important
measure of liquidity because short-term liabilities are due within the next year.

Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 ⁄ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Equation 5: Current Ratio

 This means:
The higher the ratio, the more the fund that the company will cash as a result
of the payments of its debtors and the sale of stocks will pay all of its short-
term debts.
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 Acid-Test / Quick Ratio

This ratio, unlike the previous one, increases from quasi-liquid by eliminating the least
liquid element.
It is equal to:

Acid Test = Cash + Marketable Securities+ Accounts receivable / Current Liabilities

Equation 6: Acid Test

 It should be noted that the higher the ratio, the more money the company will
receive as a result of payments from its debtors will pay all of its short-term
debts. If this ratio is greater than 1, this means that the company is able to meet
its short-term debt without having to sell its stocks.
 A low and/or decreasing quick ratio might be delivering several messages about
a company. It could be telling us that the company’s balance sheet is over-
leveraged. Or it could be saying the company’s sales are decreasing, the
company is having a hard time collecting its account receivables or perhaps the
company is paying its bills too quickly.

Profitability Ratios

Profitability, as its name suggests, is a measure of profit which business is generating.

So Profitability ratios are basically a financial tool which helps us to measure the
ability of a business to create earnings, given the level of expenses they are incurring.
These ratios take into account various elements of the Income statement and balance
sheet to analyze how the business has performed. Higher the value of these ratios as
compared to competition and market, better the business’s performance.
we distinguish:

Return on Assets Return on Equity

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 Return on Assets (ROA)

This ratio basically tells us that what is the return which business is generating giving
the level of assets the business has.

Return on Assets = (Net income / Assets) * 100

Equation 7: Return On Assests

 Return on Equity (ROE)

This ratio measure level of return which business is producing for each dollar which
an investor has put into it. So basically, it compares the income with the equity which
investors have invested.

Return on Equity = Net Income / Shareholder’s Equity

Equaton 8: Return On Equity

Solvency Ratio
It is the ability of the company to meet all of its financial commitments: repayment of
debts on scheduled deadlines, regular payment of interest, etc. In other words, the
solvency ratios make it possible to measure the degree of indebtedness of the
company to estimate to which extent, these fixed commitments resulting from the
loans are covered by the financial resources of the company.
we distinguish:

Financial Autonomy Debt Ratio

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 The financial Autonomy Ratio

On this point, we will say that the company has a financial autonomy only when more
than half of its resources come from its equity because it is a variable best indicated
in the balance sheet to make a judgment on the level of debt of the company

Financial Autonomy Ratio = ( Equity Capital / Total Liabilities ) x 100

Equation 9: financial Autonomy Ratio

 The Debt Ratio

The debt ratio is a financial ratio that measures the extent of a company’s leverage.
The debt ratio is defined as the ratio of total debt to total assets, expressed as a
decimal or percentage. It can be interpreted as the proportion of a company’s assets
that are financed by debt.
The higher the debt ratio, the more leveraged a company is, implying greater financial
risk.

Debt ratio = Total assets / Total debt

Equation 10: Debt Ratio

2.1.2. INTERNAL CONTROL MEASURES FOR CASH MANAGEMENT

A- General Control Requirements

1- For collection received in person, it is expected that proper receipting devices

such as cash registers, cashiering terminals or cash receipts be used to receipt
funds at the initial point of collection and that all customers be provided with
a receipt or cash register tape.
2- Checks should be restrictively endorsed immediately upon receipt.
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3- All monies received by the company must be receipted by cash register, cash
receipt or check log and prepared for deposit into an authorized depository
account for the company.

4- There should be separation of duty for cash handling responsibilities. This

separation of duties is essential to an effective control process. Generally, the
individual that provides this check and balance is someone with the accounting
responsibility.

5- Persons with the responsibly for maintaining and billing accounts receivables
should not be given responsibility for collecting payments.

6- Different employees should not work simultaneously out of the cash drawer.
Whenever funds are transferred among employees, responsibility should be
fixed through some receipting mechanism.

7- There should be independent verification of deposits by another person. The

person verifying the deposits should account for sequentially numbered
receipts, including void receipts.

