Corporate Finance Theory and Practice, Third Edition

PART TWO

MANAGING CASH FLOWS, WORKING CAPITAL AND FINANCIAL RISKS

In this part, we aim to analyse the day-to-day management of a company's financial resources in terms of three main components:

• management of cash flows and treasury, which we will examine in Chapter 47;
• management of working capital (Chapter 48); and
• management of financial risks, particularly interest rate, exchange rate, liquidity, credit risks and the risk of fluctuations in raw materials prices, which is described in Chapter 49.

These components were traditionally managed by distinct corporate functions, i.e. treasury and risk management. That said, they have now generally been pooled under the responsibility of the corporate treasurer, given the interlinkage between them. The treasurer's role is to oversee:

• a centralised treasury unit responsible for managing cash flows and monitoring working capital;
• a financing unit responsible for securing funds and negotiating borrowing terms with banks;
• a front-office unit handling market transactions as well as interest rate and exchange rate risks; and
• in large groups, a joint administrative unit (“back office”) that processes transactions for all units.