1. CTP Exam Preparation- Essentials of Treasury Management, 3ed.
Chapter 6: Intro. To Working Capital Management
Chapter 7: Working Capital Tools
Presented By: Susan Etheredge, CTP, CICM
CTM Director
Baylor University

2. Chapter 6: Introduction to Working Capital Management
Outline:
The Cash Conversion Cycle (CCC)
How Changes in Current Accounts Impact External Financing
Working Capital Investment and Financing Strategies
Management of Credit and A/R
Management of Inventory
Management of A/P

3. The Cash Conversion Cycle
Order Credit Sale $$$$
Received Received
< Inventory > < Accounts Receivable >
(DIH) (DSO)
Time 
< Accounts Payable > < CCC >
(DPO)
Invoice Received $$$$ Disbursed

4. Cash Conversion Cycle (CCC)
Formula:
CCC = DIH + DSO – DPO
Days Inventory Held
Days Receivables/Sales Outstanding
Days Payables Outstanding

5. Calculation of CCC and Cash Turnover
Calculate the CCC and Cash Turnover given the following:
Days inventory = 45 days
Days receivables = 35 days
Days payables = 30 days
CCC = DIH + DSO + DPO
CCC = – 30 = 50 days
Cash Turnover = 365/CCC = 365/50 = 7.3 times

6. Spontaneous Assets & Liabilities
Current Assets
Inventory and Accounts Receivable
As sales increase, inventory and A/R also increase, resulting in larger dollar amounts invested in those accounts.
Increase results in decreased cash and/or increased debt
Current Liabilities
Accounts Payable and Accruals
A decrease results in decreased cash and/or increased debt

7. Current Asset Investment Strategies
Restrictive
Low levels of current assets relative to sales.
Raw materials investment is tightly managed using JIT.
A/R and cash balances are kept low.
Result:
Greater profit possible
Greater risk
Relaxed
High levels of current assets relative to sales.
High levels of cash
High levels of A/R
Lower profit likely
Less risk

8. Current Asset Financing Strategies
Maturity Matching
Conservative
Aggressive

9. Credit Policies Policies should clearly define: Credit standards
Credit terms
Discount terms
Collection policies

10. Standards - Five C’s of Credit
Character
Willingness to pay -- evidenced by payment history
Capacity
Current and future financial resources that can be committed to pay obligations
Capital
Short- and long-term financial resources -- supplement insufficient cash flow
Collateral
Assets or guarantees to secure an obligation if non-payment
Conditions
Economic environment impacting customer’s ability to pay, or willingness of a company to grant credit
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

11. Forms of Credit Extension
Payment
Due
Interest?
Customer
Type
Payment restore available credit?
Open Account
(Open Book)
By invoice per terms of sale
No – unless late payment
B2B
Yes
Installment
Credit
Monthly – equal payments of Prin. & Int.
B2C No
Revolving
(Like credit cards)
Monthly – on unpaid amounts plus current month purchases
Yes – on unpaid balances
Letter of
Credit – Int’l Trade
May be sight or deferred
Sometimes
Both

12. Common Terms of Sale Cash before delivery (CBD) Cash on delivery (COD)
Cash terms
Net terms
Discount terms
Monthly billing
Draft/bill of lading
Seasonal dating
Consignment

13. Financing A/R Unsecured borrowing Secured borrowing Securitization
Captive finance subsidiary
Third-party financing
B2B credit cards
Factoring
Private-label financing

14. Cross-Border Trade Management
Other methods:
Banker’s acceptances (BAs)
Trade acceptances
Barter
Countertrade
Trading companies

15. Foreign Collecting Bank
Documentary Collection Note: Banks act only as collecting and paying agents and do not guarantee payment
5-Pay
6-Docs
7-Pay
4-Docs
2-Ship
1-Agree
3-Docs
8-Pay
Buyer (Importer)
Seller (Exporter)
Foreign Collecting Bank
Remitting Bank
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

16. Commercial vs. Standby L/Cs
Issued by a bank
Payment mechanism
Ensures payment for the shipment of merchandise
Typically requires presentation of a draft, commercial invoice and shipping documents
Issued primarily by U.S. banks
“Stands by”-not intended as payment mechanism
Ensures the performance of a bank’s customer (applicant) to a third-party (beneficiary)
Typically requires the presentation of a sight draft and notice of non-performance by the applicant

17. L/C Transaction 3-Issue L/C 7-Docs Advising/ Negotiating Bank
2-Apply
for L/C
10-Docs,
when pymt.
arranged
11-B/A presented
7-Docs
5-Ship
1-Agree
6-Docs
4-Advise
L/C
3-Issue L/C
8-B/A
9-Pay
Issuing Bank
Advising/ Negotiating Bank
Buyer (Importer)
Seller (Exporter) (Beneficiary)
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

