afp_treasury4_session chp 9 and 10

8/11/2019 AFP_Treasury4_Session Chp 9 and 10

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Working Capital Management

Session 5, Module Three:


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Chapter 9:

Working Capital Metrics Chapter 10:

Collections,Concentration

andDisbursements

Session 5, Module Three:Working Capital Management

v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Overview - 2


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Outl ine:

Basic Financial Concepts

Working Capital Metrics Cash Conversion Cycle (CCC)

Cash Discount Calculations

A/R Monitoring and Control Collections and Concentration Calculations

Chapter 9: Working Capital Metrics

v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 9 - 3


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Time Value of Money Dollar today worth

more than dollartomorrow

How much to cashsettle future debtnow?

Cash flow value: Amounts Interest rate When expected



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What is the future value of $100 invested for 2years, compounded annually, at 10%/year?

Future Value


n

2

Future Value = PV (1 + i)

= $100 (1 + .10)

= $100 (1.21) = $121Where:

FV = Future valuePV = Present valuei= Periodic interest raten = Number of periods


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What is the present value of $2,382 to bereceived after 3 years, discounted at 6.00%annually?

Present Value


Where:

FV = Future valuei = Periodic interest raten = Number of periods

n 3

$2,382FVPresent Value= =

1 + i 1 + 0.06

$2,382= = $2,000

1.191


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Degree current obligations covered by currentassets

Example: Per $1 of short-term liabilities, $2.35of cash and short-term assets expected tobecome cash in next year

Working Capital: Current Ratio


Total Current Assets $8,000Current Ratio = = = 2.35

Total Current Liabilities $3,400


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Degree companys current liabilities coveredby most liquid current assets

Example: $1.32 of very liquid assets for each$1 of short-term liabilities

Working Capital: Quick Ratio


(Cash) + (Short-Term Investments) + (Accounts Receivable)Quick Ratio =Total Current Liabilities

($1,500 + $1,300 + $1,700)= = 1.32

$3,400


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Ability to repay debt

Low ratio is weak ability to repay debt Reliable predictor of financial failure

High ratio implies more safety

Working Capital: Cash Flow to Total DebtRatio


Net Income + DepreciationCash Flow to Total Debt Ratio =

Short-Term Debt + Long-Term Debt

$850 + $200 $1,050= = = 0.184

$1,800 + $3,900 $5,700


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Amount current assets exceed currentliabilities (not a ratio)

Example: If all current assets convert to cash,would have $4,600 over what needed to pay offshort-term liabilities

Working Capital


Working Capital = Current Assets Current Liabilities

= $8,000 $3,400 = $4,600


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Elements in the CCC:Cash Conversion Cycle (CCC)


Days inventory

Days receivables

Days payables

Inventory 365

Cost of Goods Sold

Accounts Receivable365

Revenues

Accounts Payable365

Cost of Goods Sold


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Time to convert

Cash outflow (payment to supplier)

into Cash inflow (customer collection)

Calculation of the CCC


Cash Conversion Cycle = Days' Inventory + Days' Receivables Days' Payables

= 103.15 Days + 41.37 Days 63.48 Days = 81.04 Days


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Discussion QuestionGiven a cash conversion cycle of 81.03 days,how many CCCs are there in a year (cashturnover ratio)?

Answer (p.3-86):


365 DaysCash Turnover =

Cash Conversion Cycle

365=

81.03

= 4.5 Times


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Company-to-company (days not $s)

Less frees up cash

Days of Working Capital (DWC)


DWC = DSI + DSO - DP

= 103.15 + 82.74 - 63.48 Days

Where:

DSI = Days Sales in Inventory103.15 daysDSO = Days Sales Outstanding82.74 daysDP = Days payables63.48 days

Example:


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Should a discount be taken if the cost of short-term funds is 8%?

