Table of Contents
Chapter 1 - Treasury Management .............................................................................Error! Bookmark not defined.
Treasury Responsibilities............................................................................................. Error! Bookmark not defined.
Treasurer Job Description ........................................................................................... Error! Bookmark not defined.
Treasury Organizational Structure .............................................................................. Error! Bookmark not defined.
Treasury Centralization ............................................................................................... Error! Bookmark not defined.
Treasury Outsourcing.................................................................................................. Error! Bookmark not defined.
The Performance Culture ............................................................................................ Error! Bookmark not defined.
Schedule of Activities .................................................................................................. Error! Bookmark not defined.
Process Reviews .......................................................................................................... Error! Bookmark not defined.
Department Layout ..................................................................................................... Error! Bookmark not defined.
Skills Review and Training ........................................................................................... Error! Bookmark not defined.
Chapter 2 - Bank Relations ..........................................................................................Error! Bookmark not defined.
Bank Centralization..................................................................................................... Error! Bookmark not defined.
Banker Dialog ............................................................................................................. Error! Bookmark not defined.
Frequency of Reporting ............................................................................................... Error! Bookmark not defined.
Bank Fees .................................................................................................................... Error! Bookmark not defined.
Loan Covenants........................................................................................................... Error! Bookmark not defined.
Collateral .................................................................................................................... Error! Bookmark not defined.
Account Signers .......................................................................................................... Error! Bookmark not defined.
Credit Assessment ....................................................................................................... Error! Bookmark not defined.
Causes for Change ...................................................................................................... Error! Bookmark not defined.
Chapter 3 - Cash Concentration ..................................................................................Error! Bookmark not defined.
The Need for Cash Concentration ............................................................................... Error! Bookmark not defined.
Cash Sweeping ............................................................................................................ Error! Bookmark not defined.
The Zero Balance Account ...................................................................................... Error! Bookmark not defined.
Multiple Sweep Arrangements ............................................................................... Error! Bookmark not defined.
Manual Sweeping ................................................................................................... Error! Bookmark not defined.
Sweeping Rules ....................................................................................................... Error! Bookmark not defined.
Sweep Problems ..................................................................................................... Error! Bookmark not defined.
Sweep Costs ............................................................................................................ Error! Bookmark not defined.
Summary ................................................................................................................. Error! Bookmark not defined.
Notional Pooling ......................................................................................................... Error! Bookmark not defined.
Notional Pooling Problems ..................................................................................... Error! Bookmark not defined.
Notional Pooling Costs ............................................................................................ Error! Bookmark not defined.
Summary ................................................................................................................. Error! Bookmark not defined.
Multi-Tiered Banking .................................................................................................. Error! Bookmark not defined.
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Hybrid Pooling Solutions ............................................................................................. Error! Bookmark not defined.
Cash Concentration Best Practices ............................................................................. Error! Bookmark not defined.
Cash Concentration Alternatives ................................................................................ Error! Bookmark not defined.
Chapter 4 - Cash Forecasting .......................................................................................Error! Bookmark not defined.
The Cash Forecast ....................................................................................................... Error! Bookmark not defined.
The Short-Term Cash Forecast................................................................................ Error! Bookmark not defined.
The Medium-Term Cash Forecast ........................................................................... Error! Bookmark not defined.
The Long-Term Cash Forecast................................................................................. Error! Bookmark not defined.
The Use of Averages ............................................................................................... Error! Bookmark not defined.
Automated Cash Forecasting ...................................................................................... Error! Bookmark not defined.
The Reliability of Cash Flow Information .................................................................... Error! Bookmark not defined.
The Impact of Special Events ...................................................................................... Error! Bookmark not defined.
Cash Forecasting Documentation ............................................................................... Error! Bookmark not defined.
The Foreign Currency Cash Forecast ........................................................................... Error! Bookmark not defined.
Cash Forecast Reconciliation ...................................................................................... Error! Bookmark not defined.
Chapter 5 - Clearing and Settlement Systems .............................................................Error! Bookmark not defined.
The Clearing and Settlement Process ......................................................................... Error! Bookmark not defined.
Correspondent Banks .................................................................................................. Error! Bookmark not defined.
