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Management Research NewsCurrent Practices of Treasury Management in Belgium's Largest Industrial Companies
Luc A. Soenen
Ar ticle in format ion:To cite this document:Luc A. Soenen, (1987),"Current Practices of Treasury Management in Belgium's Largest Industrial Companies", ManagementResearch News, Vol. 10 Iss 4 pp. 3 - 5Permanent link to this document:http://dx.doi.org/10.1108/eb027917
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Current Practices of Treasury Management in Belgium s
Largest Industrial Companies
by Luc A. Soenen
Introduction
It is likely that, because of the increased volatility in the
economic and political environment, the treasury function
in most companies has not only changed greatly, but has
also become much more im portant over th e last few yea rs.
Advances in banking technology and the treasuryuseof the
micro-computer are also challenging traditional practices
in these area s in most oftheindustrial countries. Ne verthe
less,very little is known about a ctual corpo rate prac tice es
sentially ou tside the U. S. The purpose of this study was to
survey the cu rrent state of practice of treasury managem ent
in large companies located
in
Belgium. This article analyses
and compares corporate responses in three important areas
of treasury management, i.e. managing banking relations,
domestic cash management and the m anagement of foreign
exchange exposure. The study also attempts to gauge the
sophistication of the treasury function in Belgium's largest
industrial companies. The country is one of the world's
most open trading economies with an export to GN P ratio
of
75.7%
for 1984. Because of the small home market and
the lack of natural resources (except for the troubled coal
mining sector) Belgian business firms are by necessity very
much involved in international trade, essentially via export
and import activities.
To gather information on current practices a survey was
conducted in 1984 using a mail questionnaire. It included
47 questions most ofwhichasked the respondent to choose
an answer among several possibilities. The potential re
spondents were selected from the list of Value
Added Tax
payers w ith sales in excess of
10
billion Belgian francs (the
average exchange rate of the Bfrwas 0.01301in
1984).
All
companies surveyed are Belgian by majority ownership
and have production facilities in at least one foreign
country. In total 26 Belgian companies participated in the
survey, representing23%ofallBelgian non-pure domestic
companies with (1984) sales above 10 bi Bfr. The respon
ding companies can be classified into the major industrial
sectors of the company, i.e. manufacturing (16), trade (8)
and services (2). The companies surveyed are mostly loc
ated in Brussels (14), followed by Flanders (8) and
Wallonia (4). Almost half of the respondents have more
than 50% of their purchases and sales denominated in for
eign currencies. For 6 companies this is even more than
75% of trade receivables and disbursements.
Banking relations
Banking relations play an important role in determining
comp anies' costs and even a com pany's survival during if-
ficult
times.
Because banking relations are based so heavily
on trust, companies should establish a relationship with
one or several banks (and banke rs, since there are probably
no good and bad ban ks but there certainly are good and bad
bankers) before the need arises. Therefore, choosing a
bank is one of the m ost important business decisions con
fronting the developing firm and should involve a sys
tematic and detailed approach. In 21 of the respondent
companies banking relationships have been established on
quality standards with regard to bank performance. The
large number of criteria that favoured the selection of a
specific bank on its quality can be classified into 4 grou ps:
a. conditions made by the bank
- value dating terms
- pricing policy and credit availability
- margins
- exchange rates for particular currencies
- interest income on demand deposits
b.
bank service
- speed, efficiency, promptness
- technical knowledge, advice on complex problems
- accuracy, smallest number of errors
- automated services
- courtesy of employees
- source of information and imaginativeness of per
sonnel
c. personal relationships
- capability and professionalism of the account manager
- mutual trust
- follow-up of the company's business
- blunder by previous banker
d. special services
- preparation of application files for investment sub
sidies
- export financing
- extensiveness of the international network
- contacts with correspondent banks
- swift transactions
- foreign exchange advisory
- financial information on the banks' clients
- corporate computer linkup with the bank
One company specified its banking relationships were
based on tradition, i.e . the continuation of a longstanding
relationship. One single company had no prior preference
in selecting a bank, it happened as luck would have it - by
coincidence. The remaining three companies said other
reasons determined their relations with particular banks,
such as an existing commitment because of a long-term
loan agreemen t, an obligation of the parent com pany, and
a mutual commercial interest.