8- Checks must be drawn and recorded in Moroccan Dirhams if the company is in

Morocco and must be restrictively endorsed immediately upon receipt. Any
exceptions must be approved by the company’s Controller’s office.

9- Departments may order their own official stamps from the company
management. Each check must be restrictively endorsed with the department
provided stamp and recorded appropriately. This includes endorsements by
any individual also named as payee on the check.
10- Cash collections, petty cash and change funds should adequately be secured at
all times. Cash drawers should be locked when a cashier is away from his or her
workstation. Safe locks and combinations should be changed whenever
staffing changes occur among those that know the combinations(passwords)
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11- Persons assigned with upfront cash handling responsibilities should be given
clear written procedures with regard to the handling and controlling of cash
collections or change funds.
12- At a minimum, persons handling cash should be required to read these cash
handling procedures and sign a copy of acknowledgement that they have read
and understood them.
13- Policy background checks should be performed on any employees who will
have significant cash handling responsibilities and this should be coordinated
through Human Resource.
14- Element of surprise in relation to periodic audits and related initiatives.
15- Summarization and reports
16- Adhesive Compliance with applicable laws and regulations.

Bank Accounts – The company controller has the responsibility for provision of
banking services for the company. Accordingly, bank accounts in the name of the
company or accounts using the company’s tax id number can only be established by
the company controller. All such accounts must reside within banks approved by the
Board of Trustees as public depositories.

Returned Checks – When a check is returned by the bank for any reason the company
cashier will charge the responsible department for the amount of the check and
forward the returned check to the appropriate department. The company’s
controller must approve any exception to this policy.

International Wire Payments – This may be subject to additional fees charged by the
originating or destination bank/or taxes, which will be deducted from the incoming
funds unless arrangement are made.

Investments – The Company’s investment goal is to maximize investment earnings

while maintaining adequate cash to meet the company’s operating needs.
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Investments should be made in accordance with applicable country’s statutes and

company policy. Both cash invested and cash in company bank accounts should be
analyzed daily and investments purchased and sold according to company operating
cash needs. Investment should be kept in an interest bearing account.

Replenishing of Funds – This is the act of creating a check to reimburse the fund for
the money that has been spent from it. Because petty cash is treated as a loan within
the same company, money that is spent must replenished at least once a month to
bring the fund back to its full balance. Understanding of this means, funds that are
open for extended periods may be replenish multiple times. An unencumbered
voucher must be created payable to the custodian vendor account for petty cash. The
voucher must be supported by an expenditure log and receipts and must be kept for
auditing purpose.

Bank Reconciliation – A process where the cash accounts on the business books are
regularly checked against bank statements.

B- Receivables and payables

Breaking down of Receivables

When a sales invoice is issued to a customer, it is regarded as a receivable. That is
cash or revenue earned but not yet received in hand or cheque by the company
and might be received in days, weeks, months or years to come.

Breaking down of Payables

Payables simply refers to trade credit purchases. Purchasing inventory, raw
materials and other goods on trade credit allows a company to defer its cash
outlays, while accessing resources immediately. Poor payable management can
lead to bankruptcy of a firm.
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Internal Controls Recommendations on Receivables

1. There should be terms and conditions in the issuance of the sales invoice by
the company to the customer(s)
2. Clarifying billing terms with customers
3. Using an automated billing service to bill customers immediately
4. Using electronic payment processing through a bank to collect payments

Internal Controls Recommendations on Payables

1. Electronic payment processing
2. Direct payroll deposit
3. Controlled disbursement
4. Acquiring favorable terms of purchase( lengthy payment periods)
C- Benefits of Effective Cash Management
1. Cost savings
2. Reallocation of precious resources to growing the business.
3. Minimizes the occurrence of errors and breakdowns
4. Limit the potential exposure to loss of assets or fraud
5. Efficient way of company’s effective working capital management
6. Enhances a company’s short-term cash flow

