2Have you seen this? http://www.afponline.org/pub/cert/examprep.html
3Chapter 8 ties it all together and represents what CTP is really all about Chapter 3 – Managing Relationships with Service ProvidersChapter 4 – Financial Accounting and ReportingChapter 7 – Working Capital ToolsChapter 10 – Payment Systems, Collections and DisbursementsChapter 11 – Money Markets, Short-Term Investing and BorrowingChapter 12 – Capital MarketsChapter 14 – Capital Structure and Dividend PolicyChapter 15 – Operational and Enterprise Risk Management
4Primary objective: Establish closing cash position Plan daily borrowing or investment decisionsWhy?Obtain most favorable investment returns and yieldsMeet notification deadlines on borrowing requirementsAccommodate critical or priority funds transfersProperly plan maturities in investments and borrowing
5Determine daily cash position: Primary objective – plan the day’s borrowing or investment decisions based on projected closing position – shortfall or surplus?Make decisions early in the day – to obtain best investment returns/yields, meet borrowing notification deadlines, fund for important transfers, plan maturities in investments and borrowing.Daily cash position – time-critical, need accurate and timely information, delays in receiving balance and transaction info possible, sometimes using late-closing MMMF or sweeps.
6General objectives of cash management: Maintaining liquidityOptimizing cash resourcesMinimizing cost of short-term borrowingManaging risk and return on short-term borrowingPreventing fraud relating to cash management transactions
7Process considerations: Organization’s industry, size and structureCurrent legal and regulatory environmentCurrent payments systemAvailable payment instrumentsDesign and operate a process that best suits the organization’s needs
8Purpose of liquidity (4 reasons) – short-term investments or borrowing: Transaction requirements – inflows and outflowsPrecautionary requirements – unplanned cash outflowsOpportunistic requirements – funding sudden opportunitiesRegulatory or covenant requirements – required liquidity (ex: insurance or securities) or balance requirements (ex: loan covenant agreements)What is proper level of liquidity?
9Purpose of Stress testing: Contingency funding plan – stress test of short-term liquidityAssume adverse change in funding sources or shock to core business – examplesShould be performed at least annuallyChanges could affect borrowing facilities (loss of or cost increase)Changes could affect credit ratings, violate loan covenants, or cause default on creditTest loss of revenue for period of time due to crisisForecast firm’s capacity for cost-effective debt or cash reserves to survive adversity
10Short-term financing to meet cash needs: Debt used to meet temporary cash needs – one year or lessThree primary sources – spontaneous trade credit, sale or factoring of A/R, borrowing arrangementsBorrowing – banks, finance companies, or issuing short-term debt securitiesMay have option of internal borrowing from subsidiariesConsiderations required – careful planning of current and future credit needs, determining short-term financing objectives, setting overall strategic objectives regarding financing needs
11Three forms of pooling in global concentration of funds: Notional pooling – all company’s subsidiaries use same bank, usually in same country, and all account balances are summed for purpose of calculating interestPhysical pooling – use of a single currency per account and balances are physically transferred into main account (header account) daily, company must keep records of all transfers, interest earned, and investments, can be cross-border since single currency per account, but cross border pooling expensive and complexBank Overlay Structure – combines both sweeping and pooling, typically used when company’s primary bank (overlay bank) has branches (but not full banking services) in other countries, local bank accounts provide collections and disbursement, but sweep funds to primary bank; primary bank can use notional or physical pooling, provides a multi-country solution
12OTC/field deposit systems in USA: A business’ field locations (local offices or branches and retail stores) collect receipts.Retail POS accepts cash, checks and payment cards. A vendor’s office may receive checks or cash from customers or agents. Or, a payee or agent might pick up cash or checks from deliveries to customers.Field accounts at local depository banks offer convenience, security, and more readily available funds. Field location deposits can be delivered by employees or using courier services.Remote Deposit allows organizations to scan and image checks, then transmit the deposit to financial institution or Fed Reserve, clearing the items electronically.Card payment accepted are usually transmitted electronically, with final settlement credits posted directly to the local depository bank.
