Treasury Management Fundamentals

Treasury Management Session 2:Managing Cash Flows

1

Treasury Management

Fundamentals

Mark K. Webster, CPA, CCMTreasury Alliance Group LLC

Treasury Management Session 2:

Managing Cash Flows

Disbursements Short Term

Borrowing

and Investing

Cash Collection

and

Concentration

Cash

Forecasting


2

Session 2 Learning Objectives

Upon completion of this session, you should know:

The mechanics and applications of the principal paper and electronic payment instruments

The advantages of over-the-counter systems, mail processing systems (lockboxes, company processing centers) and electronic payment collection networks

The components of collection and disbursement float

The factors impacting the design of a cash concentration system and how to minimize its cost components

Key disbursement products and their applications

The objectives of cash flow forecasting

Various cash forecasting methodologies

The principal features of short-term financing alternatives

3

Cash Collections

& Concentration

Cash Collection System Objectives

Types of Collection Systems

Over the Counter Collections

Mail Collection Systems

Electronic Collection Systems

4


3

Collections: Introduction

Treasury’s fundamental responsibility is to

determine and manage the daily cash position:

Obtain the most favorable investment

returns and yields (which may be more

favorable early in the day)

Meet notification deadlines on borrowing

requirements

Accommodate critical or priority funds

transfers

5

Collection System Objective

Move money into the firm’s banking system as

quickly and cost effectively as possible.

Concentration is getting it to the right place.

6


4

Types of Collection Systems

Over-the-Counter/

Field Deposit

Mail Collection

Systems

Electronic Collection

Systems

7

Collection Float Components

Mail float (1 – 5 days)

Processing float (0 – 1 day)

Availability float (1 – 2 days)

8


5

Over-the-Counter Collections

Types of payment

instruments:

Cash

Checks

Debit/Credit Cards

Issues:

Cost of handling cash

and checks

Availability times for

deposits

Interchange fees

Concentration costs

9

Discussion Question

A retailer gets cash and checks from local banks at each POS. Which

offers cash/coin pickup and delivery and immediate provisional

credit?

a) Depository institution near each field location

b) Smart safes

c) Remote deposit capture (RDC)

d) Armored carriers


6

Over-the-Counter Collections

Finding cash in system improvements:

Check 21 – Remote Deposit Capture

Converting Checks to ACH

POP

BOC

Virtual Vaults and Smart Safes

Remote Cash Capture

PIN debit payments

11

Cash Concentration

Helps to:

Mobilize funds

Minimize excess bank balances

Facilitate daily liquidity

management

The transfer of funds from outlying depository

locations to a central bank account, commonly

referred to as a concentration account

12


7

Cash Concentration System

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Techniques to Reduce Concentration

System Costs: Improve Transfer Timing

Anticipate availability.

Anticipate deposits.

Use a faster transfer

mechanism.

14


8

Techniques to Reduce Concentration

System Costs: Reduce Transfer Costs

Use less expensive

transfer mechanisms.

ACH vs. wire transfers vs

Same Day ACH

Repetitive versus non-

repetitive wires

Adjust target and

threshold concentration.

Threshold concentration

Target concentration

15

Minimum Wire Transfer

AmountTotal ACH costs = $1.00

Total wire transfer costs = $10.00

Opportunity cost of funds = 3.5%

= $93,8570.035

365 Days

$10.00 – $1.00

1 Day

Minimum Transfer =Wire Cost – ACH Cost

Days Accelerated Opportunity Cost

365 Days

16


9

Mail Payment Systems

Company Processing Center Lockbox

Company does its own

processing and deposit

preparation.

Typically used for a large

volume of relatively small-

dollar amounts.

A financial institution or third

party receives payments at

specified post office (lockbox)

addresses, processes the

remittances and deposits

them in the payee’s account.

Can be electronic, paper-

based or a combination of the

two.