“ Cash management is the main focus of short-term financial management. She began to
take a real dimension in business. Because it must interest all members of the company by
representing a reflection of its survival. In this way the previously treated chapters have shown
us the concepts necessary for cash management (its importance and objectives) and presents
the profile of the treasury manager as well as his internal and external environment.
It also interests not only the treasurer but also all the other members of the company since they
contribute indirectly to its management. However, the treasurer must be in constant contact
with the actors of his internal and external environment, since most of his decisions will depend
on the actors in his environment. As a result, he must maintain good relations in order to have
the benefits they offer”
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2.2 Planning And Budget Management

Nowadays, the main concern of any business executive is how to put the outfits to
its structure. To manage a company is to plan, organize, order, coordinate, control,
foresee, it is at the same time to evaluate the future and to prepare it, to envisage
is already to act. Management is based on forecasting: doing budget management
in a company means doing management planning (David F Amakobe, 2017)
However, budget management and forecasting management are two synonymous
expressions. In business economics, a forecast is called budget. Company budgets
should not be confused with government budgets. In the company a budget is a
forecast, whereas in the administration it is rather an allocation or an authorization
of expenses

It is not enough to find a financial balance and a certain profitability to be assured

of the good health of the company. It would be necessary to visualize its state in
the future to allow an anticipation allowing to make a correction and to avoid
future risks (ACCA ,2012)

The cash budget is a set of chart of financial forecast and control of the treasury of
the company. It is the main instrument of short-term financial forecasting. It is a
statement that shows monthly, weekly, the receipts and the projected expenses of
the company, as well as the moment of its needs in cash or the available cash at
the end of the year to consider solutions for balance, to ensure optimal cash
management (ACCA, 2012) In the budget, a distinction must be made between
revenue and operating expenses (sales of goods, finished products, purchases of
raw materials, wage settlements, etc.) and off-farm (transfer of capital assets,
reimbursement of loans, etc.) (CIMA, 2008)
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2.2.1. PLANNING CONCEPT

A- Definition and Characteristics
a. Definition
Planning is defined as "a process of implementing strategies and developing action
plans to achieve them". From coordinated, time-programmed action projects, it is
possible to identify two types of plans regularly implemented in the company: the
strategic plan (positioned in the medium and long term), and the operational plan
( concerning the short term).

It is the organization in time of achieving goals:

 In a specific area;
 With different means implemented;
 And over a specific duration (and steps).

b. Characteristics
Planning is generally based on a triple effort that can be summarized as follows:

o A capacity to anticipate (it is above all to foresee the future)

o A capacity for action (objectives, implementation strategies, resources
allocated)
o A capacity for change (resources, businesses, organization).
Ackoff (1969) emphasizes that there are three different attitudes to the future
"wait and see; predict and prepare; and make it happen. Those who benefit most
from the future are those who help to create it. "

So the whole approach in terms of planning, aims to master the future. Planning is
then equated with the design of a desired future and the means to achieve it. This
willingness to plan can take different forms depending on the company (sector,
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size). In some, the planning process will be very formalized (books, documents,
codes), in others, however, the approach will be more informal.

B- Planning Steps
The planning function of management is one of the most crucial ones. It involves
setting the goals of the company and then managing the resources to achieve such
goals. As you can imagine it is a systematic process involving seven well thought out
steps. Let us take a look at the planning process (Omran, 2002)
Recognizing Need for Action
An important part of the planning process is to be aware of the business
opportunities in the firm’s external environment as well as within the firm. Once
such opportunities get recognized the managers can recognize the actions that
need to be taken to realize them. A realistic look must be taken at the prospect of
these new opportunities and a SWOT analysis should be done.

Setting Objectives
This is the second and perhaps the most important step of the planning process.
Here we establish the objectives for the whole organization and also individual
departments. Organizational objectives provide a general direction, objectives of
departments will be more planned and detailed. Objectives can be long term and
short term as well. They indicate the end result the company wishes to achieve. So
objectives will percolate down from the managers and will also guide and push the
employees in the correct direction.