Check Clearing ............................................................................................................ Error! Bookmark not defined.
Foreign Check Clearing ............................................................................................... Error! Bookmark not defined.
The Automated Clearing House System (ACH) ........................................................... Error! Bookmark not defined.
CHIPS ........................................................................................................................... Error! Bookmark not defined.
Fedwire ....................................................................................................................... Error! Bookmark not defined.
CHAPS ......................................................................................................................... Error! Bookmark not defined.
TARGET2 ..................................................................................................................... Error! Bookmark not defined.
Continuous Linked Settlement .................................................................................... Error! Bookmark not defined.
SWIFT .......................................................................................................................... Error! Bookmark not defined.
Chapter 6 - Investment Management .........................................................................Error! Bookmark not defined.
Investment Guidelines ................................................................................................ Error! Bookmark not defined.
Cash Availability Scenarios ......................................................................................... Error! Bookmark not defined.
Investment Strategy.................................................................................................... Error! Bookmark not defined.
Types of Investments .................................................................................................. Error! Bookmark not defined.
Repurchase Agreements ......................................................................................... Error! Bookmark not defined.
Time Deposits ......................................................................................................... Error! Bookmark not defined.
Certificates of Deposit ............................................................................................ Error! Bookmark not defined.
Bankers’ Acceptances ............................................................................................. Error! Bookmark not defined.
Commercial Paper .................................................................................................. Error! Bookmark not defined.
Money Market Funds ............................................................................................. Error! Bookmark not defined.
ii
U.S. Government Debt Instruments ....................................................................... Error! Bookmark not defined.
State and Local Government Debt.......................................................................... Error! Bookmark not defined.
Bonds ...................................................................................................................... Error! Bookmark not defined.
The Primary and Secondary Markets .......................................................................... Error! Bookmark not defined.
The Discounted Investment Formula .......................................................................... Error! Bookmark not defined.
Chapter 7 - Equity Financing .......................................................................................Error! Bookmark not defined.
Regulation A Stock Sales ............................................................................................. Error! Bookmark not defined.
Solicitations of Interest ........................................................................................... Error! Bookmark not defined.
Forms 1-A and 2-A .................................................................................................. Error! Bookmark not defined.
Regulation D Stock Sales ............................................................................................. Error! Bookmark not defined.
Regulation D Rules .................................................................................................. Error! Bookmark not defined.
Regulation D Process Flow ...................................................................................... Error! Bookmark not defined.
The Form D Filing .................................................................................................... Error! Bookmark not defined.
The Accredited Investor .............................................................................................. Error! Bookmark not defined.
Private Investments in Public Equity ........................................................................... Error! Bookmark not defined.
Seasoned Equity Offerings .......................................................................................... Error! Bookmark not defined.
The Rights Offering ..................................................................................................... Error! Bookmark not defined.
Dilution ....................................................................................................................... Error! Bookmark not defined.
Chapter 8 - Debt Financing ..........................................................................................Error! Bookmark not defined.
Overview of Debt Financing ........................................................................................ Error! Bookmark not defined.
The Line of Credit ........................................................................................................ Error! Bookmark not defined.
The Borrowing Base .................................................................................................... Error! Bookmark not defined.
Invoice Discounting ..................................................................................................... Error! Bookmark not defined.
Factoring ..................................................................................................................... Error! Bookmark not defined.
Receivables Securitization........................................................................................... Error! Bookmark not defined.
Inventory Financing .................................................................................................... Error! Bookmark not defined.
Loan Stock ................................................................................................................... Error! Bookmark not defined.
Purchase Order Financing ........................................................................................... Error! Bookmark not defined.
Hard Money Loans ...................................................................................................... Error! Bookmark not defined.
Mezzanine Financing .................................................................................................. Error! Bookmark not defined.
The Long-Term Loan ................................................................................................... Error! Bookmark not defined.
Bonds .......................................................................................................................... Error! Bookmark not defined.
Debt for Equity Swaps ................................................................................................. Error! Bookmark not defined.
Chapter 9 - Supply Chain Financing .............................................................................Error! Bookmark not defined.
Supply Chain Financing ............................................................................................... Error! Bookmark not defined.
