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International Cash Management

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Presentation on theme: "International Cash Management"— Presentation transcript:

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 Funding Cash Management Investment The Treasurer
Risk Management Bank Relations Foreign Exchange 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 anb

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

11 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 £40 £20 £20 Stock labour Sale £80 purchases Profit?
Cash Balance? 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 Receivables Conversion Receivables/Debtors x 365 Turnover anb

15 Balance Sheet Short Term Items
Current assets Inventories , ,903 Trade and other receivables , ,625 Current tax assets Other financial assets Cash and short term assets 4, ,523 Current liabilities Short term borrowings Trade and other payables , ,735 Current tax liabilities Other financial liabilities Short term provisions 1, ,477 Turnover ,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 Bank Services 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 anb

24 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 anb

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

26 Speeding Receivables Stating 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? anb

28 Payables Management Improving Performance
Timing – credit period, float neutral Costs – discounts, zero balance, avoid penalties, forward value and forward plan, consolidate payments, use repetitives where possible, STP, BICs and IBANs 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 days Operating Cycle 143 From:Fundamentals of Contemporary Financial Management, 2nd ed , by Moyer, McGuigan and Rao anb

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