Cost for Buyer Not Taking Cash Discount


D 365Discount Cost = 100 D N T

2 365=

100 2 30 10

2 365= = 0.0204 18.25 =.3723 or 37.23%98 20Where:

D = Discount percentage2%N = Net period30 daysT = Discount period10 days


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Discussion QuestionWhich is a situation when a buyer should forgoan offered cash discount?

a) Firm invests in short-term funds that earn less thandiscount rate

b) Firm has insufficient cash to pay now but has short-term credit with lower interest rate than cost of nottaking discount

c) Firm has ability to change discount terms bystretching A/P terms

d) The discount should never be foregone

Answer: c (p.3-89)



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Sellers induce early payment or offer competitivediscount.

Example of sellers NPV loss if discount taken: Credit

sale of $100, terms 2/10, net 30, 8% annual interest.

Impact to Seller of Offering Cash Discount


Receive on Day 10

Receive on Day 30

Credit Sale 1 D $100 1 .02PV = = =$97.78

Annual Interest .081 + T 1 + 10

365 365

Credit SalePV = Annual Interest

1 + N365

Day 10 Day 30

$100= =$99.34.08

1 + 30365

NPV = PV PV = $97.78 $99.34 = $1.56

Where:D = discount rate; T = days in discount period; N = days in net period


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Discussion QuestionWhat can a treasury professional discover bymonitoring individual accounts receivable?

a) Errors or delays in payments by credit card that areslowing collections

b) Customers who may delay payment intentionallyuntil follow-up is initiated

c) Change in financial condition that may result inslower payments and require extension oflonger credit terms

d) Increase in receivables that affectsliquidity

Answer: b (p.3-92)



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Company has outstanding receivables of $285,000and credit sales of $310,000 at first quarter end.Using a 90-day averaging period, DSO is:

Days Sales Outstanding (DSO)


$310,000Credit Sales in PeriodDaily Credit Sales = = = $3,444.44

Days in Period 90

$285,000.00Accounts ReceivableDSO = = = 82.74 Days

Daily Credit Sales for Period $3,444.44

Average Past Due = DSO Avg. Days of Credit Terms

= 82.74 Days 30 Days = 52.74 Days

Could be bad, e.g., if credit terms are net 30:


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A/R current and past-due

30-day increments

Customer or aggregate basis

Percent past due

Aging Schedule


Age of A/R Amount of A/R % of Total A/R

Current $1,750,000 70%

1-30 days past due 375,000 15%

31-60 days past due 250,000 10%

Over 60 days past due 125,000 5%

Total $2,500,000 100%


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Discussion QuestionInternal processing has $99k annual float, 9% opportunitycost and $3k in variable internal processing. A lockboxhas $24m dollar-days in 30 days, $10k in fixed costs and

$6k in variable costs. Method with net benefit?a) Internal processing: $14k

b) Internal processing: $685k

c) Lockbox: $14k

d) Lockbox: $685k

Answer: c. $24m/30 = $800k;$800k x 0.09 = $72k; $99k - $72k = $27k;$27k - $10k - 6k + $3k = $14k lockbox (p.3-98)



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Total ACH costs = $1.00 Total wire transfer costs = $10.00 Opportunity cost of funds = 3.5%

Break-Even Wire Transfer Amount


Wire Cost ACH CostMinimum Transfer =

Opportunity CostDays Accelerated

365 Days

$10.00 $1.00=0.035

1 Day365 Days

= $93,858


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Outl ine:

Disbursements Collections

Concentration of Funds

Payments Fraud

Chapter 10: Collections, Concentration andDisbursements



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Disbursements



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Disbursement Products


ZBA

Multi-tiered

Deposit-only

Master account

Payment info

Positive pay

Reverse

Disbursement bank

Fraudu lent endo rsement

Controlleddisbursement

Clearingnotification e.g., ZBA


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Discussion QuestionWhich requires indemnity from the alternatebank for losses including fraud?

a) Debit filtersb) Default pay all or pay none

c) Multiple drawee checks

d) Imprest accounts

Answer: c (p.3-111)



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DirectDeposit

(ACH)Payments

Global expansion (SEPA, cross-border ACH)

Payroll, reimbursement, interest,tax, dividend and B2B

TaxPayments

US EFTPS Sub-sovereign electronic payment

NACHA: ACH TXP

WireTransfers

Immediate and final Telephone and online initiation

Electronic Disbursement Products



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Repetitive

Semi-repetitive

Non-repetitive(free form)

