Regardless of the type of organization, the basic objectives for the treasurer will always aim to ensure that the organization is funded at all times, the balance sheet is optimized, financial flexibility is maintained, and value-enhancing decisions are made to the benefit of all stakeholders.

The typical treasurer will be familiar with and have targets. However, some numbers are more important than others in fulfilling the treasury mandate. Six of the most important numbers are discussed below.

1. Total cash position

The treasurer must have, on at least a daily basis, complete visibility of the total cash within the organization. The treasurer must also know how much cash is immediately available vs. not available or trapped. Inevitably, there may be some cash not readily available (e.g. a project financing debt reserve account). A lack of daily visibility may show inefficiencies in the cash management processes, due to inefficient use of technology, poor cash concentration or pooling mechanisms, poor bank account controls, etc.

2. Minimum liquidity buffer

A company must have cash in the right place, at the right time and in the right currency in order to meet its obligations at all times. Part of this is to have a liquidity buffer in the event of unforeseen events or closed periods where debt capital markets typically may not be accessed. The form of the buffer will usually be a combination of both cash and an undrawn committed bank funding facility.

3. Funding requirement

This is one of the most important numbers for the treasurer. It shows the funding required (including the peak funding) and will drive the funding strategy and the bank and debt investor strategies as subset of the funding strategy.

The period over which the funding is measured should be at least 12 to 24 months. This period is in line with most company’s internal budgeting cycles, as well as the period over which the rating agencies will scrutinize the company’s financial profile.

The amount required will be a function of factors such as capital intensity, dividend policy, optimal capital structure and the competitive environment. Be very cautious when assuming disposals will reduce the funding required, especially if the timing thereof is uncertain. 

4. Cash flow at risk

No matter how predictable the underlying business or how sophisticated the forecasting processes, actual cash will probably never equal forecasted cash. If cash flows are volatile, then the actual position can be significantly different compared to the forecasted position, over even a relatively short period. 

A quantification of the downside cash flow delta is critical, as this impacts not only the funding strategy but under certain circumstances, also the credit rating, relationships with providers of capital, the ability to grow the operations or even the ability to operate.

Determining the downside with any degree of confidence can be difficult because assumptions will have to be made. The treasurer must work closely with the business and the forecasting group. A good understanding of the cash flow drivers are essential, as well as the sensitivity of key risk factors to market movements. As seen over the last few years, low probability but large impact events are becoming more common—this cannot be ignored anymore, although quantifying it remains hard.

5. Projected balance sheet

Following on from the previous two numbers, a projected balance sheet should be prepared (over a 24-month period at least). This projected balance sheet should then be assessed against target financial ratios in order to show the extent to which the financial strength and flexibility of the company is expected to remain intact. The financial strength will typically be expressed relative to the net gearing ratio and the relevant credit rating agency ratios (e.g., debt to EBITDA, funds from operations to debt).

Importantly, balance sheet strength is not only about ratios but equally about the absolute level of debt outstanding. The debt will have to be refinanced in the future (under potentially adverse market conditions), and if the debt is too high, it could result in significant financial pressure on the company. 

6. Maximum refinancing risk

The treasurer must determine the maximum amount to be refinanced in, say, any 12-month period. It is important not to set the limit too high based on past good market conditions. Market conditions can change quickly due to lower investor appetite, negative sentiment towards the sector or overall lower available liquidity in the market. All things being equal, the stronger the credit rating, the higher the acceptable refinancing risk.

Riaan Bartlett, CTP is a finance and treasury executive based in Pretoria, South-Africa.