Presentation is loading. Please wait.

Presentation is loading. Please wait.

CTP Exam Preparation- Essentials of Treasury Management, 3ed.

Similar presentations

Presentation on theme: "CTP Exam Preparation- Essentials of Treasury Management, 3ed."— Presentation transcript:

1 CTP Exam Preparation- Essentials of Treasury Management, 3ed.
Chapter 6: Intro. To Working Capital Management Chapter 7: Working Capital Tools Presented By: Susan Etheredge, CTP, CICM CTM Director Baylor University

2 Chapter 6: Introduction to Working Capital Management
Outline: The Cash Conversion Cycle (CCC) How Changes in Current Accounts Impact External Financing Working Capital Investment and Financing Strategies Management of Credit and A/R Management of Inventory Management of A/P

3 The Cash Conversion Cycle
Order Credit Sale $$$$ Received Received < Inventory > < Accounts Receivable > (DIH) (DSO) Time  < Accounts Payable > < CCC > (DPO) Invoice Received $$$$ Disbursed

4 Cash Conversion Cycle (CCC)
Formula: CCC = DIH + DSO – DPO Days Inventory Held Days Receivables/Sales Outstanding Days Payables Outstanding

5 Calculation of CCC and Cash Turnover
Calculate the CCC and Cash Turnover given the following: Days inventory = 45 days Days receivables = 35 days Days payables = 30 days CCC = DIH + DSO + DPO CCC = – 30 = 50 days Cash Turnover = 365/CCC = 365/50 = 7.3 times

6 Spontaneous Assets & Liabilities
Current Assets Inventory and Accounts Receivable As sales increase, inventory and A/R also increase, resulting in larger dollar amounts invested in those accounts. Increase results in decreased cash and/or increased debt Current Liabilities Accounts Payable and Accruals A decrease results in decreased cash and/or increased debt

7 Current Asset Investment Strategies
Restrictive Low levels of current assets relative to sales. Raw materials investment is tightly managed using JIT. A/R and cash balances are kept low. Result: Greater profit possible Greater risk Relaxed High levels of current assets relative to sales. High levels of cash High levels of A/R Lower profit likely Less risk

8 Current Asset Financing Strategies
Maturity Matching Conservative Aggressive

9 Credit Policies Policies should clearly define: Credit standards
Credit terms Discount terms Collection policies

10 Standards - Five C’s of Credit
Character Willingness to pay -- evidenced by payment history Capacity Current and future financial resources that can be committed to pay obligations Capital Short- and long-term financial resources -- supplement insufficient cash flow Collateral Assets or guarantees to secure an obligation if non-payment Conditions Economic environment impacting customer’s ability to pay, or willingness of a company to grant credit v3.0 © 2011 Association for Financial Professionals. All rights reserved.

11 Forms of Credit Extension
Payment Due Interest? Customer Type Payment restore available credit? Open Account (Open Book) By invoice per terms of sale No – unless late payment B2B Yes Installment Credit Monthly – equal payments of Prin. & Int. B2C No Revolving (Like credit cards) Monthly – on unpaid amounts plus current month purchases Yes – on unpaid balances Letter of Credit – Int’l Trade May be sight or deferred Sometimes Both

12 Common Terms of Sale Cash before delivery (CBD) Cash on delivery (COD)
Cash terms Net terms Discount terms Monthly billing Draft/bill of lading Seasonal dating Consignment

13 Financing A/R Unsecured borrowing Secured borrowing Securitization
Captive finance subsidiary Third-party financing B2B credit cards Factoring Private-label financing

14 Cross-Border Trade Management
Other methods: Banker’s acceptances (BAs) Trade acceptances Barter Countertrade Trading companies

15 Foreign Collecting Bank
Documentary Collection Note: Banks act only as collecting and paying agents and do not guarantee payment 5-Pay 6-Docs 7-Pay 4-Docs 2-Ship 1-Agree 3-Docs 8-Pay Buyer (Importer) Seller (Exporter) Foreign Collecting Bank Remitting Bank v3.0 © 2011 Association for Financial Professionals. All rights reserved.

16 Commercial vs. Standby L/Cs
Issued by a bank Payment mechanism Ensures payment for the shipment of merchandise Typically requires presentation of a draft, commercial invoice and shipping documents Issued primarily by U.S. banks “Stands by”-not intended as payment mechanism Ensures the performance of a bank’s customer (applicant) to a third-party (beneficiary) Typically requires the presentation of a sight draft and notice of non-performance by the applicant

17 L/C Transaction 3-Issue L/C 7-Docs Advising/ Negotiating Bank
2-Apply for L/C 10-Docs, when pymt. arranged 11-B/A presented 7-Docs 5-Ship 1-Agree 6-Docs 4-Advise L/C 3-Issue L/C 8-B/A 9-Pay Issuing Bank Advising/ Negotiating Bank Buyer (Importer) Seller (Exporter) (Beneficiary) v3.0 © 2011 Association for Financial Professionals. All rights reserved.

