Innovations in Liquidity Management - the Potential of Corporate Treasury*

Abstract

IntroductionLiquidity management is a crucial managerial area of corporate finance. There is a common knowledge that even the most profitable company may go bankrupt if it does not manage its liquidity in a proper way. The importance of liquidity maintenance arises in times of crisis characterized by the high volatility of financial markets and clear symptoms of economic downturn.In this paper we focus on the problem of liquidity management by discussing the objectives and functions of corporate treasury. Corporate treasury is relatively new phenomenon, representing a profession dedicated for a defined, complex set of financial management-related tasks in a company. Corporate treasury function may be performed solely or by a dedicated department under the CFO supervision.In particular, the purpose of this paper is to support a thesis that corporate treasury has potential to enhance innovative actions within liquidity management. This potential arises primarily from the holistic managerial approach of the corporate treasury, which is supported by the broad understanding of the entire company and the extensive knowledge of all financial management areas that influence liquidity (through cash inflows and outflows) accompanied by the deep knowledge of financial market and instruments.This is a conceptual paper, based on the analysis of the current literature and practical documents. The paper is organized as follows. In the first Section we present the contemporary views on corporate treasury objectives and functions. The second Section discusses the understanding of liquidity management of a company, with cash management as the core issue regarding actions within, in the context of the core function of corporate treasury. In the third Section we address the potential areas of innovative actions of corporate treasury. The last Section concludes the paper.1. The identity of corporate treasury objectives and functionsCorporate treasury management involves financial activities within maximizing company's liquidity and mitigating various types of financial risk. However, the understanding of tasks and functions of corporate treasury is not homogenous. Possibly, it is partially connected with the clearly visible several stages of the development of corporate treasury functions. The role of the corporate treasury evolved over time, as the financial market was developing and becoming more volatile, with the growing importance of large international corporations (Figure 1).The evolution of the treasury role can be divided into three phases. During Phase I (Immature Treasury, TS 1.0) before the 1970s, treasury functions were decentralized and informal, characterized by manual processes, concerned with operational activities. Phase II (Mature Treasury, TS 2.0) started with the introduction of floating currencies systems and the end of gold standard for US dollar. This led to the increased volatility in financial markets and greater importance of treasury that become focused on financial risk management, using more and more sophisticated tools and instruments. Changing role of the treasury in Phase III (Strategic Treasury, TS 3.0) is a result of globalization process and increased complexity of financial system. Corporate treasury has to coordinate its activity with business partners and support business units in their strategies in order to create value (Polak, Robertson, Lind, 2011, p. 50). It is said that treasury involvement should be increased in all areas that require cash management, asset and liabilities management and financial risk management. It also involves enhanced reporting and communication with internal and external stakeholders as a response to their demand for better information. The strategic role of treasury in Phase III is to deliver value and efficiency for the company and act as a strategic unit to achieve the company's goals. It is stressed that the efficient treasury management is determined by four important factors: (1) centralization, (2) standardization, (3) simplification and (4) automation (Ala, 2011). …