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Anb1 International Cash Management Introduction and First Steps.

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Presentation on theme: "Anb1 International Cash Management Introduction and First Steps."— Presentation transcript:

1 anb1 International Cash Management Introduction and First Steps

2 anb2 Agenda The Role of Treasury Definition of Cash Management Benefits of Cash Management Liquidity Working Capital Float Receivables/Payables Management

3 anb3 The Role of Treasury The Treasurer Funding Cash ManagementInvestment Bank Relations Foreign Exchange Risk Management

4 anb4 Risk Management Currency Risk - Transaction - Translation - Economic Interest Rate Risk Other Risks - Counter-party Risk - Settlement Risk - Systemic Risk

5 anb5 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

6 anb6 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

7 anb7 Benefits of Good Cash Management Control of financial risk Opportunity for profit Strengthened balance sheet Increased customer, supplier, and shareholder confidence

8 anb8 Nature of Cash Flows Different industries have different cash flow characteristics Timing and mismatches Fluctuations Predictability Currency Location

9 anb9 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

10 anb10 We Need Liquidity for Day to day transactions Precautionary balances Compensating balances Obtaining discounts Acid tests Favourable opportunities Overall, avoiding bankruptcy!

11 anb11 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?

12 anb12 The Cash Cycle Stock £20 £40 purchases Sale £80 Profit? Cash Balance? labour

13 anb13 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, 2 nd ed, by Moyer, McGuigan and Rao

14 anb14 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

15 anb15 Balance Sheet Short Term Items Current assets Inventories 1,910 1,903 Trade and other receivables 1,713 1,625 Current tax assets 13 - Other financial assets Cash and short term assets ,412 4,523 Current liabilities Short term borrowings Trade and other payables 1,690 1,735 Current tax liabilities Other financial liabilities Short term provisions ,367 2,477 Turnover 9,577 Cost of goods sold 8,943

16 anb16 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

17 anb17 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

18 anb18 Why Does Float Arise? Deliberately Inefficiency Logistical situations Compensation mechanism

19 anb19 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

20 anb20 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

21 anb21 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

22 anb22 Impact of Poor Receivables Management Important because of costs arising from Float Bad debts Management time Legal fees Impact on analysts and creditors

23 anb23 Speeding Receivables Terms of trade Clear instructions Method of payment Account structures Documentation

24 anb24 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

25 anb25 Speeding Receivables Penalties Post dated cheques Legal process Internal process Stop supply Learn customer practices

26 anb26 Speeding Receivables Stating the Obvious Receivables management is a Team Effort Never forget the Relationship

27 anb27 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?

28 anb28 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

29 anb29 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

30 anb30 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, 2 nd ed, by Moyer, McGuigan and Rao


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