Drawdown

Standing

Wire Transfer Usage Categories



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P-cards

T&E cards

Fleet cards

Combined cards

Payroll/stored value cards

EBT cards

Card Payments



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Freight payments Payroll services

Integrated or

comprehensiveA/P

Payment factories

Outsourced A/P Services



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Discussion QuestionWhich integrated or comprehensive A/P servicesends only limited information to the FSP andstaggers payments by transaction date?

a) Send data file with list of all warehoused payments to bemade

b) Send data file with list of all immediate payments to bemade

c) FSP maintains database of payees and warehouses

the itemsd) FSP maintains database of payees and issuespayments immediately

Answer: c (p.3-118)v4.0 2013 Association for Financial Professionals. All rights reserved. Session 5: Module 3, Chapter 10 - 32


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Discussion QuestionWhich provides same day or pr ior dayinformation to help with fraud control?

a) Balance reporting servicesb) Interface with A/P

c) Account reconciliation program

d) Imaging technology

Answer: a (p.3-119)



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Collect

Speed

SecurityRemittanceInformationAvailability

Cost

Collections



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Discussion QuestionA retailers over-the-counter/field depositsystem gets cash and checks from local banksat each POS. Which offers cash/coin pickup

and delivery and immediate provisional credit?

a) A depository institution near each field location

b) Virtual vault services

c) Remote deposit capture (RDC)d) Armored carriers

Answer: b (p.3-122)



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ScanandImage Eliminates check

transit

Can incorporatevirtual vault

Faster, cheaper

De

pository

Bank Eliminates local

bankconsolidation

Service distantlocations

USD only

Remote Deposit Capture (RDC)



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Merchant services

Check conversion

Mail payments

Lockbox Retail

Wholesale

Hybrid

Other Domestic Collection Products



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Reduced mail and processing float

Improved access to remittance information Reduced risk and improved security

Improved control and record keeping

Uninterrupted service Scalability

Proper segregation of duties

Lockbox Advantages vs. InternalProcessing



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Electronic bill/invoice presentment andpayment

Send billing data to customers E-mail link to companys billing portal

Customer triggers EFT debit

Control of remittance information

Less exception processing

EBPP and EIPP



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Discussion QuestionWhat is a successor to the electronic lockboxthat consolidates all remittances into acommon stream of data in a common format?

a) EFT with remittance information

b) EBPP and EIPP

c) Consolidated remittance processing(CRP)

d) Imaging technology

Answer: c (p.3-127)



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Cross-Border Collections and Trade


Other methods: Bankers acceptance (BA)

Trade acceptance

Barter, countertrade, trading companies

SellerMost Protection

Least Protection

BuyerMost Protection

Least Protection

CASH IN ADVANCE

LETTER OF CREDIT

DOCUMENTARY COLLECTION

OPEN ACCOUNT


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Collect ion let ter

Name of seller (exporter)

Name and address of buyer (importer) Collecting bank information

Details of accompanying documentation

Date, tenor and value

Details of bank/other charges by party Recourse procedures

Nonstandard terms or conditions

Documentary Collection



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Discussion QuestionA _____ draft requires the ______ bank toreceive full and final payment before releasingdocuments.

a) sight; collecting

b) sight; remitting

c) time; collecting

d) time; remitting

Answer: d (Sight a.k.a. documents againstpayment; time a.k.a. documents againstacceptance.) (p.3-130)



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Documentary Collection


1

4 DC

7Pays

Seller

Remitting Bank

2

DC

3

L/C

8

Pays

Buyer

Collecting Bank

5

DC

6

Docs

Debit

+


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Commercial L /C

To ship domestic orinternational goods

Bank roles Issuing Advising Confirming

Typically requires

Draft Commercial invoice Shipping documents

Standby L/C (Guaran tee)

Issued primarily bybanks

Ensure financialperformance of bankscustomer to a 3rd-party

Payable events

Typically requires

Sight draft Documentation

Letter of Credit (L/C)



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Letter of Credit (L/C)


Seller (Beneficiary)

Advising Bank

2

L/C

Buyer (Applicant)

