Introduction and First Steps
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The Role of Treasury
Definition of Cash Management
Benefits of Cash Management
Liquidity
Working Capital
Float
Receivables/Payables Management
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Funding
Investment
Cash Management
The Treasurer
Risk Management
Bank Relations
Foreign Exchange
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Currency Risk
- Transaction
- Translation
- Economic
Interest Rate Risk
Other Risks
- Counter-party Risk
- Settlement Risk
- Systemic Risk
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The effective planning, monitoring and
management of liquid / near liquid resources
including:
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Day-to-day cash control
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Money at the bank
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Receipts
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Payments
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Short Term investments and borrowings
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FX
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The effective planning, monitoring and management of
liquid / near liquid resources including:
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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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Control of financial risk
Opportunity for profit
Strengthened balance sheet
Increased customer, supplier, and shareholder
confidence
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Different industries have different cash flow
characteristics
 Timing and mismatches
 Fluctuations
 Predictability
 Currency
 Location
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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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Day to day transactions
Precautionary balances
Compensating balances
Obtaining discounts
Acid tests
Favourable opportunities
Overall, avoiding bankruptcy!
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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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£40
labour
£20
Stock
Stock
Sale
purchases
£80
Profit?
Cash
£20
Balance?
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Purchase Resources
Pay
Sell on Credit
Inventory Conversion
Payables Period
Receive Cash
Receivables Conversion
Cash Conversion Cycle
Operating Cycle
From:Fundamentals of Contemporary Financial Management, 2nd ed , by Moyer,
McGuigan and Rao
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Inventory Conversion/Days Inventory
Inventory x 365
Cost of Goods Sold
Payables Conversion/Days Payable
Payables
x 365
Cost of Goods Sold
Receivables Conversion/Days Receivable
Receivables
x 365
Turnover
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Current assets
Inventories
Trade and other receivables
Current tax assets
Other financial assets
Cash and short term assets
Current liabilities
Short term borrowings
Trade and other payables
Current tax liabilities
Other financial liabilities
Short term provisions
2013
2012
1,910
1,713
13
43
733
4,412
1,903
1,625
78
917
4,523
355
1,690
121
119
82
1,367
555
1,735
44
13
130
2,477
Turnover
9,577
Cost of goods sold 8,943
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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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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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Deliberately
Inefficiency
Logistical situations
Compensation mechanism
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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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Actions
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Change own systems
Educate customers
Include costs in prices
Negotiate with bank
Bank Services
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Lockbox
Intervention accounts
Remote disbursement
Controlled disbursement
Direct collections
Efficient collections structure
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Good receivables and payables management
aids in:
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Cash flow forecasting
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Long-term funding and investment decisions
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Reduced risk of bad debts
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Stronger liquidity
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Stronger balance sheet ratios
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Important because of costs arising from
 Float
 Bad debts
 Management time
 Legal fees
 Impact on analysts and creditors
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Terms of trade
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Settlement
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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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Terms of trade
Clear instructions
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Such As
 Beneficiary name
 Bank code
 Account number (IBANs) e.g.
GB 19 Loyd 3508 2500 7568 22
 Transfer method
 Value date
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Terms of trade
Clear instructions
Method of payment
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Float
Value dating
Availability
Finality
Cost
Security
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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.
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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
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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
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Availability
The time when the beneficiary actually has
access to the funds i.e. to use to make a
payment
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The time after which a payment is
considered to become irrevocable and
cannot be returned without the permission
of the beneficiary account holder.
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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
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Terms of trade
Clear Instructions
Method of payment
Account structures
Documentation
Educate customer
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Penalties
Post dated cheques
Legal process
Internal process
Stop supply
Learn customer practices
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Receivables management is a Team Effort
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Never forget the Relationship
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Obvious but critical questions:
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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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
1.
2.
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
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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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Purchase Resources
Pay
Sell on Credit
Receive Cash
Inventory Conversion 78 days
Payables Period
69 days
Receivables Conversion
65 days
Cash Conversion Cycle
74 days
Operating Cycle
143
From:Fundamentals of Contemporary Financial Management, 2nd ed
, by Moyer, McGuigan and Rao
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