Bank balance information gathering can be used as an
input for preparation of the cash budget or just as a check
on the cash budget derived from internal data . In the first
case,
the company runs behind the actual cash balance situ
ation. The second approach to cash planning assumes the
availability of an own up-to-date information system that
keeps track ofallreceipts and disbursements on a calendar
day basis. Twenty of the respondents use the account in
formation provided by banks only to check on their cash
budge t. This implies that those companies have
a
cash plan
ning system that can function independent of the balance
reporting by banks. T he remaining six companies still rely
on their banks for forecasting cash positions. All respon
ding companies receive balance reporting at least once a
day/e leven of them several times a day. The bank account
information ismostly acquired by mail, telephone o r telex.
Bank balance reporting by means of
a
computer linkup be
tween the company and its bank(s) is only emerging. Only
4 respondents used this advanced method of information
gathering. However,asubstantial inc rease of the use of this
medium is expected as another 15 companies (58% of all
respondents) give serious consideration to set up a bank to
corporate computer linkup. The three leading Belgian
banks (Generale Bank, Bank Brussel Lambert, Krediet-
bank) offer similar systems for transmission of detailed
bank balance and transaction d ata. The Bank B russel Lam
bert was first to introduce a computer linkup system in
1983,
i.e. Telelink. Short-term interest rates and exchange
rates are very important for short-term investments and
borrowings, determining the optimal cash balance and
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managing the company's foreign exchange exposure. In
formation on interest rates and exchange rates is obtained
from banks by almost all (24) respondents , although 10
among them acquire interest information also from other
sources. This kind of information is usually (in 90% of the
cases) gathered at least once a day mainly by phone or
telex. Six companies make already use of a bank to cor
pora te com pute r l inkup and 12 mo re companie s are in
favour of it.
The large Belgian industrial firms seen to be rather
sophisticated in managing their banking relations, as is i l
lustrated by the following findings:
- all of the participating companies have value dating
arrangements with their bankers . This should normally
result in a better control of bankfloat. It is also a require
ment for accurate cash flow planning
- 21 companies make daily transfers between the com
pany's bank accounts to achieve an overall zero balance.
This practice corresponds with the theoretical adage
Keep funds fully utilised
- 22 respo nden ts use the quarterly account analyses to con
trol the movements in the company's bank balances. All
companies surveyed, except one, have a periodic check
on bank service charges, with corrective action when re
quired
- In 24 of the 26 participating compan ies the executive re
sponsible for treasury management determines the
amount of business done with any particular bank.
Domestic Cash Management
The registration of incoming and outgoing cash flows is a
fundamental cash management activity. The reporting of
cash flows by value date is a requirement for efficient cash
ma nag em ent. Cash f low reporting on the basis of (often de
layed) bank balance s ta tements or bookkeeping en tr ies re
sults in excessive float in the cash system and a larger than
needed amount of idle cash being held. Twenty of the re
spondents keep track of the firm's cash flows by value date
and 5 do so by bookkeeping entry. More evidence of the
relative high degree of sophistication of domestic cash
management in the largest Belgian industr ial companies is
further exemplified by the following survey results:
- in 90% of the companies surveyed all corporate cash
flows are centralised in one treasury department. The
advantages of a centralised cash management system
have been treated at great length in the financial lit
era ture
- In 15of the respon dent com panies a cash f low planning is
made on a day-to-day basis , 7 respondents update the
cash budget on a weekly basis , the 4 remaining com
panies prep are a monthly cash budget . Reduc tion of f loat
and idle cash balances requ ires a t ight control and m oni
toring of the compa ny's cash f lows. Howe ver, the prepa r
ation of the cash budg et is still in
19
companies done m an
ually while only 7 respon dents m ake use of the c om puter
also for this purpose
- Cash surplus es ar e invested o n a daily basis in 18 of the
participating companies , thereby minimising the amount
of idle cash. Th e minim um period of investme nt is a few
days up to one week for6responde nts . In total 18 respon
dent companies opera te on the Euro-markets for shor t -
term borrowing and investments
- many special cash managem ent techniq ues are used such
as compensation of intercompany payments with same
day value (23), intercompany loans (20), cash pooling
(16) , netting (15), lock-boxes (4) and factoring (3)
- to deal with the very complex tax legislation 23 of the
companies surveyed had at least one tax manager among
their personnel
- all 26 resp ond ing com pani es claim to have a clear insight
into and control of the paymen t habits of their custom ers.
