International Cash Management Introduction and First Steps anb

Agenda The Role of Treasury Definition of Cash Management Benefits of Cash Management Liquidity Working Capital Float Receivables/Payables Management anb

The Role of Treasury Funding Cash Management The Treasurer Investment The Treasurer Risk Management Bank Relations Foreign Exchange anb

Risk Management Currency Risk - Transaction - Translation - Economic Interest Rate Risk Other Risks - Counter-party Risk - Settlement Risk - Systemic Risk anb

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 Short Term investments and borrowings FX anb

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

Benefits of Good Cash Management Control of financial risk Opportunity for profit Strengthened balance sheet Increased customer, supplier, and shareholder confidence anb

Nature of Cash Flows Different industries have different cash flow characteristics Timing and mismatches Fluctuations Predictability Currency Location anb

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

We Need Liquidity for Day to day transactions Precautionary balances Compensating balances Obtaining discounts Acid tests Favourable opportunities Overall, avoiding bankruptcy! anb

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

The Cash Cycle £40 £20 £20 Profit? Cash Balance? Stock labour Sale £80 purchases anb

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

Operating Cycles Inventory Conversion/Days Inventory Inventory x 365 Cost of Goods Sold Payables Conversion/Days Payable Payables x 365 Receivables Conversion/Days Receivable Receivables x 365 Turnover anb

Balance Sheet Short Term Items 2013 2012 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

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

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

Why Does Float Arise? Deliberately Inefficiency Logistical situations Compensation mechanism anb

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

Ways to Control Float Actions Bank Services 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

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

Impact of Poor Receivables Management Important because of costs arising from Float Bad debts Management time Legal fees Impact on analysts and creditors anb

Speeding Receivables Terms of trade anb

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

Speeding Receivables Terms of trade Clear instructions anb

Clear Instructions Such As Beneficiary name Bank code Account number (IBANs) e.g. GB 19 Loyd 3508 2500 7568 22 Transfer method Value date anb

Speeding Receivables Terms of trade Clear instructions Method of payment anb

Payment and Clearing Systems What is important? Float Value dating Availability Finality Cost Security anb

Payment and Clearing Systems Value Dating Value is the time when a payor ceases to be able to use the funds in the sense of accruing interest or making a payment and is the time when a beneficiary is able to use the funds in the sense that they may be used to pay down an overdraft, accrue interest or be used to make a payment. anb

Payment and Clearing Systems Value Dating Forward Value Dating The time between a bank being notified of a transaction in favor of a customer and the customer receiving future value for the item Back Value Dating The time between a bank being notified of a transaction to the customer’s account and the item being valued on a date prior to the date of the transaction anb

Payment and Clearing Systems Availability The time when the beneficiary actually has access to the funds i.e. to use to make a payment anb

Payment and Clearing Systems Finality The time after which a payment is considered to become irrevocable and cannot be returned without the permission of the beneficiary account holder. anb

Payment and Clearing Systems Cost Different payment systems have different features as to Value, Float, Finality and security. Because of this they also have different costs The Cash Manager therefore has to be careful to use the most cost effective method to get the job done anb

Speeding Receivables Terms of trade Clear Instructions Method of payment Account structures Documentation Educate customer anb

Speeding Receivables Penalties Post dated cheques Legal process Internal process Stop supply Learn customer practices anb

Speeding Receivables Stating the Obvious Receivables management is a Team Effort Never forget the Relationship anb

Payables Management What is due? When is it due? 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

Payables Management Improving Performance Timing – credit period, float neutral Costs – discounts, avoid penalties, forward value and forward plan, consolidate payments, use repetitives where possible, STP, BICs and IBANs anb

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

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 anb