anb 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

The Treasurer

Funding

Cash Management Investment

Bank Relations

Foreign Exchange

Risk Management

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

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We Need Liquidityfor

• Day to day transactions• Precautionary balances• Compensating balances• Obtaining discounts• Acid tests• Favourable opportunities• Overall, avoiding bankruptcy!

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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

StockStock

£20

£20

£40

purchases

Sale £80

Profit?

Cash Balance?

labour

anb 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

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 733 917

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 82 130

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

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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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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?

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• Improving Performance

1. Timing – credit period, float neutral

2. Costs – discounts, zero balance, avoid penalties, forward value and forward plan, consolidate payments, use repetitives where possible, STP, BICs and IBANs

Payables Management

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

Purchase Resources 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