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Company Processing Center

Advantages Disadvantages

Control

Flexibility

Customization

Customer service

quality

Access

Updates

Reduced cost

Capital investment and

ongoing administrative

expenses

Reduced efficiency and

slower delivery

Difficulty with

establishing suitable

contingency sites

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10

Types of Lockboxes

Wholesale Configured to process B2B payments; usually for large

amounts and can be matched to specific invoices;

emphasize float reduction and timely handling of

information related to invoices.

Retail Payors are generally consumers; often small-dollar

amounts; frequently involve installments or recurring

payments and scannable remittance documents;

processing cost is more critical than float reduction.

Hybrid Combine features of both wholesale and retail

lockboxes; sometimes called automated wholesale

lockboxes; process both B2B and C2B payments;

processor aggregates remittance data and transmits it

to the company.

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Do We Need a Lockbox?

Benefits

Mail float

Zip codes

Pick up times

Processing float

Operating hours

Technology

Availability float

Other

Audit trail

Security

Contingency sites

Cost?

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11

Do We Need a Lockbox?

Things to consider . . . . . . . . .

Opportunity cost of float/float savings

Amounts

Float times

Opportunity cost

Cost of lockbox service

Internal cost savings

21

Lockbox Selection

Cost/benefit analysis: Lockbox versus company

processing center

Compare differences in collection (mail, processing

and availability) float.

Collection study estimates float savings (endpoint analysis).

Obtain mail time studies from treasury consulting

companies.

Combine mail time studies with availability schedules from

each bank.

Compare differences between fixed and variable

costs.22


12

Electronic Collection Systems

ACH or Wire

Better control of timing

More accurate forecasting

Flexibility of directing payments automatically

Elimination of float

Reduced fraud risk

NACHA’s Secure Vault Payments

23

Negotiating Shared Benefits

Firm’s customers may not be happy about the

loss of float

Remember that your collection float is someone else’s

disbursement float.

Solutions

Change payment timing

Offer a discount for electronic payment (ACH)

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13

Negotiating Shared Benefits

Suppose the time difference between paying by

check and ACH is 3 days.

The customer’s cost of short-term financing is

5.0%.

𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭 = 𝟏 −𝟏

𝟏 + 𝐃𝐚𝐲𝐬𝐎𝐩𝐩. 𝐂𝐨𝐬𝐭

𝟑𝟔𝟓

𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭 = 𝟏 −𝟏

𝟏 + 𝟑𝟎. 𝟎𝟓𝟑𝟔𝟓

𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭 = 𝟎. 𝟎𝟒𝟏%

25

Treasury Management Fundamentals

Disbursement Systems and

Processes


14

Disbursements

Overview of the U.S. Payments System

Paper-Based Payments

The ACH System

Card Payments

Wire Systems (Fedwire & CHIPS)

SWIFT

27

Paper-Based Payments: U.S.

Check System Terminology

Payor: Party who issues check

Payee: Party to whom check is payable

Drawee bank: Payor’s bank

Depository bank: Bank of first deposit

Provisional credit: Ledger credit to payee

Return item: Check rejected by draweebank

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15

Paper-Based Payments:

Sample US Business Check

AUXILLARY

ON-USEPC ROUTING/

TRANSIT

ON-US/ACCOUNT #/

CHECK SERIAL #AMOUNT

01-12 = Fed Reserve District Fed

Office Bank/ Location Check

Digit

Availability

Paper-Based Payments: The

Check Clearing Process

Presentment is key event—delivery of a check (or image substitute check) to the payor’s bank.

Check 21

Image replacement document (IRD)

Remote deposit capture (RDC)

Value is subtracted from bank’s account with:

Federal Reserve Bank

Correspondent bank

Other clearing channel

On-us check clearing

Simultaneous debit and credit

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16

Steps in the Check Clearing System

Company A1. Payor writes

checkCheck

Company B2. Payee receives

check

8. Bankstatement 5. Payment through a

credit to payee’saccount

Bank BPayee’s depository

institution

4. Checkforwarded

5. Paymentthrough acredit

6. Check presented forpayment

5. Paymentthrough adebit topayor’s bank

Bank APayor’s depository

institution

8. Bankstatement

3. Checkdeposited

7. Deposit funds tocover check

Federal Reserve Bank or

correspondent bank or local

clearing house

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Discussion Question

Which type of check clearing requires sorting and transmitting checks as cash letters to the paying bank via a clearinghouse, correspondent bank, direct send, or the central bank (e.g., the Fed)?

