AFP - Treasury4 - Session CHP 7 and 8

The Treasury Management Environment
Session 4, Module Two:

Chapter 7:
Relationship
Management and
Vendor Selection
Session 4, Module Two:
The Treasury Management Environment
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Overview - 2
Chapter 7: Relationship Management and
Vendor Selection
v4.0 2013 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 7 - 3
Outline:
Relationship
Management
Vendor Selection
Process
Bank Compensation
Practices
Assessing Service Provider
Risk
Book of business and profitability
Bundling
Unbundling for global market
TWIST standards
Fees, interest vs. earnings credits
Bank Compensation and Billing
Discussion Question
In a back-valued withdrawal, the date of the
customer account debit is _______ the actual
date the item is deducted from the ledger
balance.
a) earlier than
b) later than
c) the same as
d) unrelated to
Answer: a. Bank sets forward value date when
value is credited and back value date when value
is debited. (p.2-242)
Discussion Question
Answer: d (p.2-244)

What does an account analysis statement provide?
Services provided
Balances maintained
Volumes processed
Charges assessed

a) Standardized
terminology
b) Imputed interest for
non-US branches
c) Value dating
d) Earnings credit
allowances

Standards
AFP Service Codes
ASC X12 822 and TWIST BSB
Average ledger balance
Average deposit float
Average collected balance
Reserve requirement
FDIC fees
Service charges
Available balance
Earnings credit allowance and ECR

Account Analysis
Earnings Credit
Where:
EC = Earnings credit
CB = Average collected balances
RR = Reserve requirement
ECR = Earnings credit rate
D = Number of days in the month
| |
|
\ .
D
EC = CB (1 RR) ECR
365
Earnings Credit
Scenario:
Average ledger balance $250,000
Deposit float $30,000
Reserve requirement 10%
Earnings credit rate 1%
Service charges for the month $1,000
Days in month 30
Average Collected Balance Calculation:
Average ledger balance $250,000
Less: Deposit float ($30,000)
Equals: Average collected balance $220,000
| |
|
\ .
| |
|
\ .
D
EC = CB (1 RR) ECR
365
30
= $220,000 (1 0.10) 0.01
365
= $220,000 0.9 (0.01 0.0822) = $162.76
Collected Balances Required
Where:
CB = Average collected balances required to pay service charges
SC = Service charges
ECR= Earnings credit rate
RR = Reserve requirement
D = Number of days in the month
| |

|
\ .
SC
CB =
D
ECR (1 RR)
365
Collected Balances Required
Scenario:
Monthly service charges $1,000
Earnings credit rate 1%
Reserve requirement 10%
Days in month 30
( ) ( )
| |

|
\ .
| |

|
\ .
SC
CB =
D
ECR (1 RR)
365
$1,000
=
30
0.01 (1 0.10)
365
$1,000 $1,000
= = = $1,351,716.68
0.01 0.0822 0.9 0.0007398
Company perspective
Fees when investment
or repayment > ROI on
earnings credit
(Excess) balance
compensation:
Better FI loan prices
Less visible (budget)
Tax status
ECRs may exceed
short-term rates
Bank perspective
Fees
Deposits are liabilities
Low-risk earnings
Balances fund loans
and investments at
rates > ECR
Fee versus Balance Compensation
Operational Risk for Service Providers
SSAE 16 (AICPA)
ISAE 3402 (IAASB)
Service auditors
report:
Type 1: Controls
Type 2: In use and
effective?
Value to service
providers:
Unqualified opinion
differentiates
Builds customer trust
One report for all
customers
Customer can give
report to its auditors
Uniform Bank Performance Report (UBPR)
FFIEC analytics to supervise, examine and
manage banks
Data types:
Specific banks data
Peer group
Percentile rankings
Compare to peer group, trends over time, and
trends and changes in peer averages
Assessing Financial Risk for FIs
Sovereign risk
Political risk
Nationalization
Expropriation
Blocked currencies
Forced reinvestment
Required majority ownership
Sovereign and Political Risk
Discussion Question
An FI is a lender and a bond trustee. Which is a
risk if the borrower becomes distressed?
a) Conflict of interest, if FI protects own credit to
detriment of borrower and bondholders
b) Financial risk, if borrower default lowers FIs UBPR
score
c) Notional barrier or wall risk, if information
flows are prevented
d) Commissions or fees risk, if they could
really be bribes