Early Payment Discounts ............................................................................................ Error! Bookmark not defined.
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Chapter 10 - Treasury Risk Management ....................................................................Error! Bookmark not defined.
Benefits of Risk Management ..................................................................................... Error! Bookmark not defined.
Funding Risk ................................................................................................................ Error! Bookmark not defined.
Credit Policy Risk ......................................................................................................... Error! Bookmark not defined.
Credit Exposure Risk .................................................................................................... Error! Bookmark not defined.
Terms Alterations ................................................................................................... Error! Bookmark not defined.
Receivables Financing ............................................................................................. Error! Bookmark not defined.
Outside Financing ................................................................................................... Error! Bookmark not defined.
Portfolio Approach to Risk ...................................................................................... Error! Bookmark not defined.
Cross-Selling Credit Exposure Risk .............................................................................. Error! Bookmark not defined.
Credit Concentration Risk ........................................................................................... Error! Bookmark not defined.
Foreign Exchange Risk Overview ................................................................................ Error! Bookmark not defined.
Foreign Exchange Risk Management.......................................................................... Error! Bookmark not defined.
Take No Action........................................................................................................ Error! Bookmark not defined.
Avoid Risk................................................................................................................ Error! Bookmark not defined.
Shift Risk ................................................................................................................. Error! Bookmark not defined.
Time Compression .................................................................................................. Error! Bookmark not defined.
Payment Leading and Lagging ................................................................................ Error! Bookmark not defined.
Build Reserves......................................................................................................... Error! Bookmark not defined.
Maintain Local Reserves ......................................................................................... Error! Bookmark not defined.
Hedging ................................................................................................................... Error! Bookmark not defined.
Summary ................................................................................................................. Error! Bookmark not defined.
Types of Foreign Exchange Hedges ............................................................................. Error! Bookmark not defined.
Loan Denominated in a Foreign Currency .............................................................. Error! Bookmark not defined.
The Forward Contract ............................................................................................. Error! Bookmark not defined.
The Futures Contract .............................................................................................. Error! Bookmark not defined.
The Currency Option............................................................................................... Error! Bookmark not defined.
The Cylinder Option ................................................................................................ Error! Bookmark not defined.
Swaps ...................................................................................................................... Error! Bookmark not defined.
Netting ........................................................................................................................ Error! Bookmark not defined.
Interest Risk Overview ................................................................................................ Error! Bookmark not defined.
Interest Rate Risk Management ................................................................................. Error! Bookmark not defined.
Take No Action........................................................................................................ Error! Bookmark not defined.
Avoid Risk................................................................................................................ Error! Bookmark not defined.
Asset and Liability Matching ................................................................................... Error! Bookmark not defined.
Hedging ................................................................................................................... Error! Bookmark not defined.
Types of Interest Rate Hedges .................................................................................... Error! Bookmark not defined.
The Forward Rate Agreement ................................................................................ Error! Bookmark not defined.
The Futures Contract .............................................................................................. Error! Bookmark not defined.
The Interest Rate Swap ........................................................................................... Error! Bookmark not defined.
Interest Rate Options.............................................................................................. Error! Bookmark not defined.
Interest Rate Swaptions .......................................................................................... Error! Bookmark not defined.
Chapter 11 - Insurance ................................................................................................Error! Bookmark not defined.
Insurance Distribution ................................................................................................. Error! Bookmark not defined.
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Insurance Policy Terms and Conditions....................................................................... Error! Bookmark not defined.
Indemnity................................................................................................................ Error! Bookmark not defined.
Deductibles ............................................................................................................. Error! Bookmark not defined.
Limit of Insurance ................................................................................................... Error! Bookmark not defined.
Coinsurance ............................................................................................................ Error! Bookmark not defined.
Exclusions ............................................................................................................... Error! Bookmark not defined.
Insurance Riders ..................................................................................................... Error! Bookmark not defined.
Perils ....................................................................................................................... Error! Bookmark not defined.
Endorsements ......................................................................................................... Error! Bookmark not defined.
Who is the Payee? ...................................................................................................... Error! Bookmark not defined.
Insurance Company Analysis ...................................................................................... Error! Bookmark not defined.
