Cash forecasting and liquidity control - Centralised vs dece...

Learning Outcomes

After completing this article, you will be able to distinguish between centralised and decentralised treasury management for cash forecasting and liquidity control. You will understand the rationale for each approach, their main features, and the implications for group liquidity, risk management, and operational efficiency as examined in the ACCA Financial Management (FM) syllabus.

ACCA Financial Management (FM) Syllabus

For ACCA Financial Management (FM), you are required to understand cash forecasting and liquidity management within group organisations. In particular, focus your revision on:

• The reasons for preparing cash forecasts and managing liquidity
• The roles, advantages, and risks of centralised treasury management
• The features and limitations of decentralised treasury management
• How the choice of treasury structure affects control, risk, funding, and costs
• Examining the practical aspects of group liquidity management

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the primary difference between centralised and decentralised treasury management in a group company?
2. Which of the following is NOT typically an advantage of a centralised treasury function? a) Consistent liquidity control b) Improved local decision-making speed c) Bulk funding opportunities d) Lower overall borrowing costs
3. True or false? Under decentralised treasury management, each subsidiary has full control over its own cash balances and short-term investments.
4. Briefly explain why a group may prefer centralised treasury for managing foreign exchange exposure.
5. Name one potential risk of a fully centralised treasury structure.

Introduction

Effective cash forecasting and liquidity control are essential for ensuring a business can meet its payment obligations and optimise use of surplus cash. Multinational groups often face a choice between managing these activities through a centralised treasury function or allowing each subsidiary or division to operate its own system (decentralised treasury). Understanding the key distinctions, benefits, and drawbacks of each approach is essential for ACCA Financial Management (FM) exam candidates.

Key Term: cash forecasting
The process of estimating future cash inflows and outflows over a given period to identify expected surplus or deficit positions and enable effective liquidity management.

CENTRALISING CASH AND LIQUIDITY MANAGEMENT

Companies operating across multiple locations or countries can choose how to structure their treasury operations—the central point of control for all cash management, or autonomous control at the operating unit level.

Centralised Treasury

A centralised treasury structure means that most cash management activities—such as cash concentration, funding, investing, and risk management—are conducted by a central group team.

Key Term: centralised treasury
A treasury function where cash management, funding, and risk control for the group are managed by the head office or a specialist central department, rather than by individual subsidiaries.

Main Features

• Group companies remit surplus cash to head office (cash pooling)
• Funding for subsidiaries coordinated centrally
• Central negotiation of banking, investment, and foreign exchange transactions
• Uniform policies and procedures for liquidity control

Advantages

• Tighter control of group liquidity: Easier to forecast and manage surplus and deficit cash positions across the group.
• Lower funding costs: Surplus and deficit positions can be netted, reducing external borrowing and enabling better rates for large transactions.
• Centralised risk management: Foreign exchange and interest rate exposures are monitored and hedged at head office, improving oversight.
• Specialist knowledge: A central team can develop advanced skills and systems unavailable in smaller operating units.
• Consistent policies: Uniform procedures improve compliance and standardisation.

Disadvantages

• Reduced subsidiary autonomy: Local managers may feel disempowered and less motivated to manage their cash effectively.
• Slower local responses: Delays may arise when central approval is needed for urgent payments or investments.
• Possible lack of local knowledge: The central treasury may be less familiar with local banking relationships, regulations, or market conditions.

Decentralised Treasury

A decentralised treasury structure delegates cash management responsibilities to each subsidiary or business unit within the group.

Key Term: decentralised treasury
A treasury approach in which each subsidiary or operating unit is responsible for its own cash management, funding, banking, and risk management activities.

Key Term: cash pooling
The process by which surplus cash from group entities is transferred to a central account to offset group deficits and optimise group liquidity.

Main Features (Decentralised)

• Each unit forecasts and monitors its own cash flows
• Banking relationships and funding decisions are handled locally
• Local management is responsible for short-term investment and foreign exchange exposures

Advantages (Decentralised)

• Responsiveness: Local teams can act quickly to address cash needs or investment opportunities.
• Greater local accountability: Subsidiary managers are more motivated to manage their division’s liquidity effectively.
• Local knowledge utilised: Relationships with local banks and understanding of local regulations can be leveraged.

Disadvantages (Decentralised)

• Fragmented control: Group-wide cash surpluses may remain unused while others borrow unnecessarily, increasing overall financing costs.
• Inconsistent policies: Procedures and controls may vary by location, increasing risk of errors or compliance issues.
• Difficulties in risk management: Exposures may go undetected at group level, slowing response to changing market conditions.

REASONS FOR CHOOSING A TREASURY STRUCTURE

Factors Supporting Centralisation

• Operations in countries with stable banking systems
• Need for strong controls and group-wide risk visibility
• Significant intra-group transactions requiring internal funding
• Opportunities for better rates through bulk transactions

Factors Supporting Decentralisation

• Highly diverse business activities across regions
• Complex regulatory environments restricting cash movement
• Groups operating in emerging markets with limited head office reach
• Need for rapid reaction to local events

Worked Example 1.1

A global company, Orbis Group, has 20 subsidiaries in different countries. Each subsidiary manages its own cash balances, but some often maintain large bank deposits, while others have to arrange expensive overdrafts. Orbis wants to reduce the group’s net borrowing cost. Which treasury structure should it consider, and why?

Answer:
Orbis Group should consider centralising its treasury operations. By pooling surplus cash from subsidiaries and covering deficits from central funds, Orbis can reduce overall external borrowing, obtain better rates by making larger single transactions, and improve visibility of group liquidity.

Worked Example 1.2

Beta Plc’s central treasury manages all group’s FX exposures. A subsidiary in Brazil needs urgent funds in local currency and seeks approval. Due to time differences and bureaucracy, the approval is delayed, leading to missed supplier discount. What is the drawback illustrated?

Answer:
The example highlights how a fully centralised treasury can slow down local decision-making and create operational bottlenecks, demonstrating a disadvantage of excessive centralisation.

Exam Warning

For the ACCA FM exam, do not assume centralised structures are always best. Be ready to explain potential drawbacks such as loss of local flexibility, and the impact of regulatory restrictions on moving funds between countries. Recommend the structure most suitable for the scenario given.

GROUP CASH FORECASTING PRACTICES

The chosen treasury structure affects cash forecasting—a critical part of liquidity control.

• Centralised system: The head office collects cash flow forecasts from all units, consolidates data, and plans funding centrally.
• Decentralised system: Each subsidiary forecasts and manages its own cash, sometimes reporting summary data to head office but retaining operational independence.

Accurate forecasting enables:

• Timely transfer of surplus funds
• Planning group funding requirements
• Proactive risk management (FX, interest rates)
• Minimising idle cash and interest expense

SUMMARY TABLE: COMPARING CENTRALISED AND DECENTRALISED TREASURY

Key Point Checklist

This article has covered the following key knowledge points:

• Distinguish between centralised and decentralised treasury management
• Explain the benefits and drawbacks of each structure for cash forecasting and liquidity control
• List the main factors influencing the choice of treasury structure in a group
• Illustrate how cash pooling and policy consistency affect group performance
• Highlight risks inherent in both models, particularly for the ACCA FM exam

Key Terms and Concepts

• cash forecasting
• centralised treasury
• decentralised treasury
• cash pooling