18 Inventory Policy Reasons for holding Types held Levels of inventory
Benefits and costs of holding Financing

19 JIT Inventory Management
Minimizes inventory Often paired with MPS. Retailers link to POS equipment. Goals: Eliminate waste. Standardize the production process. Continuously improve quality. Benefits: Improved supplier relationships lower transaction costs better planning Supplier-managed replenishment programs Paid-on-production processes

20 A/P Responsibilities Vouchering Disbursement System
Verify incoming invoices and authorize payments. Traditional three-way match: Invoice matched to both an approved purchase order and receiving information. Disbursement System Information Fraud Prevention Relationship with Payees P.O. Invoice Goods Rec’d.

21 Chapter 7: Working Capital Tools
Outline: Treasury Management Timelines Cash Discount Calculations Cash Conversion Cycle (CCC) A/R Monitoring and Control Considerations for Global Management of Working Capital E-Commerce

22 Cash Flow Timeline and Float
v3.0 © 2011 Association for Financial Professionals. All rights reserved.

23 Collection vs. Disbursement Float
Mail float Processing float Clearing or Availability float (depends on POV) Mail Processing Collection \ Availability POV of Payee Disbursement \ Clearing POV of Payor

24 Float Neutral Calculation
Payment timing changes Seller adjusts the timing (i.e., value date) of the payment. Price changes (discount offer) Seller offers buyer a cash discount to compensate for earlier payment. Discount depends on buyer’s cost of funds and timing difference in days. Example: r = 12% and TD = 3 days. Where: TD = Total days difference between check and electronic payments r = Opportunity cost as an annual rate v3.0 © 2011 Association for Financial Professionals. All rights reserved.

25 Cost for a Buyer of Not Taking a Cash Discount
Terms: 2/10 net 30 Should a discount be taken if the cost of short-term funds is 8%? Where: D = Discount percentage—2% N = Net period—30 days T = Discount period—10 days v3.0 © 2011 Association for Financial Professionals. All rights reserved.

26 Offering a Cash Discount: Benefit/Cost for Seller
Terms are 2/10, net 30. Seller’s opportunity cost of funds is 15% $100,000 sale Sellers induce early payment or offer discount to be competitive. Where TAFP = total amount of full payment; CC = annual opportunity cost of capital (in this example, 15%); D = discount rate; T = days in discount period; N = days in net period v3.0 © 2011 Association for Financial Professionals. All rights reserved.

27 Monitoring A/R Monitoring individual accounts allows identification of: Errors or delays in the invoicing or payment that are slowing collections Customers who may delay payment intentionally A change in financial condition that may alter a customer’s ability to make timely payments and require the curtailment of future credit sales Monitoring aggregate A/R allows identification of: Changes in financing needs Changes in business

28 Days’ Sales Outstanding (DSO)
Assume: outstanding receivables of $285,000 at the end of the first quarter credit sales of $310,000 for the quarter. Using a 90-day averaging period, the DSO is computed as follows: If the company’s credit terms are net 60, the average past due is computed as follows: v3.0 © 2011 Association for Financial Professionals. All rights reserved.

29 Aging Schedule Separates A/R into current and past-due receivables in 30-day increments Can determine the percent past due Age of A/R Amount of A/R % of Total A/R Current $1,750,000 70% 1-30 days past due 375,000 15% 31-60 days past due 250,000 10% Over 60 days past due 125,000 5% Total $2,500,000 100% v3.0 © 2011 Association for Financial Professionals. All rights reserved.

30 A/R Balance Pattern for March
=+$ 25,000 =+$160,000 =+$105,000 =+$ 50,000 v3.0 © 2011 Association for Financial Professionals. All rights reserved.

31 Multilateral Netting

32 Leading and Lagging Leading Lagging Paying before
Payor’s currency is expected depreciate Lagging Paying after Payor’s currency is expected to appreciate

33 Re-Invoicing v3.0 © 2011 Association for Financial Professionals. All rights reserved.

34 Electronic Data Interchange (EDI)
Structured electronic transactions Secure messages, no data reentry Buy side Sell side Purchasing Order placement Receiving A/P Sales Order processing Shipping A/R Exclusive use of trading partners Retail, transportation, automotive ASC X12 UN/EDIFACT Proprietary EDI Cross-industry EDI v3.0 © 2011 Association for Financial Professionals. All rights reserved.

35 Use of the Internet for E-Commerce and EDI
Internet-based e-commerce Internet-enabled EDI Uses the Internet and Internet technology to link business applications between trading partners Data transfer is often in a non-EDI format: Proprietary between two users Industry standard or a general standard Often used to encourage smaller trading partners to begin using EDI Useful for low transaction volumes within limited trading communities

36 Differentiate: ERS, P-o-P, EBPP, EIPP
A manufacturer has a long CCC , a strategic partnership with a single supplier, cannot adjust raw materials turnover due to the nature of the process, and must use JIT. Which e-commerce process fits best? Evaluated receipts settlement (ERS) Paid-on-production Electronic bill presentment and payment (EBPP) Electronic invoice presentment and payment (EIPP)

Download ppt "CTP Exam Preparation- Essentials of Treasury Management, 3ed."

Similar presentations

Ads by Google