a) On-us

b) On-we

c) Transit

d) Foreign


17

Paper-Based Payments:

Clearing Channels

On-us check clearing

On-we check clearing

Transit check clearing

Clearing house

Federal Reserve Bank

Correspondent bank

Direct send or direct exchange

33

Electronic Payments: Electronic

Funds Transfer Systems

Automated

Clearing House

(ACH) System

A network of regional

associations, interbank

associations and private-

sector processors

Fedwire The Federal Reserve funds

transfer system

Clearing House

Interbank

Payments

System (CHIPS)

An independent large-dollar

funds transfer network

operated by the Clearing

House Association

Money transfer

services

Consumer-to-consumer and

consumer-to-business

payment mechanisms 34


18

Electronic Payments:

Check vs. ACH Transactions

Checks ACH Transactions

Paper- or image-based Electronic

Limited to payment

instructions

Can transmit additional payment-

related information

Parties are the payor and the

payee

Parties are the originator and the

receiver

Can only debit a payor’s

account and credit a payee’s

account

Can be either a debit or credit

transaction; credits move funds

from the originator’s account and

debits move funds from the

receiver’s account35

Electronic Payments: ACH

Electronic, batch payments system

Standard settlement = 1 day

May be credit or debit transactions

Prearranged Payment or Deposit (PPD)

Corporate Concentration or Disbursement (CCD)

CCD+

Corporate Trade Exchange (CTX)

POP

ARC

IAT

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http://www.nacha.org/

http://www.nacha.org/


19

Electronic Payments:

ACH Transaction Participants

Receiver

$$

$ $

$

Originating

Depository

Financial

Institution

(ODFI)

Originating

ACH

Operator

$

Receiving

ACH

Operator

Receiving

Depository

Financial

Institution

(RDFI)Originator

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FedGlobal ACH

Credit payments to 35 countries

Currency options

Fixed-to-variable

Fixed-to-fixed – U.S. Dollar

Fixed-to-fixed – Foreign currency

38


20

Outbound IAT Process Flow

Country Border

ODFI sends IAT to US

Gateway Operator

ODFI

US Gateway Operator

Foreign Gateway

Operator

US Gateway Operator can be

a DFI or ACH Operator Foreign Gateway Operator sends payments to

RDFI through domestic payments system in the receiving country.

European Banks

IAT Format

Required forACH transactions

sent through the

US ACH

United States Europe

Foreign Gateway Operator may be a bank

Or ACH Operator in the receiving country.

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Inbound IAT Process Flow

Country Border

Bank A sends a SWIFT

or proprietary message to Bank B

Bank A

Bank B

Foreign

GatewayOperator

US Gateway Operator can be

a DFI or ACH Operator

Foreign Gateway Operator sends a SWIFT

or proprietary message to US Gateway Operator (DFI) the SWIFT message is

translated to the IAT ACH format for

distribution to the US RDFI

Gateway Operator sends

IAT transactions to ACHOperator for distribution

To US RDFIs

US - ACH

Operator

US

RDFI

IAT Format

Required forACH transactions

sent through the

US ACH

EuropeUnited States

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21

Electronic Payments: ACH Advantages

and Disadvantages

Advantages:

Reduced payment costs

Reduced reconciliation and

cash application costs

Faster inflows

Control of payment timing

More accurate forecasting

Increased reliability

Enhanced service

Reduced fraud

Disadvantages:

Reduction in disbursement float

Loss of control with direct debits

System start-up costs

41

Credit Cards

Transaction Participants Card Associations – VISA, Mastercard, Amex, etc.

Bank owned national credit card associations that maintain communication networks to support credit card transaction activities such as authorization, clearing, and settlement.

