Finance company treasury management
- Neville Giles, General Manager, Distribution, HANOVER GROUP LIMITED
The skill of treasury management is an important part of a finance company’s operations. It is critical to ensure that the business has sufficient cash on hand to meet its outgoings on a daily basis. Outgoings for a finance company can be grouped into three main items: payment of interest on deposits, repayment of deposits on maturity, and the operating expenses of the firm.
Treasury management operations revolve around a Treasury forecast which estimates cashflows derived from both the deposit and lending sides of the business. The deposit projection will include forecasts of inflows coupled with likely reinvestment rates to give a net inflow position. The lending report combines expectations of loan repayments of both interest and principal amounts.
The purpose of the Treasury forecast is to identify mismatches between expected inflows and outflows for the business. Once shortfalls are identified, measures can be undertaken to ensure that the potential shortfall does not occur. A variety of short and long term solutions can be utilised once a shortfall is identified.
For a finance company, the first protection against a projected shortfall is the maintenance of a prescribed level of cash at all times. Cash balances are maintained mainly as a protection against unanticipated shortfalls such as diminished inflows, lower than expected reinvestment rates or delayed repayment of loans.
For anticipated shortfalls the business can be more proactive through actions on either the lending or deposit side of the business. A finance company might look to increase their offered rates, increase their advertising, or target existing investors to improve the reinvestment rate. Conversely (or simultaneously), the finance company might also decrease the amount that is being lent out through a tightening of the credit criteria used in approving loans.
A further protection against shortfalls is a bank funding line. This is an agreement between an external financial institution and the finance company whereby the finance company can, at any time, draw down an amount up to the limit prescribed by the agreement. This facility is likely to be used only in an emergency mainly because the facility is expensive.
Perhaps the most important strategic aspect of treasury management is the matching of the lending and deposits. This involves ensuring that the average term and spread of maturities of the deposit side of the business closely matches the average term and spread of the lending the firm undertakes.
The use of the above tools will help ensure that a finance company manages its treasury operations so as to maintain a sustainable level of liquidity throughout a normal business cycle.
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