Presentation is loading. Please wait.

Presentation is loading. Please wait.

CTP Exam Preparation- Essentials of Treasury Management, 3ed. Chapter 6: Intro. To Working Capital Management Chapter 7: Working Capital Tools 1 Presented.

Similar presentations


Presentation on theme: "CTP Exam Preparation- Essentials of Treasury Management, 3ed. Chapter 6: Intro. To Working Capital Management Chapter 7: Working Capital Tools 1 Presented."— Presentation transcript:

1 CTP Exam Preparation- Essentials of Treasury Management, 3ed. Chapter 6: Intro. To Working Capital Management Chapter 7: Working Capital Tools 1 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 2

3 The Cash Conversion Cycle Order Credit Sale $$$$ Order Credit Sale $$$$ Received Received Received Received (DIH) (DSO) Time  Time  (DPO) (DPO) Invoice Received $$$$ Disbursed Invoice Received $$$$ Disbursed Order Credit Sale $$$$ Order Credit Sale $$$$ Received Received Received Received (DIH) (DSO) Time  Time  (DPO) (DPO) Invoice Received $$$$ Disbursed Invoice Received $$$$ Disbursed

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

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

6 6 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 – Result: Lower profit likely Less risk 7

8 Current Asset Financing Strategies Maturity Matching Conservative Aggressive 8

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

10 Standards - Five C’s of Credit C haracter Willingness to pay -- evidenced by payment history C apacity Current and future financial resources that can be committed to pay obligations C apital Short- and long-term financial resources -- supplement insufficient cash flow C ollateral Assets or guarantees to secure an obligation if non-payment C onditions 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 Form Payment Due Interest? Customer Type Payment restore available credit? Open Account (Open Book) By invoice per terms of sale No – unless late payment B2BYes Installment Credit Monthly – equal payments of Prin. & Int. YesB2CNo Revolving Credit (Like credit cards) Monthly – on unpaid amounts plus current month purchases Yes – on unpaid balances B2CYes Letter of Credit – Int’l Trade May be sight or deferred SometimesBothSometimes

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 12

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

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

15 Documentary Collection Note: Banks act only as collecting and paying agents and do not guarantee payment v3.0 © 2011 Association for Financial Professionals. All rights reserved. 5-Pay6-Docs 7-Pay 4-Docs 2-Ship 1-Agree 3-Docs8-Pay Buyer (Importer) Seller (Exporter) Foreign Collecting Bank Remitting Bank

16 Commercial vs. Standby L/Cs Commercial Issued by a bank Payment mechanism Ensures payment for the shipment of merchandise Typically requires presentation of a draft, commercial invoice and shipping documents Standby 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 v3.0 © 2011 Association for Financial Professionals. All rights reserved. 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)

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

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 19

20 A/P Responsibilities Vouchering – 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 20 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 23

24 Float Neutral Calculation v3.0 © 2011 Association for Financial Professionals. All rights reserved. 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 Payment timing changesSeller 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.

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%? v3.0 © 2011 Association for Financial Professionals. All rights reserved. Where: D = Discount percentage — 2% N = Net period — 30 days T = Discount period — 10 days

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 v3.0 © 2011 Association for Financial Professionals. All rights reserved. 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

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 27

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: v3.0 © 2011 Association for Financial Professionals. All rights reserved. If the company’s credit terms are net 60, the average past due is computed as follows:

29 Aging Schedule Separates A/R into current and past-due receivables in 30-day increments Can determine the percent past due v3.0 © 2011 Association for Financial Professionals. All rights reserved. Age of A/RAmount of A/R% of Total A/R Current$1,750,00070% 1-30 days past due375,00015% days past due250,00010% Over 60 days past due125,0005% Total$2,500,000100%

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

31 Multilateral Netting 31

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

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

34 Electronic Data Interchange (EDI) v3.0 © 2011 Association for Financial Professionals. All rights reserved. Structured electronic transactions Secure messages, no data reentry Buy sideSell 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 EDICross-industry EDI

35 Use of the Internet for E-Commerce and EDI Internet-based e-commerce 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 Internet-enabled EDI Often used to encourage smaller trading partners to begin using EDI Useful for low transaction volumes within limited trading communities 35

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? a)Evaluated receipts settlement (ERS) b)Paid-on-production c)Electronic bill presentment and payment (EBPP) d)Electronic invoice presentment and payment (EIPP) 36


Download ppt "CTP Exam Preparation- Essentials of Treasury Management, 3ed. Chapter 6: Intro. To Working Capital Management Chapter 7: Working Capital Tools 1 Presented."

Similar presentations


Ads by Google