Banks

Issuing bank maintains individual credit card accounts, bills, and collects payment

Merchant Processor

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22

Credit Cards

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Other Payment Cards

Procurement or Purchasing Cards

Debit Cards

Offline Debit Cards

Processed like a credit card.

No PIN number required

Next Day Settlement

Online Debit Cards

Direct Access to Checking Account

PIN Required

Immediate or same day clearing

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23

Electronic Payments: Fedwire

Both a communications and settlement system

Almost instantaneous transfer of value

Payment finality: Fed guarantees funds

Format: Interface with CHIPS and S.W.I.F.T.

High expense: Sending and receiving institutions may

charge fees

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Discussion Question

Which of the following is true of gross versus net

settlement systems?

a) Net settlement batch processing systems send

the entire amount of each transaction at day’s

end.

b) Gross settlement has a separate value transfer

between payor and payee and is usually

accompanied by real-time settlement.

c) Electronic credit transactions are not considered

final immediately after net settlement.

d) Electronic debits are never reversible.


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Electronic Payments: Types of

Wire Transfers

Wire Classification

Semi-repetitive

Non-repetitive or

free-form

Drawdown

Standing

All information may vary

except sending and

receiving parties.

All information may vary.

Request to a sending

bank for an incoming

transfer.Request to transfer

funds whenever balances

reach a designated level.

Frequent transfers to one

party, many transactions

(e.g., vendor payments)

Any payment

Funds concentration

Description Uses

RepetitiveOnly the date and

amount can vary.

Frequent transfers to

one receiver for recurring

payment (e.g., dividends)

Funds concentration

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Clearing House Interbank

Payments System (CHIPS) Bank-owned, large-dollar funds

transfer network operated by The

Clearing House Association

Real-time intraday net settlement

system providing finality of

payment at time of release

Clearing and settlement (in USD)

CHIPS member banks fund New York

Fed CHIPS accounts.

CHIPS formats: Fedwire, S.W.I.F.T.

Dollar volume is 80% of Fedwire

volume.

48

http://www.chips.org/

http://www.chips.org/


25

Society for Worldwide Interbank Financial

Telecommunication (S.W.I.F.T.)

Not a funds transfer network;

transmits information about

financial transactions

Settlement occurs through Fedwire,

CHIPS, correspondent accounts or

other RTGS systems

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Disbursements

Opportunity costs

Excess borrowing or lost investment income when

idle balances exist in disbursement accounts

Paying bills late or early

Administrative costs

Overhead costs, fixed costs, variable disbursement

costs, overdraft costs, the cost of possible damage

to a banking relationship, account management

costs

The basic goal of managing an accounts payable (A/P)

and disbursement system is to disburse funds in a

timely, accurate and cost-effective manner.

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26

Opportunity Cost

Suppose a firm mails checks to vendors totaling

$7,000,000

The firm borrows against the revolving credit

facility on the day the checks are issued

Interest rate = 2.0%

Total disbursement float time = 6 days

Interest cost = (7,000,000)(6)(0.02/365)

= $2,301.36

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Disbursement Products

Controlled disbursement

Zero balance account (ZBA)

Payable through draft (PTD)

Positive pay

Reverse Positive Pay

Multiple drawee check

Imprest account

52


27

Controlled Disbursement

A bank service

providing notification of

the dollar amount of

checks that will clear

against a controlled

disbursement account

that day.

Daily clearings usually

available by early or

mid-morning.

Adequate funds must

then be provided to the

account to cover the

value of the checks

presented.

53

Zero Balance Account (ZBA)

Disbursement account on which a company issues checks, ACH debits or wires—even though the account balance is kept at zero.

A transfer of funds from a master account (located in the same bank) covers checks debited against a ZBA for payment.

May be multi-tiered so multiple divisions or subsidiaries can write checks on separate accounts all funded by a master account.

Eliminates need for sweep account ??