Insurer Financial Performance .................................................................................... Error! Bookmark not defined.
Boiler and Machinery Insurance ................................................................................. Error! Bookmark not defined.
Business Interruption Insurance.................................................................................. Error! Bookmark not defined.
Policy Inclusions ...................................................................................................... Error! Bookmark not defined.
Additional Coverages .............................................................................................. Error! Bookmark not defined.
Management Actions ............................................................................................. Error! Bookmark not defined.
Commercial Automobile Insurance ............................................................................. Error! Bookmark not defined.
Commercial Crime Insurance ...................................................................................... Error! Bookmark not defined.
Commercial General Liability Insurance ..................................................................... Error! Bookmark not defined.
Coverage Limitations .............................................................................................. Error! Bookmark not defined.
Umbrella Coverage ................................................................................................. Error! Bookmark not defined.
Credit Insurance .......................................................................................................... Error! Bookmark not defined.
Directors and Officers Liability Insurance ................................................................... Error! Bookmark not defined.
Management Actions ............................................................................................. Error! Bookmark not defined.
Additional Coverages .............................................................................................. Error! Bookmark not defined.
Inland Marine Insurance ............................................................................................. Error! Bookmark not defined.
Life Insurance .............................................................................................................. Error! Bookmark not defined.
Property Insurance ...................................................................................................... Error! Bookmark not defined.
Types of Property ................................................................................................... Error! Bookmark not defined.
Policy Inclusions ...................................................................................................... Error! Bookmark not defined.
Policy Exclusions ..................................................................................................... Error! Bookmark not defined.
Additional Coverages .............................................................................................. Error! Bookmark not defined.
Coverage Limitations .............................................................................................. Error! Bookmark not defined.
Valuation Issues ...................................................................................................... Error! Bookmark not defined.
Management Actions ............................................................................................. Error! Bookmark not defined.
Surety Bonds ............................................................................................................... Error! Bookmark not defined.
Surplus Lines Insurance ............................................................................................... Error! Bookmark not defined.
Managing the Cost of Insurance ................................................................................. Error! Bookmark not defined.
Broker Training ....................................................................................................... Error! Bookmark not defined.
Odds Analysis .......................................................................................................... Error! Bookmark not defined.
Insurer Messaging................................................................................................... Error! Bookmark not defined.
Covered Items Analysis ........................................................................................... Error! Bookmark not defined.
Double Coverage Analysis....................................................................................... Error! Bookmark not defined.
Split Limits Elimination ........................................................................................... Error! Bookmark not defined.
v
Continual Policy Updates ........................................................................................ Error! Bookmark not defined.
Unlikely Payouts ..................................................................................................... Error! Bookmark not defined.
Non-Comparability ................................................................................................. Error! Bookmark not defined.
Deductibles Analysis ............................................................................................... Error! Bookmark not defined.
Small Claims Avoidance .......................................................................................... Error! Bookmark not defined.
Self-Funded Insurance ............................................................................................ Error! Bookmark not defined.
Captive Insurance Company ................................................................................... Error! Bookmark not defined.
Insurance Claims Administration ................................................................................ Error! Bookmark not defined.
Chapter 12 - Credit Management ................................................................................Error! Bookmark not defined.
Overview of the Credit Policy ...................................................................................... Error! Bookmark not defined.
Credit Policy: Mission .................................................................................................. Error! Bookmark not defined.
Credit Policy: Goals ..................................................................................................... Error! Bookmark not defined.
Credit Policy: Responsibilities ...................................................................................... Error! Bookmark not defined.
Credit Policy: Required Documentation ...................................................................... Error! Bookmark not defined.
Credit Policy: Review Frequency ................................................................................. Error! Bookmark not defined.
Credit Policy: Credit Calculation .................................................................................. Error! Bookmark not defined.
Credit Policy: Terms of Sale ......................................................................................... Error! Bookmark not defined.
Credit Policy: Revision Frequency................................................................................ Error! Bookmark not defined.
The Credit Application................................................................................................. Error! Bookmark not defined.
Adjustments to the Credit Application ........................................................................ Error! Bookmark not defined.
Trade References ........................................................................................................ Error! Bookmark not defined.