13Virtual vault services: Utilize armored car or courier services to replace or enhance physical bank branch locationsDeposits delivered directly to organization’s bank or another clearing point (Fed Reserve or branch bank)Offered by banks or third-party non-bank companiesMany offer immediate funds availabilityService may include “smart safe” – verifies cash as deposited into safeAttractive to retailers or other geographically incongruent locationsManage deposits and currency for remote locations – pick-up cash/check deposits and deliver currency and change for cash registersProvides deposit reporting and verification
14Methods of transferring funds in cash concentration system: Most common concentration methods in USA are electronic depository transfers (EDTs) and wire transfers.(1) EDTs are Automated Clearing House (ACH) transactions that concentrate funds using CCD or CCD+ formats. ACHs are inexpensive and usually settle in one business day.(2) Wire transfer (Fedwire in USA) is alternative used for same-day funds transfers, usually processed using repetitive wire instructions. Wires provide immediate funds availability and are helpful to reduce excess balances in accounts. Wire transfers are expensive and are useful to move large dollar transactions with same-day value and finality.
15Formula to determine break-even to justify Wire over ACH: Minimum Transfer = (Wire Cost – ACH Cost) / (Days Accelerated x (Opportunity costs/365))Sample test questions: Keegan’s is contemplating expanding their use of a newly implemented ACH payment platform. They are currently paying $8 for each wire transfer. The cost of an ACH transfer is $.50 and the funds settle on the next day. Keegan currently earns 2% (opportunity cost) on their overnight funds. What is the break-even to justify using a wire over an ACH transaction transfer amount?(A) $127,750(B) $136,875(C) $180,000(D) $182,500Calculation: ($ $0.50) / (1 x (.02/365)) = $136,875Realistic today: ($ $0.50)/(1 x (.0010/365)) = $1,642,500
16Costs of cash concentration systems to be considered: Excess balances – When an account’s average collected balances is greater than the compensating balance required by the depository bank or is greater than the target level of the companyBank charges – Banks may assess fees for almost every service used (examples). Earnings credits from balances may be used to compensate for bank fees. Other vendors used to assist in concentration may also assess fees (examples).Administrative costs & responsibilities – Company’s costs to operate a concentration system (examples).
18Five steps in forecasting process: Forecasting horizonsShort-term financingMedium-term financingLong-term financingCash flow componentsDegree of certaintyData identification and organizationSelections and validation of the forecasting method
19Degrees of certainty when developing cash forecasts: Certain flows – interest and principal repayments, dividends, taxesPredictable flows – collection of credit sales, disbursement for payroll and benefits, vendor check clearing patternsLess predictable flows – sale of new product, unexpected repairs, legal litigation
20Data identification and organization Information sources – internal and external, cash forecasting softwareIdentification – centralized or decentralized companyAccount structure – bank accounts, concentration, controlled disbursements, ZBAReporting requirements – useful data, accuracy, timelyHistorical data – predicting based on prior periods
22Testing and validating forecasting model(s): In-Sample validation – predicting data series from historical data, no data available for new modelsOut-of-Sample validation – using data not used to develop model, projecting forwardOngoing validation – projected versus actualDocument the process – allows others to understand
23Types of forecasting methods: Short-term methods – expected receipts and disbursements, effect on cash flowReceipts and disbursements forecast – prepare separate schedules, cash vs. accrualDistribution forecasts – daily impact of event over specified period based on historical patterns, simple average or regression analysisMedium- and Long-term methods – using internal accounting data and financialsStatistical forecasting – using past trends to predict future patterns
24Types of statistical forecasting techniques: Time series forecasting – serial chains of values for variables, uses statisticsSimple moving average – rolling average of past values for a seriesExponential smoothing – weighting by use of smoothing constant, calculated using computer softwareCorrelation and regression – involve degree of association, single variable or multiple variables
25Purpose of closing cash position: Cash manager’s function – (1) mobilize funds to arrive at the closing cash position and (2) provide timely and accurate reports to optimize use of available fundsProjected closing cash position = opening available bank balance(s) + expected receipts – expected disbursementsReceipts – Deposits (lockbox deposits, remote deposit capture, virtual vault services, OTC), ACH collections, incoming wires and transfers, concentration accounts (retail or field locations)Disbursements – Checks paid (controlled disbursement funding, estimated non-ZBA checks) ACH payments, outgoing wires and transfers, virtual vault services (currency or change for cash registers)Usually best to use some type of cash position worksheet – Excel, Treasury workstation, bank software
26Internal control issues: System of checks and balancesMonitoring transactions, cash flows and information within organizationMatching process – (1) looks for possible errors in amounts, prices and other provisions (EX: Invoice => Original P.O. => Agreed terms => Receiving records => Order received (2) compare amounts deposited with sales/field records and determine whether transactions are authorizedSegregation of duties – important to keep functions for collections and disbursements of funds separate. In addition, separate approvals, authorizations and verification functions. If staff size limitations prevent segregating responsibilities, consider outsourcing.