54


28

Zero Balance Account (ZBA)

Master Account

Checks

Payroll

ACH outflows

Investment

Sweep

Revolving

Credit Line

55

Deposits

Positive Pay

Standard

Matches serial number and dollar amount

Reverse

Firm matches presentment &

disbursement files

Payee Positive Pay

Matches serial number, amount, and

payee

Information from a

firm’s disbursement

file is matched to

checks presented

prior to payment

56


29

Other Disbursement Products

Payable through draft

(PTD)

A payment instrument resembling a check that is

drawn against the payor (not the bank); payor

may honor or refuse payment.

Multiple drawee check Checks that can be presented for payment at a

bank other than the drawee bank; also known as

payable-if-desired (PID) checks.

Imprest account An account maintained at a prescribed level;

periodically replenished.

57

Integrated Payables

Customer “outsources” payables processing to a financial

service provider

A single payment file can contain instructions for multiple

payment types

ACH

Checks

Wire Transfer

58


30

Discussion Question

Which integrated or comprehensive A/P service sends only limited information to the FSP and holds payments until a future transaction date?

a) Sending data file with list of all warehoused payments to be made

b) Sending data file with list of all immediate payments to be made

c) FSP maintaining database of payees and warehousing the items

d) FSP maintaining database of payees and issuing payments immediately


Cash Forecasting


31

Cash Forecasting

Objectives of Cash Forecasting

Forecast Horizons

Cash Flow Components & Certainty

Cash Forecasting Methods

Receipts and Disbursements

Distribution Forecast

Moving Averages

Exponential Smoothing

Basic Regression

61

Objectives of Cash Forecasting

Liquidity management

Financial control

Meeting strategic

objectives

Capital budgeting

Managing costs

Managing currency exposure

62


32

Forecasting Process:

Forecasting HorizonsShort-term Daily, weekly

or monthly

basis

Predict cash receipts and

disbursements and the resulting

balances

Medium-term One to 12

months

Project the inflows (collections

from sales and other sources of

funds) and outflows (expenses

and other uses of funds) on a

monthly basis

Long-term Any period

beyond one

year

Consider projections of long-

term sales, expenditures and

market factors; of strategic

importance

63

Forecasting Process: Cash

Flow Components Operating

Inflows

Product line

Type of customer

Sale region

Outflows

Large-dollar vendor payments

Small-dollar vendor payments

Payroll

Taxes

Other expense categories

Investing

Financing64


33

Forecasting Process:

Degrees of CertaintyKnown in advance (e.g., interest, debt principal repayments, dividends, royalties and tax payments)

Can be predicted with reasonable accuracy; prediction of future cash flows can be made based on past observations (e.g., cash collections from credit sales, payroll and clearing of vendor checks)

Difficult to forecast; involves experience and judgment (e.g., new product sales, unexpected repairs and claims and strike settlements)

65

Forecasting Process: Data

Identification and Organization

Information sources

Identification

Account structure

Reporting requirements

Historical data

66


34

Forecasting Methods

Receipts and disbursements forecast

Receipts schedule

Disbursements schedule

Completed forecast

Distribution forecast

Moving averages


Regression analysis

67

Discussion Question

A daily forecast is performed in a worksheet and takes a half hour to produce. If it is inaccurate 10% of the time, what would be a reason to change this process?

a) This level of inaccuracy is quite high and an investment in more sophisticated tools would be a best practice

b) The firm has excess liquidity on many occasions.

c) This level of inaccuracy creates a large risk of breaching a covenant.

d) The firm should never be forecasting in a worksheet and this is reason enough to invest in a more sophisticated tool


35

Forecasting Methods:

Receipts and Disbursements Forecast

69


Distribution Method

70


36


Statistical Forecasting

Extrapolation Identifies past trends to predict pattern

of future cash flows

Correlation Statistically identifies degree of

association between cash flow and

another variable

Time series Identifies repetitive patterns in a

historical series to predict future values

of the series; simple moving average

bases a forecast on a rolling average of

past values

71

Moving Averages

Day Cash Flow 3-Day MA 5-Day MA

1 $ 115,000

2 $ 120,000

3 $ 125,000

4 $ 118,000 $ 120,000

5 $ 112,000 $ 121,000

6 $ 110,000 $ 118,333 $118,000

7 $ 115,000 $ 113,333 $117,000

8 $ 120,000 $ 112,333 $116,000

9 $ 123,000 $ 115,000 $115,000

10 $ 124,000 $ 119,333 $116,000

72


37

Moving Averages

73


t+1 t tF = X + 1 F

Where:

t = Time period subscript (t = current period, t+1 = next period, etc.)