Updating the Credit Application ................................................................................. Error! Bookmark not defined.
The Credit Rating ........................................................................................................ Error! Bookmark not defined.
Internal Credit Rating Systems.................................................................................... Error! Bookmark not defined.
Third Party Credit Ratings ........................................................................................... Error! Bookmark not defined.
Use of Credit Ratings .................................................................................................. Error! Bookmark not defined.
Credit Rating Errors .................................................................................................... Error! Bookmark not defined.
Credit Documentation................................................................................................. Error! Bookmark not defined.
Indicators of Future Payment Delinquency ................................................................. Error! Bookmark not defined.
Ongoing Credit Monitoring Actions ............................................................................ Error! Bookmark not defined.
Requests for Credit Increases ...................................................................................... Error! Bookmark not defined.
The Riskiest Customers ............................................................................................... Error! Bookmark not defined.
Chapter 13 - Working Capital Management ................................................................Error! Bookmark not defined.
The Nature of Working Capital ................................................................................... Error! Bookmark not defined.
The Importance of Working Capital ............................................................................ Error! Bookmark not defined.
The Optimum Amount of Working Capital ................................................................. Error! Bookmark not defined.
Zero Working Capital .................................................................................................. Error! Bookmark not defined.
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Working Capital for a Growing Business .................................................................... Error! Bookmark not defined.
Working Capital for a Declining Business ................................................................... Error! Bookmark not defined.
Responsibility for Working Capital.............................................................................. Error! Bookmark not defined.
The Receivables Component of Working Capital ........................................................ Error! Bookmark not defined.
Receivables Strategy ................................................................................................... Error! Bookmark not defined.
Inventory Strategy ...................................................................................................... Error! Bookmark not defined.
Replenishment Strategy ......................................................................................... Error! Bookmark not defined.
Fulfillment Strategy ................................................................................................ Error! Bookmark not defined.
Customization Strategy........................................................................................... Error! Bookmark not defined.
Startup Outsourcing Strategy ................................................................................. Error! Bookmark not defined.
Payables Strategy ....................................................................................................... Error! Bookmark not defined.
Chapter 14 - Accounting for Treasury Transactions .....................................................Error! Bookmark not defined.
Other Comprehensive Income ..................................................................................... Error! Bookmark not defined.
Investment Classifications .......................................................................................... Error! Bookmark not defined.
The Realized and Unrealized Gain or Loss .................................................................. Error! Bookmark not defined.
Purchase and Sale of Investments .............................................................................. Error! Bookmark not defined.
The Gain or Loss Calculation ................................................................................... Error! Bookmark not defined.
Noncash Acquisition of Securities .......................................................................... Error! Bookmark not defined.
Assignment of Costs to Securities ........................................................................... Error! Bookmark not defined.
Lump-Sum Purchases.............................................................................................. Error! Bookmark not defined.
Restricted Stock ...................................................................................................... Error! Bookmark not defined.
Conversion of Securities ......................................................................................... Error! Bookmark not defined.
Sale of Securities ..................................................................................................... Error! Bookmark not defined.
Accounting for Dividends and Interest Income ........................................................... Error! Bookmark not defined.
Stock Dividends and Stock Splits ............................................................................ Error! Bookmark not defined.
Noncash Dividends ................................................................................................. Error! Bookmark not defined.
Ongoing Accounting for Investments ......................................................................... Error! Bookmark not defined.
Investment Transfers .............................................................................................. Error! Bookmark not defined.
The Effective Interest Method ................................................................................ Error! Bookmark not defined.
Impairment of Investments......................................................................................... Error! Bookmark not defined.
What is a Derivative? .................................................................................................. Error! Bookmark not defined.
Hedge Accounting - General ....................................................................................... Error! Bookmark not defined.
Hedge Accounting – Fair Value Hedges ...................................................................... Error! Bookmark not defined.
Hedge Accounting – Cash Flow Hedges ...................................................................... Error! Bookmark not defined.
Accounting for Insurance ............................................................................................ Error! Bookmark not defined.
Insurance Payments ............................................................................................... Error! Bookmark not defined.
Claims Receipts ....................................................................................................... Error! Bookmark not defined.