Developing Premises
Planning is always done keeping the future in mind, however, the future is always
uncertain. So in the function of management certain assumptions will have to be
made. These assumptions are the premises. Such assumptions are made in form of
forecasts, existing plans, past policies etc.
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Identifying Alternatives
The fourth step of the planning process is to identify the alternatives available to
the managers. There is no one way to achieve the objectives of the firm, there is a
multitude of choices. All of these alternative courses should be identified. There
must be options available to the manager.

Examining Alternate Course of Action

The next step of the planning process is to evaluate and closely examine each of
the alternative plans. Every option will go through an examination where all there
pros and cons will be weighed. The alternative plans need to be evaluated in the
light of the organizational objectives.

Formulating Supporting Plan

Once you have chosen the plan to be implemented, managers will have to come up
with one or more supporting plans. These secondary plans help with the
implementation of the main plan. For example plans to hire more people, train
personnel, expand the office etc… are supporting plans for the main plan of
launching a new product. So all these secondary plans are in fact part of the main
plan.

Implementation of the Plan

And finally, we come to the last step of the planning process, implementation of
the plan. This is when all the other functions of management come into play and
the plan is put into action to achieve the objectives of the organization. The tools
required for such implementation involve the types of plans- procedures, policies,
budgets, rules, standards etc.

C- Planning Techniques
a. Forecasting Techniques
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The purpose of the forecast is to estimate a future variable from the knowledge of
a story. In general, a forecast is the interpretation of a history, which consists of a
series of observations made on fixed dates and chronologically classified. The
central theme of the forecast is the assumption that we can detect some
generalities, some laws in what happened before

Quantitative Techniques
The time series model is the most answered model in the field of quantitative
forecasting in which time is an explanatory factor. The moving average consists of
taking together observed values, calculating their arithmetic mean and finally using
this average as a forecast for the next period. Causal methods are used when
historical data are available and the relationship between the factor to be
forecasted and other external or internal factors can be identified. Linear
regression is a causal method in which one variable (the dependent variable) is
related to one or more independent variables by a linear equation

b. Other Techniques
The whole point of a planning is to optimize the four essential parameters:

QUALITY / COST / DELAY / PERFORMANCE

Splitting:
The different planning techniques all rely on a division into elementary tasks. These
tasks are then scheduled and positioned in the logical order of realization.

These are the different tasks that are planned. It is therefore essential that the
division is as relevant as possible, given the low margin of error allowed.
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Cost & Delay:

Once the division into tasks is obtained, we proceed:

- To the estimation: what will be the length and the cost?

- To the planning: when does it start, when does it end? The beginning of a
task can be determined by the availability of the resource assigned to that
task activities that must precede this task.
- To the allocation of resources: by whom is it achieved, With what means?

D- Planning Issues
Planning has a series of strengths and limitations that should be emphasized.

The Pros
It is noted that planning drives leaders and staff to strategic thinking. In other
words, it makes it possible to seize market opportunities and anticipate future
difficulties.

Similarly, planning makes it possible to look for the best use of factors of
production. In this sense, it allows the search for efficiency, that is to say the ability
to make the best use of the resources used.

In addition, planning promotes communication within the company (awareness of

social phenomena, sensitivity of the different actors, understanding of the different
points of view of staff and management).

Lastly, planning makes it possible to improve the control and the control of the
company (the control of Management proves useful to note the differences
between forecast and realization).
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The Cons
As for the limits, we note that it is impossible to anticipate the future.
As Terry Franklin (2007) points out, "If the situation changes dramatically from the
planner's assumptions, the plan may lose a lot of value.”
Similarly, completed formalism, set up and implemented plans, can result in
rigidities and significant costs for the company.
Finally, planning should not be imposed on the flexibility of contemporary
businesses.
Thus, to be effective, planning must be a factor of change with all staff.

2.2.2. BUDGET MANAGEMENT AND BUDGETARY SETTING AND

CONTROL
A- BUDGET MANAGEMENT

a. Definiton and objectives

The budget is the monetary translation of the program or action plan chosen for
each manager; it defines the resources delegated to it to achieve the objectives it
has negotiated. The budgets are generally annual and detailed according to a more
or less detailed periodicity (quarterly, monthly, ... etc.) .

