141117 chapter 1. treasury management

BA FINC 46 TREASURY MANAGEMENT
By: KLIEF T. AMORES, 2014
TREASURY MANAGEMENT AND RELATED CONCEPTS

oIntroduction to Treasury Management
oCash Management
oCash Transfer Methods
oCash Forecasting
oCash Concentration
oWorking Capital Management
oCredit Management
oReceivables Management
oInventory Management
oWorking Capital Metrics
Course Outline

oFinancing
oDebt Management
oEquity Management
oInvestment Management
oRisk Management
oForeign Exchange Risk Management
oInterest Risk Management
oOperation Risk Management
oOperational Considerations
Course Outline

oFinancial and Regulatory Influences
oClearing and Settlement Systems
oTreasury Technology and Systems
Course Outline

The financial center of the organization
Safeguarding and Stewardship of financial assets and the management of financial liabilities.
Responsible for a company’s liquidity
Monitor Current Cash Flow
Monitor Projected Cash Flows
Monitor Special Funding Needs
Use this information to correctly invest excess funds
Prepare for additional borrowings or capital raises
Treasury Department

Cash and Cash Equivalents
Cash in Bank, Time Deposits, SDA’s
Short Term Investments
Money Market Funds
Accounts and Notes Receivable
Investments in Securities
Bonds
Equity
Funds
Derivatives
Financial Assets

Financial Institutions (Including Banks and Dealers)
Investment Community
Regulatory Environment that dictates reporting and accounting requirements
Accounting, audit, and legal experts
Vendors of information or infrastructure, including payments, data, and software
Credit rating agencies
Treasury Community

Cash Forecasting
Working Capital Management
Cash Management
Investment Management
Treasury Risk Management
Management Advice
Credit Rating Agency Relations
Bank Relationships
Fund Raising
Credit Granting
Other Activities (i.e. Merger, Acquisition, System Integration)
Role of the Treasury Department

A process, affected by an entity’s Board of Directors, management or other personnel (including treasury team), designed to provide reasonable assurance regarding the achievement of (treasury and corporate finance) objectives in the following categories: effectiveness and efficiency of (treasury) operations; reliability of financial (and treasury reporting; compliance with applicable laws and regulation”. - François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACT
Treasury Controls

REPORTS TO CHIEF FINANCE OFFICER) Basic Functions:
1.Forecast cash flow positions, related borrowing needs, and available funds for investment.
2.Ensure that sufficient funds are available to meet ongoing operational and capital investment requirements.
3.Use hedging to mitigate financial risks related to the interest rates on the company’s borrowings, as well as on its foreign exchange positions.
Treasurer Job Description

Basic Functions:
4.Maintain banking relationships.
5.Maintain Credit Rating Agency Relationships.
6.Arrange for equity and debt financing.
7.Invest funds.
8.Invest pension funds.

Basic Functions:
9.Monitor the activities of third parties handling outsourced treasury functions on behalf of the company.
10.Advise management on the liquidity aspects of its short and long-range planning.
11.Oversee the extension of credit to customers.
12.Maintain as system of policies and procedures that impose an adequate level of control over treasury activities

Stage 1. Complete Decentralization
Individual locations manage their own bank accounts, foreign exchange transactions, customer credit, payable borrowings, and investments.
Stage 2. Centralized netting and hedging
A central staff nets payments between subsidiaries and hedges major foreign exchange and interest rate risks. Local locations still manage their own bank accounts, customer credit, payables, borrowings, and investments.
Treasury Centralization

Stage 3. Centralized Investments In addition to prior centralization, a central treasury staff consolidates and manages all bank accounts, including pooling of funds and investment of those funds. Local locations still manage customer credit and payables. Stage 4. Centralized Working Capital Management In addition to prior centralization, the central treasury staff centralizes credit granting and uses a payment factory for centralized payables management.
Treasury Centralization

Treasury staff should not operate under a bonus plan that issues compensation based on unusually high rates of return on investment, nor for gains from active speculation in other currencies.
It makes considerably more sense to create a compensation plan that rewards the treasury staff for its exact adherence to a detailed set of investment guidelines (IG).
Treasury Compensation

Relationship Bank Relations
Bank Account Analysis
Type of Fees
Bank Account Management
Loan Covenants
Collateral
Bank Relations

Type of Fees
General Category
Services Provided
General Account Services
Monthly account fees for checking, zero-balance, and concentration accounts, as well as the account analysis statement fee

Type of Fees
General Category
Services Provided
Depository Services
Fees on an individual basis for domestic deposits, international deposits, scanned checks, electronic payment direct sends, and fees for the electronic clearing agent. If a check scanned is used, there is also a monthly fee for that service.

