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Current Practices of Treasury Management in Belgium's Largest Industrial Companies

Luc A. Soenen

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To cite this document:
Luc A. Soenen, (1987),"Current Practices of Treasury Management in Belgium's Largest Industrial Companies", Management
Research News, Vol. 10 Iss 4 pp. 3 - 5
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Current Practices of Treasury Management in Belgium's

Largest Industrial Companies
- margins
- exchange rates for particular currencies
- interest income on demand deposits

by Luc A. Soenen

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Introduction

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 personnel

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 important over the last few years.
Advances in banking technology and the treasury use of the
micro-computer are also challenging traditional practices
in these areas in most of the industrial countries. Nevertheless, very little is known about actual corporate practice essentially outside the U.S. The purpose of this study was to
survey the current state of practice of treasury management
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 management 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 GNP 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 of which asked the respondent to choose
an answer among several possibilities. The potential respondents were selected from the list of Value - Added Tax
payers with sales in excess of 10 billion Belgian francs (the
average exchange rate of the Bfr was 0.01301 in 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, representing 23% of all Belgian non-pure domestic
companies with (1984) sales above 10 bi Bfr. The responding 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 located 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 foreign currencies. For 6 companies this is even more than
75% of trade receivables and disbursements.

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 subsidies
- 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 agreement, an obligation of the parent company, 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 situation. The second approach to cash planning assumes the
availability of an own up-to-date information system that
keeps track of all receipts and disbursements on a calendar
day basis. Twenty of the respondents use the account information provided by banks only to check on their cash
budget. This implies that those companies have a cash planning system that can function independent of the balance
reporting by banks. The remaining six companies still rely
on their banks for forecasting cash positions. All responding companies receive balance reporting at least once a
day/eleven of them several times a day. The bank account
information is mostly acquired by mail, telephone or telex.
Bank balance reporting by means of a computer linkup between the company and its bank(s) is only emerging. Only
4 respondents used this advanced method of information
gathering. However, a substantial increase 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, Kredietbank) offer similar systems for transmission of detailed
bank balance and transaction data. The Bank Brussel Lambert 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

Banking relations
Banking relations play an important role in determining
companies' costs and even a company's survival during difficult times. Because banking relations are based so heavily
on trust, companies should establish a relationship with
one or several banks (and bankers, since there are probably
no good and bad banks but there certainly are good and bad
bankers) before the need arises. Therefore, choosing a
bank is one of the most important business decisions confronting the developing firm and should involve a systematic 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 groups:
a. conditions made by the bank
- value dating terms
- pricing policy and credit availability
3

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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 corporate computer linkup and 12 more companies are in
favour of it.
The large Belgian industrial firms seen to be rather
sophisticated in managing their banking relations, as is illustrated by the following findings:

basis. It is remarkable that two companies update the accounts receivable on a monthly basis and two other respondents do not have a periodic updating frequency. In
accordance with the principle to maximise net float, defined as payable float minus receivable float, accounts
payable are in general less frequently updated than accounts receivable
- in total 22 of the companies surveyed make use of computer 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 determination, derivation of an optimal investment or
hedging strategy are used by few companies, i.e. 6 respondents used a foreign exchange exposure model, 5 a
hedging model and only one an investment model.

- 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 requirement for accurate cash flow planning
- 21 companies make daily transfers between the company's bank accounts to achieve an overall zero balance.
This practice corresponds with the theoretical adage
"Keep funds fully utilised"
- 22 respondents use the quarterly account analyses to control 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 required
- In 24 of the 26 participating companies the executive responsible for treasury management determines the
amount of business done with any particular bank.

Management of Foreign Exchange Exposure

The number of banks called upon for foreign exchange
transaction is, of course, influenced by the degree of multinationality of the firm but is also the result of "shopping
around for best rates or conditions". The number of banks
involved in the foreign exchange operations of the companies surveyed was 9 on average although ranging from 1
to 30. The corporate banker is also the major source of
advice on foreign exchange matters in 60% of the 16 respondent companies which seek external advice with regard to foreign exchange management. Specialised foreign
exchange advisories were far behind with only 6 respondents (23%) making use of their services. About 90% of
the respondents prepare own exchange rate forecasts based
on internal as well as external information. Half of the
sample companies have a foreign exchange committee
composed of a small number of key executives to deliberate
on the company's foreign exchange exposure, exchange
rate developments and hedging strategies.
When hedging foreign exchange exposure, respondents
use a large number of methods. The forward exchange contract is by far the most popular method, followed by matching 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 companies), sales price adjustments, currency options and foreign exchange risk insurance.
The recent development of financial futures contracts
offers the financial manager an opportunity to reduce the
risks associated with cash and foreign exchange exposure.
Futures contracts are yet not much used to lock-in borrowing or lending costs (2 respondents) or as a hedge against
foreign exchange risk (3 companies). Half of the respondents do not consider financial futures as a financial instrument that could be useful or even feasible with regard to
their treasury management.
Since exchange rate movements are not perfectly positively 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 transactions have to be considered. In total 17 respondents
(65%) take explicit account of correlations between exchange rates when dealing with foreign exchange exposure.
Conclusion

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
management. Cash flow reporting on the basis of (often delayed) bank balance statements or bookkeeping entries results in excessive float in the cash system and a larger than
needed amount of idle cash being held. Twenty of the respondents 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 industrial 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 literature
- In 15 of the respondent companies a cash flow planning is
made on a day-to-day basis, 7 respondents update the
cash budget on a weekly basis, the 4 remaining companies prepare a monthly cash budget. Reduction of float
and idle cash balances requires a tight control and monitoring of the company's cash flows. However, the preparation of the cash budget is still in 19 companies done manually while only 7 respondents make use of the computer
also for this purpose
- Cash surpluses are invested on a daily basis in 18 of the
participating companies, thereby minimising the amount
of idle cash. The minimum period of investment is a few
days up to one week for 6 respondents. In total 18 respondent companies operate on the Euro-markets for shortterm borrowing and investments
- many special cash management techniques 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 responding companies claim to have a clear insight
into and control of the payment habits of their customers.
About 60% of the participating companies update their
accounts receivable and accounts payable on a daily

The importance of the treasury 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 companies. In all companies, except one, the executive responsible for treasury management belongs to senior management. Treasury management is in 19 companies his principal occupation. Only three respondents indicate that top
management is not sufficiently convinced of the importance of an efficient management of the treasury function
In these three companies financial managers in charge of
treasury management also found themselves insufficiently
entitled to perform the treasury function adequately.
4

In general, large Belgian companies seem to be rather

advanced in the development and application of an efficient treasury management system. The relative high degree of sophistication could be an indication of the quality
of treasury management, however, a sophisticated approach is not a sufficient condition for quality in terms of
effectiveness and efficiency.

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Dr. Luc A Soenen is Associate Professor of Finance,

School of Business Administration, University of San
Diego, Alcala Park, San Diego, California 92110, USA.
The author was still at the Limburgs Universitair Centrum,
Belgium at the time of this study.