Ft+1 = Cash flow forecast for the next period (t+1)

Ft = Cash flow forecast for the current period (t)

α = Smoothing constant (0 < α < 1)

Xt = Actual cash flow for the current period (t)

74


38


Day Cash Flow ES (0.5) ES (0.3)

1 $ 115,000

2 $ 120,000

3 $ 125,000

4 $ 118,000

5 $ 112,000

6 $ 110,000

7 $ 115,000 $114,000 $ 115,600

8 $ 120,000 $114,500 $ 115,420

9 $ 123,000 $117,250 $ 116,794

10 $ 124,000 $120,125 $ 118,656

11 $ 126,000 $122,063 $ 120,259

12 $ 128,000 $124,031 $ 121,981

13 $ 132,000 $126,016 $ 123,787

75


76


39

Moving Averages

& Exponential Smoothing

77

Basic Regression

Regression analysis calculates a trend line that is the best fit for the data.

Selects the intercept and the slope that minimizes the (squared) errors when

compared to the sample data.

Y = a + b(X)

78


40

Basic Regression

Regression Statistics

Multiple R 0.6778

R Square 0.4595

Adjusted R Square 0.4294

Standard Error 5189.9548

Observations 20

Coefficients Standard Error t Stat P-value

Intercept 115184.21 2410.897 47.776 0.000

Day 787.22 201.258 3.911 0.001

Cash Flow = 115,184.21 + (787.22)(Day#)

79

Basic Regression

80


41


Short Term Borrowing and Investing

Short Term Borrowing and

Investing

Short-term Investment Objectives

Short-term Investment Instruments

Objectives of Short-term Borrowing

Short-term Funding Alternatives

82


42

Discussion Question

All of the following are related to short-term

financing EXCEPT?

a) it is discussed in terms of target capital

structure.

b) it is concerned with liquidity funding.

c) it is structured to find alternate liquidity sources

such as trade credit or internal borrowing.

d) it is used to finance current assets such as

accounts receivable and inventory.

Why Companies Hold Short-

Term Investments

Reserve liquidity

Temporary surplus funds

Ongoing operations

Seasonal performance

Asset sales

Securities issuance

Income generation

84


43

Short-Term Investment

Objectives

The primary objective of the short-term investment portfolio is

preservation of principal.

Structure the portfolio to limit risk:

Price (interest rate) risk

Default (credit) risk

Liquidity risk

Foreign exchange risk

85

Investment Risk Considerations:

Credit or Default Risk

Risk that payments on a security will not be

made under the original terms.

Credit evaluation assesses default likelihood.

Credit ratings based on default risk, seniority,

collateral, back-up lines of credit or credit

enhancement.

Moody’s

Standard and Poor’s (S&P)

Fitch

86


44

Short-Term Credit Rating Agency

ExamplesMoody’s RatingsPrime-1 (P1) Superior ability for short-term debt repayment

Prime-2 (P2) Strong ability for short-term debt repayment

Prime-3 (P3) Acceptable ability for short-term debt repayment

Not Prime Rated below the first three categories

Standard and Poor’s RatingsA-1+ Top degree of safety for short-term debt repayment

A-1 Strong degree of safety for short-term debt repayment

A-2 High degree of safety for short-term debt repayment

A-3 Acceptable degree of safety for short-term debt

repayment

B Below investment grade87


Interest Rate/Price Risk

Limit price/interest rate risk

Security prices need to have low volatility

Stocks are out (most of the time)

Debt instruments

Remember the inverse relationship between

interest rates and bond prices?