Issuing Bank

Purchaseagreement

requiring L/C

1

Pleaseissue

3L/C

4

L/C


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Bankers Acceptance (BA) Unconditional written

order directing bank topay sum of money

On demand At a definite time

By accepting, bankagrees to pay facevalue if buyer fails to

pay Hold to maturity

Sell at discount

BA financing cost: Discount rate Commission


Accepted


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Major ob ject ives:

Efficiently move funds

from deposit banks toconcentration bank

Minimize excessbalances

Concentrat ion enables:

Excess- -Deficit cash Locations Entities Currencies

Invest more, interest income

Pay debt faster,

interest expense Use discount terms,

COGS or operatingexpenses

Cash Concentration System Objectives



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Cash Concentration System


Sources Intermediaries Transfer Uses

LoanRepayment

S/TInvestment

PayrollVendor

PaymentsDividends

Field/Branch

FieldBank

Lockbox/Electronic

S/TBorrowing

Maturing S/TInvestments

Cash, Check orCard

Check, Wire,ACH

SubsidiaryPayments


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Domestic Concentration of Funds Large retailers

transmit receiptsfrom POS to

headquarters Wires expedite funds

transfers over ACH Large amounts

Same-day value

Finality

Sweeping (sweepaccount differs)

Collect receipts Local offices Local branches

Retail stores

Was field banks, nowRDC and virtual vault



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Entities use distinct depositoryaccounts

Full end-of-day balance transferto master concentration account

ZBA

Multiple location deposits

credited to one account Location-specific deposit reports

via unique location identifiers

Depositreconciliation

Bank Services for Domestic Concentration


Both mus t

use

mult ip le

branches

of single

bank.


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Physical poo l ing

Automatic ZBA ofsubaccounts

Multiple legal entities,countries

Same currency

Intercompany loans at

arms length

Not ional poo l ing

Balancing entries onvirtual accounts

No physical moves Cross-guarantees

Disallowed in US,Germany, Mexico,

Japan and Brazil

Global Concentration of Funds



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Notional Pooling Physical Pooling

Interest earned/paid asbank interest.

COMPENSATION Must use arms length, trackloans and allocate interest.

Can provide tax efficiency. TAX Withholding taxes can applyto intercompany loans.

Is highly complex duebanks and jurisdictions.

COMPLEXITY Greater transparency lowersregulatory concern.

Can be used acrossmultiple currencies.

APPLICABILITY Must be done on acurrency-by-currency basis.

Is restricted in manycountries

AVAILABILITY Is widely available and mostcommon form of pooling.

Pooling Comparison



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Discussion QuestionWhich is true of a bank overlay structure?

a) It uses sweeping not pooling.

b) It is used when primary bank has branches inseveral countries but not full domestic banking.

c) It uses primary bank for domestic transactions andto sweep surplus funds to local banks.

d) Local bank notionally pools balances on

overlay accounts for a multi-countrysolution.

Answer: b (p.3-142)



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Bank Overlay Structure


Home CountryNotional Pooling and/orPhysical Funds Transfer

Primary OverlayAccount

Primary Bank Concentration Account



Local Account

Local Account

Local Account

Local Account

Local Account

Local Account


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Attempted fraud common, success less so

Controls Positive pay

ACH filters and blocks Daily reconciliations Security feature check stock Segregation of duties Dual EFT authentication No or few non-repetitive wires Separate deposit and disbursement accounts Dedicated EFT computer

Payments Fraud



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Discussion QuestionWhich is a good way to reduce credit cardidentity theft?

a) Use holder in due courseb) Use non-photo-reproducible features

c) Use address verification service

d) Use neural networks to eliminate card verificationvalues or codes

Answer: c (p.3-144)



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Assignment:

Complete the following tasksfor Module Three, Chapter 11:

Review the chapter. Complete the test-your-understanding questions at

the end of the chapter. Review the online flashcards. Complete the online calculations. Complete the online module-specific test. Complete the Exam Practice (Describe and

Differentiate) questions (located at the end of th emodule textboo k).

End of Session 5

afp_treasury4_session chp 9 and 10

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