According to LEO SHADONNET ( 2007) , to make budget is to establish a forecast of

probable fact that will intervene during a given period. It is also a provisional
statement intended to note on the one hand, a source of resources on the other
hand a use of these resources.

The construction of programs and budgets meets several objectives.

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Budgets are tools for steering the company

- Budgets make it possible to determine all the means and resources
necessary to achieve the goals of the organization, they also make it
possible to identify short-term external or internal constraints and
opportunities;
- They ensure the consistency of the decisions and actions of the various
responsibility centers, with reference to the objectives of the company;
- They make it possible to check that the budgetary construction respects the
fundamental balances of the organization (cash flow and financing).

Budgets are tools for communication, accountability and motivation

- They provide managers with information on the company's objectives and
their declination at each responsibility center;
- They install the empowerment and motivation of men in the framework of
decentralization by negotiating objectives and means implemented.

Budgets are means of control and measurement

- It allows the detection of anomalies and the commitment of corrective
measures.
- The budget is a living tool that needs to be constantly adapted to reality.
Each change constitutes a new act of management and decision.
Monitoring is therefore all the time essential for budgeting and contributes
fully to the quality of the management of the company.
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b. Role and purpose of budget management

Role
- The budget system provides cost-effective and timely, reliable information
to know, predict and understand important events affecting the company.
- The main purpose of budgeting is to put in place a management mode that
ensures coherence, decentralization and control of the different
subsystems of the company (Linn, 2007)
- The elaborated budget makes explicit all the predictions and objectives that
serve as a compass for daily action, and it plays the role of a decision
support tool.
- Budgetary management makes it possible to correctly translate the
strategic objectives set by the general management, to coordinate the
various actions of the company and to provide the means necessary for
their implementation after having processed and chosen between several
hypotheses.
- The Cash Budget summarizes the financial effects of the implementation of
all other budgets. Its establishment is often the "test of truth" for the
manager: it is on this occasion that we can test the realism and the
feasibility of the activity programs. With this in mind, the cash budget is the
ultimate simulation tool (Drury 1992)

Purpose
- The purpose of budget management is to formulate forecasts, the latter
allowing the general management to:
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- To achieve at the different levels of the company the ideal balance, this
balance being able to concern for example the sales, the productions, the
homogeneous sections or the workshops.
- To prevent events instead of undergoing them.
- To Improve relationships between employees, since they are called to work
for the same goal: monitoring and development of the company
- Highlight discrepancies between achievements and predictions, and initiate
corrective actions.
B- Setting up the cash budget
The cash budget meets two requirements:
- Ensure a balance between receipts and disbursements in order to prevent
a level of cash either in deficit or in surplus: an adjustment may be made if
necessary
- Know at the end of the period the balances of the accounts of third parties
and availabilities that will appear in the summary report.

Sales Production Supply Investment Budget

Cash Budget

Receipts Disbursements

Figure 5: Cash Budget Setting

Before obtaining the cash budget table, partial budgets are drawn up (receipts, VAT
and disbursements)
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a. Collect information
The cash budget is a link between two different accounting years, so the elements
needed for the budgeting of the coming year are
Balance sheet of the previous year: Net Cash Balance

Approved budgets for the incoming year

Document to get

Payment Methods

Exceptional disbursement and collection

Figure 6: Requirements for cash budgeting

b. Cash receipt budget

The cash receipts budget takes into account the following elements:

January February March

Customer credits (01-01)
Immediate Payments

Term payments

Loans
Other receipts
Total Receipts
Table 1: Cash receipt table

For the presentation of the receipts budget, we distinguish, horizontally, two

categories of receipts:
- Cash receipts directly related to the company's operations, distinguishing
between cash sales and credit sales, and providing the necessary lines to
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distinguish payment methods and payment due dates in order to facilitate

the application of offsets;
- Other receipts, also known as non-operating receipts, subject to specific
financial decisions or forecasts: borrowings, asset disposals, capital
contributions, etc.