Answer: a (p.2-257)
Working Capital Management
Session 4, Module Three:
Chapter 8:
Introduction to
Working Capital
Management
Session 4, Module Three:
Working Capital Management
Outline:
Overview of Working Capital
The Working Capital 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
Multi-National Working Capital Management Tools
Chapter 8: Introduction to Working Capital
Management
Cash Conversion Cycle
BORROW
INVEST
Operating Cash Flows
Cash outflows
(disbursements)
Cash inflows
(various sources)
$ $
$
Concentration/
funding flows
Liquidity
management
flows
Surplus
Suitable investments
Pay down debt
Shortage
Sell investments
Draw on debt
Purchase-to-Pay Timeline
Source
Suppliers
Select
Supplier
and Goods
Negotiate
Payment
Terms
Arrange
Credit
Send PO
Receive
Goods and
Invoice
Send
Payment
Reconcile
and
Account
Analyze
and
Review
Discussion Question
Which purchase-to-pay step starts the collection-
to-cash cycle (and relates to inventory cycle cash
flows), and which order-to-cash step ends it?
a) Send and receive PO
b) Ship and receive goods and invoice
c) Send and receive payment
d) Reconcile and account
Answer: c (p.3-204)
Raw Materials
Work in
Progress
Finished
Goods
Order-to-Cash Timeline
Source
Customers
Quote Price
Negotiate
Sales
Terms
Manage
Credit
Receive PO
Ship Goods
and Send
Invoice
Receive
Payment
Reconcile
and
Account
Analyze
and
Review
Working
Capital
Float Timeline
Payment Float 30+
days
Invoicing Float 40+
days
Disbursement/
Collection Float
15 days
Purchases
Invoice
Received
Invoice
Paid
Payment
Posted
Order & Invoice
Preparation
Credit Period
Payment Collection &
Application
Entry Ship
Invoice
Prep
Invoice
Sent
Payable
Policy
Check
Prep
Mail Process Availability
Delays
Two Sides of Float
Discussion Question
The delay between when a payment is initiated
and __________ is called what?
a) seller/payees account is credited: called
disbursement float
b) seller/payees account is debited: called
collection float
c) buyer/payors account is credited: called
collection float
d) buyer/payors account is debited: called
disbursement float

Answer: d (p.3-12)
Payment timing
changes

Seller adjusts timing (i.e.,
value date) of payment

Price changes
(discount offer)
Seller offers buyer a cash
discount for earlier payment
Benefits of Float Reduction
Sell and Collect Purchase and Build
Discount approach
r = 12%
TD = 3 days
Float Neutral Calculation
(
| |
|
(
\ .

(
| |
|
(
\ .

+

+

1
Discount = 1
r
1 TD
365
1
= 1
12%
1 3
365
1
= 1 = 1 0.99901467
1.0009863
= 0.00098533 = 0.001 (Rounded) or 0.10%
Where:
TD = Total days
difference between
check and electronic
payments
r = Opportunity cost
as annual rate
Elements of Cash Flow
Purchase
Raw
Materials
Store and
Produce
Goods
Sell Goods
Collect Cash
Holding Period
(Inventory Days)
Conversion
Period (A/R Days)
Payment Period
(A/P Days)
Cash Flow
Timing
Difference
+ =
Pay Supplier Cash Conversion Cycle
Elapsed Days
0 30 45 60
Discussion Question
What is a companys CCC and cash turnover given the
following?
Days inventory = 45
Days receivables = 35
Days payables = 30

a) 50 days; 6.6 times
b) 50 days; 7.3 times
c) 55 days; 6.6 times
d) 55 days; 7.3 times


Answer : b (p.3- 20)
CCC = Days' Inventory + Days' Receiveables
Days' Payables
CCC = 45 + 35 30 = 50 days
365 365
Cash Turnover = = = 7.3 Times
CCC 50
Discussion Question
Answer: b (p.3-21)

Why else use caution if reducing A/R and inventory
conversion or extending A/P deferral periods?
Production stoppages from
poor materials or parts
A/P stretched past due
Lost trade discounts
Higher vendor charges
from small orders or
slow payment

a) Overly loose credit and
collection standards
b) Wont sell to good credit
customers a bit slow in
paying
c) Excessive reliance on
short-term bank
credit
d) Insufficient
reliance on A/P


Cash Flow Timeline and Opportunity Cost
Net borrower
Prefer stable rate
Net investor (must
sell short-term
investments)
Short-Term
Borrowing
Rate
WACC
Short-Term
Investing Rate
Discussion Question
Which two accounts vary spontaneously as
sales levels change (and why do they change)?
a) Current assets (credit sales) and current liabilities
(fewer assets or more liabilities)
b) Inventories (JIT) and long-term liabilities (CapEx)
c) Common stock (dividends) and long-term liabilities
(CapEx)
d) Current assets (credit sales) and
long-term assets (capacity expansion)
Answer: a (p.3-23)
Discussion Question
What is characteristic of a restrictive current
asset investment strategy?
a) Company maintains high levels of current assets
relative to sales.
b) Raw materials investment is significant.
c) Just in time is commonly used.
d) A/R balances are kept high.
Answer: c (p.3-25)

Discussion Question
What is characteristic of a relaxed current
asset investment strategy?
a) Company has low levels of cash
b) Company has low levels of A/R
c) Company has less risk due to larger liquid asset
balances
d) Company has higher investment
returns than a restrictive strategy
Answer: c (p.3-25)
Current Asset Financing Strategies
Credit management
Treasury separate but
must maintain
relationship
Credit is sales tool
Credit standards
Credit extension terms
and approvals
Set individual/aggregate
credit limits
A/R management
Credit manager
responsibility
Billing
Remittance
Monitor payment
patterns
Collect delinquent

Treasury versus Credit Management
Trade Credit Policies
Credit standards
Credit terms
Discount terms
Collection policies

Discussion Question
What is a ramification of overly strict credit?
a) Company may decline trade credit to customers
who are an acceptable credit risk.
b) Company has improved sales opportunities.
c) Company may grant trade credit to customers who
are an unacceptable credit risk.
d) May increase risk of late payments
and bad debt expenses.

