1. International Cash Management
Introduction and First Steps
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2. Agenda The Role of Treasury Definition of Cash Management
Benefits of Cash Management
Liquidity
Working Capital
Float
Receivables/Payables Management
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3. The Role of Treasury Funding Cash Management Investment The Treasurer
Risk Management
Bank Relations
Foreign Exchange
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4. Risk Management Currency Risk - Transaction - Translation - Economic
Interest Rate Risk
Other Risks
- Counter-party Risk
- Settlement Risk
- Systemic Risk
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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
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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
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7. Benefits of Good Cash Management
Control of financial risk
Opportunity for profit
Strengthened balance sheet
Increased customer, supplier, and shareholder confidence
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8. Nature of Cash Flows
Different industries have different cash flow characteristics
Timing and mismatches
Fluctuations
Predictability
Currency
Location
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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
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10. We Need Liquidity for Day to day transactions Precautionary balances
Compensating balances
Obtaining discounts
Acid tests
Favourable opportunities
Overall, avoiding bankruptcy!
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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?
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12. The Cash Cycle £40 £20 £20 Stock labour Sale £80 purchases Profit?
Cash Balance?
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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
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14. Operating Cycles Inventory Conversion Inventory x 365
Cost of Goods Sold
Payables Conversion
Payables/Creditors x 365
Receivables Conversion
Receivables/Debtors x 365
Turnover
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15. Balance Sheet Short Term Items
Current assets
Inventories , ,903
Trade and other receivables , ,625
Current tax assets
Other financial assets
Cash and short term assets
4, ,523
Current liabilities
Short term borrowings
Trade and other payables , ,735
Current tax liabilities
Other financial liabilities
Short term provisions
1, ,477
Turnover ,577
Cost of goods sold 8,943
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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
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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
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18. Why Does Float Arise? Deliberately Inefficiency Logistical situations
Compensation mechanism
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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
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20. 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
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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
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22. Impact of Poor Receivables Management
Important because of costs arising from
Float
Bad debts
Management time
Legal fees
Impact on analysts and creditors
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23. Speeding Receivables Terms of trade Clear instructions
Method of payment
Account structures
Documentation
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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
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25. Speeding Receivables Penalties Post dated cheques Legal process
Internal process
Stop supply
Learn customer practices
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26. Speeding Receivables Stating the Obvious
Receivables management is a Team Effort
Never forget the Relationship
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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?
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28. Payables Management Improving Performance
Timing – credit period, float neutral
Costs – discounts, zero balance, avoid penalties, forward value and forward plan, consolidate payments, use repetitives where possible, STP, BICs and IBANs
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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
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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 days
Operating Cycle
143
From:Fundamentals of Contemporary Financial Management, 2nd ed
, by Moyer, McGuigan and Rao
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