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anb 1
International Cash Management
Introduction and First Steps
anb 2
Agenda
• The Role of Treasury
• Definition of Cash Management
• Benefits of Cash Management
• Liquidity
• Working Capital
• Float
• Receivables/Payables Management
anb 3
The Role of Treasury
The Treasurer
Funding
Cash Management Investment
Bank Relations
Foreign Exchange
Risk Management
anb 4
Risk Management
• Currency Risk - Transaction - Translation - Economic• Interest Rate Risk• Other Risks - Counter-party Risk - Settlement Risk - Systemic Risk
anb 5
Corporate Definition of Cash Management
• The effective planning, monitoring and management of liquid / near liquid resources including:
• Day-to-day cash control
• Money at the bank
• Receipts
• Payments
• S-T investments and borrowings
• FX
anb 6
Bank Definition of Cash Management
• The effective planning, monitoring and management of liquid / near liquid resources including:
• Provision of bank accounts• Deposit / withdrawal facilities• Provision of information regarding bank accounts and
positions• Money transfers and collection services• Investment facilities• Financing facilities • Pooling and netting
anb 7
Benefits of Good Cash Management
• Control of financial risk
• Opportunity for profit
• Strengthened balance sheet
• Increased customer, supplier, and shareholder confidence
anb 8
Nature of Cash Flows
Different industries have different cash flow characteristics
• Timing and mismatches
• Fluctuations
• Predictability
• Currency
• Location
anb 9
Definition of Liquidity
• Having sufficient funds available to meet all foreseen and unforeseen obligations
• Liquidity has costs
- Cash is unproductive
- Spread between borrowing and deposit rates and between long and short term rates
anb 10
We Need Liquidityfor
• Day to day transactions• Precautionary balances• Compensating balances• Obtaining discounts• Acid tests• Favourable opportunities• Overall, avoiding bankruptcy!
anb 11
Sources of Liquidity(Some)
• Bonds• Bank Loans – short, long• Debtors/Receivables• Stock/Inventory• Cash• Short term investments• Treasury bills etc etc
But which are most liquid?
anb 12
The Cash Cycle
StockStock
£20
£20
£40
purchases
Sale £80
Profit?
Cash Balance?
labour
anb 13
Operating Cycle
Purchase Resources Pay Sell on Credit Receive Cash
Inventory Conversion Receivables Conversion
Payables Period Cash Conversion Cycle
Operating Cycle
From:Fundamentals of Contemporary Financial Management, 2nd ed , by Moyer, McGuigan and Rao
anb 14
Operating Cycles
• Inventory Conversion Inventory x 365 Cost of Goods Sold• Payables Conversion Payables/Creditors x 365 Cost of Goods Sold• Receivables Conversion Receivables/Debtors x 365 Turnover
anb 15
Balance SheetShort Term Items
Current assets
Inventories 1,910 1,903
Trade and other receivables 1,713 1,625
Current tax assets 13 -
Other financial assets 43 78
Cash and short term assets 733 917
4,412 4,523
Current liabilities
Short term borrowings 355 555
Trade and other payables 1,690 1,735
Current tax liabilities 121 44
Other financial liabilities 119 13
Short term provisions 82 130
1,367 2,477
Turnover 9,577
Cost of goods sold 8,943
anb 16
Cash Conversion
• We need to consider control in all areas of working capital to maximise return, reduce cost.
• Some areas are not controlled by the Finance Function – Stock/inventory
• Some areas have shared control – payables and receivables
• Some areas are controlled by the Finance Function – short term borrowing and investment
anb 17
Float
Definition of bank float
The time lost between a payor making a payment and a beneficiary receiving value
* Cost of Float
Principal amount due x No. of days x cost of funds
360 or 365
This formula is important and should be used if issues of float arise
anb 18
Why Does Float Arise?
• Deliberately
• Inefficiency
• Logistical situations
• Compensation mechanism
anb 19
Areas Where Float May Arise
• Your Systems - Order to production - Production to delivery - Invoicing - Payment banked - Funds used• Your customer systems - Invoice receipt to payment• Bank systems - Payment made
anb 20
Ways to Control Float
Actions• Change own systems• Educate customers• Include costs in prices• Negotiate with bank
Bank Services• Lockbox• Intervention accounts• Remote disbursement• Controlled disbursement• Direct collections• Efficient collections structure
anb 21
Working Capital Management Receivables and Payables
• Good receivables and payables management aids in:
• Cash flow forecasting
• Long-term funding and investment decisions
• Reduced risk of bad debts
• Stronger liquidity
• Stronger balance sheet ratios
anb 22
Impact of Poor Receivables Management
Important because of costs arising from
• Float
• Bad debts
• Management time
• Legal fees
• Impact on analysts and creditors
anb 23
Speeding Receivables
• Terms of trade
• Clear instructions
• Method of payment
• Account structures
• Documentation
anb 24
Terms of Trade
Settlement• Open account• Clean collection• Documentary collection
Against payment Against acceptance
• Revocable documentary letter of credit• Irrevocable documentary letter of credit
Unconfirmed Confirmed
• Advance payment
anb 25
Speeding Receivables
• Penalties• Post dated cheques• Legal process• Internal process• Stop supply• Learn customer practices
anb 26
Speeding ReceivablesStating the Obvious
• Receivables management is a Team Effort
• Never forget the Relationship
anb 27
Payables Management
Obvious but critical questions:• What is due?• When is it due?• Where should the payment be sent?• How should the payment be sent?• Are there funds to cover the payment?• Is the payment properly authorised?
anb 28
• Improving Performance
1. Timing – credit period, float neutral
2. Costs – discounts, zero balance, avoid penalties, forward value and forward plan, consolidate payments, use repetitives where possible, STP, BICs and IBANs
Payables Management
anb 29
Payables Management
Payables -The flip side of the coin
So• Hang on to it• Consider float versus control• Account structures• Discounts
And again, do not forget Relationship
anb 30
Operating Cycle
Purchase Resources Pay Sell on Credit Receive Cash
Inventory Conversion 78 days Receivables Conversion
65 days
Payables Period Cash Conversion Cycle
69 days 74 days
Operating Cycle
143
From:Fundamentals of Contemporary Financial Management, 2nd ed
, by Moyer, McGuigan and Rao
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