Duration – Volatility increases

with maturity

88


45


Liquidity Risk

Risk a security cannot be sold quickly without taking a significant loss

Marketability

Existence of active secondary market?

Unrated securities may not be liquid; must perform credit analysis.

Maturity

Date on which obligation is settled.

Holding investments over longer time periods increases price risk.

89

Investment Risk:

Other Risks Foreign exchange (FX) risk

Risk of change in FX rates between currency of

security and home currency

Investment policy will usually limit the amount

of the portfolio that may be invested in

securities denominated in a foreign currency

Reinvestment risk Interest rates may decrease as short-term

investments are rolled over

90


46

Yield Curves

91

Short-Term Investment Markets

and Instruments

Market for debt and equity.

Money market for short-term debt securities

Group of over-the-counter markets

Very large and efficient

Capital market for longer-term debt and equity instruments (stocks and bonds)

Sometimes in short-term portfolio directly or via mutual funds

Some highly-rated capital market investments may be included.

92


47

Money Market Instruments

U.S. Treasury bills (T-bills)

Bank issues

Corporate commercial paper (CP)

Municipal notes and CP

Repurchase agreements

Money market mutual funds (MMMFs)

Short-term mutual funds

Federal agency and GSE securities93

Money Market Instruments

CP ABCPBank

Obligations

Government

PaperFRNs Repos

Maturity Overnight–

270 days

Overnight–270

days

1 day–2 years 4–52 weeks Variable Wholly

negotiable

Issued by Companies Companies Banks Government/

public

Companies/

FIs

Companies/

FIs

Interest rate Fixed Fixed Fixed Fixed Variable Negotiable

Interest paid On maturity On maturity During or

maturity

On maturity During or

maturity

On maturity

Issued Discount Discount Interest Discount Interest Discount

Secured No Yes No No Yes/no Yes

Access to

capital before

maturity

Sell on

secondary

market

Sell on secondary

market

Negotiable

CDs sell on

secondary

market

Sell on

secondary

market

Sell on

secondary;

periodic reset

dates

Negotiable

Risks Credit, price Credit, liquidity,

price

Credit,

liquidity

Price Credit,

liquidity

Credit,

liquidity

94


48

U.S. Treasury Bills (T-Bills)

Serve as benchmark for other securities because

they have low liquidity risk and no default risk.

Sold at a discount and issued with original

maturities of less than one year.

Primary offerings are sold through a multiple-price,

sealed-bid auction.

Secondary market is one of the largest in the

world; low transaction costs make the bills highly

marketable.

95

Bank Issues

Banks raise funds in money markets.

Time deposits

Savings accounts, CDs, negotiable CDs ($1 million blocks), non-negotiable

(retail) CDs

Active secondary market for negotiable CDs

Repurchase agreements (repos)

Banker’s acceptances (BAs)

Fed funds

Eurodollar deposits (foreign banks and U.S. foreign branches)

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Commercial Paper

Overnight to 270 days, but most

issued < 45 days

Can be sold on secondary market,

but most held to maturity

Unsecured CP tends to be highly

liquid and have broad range of

maturities

Diversifiable risk

Europe and U.S. have highly

developed markets

Disadvantage is it is not asset-

backed; could have credit

enhancement

Secured against short-term trade

receivables

Single seller

Multi-seller

More security than CP and

liquidity support (credit

enhancement) facilitates timely

repayment

More complex, requires specialist

appraisal and credit monitoring;

moderately higher return

CP ABCP

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Repurchase Agreements (Repos)

A portfolio of government securities sold by a

bank or securities dealer to be repurchased

later for a higher price.

Investor’s return is fixed.

Lender bears price risk but earns profit because

the investor receives a slightly lower return

than it expects to earn.

Most repos are overnight investments but may

be arranged for longer periods.

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MMF Regulations (2016)

Floating NAV for prime institutional funds

Price fluctuation (basis point rounding)

Liquidity Fees

If weekly liquid assets of the fund decline below

30% of total assets, a money market fund my

impose a liquidity fee of up to 2% on redemptions.