18. Inventory Policy Reasons for holding Types held Levels of inventory
Benefits and costs of holding
Financing

19. JIT Inventory Management
Minimizes inventory
Often paired with MPS.
Retailers link to POS equipment.
Goals:
Eliminate waste.
Standardize the production process.
Continuously improve quality.
Benefits:
Improved supplier relationships
lower transaction costs
better planning
Supplier-managed replenishment programs
Paid-on-production processes

20. A/P Responsibilities Vouchering Disbursement System
Verify incoming invoices and authorize payments.
Traditional three-way match: Invoice matched to both an approved purchase order and receiving information.
Disbursement System
Information
Fraud Prevention
Relationship with Payees
P.O.
Invoice
Goods Rec’d.

21. Chapter 7: Working Capital Tools
Outline:
Treasury Management Timelines
Cash Discount Calculations
Cash Conversion Cycle (CCC)
A/R Monitoring and Control
Considerations for Global Management of Working Capital
E-Commerce

22. Cash Flow Timeline and Float
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

23. Collection vs. Disbursement Float
Mail float
Processing float
Clearing or Availability float (depends on POV)
Mail Processing Collection \ Availability POV of Payee
Disbursement \ Clearing POV of Payor

24. Float Neutral Calculation
Payment timing changes
Seller adjusts the timing (i.e., value date) of the payment.
Price changes (discount offer)
Seller offers buyer a cash discount to compensate for earlier payment.
Discount depends on buyer’s cost of funds and timing difference in days.
Example: r = 12% and TD = 3 days.
Where:
TD = Total days difference between check and electronic payments
r = Opportunity cost as an annual rate
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

25. Cost for a Buyer of Not Taking a Cash Discount
Terms: 2/10 net 30
Should a discount be taken if the cost of short-term funds is 8%?
Where:
D = Discount percentage—2%
N = Net period—30 days
T = Discount period—10 days
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

26. Offering a Cash Discount: Benefit/Cost for Seller
Terms are 2/10, net 30.
Seller’s opportunity cost of funds is 15%
$100,000 sale
Sellers induce early payment or offer discount to be competitive.
Where TAFP = total amount of full payment; CC = annual opportunity cost of capital (in this example, 15%); D = discount rate; T = days in discount period; N = days in net period
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

27. Monitoring A/R
Monitoring individual accounts allows identification of:
Errors or delays in the invoicing or payment that are slowing collections
Customers who may delay payment intentionally
A change in financial condition that may alter a customer’s ability to make timely payments and require the curtailment of future credit sales
Monitoring aggregate A/R allows identification of:
Changes in financing needs
Changes in business

28. Days’ Sales Outstanding (DSO)
Assume:
outstanding receivables of $285,000 at the end of the first quarter
credit sales of $310,000 for the quarter.
Using a 90-day averaging period, the DSO is computed as follows:
If the company’s credit terms are net 60, the average past due is computed as follows:
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

29. Aging Schedule
Separates A/R into current and past-due receivables in 30-day increments
Can determine the percent past due
Age of A/R
Amount of A/R
% of Total A/R
Current
$1,750,000
70%
1-30 days past due
375,000
15%
31-60 days past due
250,000
10%
Over 60 days past due
125,000 5%
Total
$2,500,000
100%
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

30. A/R Balance Pattern for March
=+$ 25,000
=+$160,000
=+$105,000
=+$ 50,000
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

31. Multilateral Netting

32. Leading and Lagging Leading Lagging Paying before
Payor’s currency is expected depreciate
Lagging
Paying after
Payor’s currency is expected to appreciate

33. Re-Invoicing
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

34. Electronic Data Interchange (EDI)
Structured electronic transactions
Secure messages, no data reentry
Buy side
Sell side
Purchasing
Order placement
Receiving
A/P
Sales
Order processing
Shipping
A/R
Exclusive use of trading partners
Retail, transportation, automotive
ASC X12
UN/EDIFACT
Proprietary EDI
Cross-industry EDI
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

35. Use of the Internet for E-Commerce and EDI
Internet-based e-commerce
Internet-enabled EDI
Uses the Internet and Internet technology to link business applications between trading partners
Data transfer is often in a non-EDI format:
Proprietary between two users
Industry standard or a general standard
Often used to encourage smaller trading partners to begin using EDI
Useful for low transaction volumes within limited trading communities

36. Differentiate: ERS, P-o-P, EBPP, EIPP
A manufacturer has a long CCC , a strategic partnership with a single supplier, cannot adjust raw materials turnover due to the nature of the process, and must use JIT. Which e-commerce process fits best?
Evaluated receipts settlement (ERS)
Paid-on-production
Electronic bill presentment and payment (EBPP)
Electronic invoice presentment and payment (EIPP)