Note:
Depending on the sector of activity, payment methods are different and involve
delays in sales receipts:
- In the retail trade, almost all payments are made in cash,
- In the industrial sectors, the payment periods can be long.

c. VAT budget

In the various budgets, receipts and charges submitted to VAT have been included for
their tax-free amount.
The company collects VAT on behalf of the state according to the following formula:

VAT due (monthly) = VAT invoiced - VAT recoverable on fixed assets - VAT recoverable on
charges

Equation 11: VAT

Note:
If this amount is positive, payment will be made before the end of the following
month, if it is negative, it will give rise to a VAT credit carried over to the following
month (s) .The amounts of the VAT to be disbursed will therefore have an impact on
the company's cash flow due to the discrepancy between receipts of sales and
disbursements of purchases of the month and payment of VAT to be paid
Month M Month M+1

VAT Collected Deductible VAT Payable VAT of M (or VAT Credit)

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Figure 7: VAT flows

January February March

Collected VAT
Deductible VAT :
- on fixed assets
- on purchases
- on production load
- distribution expenses
VAT Credit
PAYABLE VAT
Month of payment February March April
Table 2: VAT Budget table

d. Cash disbursement budget

It has the same structure as the previous tables, with the months in column and the
different disbursements in horizontal line.
This budget includes all the estimated expenses:

January February March

Payables (01-01)
Purchases
Wages
Social Contributions
Production Cost
Distribution expenses
Acquisition of fixed assets
Repayment of loans
Taxes
Dividends
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Total Disbursements
Table 3: Cash Disbursement table
e. Cash Budget
Summary of receipts and disbursements, it shows the positive or negative amount
of the monthly cash forecast. The opening balance sheet cash is also included in its
construction.
January February March
Payables (01-01)
Purchases
Wages
Social Contributions
Production Cost
Distribution expenses
Acquisition of fixed assets
Repayment of loans
Taxes
Dividends
Total Disbursements

January February March

Customer credits (01-01)

Immediate Payments

Term payments

Loans

Other receipts

Total Receipts

January February March

Treasury early in the month
Total receipts (1)
Total disbursements (2)
1-2
Treasury end of the month
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Figure 8: Cash Budget setting

f. The adjusted cash budget
Two situations may require cash adjustment:
- Very positive cash balances requiring an investment of surpluses (paid
accounts, SICAVs, etc.)
- One or more negative cash balances that will require the implementation
of solutions such as:
- The mobilization of trade receivables: discount of drafts;
- Obtaining bank loans (overdrafts, specialized cash loans, etc.);
A new cash budget, also known as a cash flow plan, will be developed. For example,
in case of discounting trade receivables.

January February March

Treasury early in the month
Receipts:
Customer credits (01-01)
Immediate Payments
30 days Draft Discount
- Accepted Drafts
Loans
Total Receipts
Total disbursements
Discounted Drafts
- Discount Interest
Present Value
Treasury end of the month
Table 4: Cash budget adjusting table

Note :
Bank Acceptance Draft Discount: The Bank Acceptance Draft Discounting means the
lawful bearer of the bank acceptance draft sells the draft to a commercial bank for an
amount of funds before its maturity.
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Discounting interest = Face Value of the commercial draft ╳ Discounting Term

╳Yearly Discounting Interest rate/360

Present Value = Face Value of commercial draft - Discounting Interest

Equation 12: Bank Draft Discount

g. Note
It is not enough to find a financial balance and a certain profitability to be assured of
the good health of the company. It would be necessary to visualize its state in the
future to allow an anticipation allowing to make a correction and to avoid certain
future risks.
The cash budget is a set of chart of financial forecast and control of the treasury of
the company. It is the main instrument of short-term financial forecasting. It is a
statement that shows monthly, weekly or weekly, the receipts and the projected
disbursements of the company.
It allows:
- To establish the cash flow forecast, cash balance, bank account, postal
account,
- Predict the need for short-term financing,
- Determine the level of liquidity required by the company according to its
objectives,
- To summarize all of the company's activities through planned financial
flows,
- To assess the foreseeable situation of the company,
- Make financial decisions.