Redemption Gates

Exemptions for Government and Retail Funds

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Short-Term Mutual Funds

Offer higher average returns but also a higher risk of losing some NAV.

Not configured to maintain a stable $1.00-per-share NAV.

Imply a purpose beyond liquidity management.

Invest in securities with maturities that exceed most money market instruments.

Average maturity is between one and three years.

Instruments include U.S. Treasuries, CDs, CP or municipal issues.

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Investment Strategies

Matching: Conservative investor

Purchasing securities that mature when funds are required to meet

an expected obligation or obligations.

Riding the yield curve: Aggressive investor

Two strategies for buying highly liquid, marketable securities (T-bills) that mature on a different day from when the investor intends to sell.

Normal yield curve: Purchase maturities past capital need, sell early.

Inverted yield curve: Purchase maturities shorter than capital need, then reinvest.

Tax-based strategies: High-tax-bracket investor

Tax-advantaged mutual funds.

Dividend capture.101

Short-Term Funding Alternatives

Trade credit

Internal borrowing

Asset sales

Commercial bank credit

Single payment notes

Reverse repurchase

agreement

Line of credit

Revolving credit

agreement

Commercial paper (CP)

issuance

Asset-based borrowing

Banker’s acceptance (BA)

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Asset Sales

Factoring The sale or transfer of A/R to a third

party who charges a percentage

commission to the borrower on the

amount of A/R (depending on the

quality of A/R, not company’s

financial statements); with or

without recourse.

Securitization Company issues debt securities

backed by a pool of receivables.

Suitable assets usually have a

predictable cash flow stream to

retire the issue and a low level of

historical loss experience.

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Loan ParticipationLoan Syndication

Commercial Bank Credit: Loan

Syndication and Participation

Multiple financial institutions share a single credit facility.

All syndicate members share documentation; each lender has a promissory note.

A financial institution purchases interest in another lender’s credit facility.

The purchaser is called a participant; the seller is the lead institution.

A participant does not have a separate note.Direct lending relationship

Indirect lending relationship

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Line of Credit Key

Characteristics Lender gives access to funds up to a maximum amount over a

specified period

Usually revolving

Usually has a 30- to 60-day clean-up period

May be secured or unsecured

May be committed or uncommitted:

Committed obligates the buyer to provide funding as long as the buyer is not in default.

Uncommitted can be cancelled by the lender at any time.

Basic cost components for a line of credit:

All-in rate

Commitment fee

Compensating balances105

Revolving Credit Agreement

A “revolver” is a committed line of credit established

for a specified period of time, often on a multiyear

basis.

Involves contractual commitments with covenants and

other loan agreements.

Usually includes a commitment fee on unused portion.

Commitment term of two to five years is

common, followed by payback period.

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Asset-Based Borrowing

The lender sets an

advance rate as a

percentage of A/R

outstanding.

The lender sets an

advance rate as a

percentage of

inventory.

Collateralizing

Accounts Receivable

Collateralizing

Inventory

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Session 2 Learning Objectives

Upon completion of this session, you should know:

The mechanics and applications of the principal paper and electronic payment instruments

The advantages of over-the-counter systems, mail processing systems (lockboxes, company processing centers) and electronic payment collection networks

The components of collection and disbursement float

The factors impacting the design of a cash concentration system and how to minimize its cost components

Key disbursement products and their applications

The objectives of cash flow forecasting

Various cash forecasting methodologies

The principal features of short-term financing alternatives

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Wrap-Up

Mark K. Webster, CCM, CPA

Partner, Treasury Alliance Group LLC

Phone (216) 932-1678 office

[email protected]

Treasury Alliance Group LLC

www.treasuryalliance.com

Session 3

Information Technology

Capital Markets

International Cash Management

Relationship Management and Vendor

Selection

110

mailto:[email protected]


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Treasury Management

Fundamentals

Mark K. Webster, CPA, CCMTreasury Alliance Group LLC

Treasury Management Fundamentals

Documents

Transcript of Treasury Management Fundamentals