Chapter 15 - Treasury Management Systems ..............................................................Error! Bookmark not defined.
Components of a Treasury Management System ....................................................... Error! Bookmark not defined.
Advantages of a Treasury Management System ........................................................ Error! Bookmark not defined.
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Disadvantages of a Treasury Management System ................................................... Error! Bookmark not defined.
Additional TMS Considerations ................................................................................... Error! Bookmark not defined.
Data Feeds .................................................................................................................. Error! Bookmark not defined.
Chapter 16 - Treasury Controls ...................................................................................Error! Bookmark not defined.
The Cash Forecasting Controls Environment .............................................................. Error! Bookmark not defined.
The Funds Investment Control Environment ............................................................... Error! Bookmark not defined.
The Foreign Exchange Hedge Control Environment.................................................... Error! Bookmark not defined.
The Debt Procurement Control Environment .............................................................. Error! Bookmark not defined.
The Stock Issuance Control Environment .................................................................... Error! Bookmark not defined.
Additional Treasury Controls – Fraud Related ............................................................ Error! Bookmark not defined.
Terminating Controls .................................................................................................. Error! Bookmark not defined.
Chapter 17 - Treasury Measurements .........................................................................Error! Bookmark not defined.
Treasury Metrics ......................................................................................................... Error! Bookmark not defined.
Cash Conversion Cycle ................................................................................................ Error! Bookmark not defined.
Days Sales in Accounts Receivable ......................................................................... Error! Bookmark not defined.
Days Sales in Inventory ........................................................................................... Error! Bookmark not defined.
Days Payables Outstanding .................................................................................... Error! Bookmark not defined.
Actual Cash Position versus Forecast .......................................................................... Error! Bookmark not defined.
Earnings on Invested Funds ........................................................................................ Error! Bookmark not defined.
Ability to Pay Measurements ...................................................................................... Error! Bookmark not defined.
Interest Coverage Ratio .......................................................................................... Error! Bookmark not defined.
Debt Service Coverage Ratio .................................................................................. Error! Bookmark not defined.
Fixed Charge Coverage Ratio .................................................................................. Error! Bookmark not defined.
Cash Coverage Ratio ............................................................................................... Error! Bookmark not defined.
Debt to Equity Ratio .................................................................................................... Error! Bookmark not defined.
Average Cost of Debt .................................................................................................. Error! Bookmark not defined.
Borrowing Base Usage ................................................................................................ Error! Bookmark not defined.
Additional Treasury Measurements ............................................................................ Error! Bookmark not defined.
Answers to Chapter Questions....................................................................................Error! Bookmark not defined.
Glossary ......................................................................................................................Error! Bookmark not defined.
Index .........................................................................................................................Error! Bookmark not defined.
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Preface
The treasurer is responsible for a broad range of activities, which include bank relations, cash
forecasting, investments, fund raising, risk management, and even insurance. These are critical high-risk
activities, so the treasurer must also have a detailed knowledge of processes, controls, and treasury
management systems. The Treasurer’s Guidebook addresses all of these topics and more, with the intent
of giving a new treasurer a solid grounding in how to perform the job.
The book is divided into three sections. In Chapters 1 through 10, we focus on the core treasury
activities, which begin with an overview of treasury management and then walk through all major job
functions. In Chapters 11 through 13, we cover ancillary treasury functions that may not always be in
included in a treasurer’s job description. These functions are insurance, credit management, and
working capital management. In Chapters 14 through 17, we cover the treasury back office, which deals
with administrative functions.
You can find the answers to many questions about treasury activities in the following chapters,
including:
 What are the differences between cash sweeping and notional pooling?
 How do I create a cash forecast?
 Which investment strategy should I follow?
 How can I reduce the risk of foreign exchange fluctuations?
 Which types of insurance does my business need?
 How do I create an internal credit rating system for customers?
 What is the proper accounting for a hedging transaction?
 What are the components of a treasury management system?
 Which controls should be applied to the various treasury transactions?
The Treasurer’s Guidebook is designed primarily for professionals, who can use it as a reference tool for
all aspects of the treasurer’s job, from accounting to risk management.
Centennial, Colorado
October 2015
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