27Minimize risk of bank failures: Monitor creditworthiness of each bank in organization’s concentration process.Great Recession of – almost 150 banks failed in USA, primarily smaller community banks often used in retail/field deposit systems.Greatest risk if company’s main cash management bank fails.
28Questions or Discussion? Contact info:Grace KramerTexas Association of School Boards,12007 Research Blvd., Austin, TXPhone:
29Sample test questions: 1, Disbursing all cash outflows via a single ZBA is an example of which forecasting factor?(A) Historical data(B) Reporting requirements(C) Account structure(D) Information sources2. A company’s payroll for the next 3 months is an example of:(A) Less predictable cash flows(B) Certain flows(C) Long-term forecasting(D) Predictable flows3. The most important reason for cash forecasting is:(A) Managing costs(B) Capital budgeting(C) Liquidity management(D) Managing currency exposure
30Sample test questions: 4. Which of the following activities is an important element of the cash flow timeline?(A) Purchasing raw materials and/or finished goods(B) Developing annual sales goals and projections(C) Reviewing the positive pay exception report(D) Automating the daily cash position worksheet5. On Friday, the manager of a sporting goods retail store made a wire transfer to the main operating account based on his weekend sales projections. He is using:(A) Deposit anticipation.(B) Availability anticipation.(C) Threshold concentration.(D) ZBA structure.
31Sample test questions: 6. What is the most effective way to combat ACH Kiting?(A) Dual verification of disbursements(B) Proper firewalls(C) Positive pay(D) ACH debit block7. General control and fraud prevention measures should include which of the following:(A) Combining authority for collection and disbursement(B) Reviewing and reconciling bank statements annually for the auditors(C) Allowing all employees access to company master files(D) Using payment authorization services similar to positive pay
32Sample test questions: 8. A global company’s main cash management bank has branches that are unable to provide all of the banking services needed by the company in foreign countries. The company’s best option is to utilize:(A) Notional pooling(B) Bank overlay structure(C) Virtual vault services(D) Physical pooling9. What best reduces the risk of internal fraud:(A) Implementing positive pay(B) Separating disbursements and account reconcilement duties(C) Payee verification(D) Blocking unauthorized ACH debits
33Sample test questions: 10. Opening account bank balance plus expected settlements minus projected disbursements equals:(A) Check float(B) Account analysis charges(C) Moving average account balance(D) Projected closing cash position11. Cooperation with purchasing, accounts receivable, accounts payable, risk management, pension management, auditing, tax and general ledger are all required for effective:(A) Collaboration.(B) Information sharing.(C) Cash management.(D) Resource planning.
34Sample test questions: 12. A treasury analyst uses a computer program to find the alpha value weight. Which cash forecasting methodology is she using?(A) Exponential smoothing(B) Receipts and disbursements(C) Simple moving average(D) Distribution13. A cash manager compiling a cash forecast starts by projecting the income statement and balance sheet. He is most likely using which method of forecasting?(A) Receipts and Disbursement(B) Distributive sales(C) Short-term borrowing and investing(D) Percentage-of-sales
35Sample test questions: 14. A startup company is developing their new cash forecasting model. Which method would be most useful for them to test their model?(A) Ongoing validation(B) In-sample validation(C) Out-of-sample validation(D) Documentary validation15. The PRIMARY goal of Treasury is to:(A) Manage receivables(B) Maintain investments(C) Utilize cash efficiently(D) Maintain credit ratingsANSWER KEY: