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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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