About 60% of the participating companies update their
accounts receivable and accounts payable on a daily
basis . It is rem arkab le that two com panies upda te the ac
counts receivable on a monthly basis and two other re
sponde nts do not have a periodic updating frequency. In
accordance with the principle to maximise net float,
ef-
ined as payable float minus receivable float, accounts
payable are in general less frequently updated than ac
counts receivable
- in total 22 of the com panie s surveyed m ake use of com
puter software in support of cash management. The
administration and projection of incoming and outgo
ing cash flows is by far most computerised. Computer
models for areas such as foreign exchange exposure de
termination, derivation of an optimal investment or
hedging s trategy are used by few companies , i .e. 6 re
sponde nts used a foreign exchange exposu re m odel, 5 a
hedging model and only one an investment model.
Management of Foreign Exchange Exposure
The number of banks called upon for foreign exchange
transaction is, of course, influenced by the degree of multi-
nationa lity of the firm but is also the result of sho ppi ng
around for best rates or conditions . The number of banks
involved in the foreign exchange operations of the com
panies surveyed was 9 on average although ranging from 1
to 30. The corporate banker is also the major source of
advice on foreign ex chan ge m atter s in 60% of the 16 re
spondent companies which seek external advice with re
gard to foreign exchange m anag em ent. S pecialised foreign
exchange advisories were far behind with only 6 respon
dents (23%) making use of their services . About 90% of
the responden ts prepa re own exchange rate forecasts based
on internal as well as external information. Half of the
sample companies have a foreign exchange committee
composed ofasmall num ber of key executives to d eliberate
on the company's foreign exchange exposure, exchange
rate developments and hedging s trategies .
When hedging foreign exchange exposure, respondents
use a large num ber of metho ds. The forward exchan ge con
tract is by far the most popul ar m eth od , followed by matc h
ing incoming and outgoing cash flows in the same currency,
the international money market, and leads and lags. Much
less frequently used are the inclusion of exchange rate
clause (5 com panies) , sales price adjustmen ts , currency o p
tions and foreign exchange risk insurance.
The recent development of f inancial futures contracts
offers the f inancial manager an opportunity to reduce the
risks associated with cash and foreign exchange exposure.
Future s contracts are yet not much used to lock-in borrow
ing or lending costs (2 respondents) or as a hedge against
foreign exchange r isk (3 comp anies) . H alf of the resp on
den ts do not consider financial futures as a financial instru
ment that could be useful or even feasible with regard to
thei r t reasury management .
Since exchange rate movements are not perfectly posi
tively correlated, at least part of the (unsystematic) risk of
the company's currency portfolio can be averaged out.
Risk diversification takes place before any hedging trans
actions have to be considered. In total 17 respondents
(65%) take explicit account of correlations between ex
change rates when dealing with foreign ex change e xposu re.
Conclusion
Th e impo rtanc e of the treasu ry function is confirmed by the
fact that the responsibility for this financial function is
assigned to a specific financial executive (i.e. treasurer,
controller or V.P.-Finance) in all 26 participating com
panies . In all com panies , except one , the executive respo n
sible for treasury management belongs to senior manage
me nt. Treasury m anag em ent is in 19 com panies his princ
ipal occupation. Only three respondents indicate that top
ma nag em ent is not sufficiently convinced of the impor t
ance of an efficient management of the treasury function
In these three companies financial managers in charge of
treasury management also found themselves insufficiently
entit led to perform the treasury function adeq uately .
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In general, large Belgian companies seem to be rather
advanced in the development and application of an ef
f icient treasury management system. The relative high de
gree of sophistication could be an indication of the quality
of treasury management, however, a sophisticated app
roach is not a sufficient condition for quality in terms of
effectiveness and efficiency.
Dr. Luc A Soenen is Associate Professor of Finance,
School of Business Administration, University of San
Diego, Alcala Park, San Diego, California 92110, USA.
Th e autho r was s ti ll at the Limburgs Universitair C entr um ,
Belgium at the time of this study.
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