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International Cash Management
Introduction and First Steps anb
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Agenda The Role of Treasury Definition of Cash Management
Benefits of Cash Management Liquidity Working Capital Float Receivables/Payables Management anb
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The Role of Treasury Funding Cash Management The Treasurer
Investment The Treasurer Risk Management Bank Relations Foreign Exchange anb
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Risk Management Currency Risk - Transaction - Translation - Economic
Interest Rate Risk Other Risks - Counter-party Risk - Settlement Risk - Systemic Risk anb
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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
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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
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Benefits of Good Cash Management
Control of financial risk Opportunity for profit Strengthened balance sheet Increased customer, supplier, and shareholder confidence anb
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Nature of Cash Flows Different industries have different cash flow characteristics Timing and mismatches Fluctuations Predictability Currency Location anb
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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
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We Need Liquidity for Day to day transactions Precautionary balances
Compensating balances Obtaining discounts Acid tests Favourable opportunities Overall, avoiding bankruptcy! anb
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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
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The Cash Cycle £40 £20 £20 Profit? Cash Balance? Stock labour Sale £80
purchases anb
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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
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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
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Balance Sheet Short Term Items
Current assets Inventories 1,910 1,903 Trade and other receivables 1,713 1,625 Current tax assets 13 - Other financial assets Cash and short term assets ,412 4,523 Current liabilities Short term borrowings Trade and other payables 1,690 1,735 Current tax liabilities Other financial liabilities Short term provisions ,367 2,477 Turnover 9,577 Cost of goods sold 8,943 anb
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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
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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
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Why Does Float Arise? Deliberately Inefficiency Logistical situations
Compensation mechanism anb
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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
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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
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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
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Impact of Poor Receivables Management
Important because of costs arising from Float Bad debts Management time Legal fees Impact on analysts and creditors anb
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Speeding Receivables Terms of trade anb
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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
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Speeding Receivables Terms of trade Clear instructions anb
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Clear Instructions Such As Beneficiary name Bank code
Account number (IBANs) e.g. GB 19 Loyd Transfer method Value date anb
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Speeding Receivables Terms of trade Clear instructions
Method of payment anb
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Payment and Clearing Systems What is important?
Float Value dating Availability Finality Cost Security anb
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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
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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
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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
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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
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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
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Speeding Receivables Terms of trade Clear Instructions
Method of payment Account structures Documentation Educate customer anb
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Speeding Receivables Penalties Post dated cheques Legal process
Internal process Stop supply Learn customer practices anb
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Speeding Receivables Stating the Obvious
Receivables management is a Team Effort Never forget the Relationship anb
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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
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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
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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
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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 days Operating Cycle 143 From:Fundamentals of Contemporary Financial Management, 2nd ed , by Moyer, McGuigan and Rao anb
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