BFF3651 Short-Term Finance and Liquidity Management Assignment Sample

• Subject Code : BFF3651
• University : Monash University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Management

Treasury Management

Question 1: The challenge that Martina Hund-Mejean faced after joining Tyco Incorporation as a treasurer

Tyco has witnessed tremendous growth in the past decade which mainly arrives due to aggressive acquisitions of more than 200 firms. The acquisition strategy of the company transformed the company into a highly complex conglomerate that could even absorb and sustain the recession across industries and geographic diversifications.

But the acquisition base structure was built upon debt, also the company created huge assets in the form of goodwill which turned into expensive write-downs. The complex structure of the conglomerate, extensive debt and expensive write-downs of goodwill resulted into criticism from analysts and investors that the company must be engaged in financial manipulations and presented fake growth.

As a treasurer, the main challenge that Martina Hund-Mejean faced after joining Tyco Incorporation is the huge pool of debt in the balance sheet of the company. The overall debt remains more than $ 11.2 billion which is going to be matured in the financial year 2003. Also, a large part of this debt of $ 6.8 billion is going to be matured in the first quarter of the upcoming year.

Considering the quarterly financial data of the company, it will not be able to meet its current debt obligations using its most liquid (current) assets and operating cash flow in any of the quarter. Also, it is interesting to note that debt in the second quarter of FY 2002 was $ 20454 million which reduced to $ 7719 million in the last quarter, but the cash and short term investments during this period remains the same.

Other issue is that the Martina could not use the available cash of approx. 6 billion to repay the debt obligation because this cash is locked up in various subsidiaries that the company acquires at various geographical regions. Also, Martina cannot opt for refinancing the current obligatory debt due to ongoing investigations about the refinancing frauds by companies. That means Martina is not able to make the debt payments using its current assets including cash and she is also not able to arrange for some alternative financing.

Question 2: The strategic reform that Martina Hund-Mejean initiated to manage the liquidity position of the Tyco Incorporation

Being a treasurer, Martina is facing liquidity crunch as she is not able to repay the debt obligation using the available cash of approx. 6 billion because this cash is locked up in various subsidiaries that the company acquires at various geographical regions. Also, Martina cannot opt for refinancing the current obligatory debt due to ongoing investigations about the refinancing frauds by companies. That means Martina is not able to make the debt payments using its current assets including cash and she is also not able to arrange for some alternative financing.

In order to ensure that the company will not face such liquidity crisis in the future periods, Martina started keeping close track of future debt maturities. Also she found that there are no significant debt maturities until 2005. Apart from that Hund-Mejean observed and proposed that the global treasury function of the company should be centralized. She added that it might be difficult, complex and painful in the beginning but will be beneficial in the long run. Under the centralize sysem of treasury, she outlined the following objectives for the departments:

• Ensure adequate liquidity
• Obtain visibility of cash balances
• Have cash available when and where needed
• Control and protect important assets
• Improve investment performance

The treasury team decided to evolve cash into a strategic asset and to use the cash pools in hedging the expected market volatility and unforeseen corporate crisis. Hund-Mejean also formulated a new corporate cash management structure which is divided into three different layers viz. parent company, intermediate holding company and the operating subsidiaries around the world. Mandate given by Hund-Mejean and her treasury team was clear to centralize the subsidiary cash, obtain visibility of cash balances and have cash availability.

Question 3: The difference between centralized and decentralized treasury management

Before Martina Hund-Mejean joined the Tyco international, its treasury management system (TMS) was decentralized, and the system has been the most common cash management organizational structures for multinationals operating in emerging markets.

Decentralization is considered to be ideal for MNCs that offers a diverse deposit of operational activities with stronger geographic needs. It helps conglomerates to establish a degree of executive layering and hierarchy.

Yet over the course of the last decade, centralized treasuries have become a far more popular choice among multinationals, as they’re designed to insulate corporations from stagnating regional economies. Therefore, to ensure that the company will not face any liquidity crisis in the future periods, Martina started making the TMS of Tyco centralized. She started keeping close track of future debt maturities and found that there are no significant debt maturities until 2005. She added that it might be difficult, complex and painful in the beginning but will be beneficial in the long run.

The key goal of a centralized treasury function is to rationalize in-country cash management. This is then subsequently used as a stepping stone towards a consolidated, regional headquarters structure with which a large organization can improve its overall visibility of funds, corporate control and governance, achieve economies of scale to cut costs and develop centralized centers of excellence.

Question 4: Short-term financing sources to be considered to manage the potential short- term liquidity requirements of a firm.

A treasurer will determine the size of the firm’s investment in current assets: A flexible, or accommodative, short-term financial policy: High ratio of current assets to sales. A restrictive short-term financial policy: Low ratio of current assets to sales

 A treasurer will determine how to finance current assets: A flexible, or accommodative, short-term financial policy: a low proportion of short-term debt relative to long-term financing. A restrictive short-term financial policy: a high proportion of short-term debt relative to long-term financing

The most important factor that protects a business from any short term liquidity crisis is an efficient cash management system. Tyco is generating large revenues year on year but the cash collection is very poor which is creating liquidity crisis (short term) for the company. Martina Hund-Mejean has already initiated the centralized treasury management system, it is also required to implement a better credit policy and manage its accounts receivables effectively.

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