Treasury

1.0 Introduction:

Treasury is defined as the theories, concepts and techniques that are used to ensure a business has the right amount to funds, in the right place, at the right time and in the right currency to ensure continued solvency for a given risk, within the constraints of maximizing financial returns and minimizing financial cost.

Treasury management generally refers to the set of policies, strategies and transactions that a company adopts and implements to raise finance at acceptable cost and risk, to manage its cash resources, and to reduce interest rate, foreign exchange and commodity price risks, as well as in the conduct of its relationships with its financial stakeholders.

In this paper, I will analyze the treasury management of Glaxo SmithKline plc (GSK) such as treasury structure, function, policy and control limits. First, IÐŽ¦d like to introduce the background of GSK. GSK was formed in 2000 by the merger of Glaxo Wellcome and Smithkline Beecham. Headquartered in the UK and with operations based in the US, GSK is one of the industry leaders, with an estimated seven per cent of the world's pharmaceutical market. GSK has 108 manufacturing sites in 41 countries that supply products to 140 markets worldwide.

2.0 Treasury organizational structure

As companies become larger, authority in treasury matters has tended to become more centralized in the interests of financial efficiency and control and at the expense of local motivation and alignment of treasury policy with local business needs. A centralized treasury operation tends to create a structure which provides sufficient scope for specialization. Within treasury, there may be separate department to manage activities such as cash management, insurance, tax, banking, etc.

A decentralized treasury operation rarely means that all treasury activities are spread among group companies. Normally, head office retains some overall treasury function to set policy guidelines, write treasury manuals, etc. A decentralized treasury is to allow each operating company within the group the responsibility and flexibility to manage their own treasury requirements.

When Glaxo Wellcome and SmithKline Beecham, two UK-based pharmaceutical giants, joined forces in December 2000 to become GlaxoSmithKline (GSK), Emerson who is CFO of GSK was trying to set up common systems across the firm. Another important issue, however, was deciding how to structure the new treasury so that it could provide the most timely and efficient services to all 41 countries in which the newly merged company was present. Prior to the merger, both companies had centralized treasury activities, though they differed in the extent of their centralization.

Though GSK is run out of the US, its headquarters are in London and it is there located the new global treasury. All internal and external funding for the firm and all foreign-exchange dealing is run from London with a treasury staff of 17, including the regional treasury managers for Europe, Asia and the international region which covers the Middle East, Africa and Australia.

In the US, a three-strong treasury team reporting to Emerson handles country-specific treasury issuesÐŽXsuch as cash forecastingÐŽXfor North and South America from their base in Philadelphia. Cash management in the US is taken care of by three banks, with a fourth running an overlay concentration account which is managed from London. Same-day wire payments are made by the team in Philadelphia and notified to London for inclusion in the daily cash position. In Europe, a similar liquidity structure to that in the US is being set up, using between eight and ten local providers, with an overlay bank to concentrate funds.

Asia, however, is more complicated. Although forex and short-term funding needs for the region are managed in London, local regulations and foreign-exchange restrictions make it harder to centralize treasury activity there. As a result, cash management is done on a country-by-country basis, with a single bank and local cash pools wherever possible. (Source: www.CFOeurope.com. Foreign Policy, May 2001)

3.0 Treasuy functions:

Core treasury functions which are:

Ñ"Ь liquidity management--- cash budegeting; borrowing and investment; interest risk management.

Ñ"Ь Currency mangement--- spot dealing; exposure management;

Ñ"Ь Term funding --- bank term debt; capital market debt;

Ñ"Ь Corporate finance --- risk-return; investment criteria; valuation for acquisitions, disposals.

The treasury function exists to support the business activities of the firm. The nature of the business (product-market profile, geographic spread, capital intensity, growth rate) dictates the nature of the treasury function in a particular firm.

3.1 Liquidity management

Treasury decisions are concerned with the effective utilization and conservation of cash resources. This typically means speeding up cash collection processes, by clarifying invoicing procedures and monitoring the follow-up procedures for suppliers on the payments side. Management decisions can be broken down into actions related to managing working capital and cash transmission and bank account configurations.

The Cash Conversion Cycle represents the number of days it takes a company to purchase raw materials, convert them into finished goods, sell the finished product to a customer and receive payment from the customer / account debtor for the product.

GSKÐŽ¦s Cash Conversion Cycle is 250 days that means the firm's money is tied up in operations of the business and not very available for other activities such as investing.

The GSK Group operates globally, primarily through subsidiary companies established in the markets in which the Group trades. Due to the nature of the GroupÐŽ¦s business, with patent protection on many of the products in the GroupÐŽ¦s portfolio, the GroupÐŽ¦s products compete largely on product efficacy rather than on price. Selling margins are sufficient to cover normal operating costs and the GroupÐŽ¦s operating subsidiaries are substantially cash generative. Operating cash flow is used to fund investment in the research and development of new products as well as routine outflows of capital expenditure, tax, dividends and repayment of maturing debt. The Group may, from time to time, have additional demands for finance, such as for share purchases and acquisitions. GlaxoSmithKline operates with a high level of interest