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International Cash Management

International Cash Management. Introduction and First Steps. Agenda. The Role of Treasury Definition of Cash Management Benefits of Cash Management Liquidity Working Capital Float Receivables/Payables Management. The Role of Treasury. Funding. Investment. Cash Management.

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International Cash Management

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  1. International Cash Management Introduction and First Steps anb

  2. Agenda • The Role of Treasury • Definition of Cash Management • Benefits of Cash Management • Liquidity • Working Capital • Float • Receivables/Payables Management anb

  3. The Role of Treasury Funding Investment Cash Management The Treasurer Risk Management Bank Relations Foreign Exchange anb

  4. Risk Management • Currency Risk - Transaction - Translation - Economic • Interest Rate Risk • Other Risks - Counter-party Risk - Settlement Risk - Systemic Risk anb

  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 anb

  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 anb

  7. Benefits of Good Cash Management • Control of financial risk • Opportunity for profit • Strengthened balance sheet • Increased customer, supplier, and shareholder confidence anb

  8. Nature of Cash Flows Different industries have different cash flow characteristics • Timing and mismatches • Fluctuations • Predictability • Currency • Location anb

  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 anb

  10. We Need Liquidityfor • Day to day transactions • Precautionary balances • Compensating balances • Obtaining discounts • Acid tests • Favourable opportunities • Overall, avoiding bankruptcy! anb

  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? anb

  12. The Cash Cycle £40 Stock Stock £20 labour Sale £80 £20 purchases Profit? Cash Balance? anb

  13. Operating Cycle PurchaseResources 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

  14. Operating Cycles • Inventory Conversion Inventory x 365 Cost of Goods Sold • Payables Conversion Payables/Creditors x 365 Cost of Goods Sold • Receivables Conversion Receivables/Debtors x 365 Turnover anb

  15. Balance SheetShort Term Items Current assets Inventories 1,910 1,903 Trade and other receivables 1,713 1,625 Current tax assets 13 - Other financial assets 43 78 Cash and short term assets 733917 4,412 4,523 Current liabilities Short term borrowings 355 555 Trade and other payables 1,690 1,735 Current tax liabilities 121 44 Other financial liabilities 119 13 Short term provisions 82130 1,367 2,477 Turnover 9,577 Cost of goods sold 8,943 anb

  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 anb

  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 anb

  18. Why Does Float Arise? • Deliberately • Inefficiency • Logistical situations • Compensation mechanism anb

  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 anb

  20. Ways to Control Float • Actions • 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

  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 anb

  22. Impact of Poor Receivables Management Important because of costs arising from • Float • Bad debts • Management time • Legal fees • Impact on analysts and creditors anb

  23. Speeding Receivables • Terms of trade • Clear instructions • Method of payment • Account structures • Documentation anb

  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 anb

  25. Speeding Receivables • Penalties • Post dated cheques • Legal process • Internal process • Stop supply • Learn customer practices anb

  26. Speeding ReceivablesStating the Obvious • Receivables management is a Team Effort • Never forget the Relationship anb

  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? anb

  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 anb

  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 anb

  30. Operating Cycle PurchaseResources Pay Sell on Credit Receive Cash Inventory Conversion 78 days Receivables Conversion 65 days Payables Period Cash Conversion Cycle 69 days 74 days Operating Cycle 143 From:Fundamentals of Contemporary Financial Management, 2nd ed , by Moyer, McGuigan and Rao anb

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