Answer: a (p.3-32)
The Five Cs of Credit
Character
Capacity
Capital Collateral
Conditions
Credit Terms and Customer Discounts
Credit
limits
Aggregate credit amount per customer
Lowest limit for new customers
Review payment patterns and adjust
Penalty
fees

Percentage of amount past due
Clearly state and disclose on invoice
Discount
eligibility
Benchmark eligibility date
Date funds received/postmarked

Open account
Installment credit
Revolving credit
Letter of
credit (L/C)
Forms of Credit Extension
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
Sales Discounting
Gross revenues:
on income statement
and in receivables
Discounts:
as expense
Net revenues:
on income statement
and in receivables
Discounts not taken:
as income
Gross Method
Gross method Net method
Financing Accounts Receivable
Unsecured borrowing
Asset-based lending
Securitization
Captive finance
company
Third-party financing
B2B credit cards
Factoring
Private-label financing

Why companies hold inventory
Goods for expected sales
Precautionary, speculative or
supplier requirements
Types of inventory
Raw materials, WIP, finished goods, scrap or
obsolete items, and stores and supplies
Levels of inventory
Obsolescence and spoilage
Benefits and costs of inventory
Elements of Basic Inventory Policy
J IT Inventory
Reduce underlying costs or
uncertainties
Liability, not asset
Excess inventory
Undesirable
Poor planning, location or
movement
Poor supplier quality
Production imbalance
With MPS
Retailers link to POS
Supplier-Managed
Supplier maintains tracks,
replenishes
Paid-on-production
Usage, not shipment
Levels of Inventory
Discussion Question
In addition to verifying incoming payments and
authorizing payments, vouchering has a three-
way match of an invoice against what?
a) Inventory level and payment receipt
b) Inventory level and receiving or shipping
information
c) Approved PO and payment receipt
d) Approved PO and receiving or
shipping information
Answer: d (p.3-51)
A/P and Disbursement Systems
Advantages
Disadvantages
Control
General and cash
position info.
Forecast accuracy
Field autonomy
Relationships
Access to short
discount terms
Payee relations
Coordination
Payment disputes
Info. control
Concentration, etc.
Unauthorized
disbursement
Redundant
Centralized Decentralized
Decentralized A/P, Centralized
Disbursements with Clearing
Enterprise Software
European Region
North American Region
South American Region
Actual disbursements
Authorize payments
Invoices, A/P
Oversight
Seems local
No excess balance
Discussion Question
All are multicurrency account stipulations
EXCEPT the
a) base currency in which account is denominated.
b) currencies not accepted (all others are accepted).
c) spread over spot rate to use in exchanging each
currency back to the base currency.
d) value date to apply to debits and credits
for each transaction type and currency.
Answer: b. Corrected: portfolio of currencies
accepted. (p.3-55)
Types of Netting
Two subsidiaries
purchases periodically
netted
Payments converted to
common currency
Multiple subsidiaries
Payments converted to
common currency
Payments combined
Central treasury
management center does
FX conversions
Net difference
transferred
Pay/receive net amount in
own currency
Bilateral Multilateral
Before Netting
With Multilateral Netting
Discussion Question
Which is sometimes used if a subsidiarys
currency is expected to appreciate relative to
the parent companys currency?
a) Leading
b) Lagging
c) Netting
d) Re-invoicing
Answer: b (p.3-57)

Re-Invoicing
Buys goods from
exporting subsidiary
Sells goods to
importing subsidiary
Company-owned
subsidiary
Actual shipment
Title and funds in subsidiarys currency
Before Re-Invoicing
With Re-Invoicing
Discussion Question
What is a benefit of using in-house banks in
international treasury management?
a) Manages international treasury management
investments but not debts
b) Replaces netting, pooling and re-invoicing
c) Aggregates many small transactions into fewer
larger ones
d) Decentralizes FX exposures
Answer: c (p.3-59)

Export Financing
Assignment:
Complete the following tasks
for Module Three, Chapters 9
and 10:
Review each chapter.
Complete the test-your-understanding questions at
the end of each chapter.
Review the online flashcards.
Complete the online module-specific test.
Complete the Exam Practice (Describe and
Differentiate) questions (located at the end of the
module textbook).
End of Session 4

AFP - Treasury4 - Session CHP 7 and 8

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The Treasury Management Environment

Session 4, Module Two:

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