Type of Fees
General Category
Services Provided
Paper Disbursement Services
Fees on an individual basis for paper checks paid.
General ACH Services
Fees on an individual basis for Automated Clearing House (ACH) debit and credit transaction.

Type of Fees
General Category
Services Provided
Wire and other fund Transfer Services
Fees on an individual basis for both incoming and outbound wire transfers. They may also be a monthly fee to maintain and on- line wire transfer capability

Type of Fees
General Category
Services Provided
Information Services
Monthly fee to provide reporting services, to which may be added line item fees for each transaction listed in the reports.
Investment / Custody Services
Monthly investment sweep fee.

Treasury Management System (TMS)
Application Service Provider (ASP)
Treasury Metrics
Earnings Rate on Invested Funds
Borrowing Base Usage Percentage
Other Metrics
Treasury Outsourcing

It will automate all standard day to day corporate treasury processes from front through to back and middle office
The system will allow the corporate treasurer to manage the organizations financial risks and liquidity profile in a transparent and controlled environment by providing timely and reliable data.
Treasury Management System (TMS)

People
Roles and Responsibilities
Segregation & Controls
Key Performance Measurement

Process
Business Process Understanding
Business Process Reengineering
Policies, Procedures & Reporting

Technology
System Identification, Evaluation & Selection
System Implementation
System Audit & Review

is a business providing computer-based services to customers over a network; such as access to a particular software application (such as customer relationship management) using a standard protocol (such as HTTP).
Application Service Provider (APS)

Earnings Rate on Invested Funds
= 퐼푛푡푒푟푒푠푡 퐸푎푟푛푒푑+퐼푛푐푟푒푎푠푒 푖푛 푀푎푟푘푒푡 푉푎푙푢푒 표푓 푆푒푐푢푟푖푡푖푒푠 푇표푡푎푙 퐹푢푛푑푠 퐼푛푣푒푠푡푒푑
Borrowing Base Usage Percentage
= 퐴푚표푢푛푡 표푓 퐷푒푏푡 푂푢푡푠푡푎푛푑푖푛푔 퐴푐푐표푢푛푡푠 푅푒푐푒푖푣푎푏푙푒 푥 퐴푙푙표푤푎푏푙푒 푃푒푟푐푒푛푡푎푔푒+(퐼푛푣푒푛푡표푟푦 푥 퐴푙푙표푤푎푏푙푒 푃푒푟푐푒푛푡푎푔푒)
Other Metrics
Bad Debts as A Percentage of Sales
Transaction Error Rate
Cost of Outside Services
Unhedged Gains and Losses

Activity 1.
Jollibee Food Incorporated (JFI)is earning a considerable return from its chains of urban cities food chains. Its treasurer wants to know its earnings rate on invested funds during the past year. It had Php10M of invested funds at the beginning of the year and Php15.5M at the end of the year. It earned Php750K in interest income, and had a net gain of Php1.5M on its short-term equity investments. What is the earnings rate on invested funds of JFI?

Activity 2.
SM Prime Holdings, a construction company, has been in a breakeven cash flow situation for a number of years. The market for its products and services is gradually declining, and the president is searching for alternative products that will shift the company into a more profitable situation. In the meantime, he needs to know the proportion of debt available under the company’s borrowing arrangement, in order to see how much funding is available to start new lines of business. Under the terms of the loan, the borrowing base percentage for accounts receivable is 70 percent, 50 percent for inventory, and 20 percent for fixed assets. According to the company’s balance sheet, it has the following assets and liabilities?

Activity 2. (Continuation)
Account
Amount
Account Receivable
Php35,000,000.00
Inventory
Php42,500,000.00
Fixed Assets
Php20,500,000.00
Accumulated Depreciation
(Php650,000.00)
Loans
Php25,000,000.00
In what percentage is the Borrowing Base Usage of SM Prime Holdings, Inc.?

Activity 1.
Jollibee Food Incorporated (JFI)is earning a considerable return from its chains of urban cities food chains. Its treasurer wants to know its earnings rate on invested funds during the past year. It had Php10M of invested funds at the beginning of the year and Php15.5M at the end of the year. It earned Php750K in interest income, and had a net gain of Php1.5M on its short-term equity investments. What is the earnings rate on invested funds of JFI?
= 퐼푛푡푒푟푒푠푡 퐸푎푟푛푒푑+퐼푛푐푟푒푎푠푒 푖푛 푀푎푟푘푒푡 푉푎푙푢푒 표푓 푆푒푐푢푟푖푡푖푒푠 푇표푡푎푙 퐹푢푛푑푠 퐼푛푣푒푠푡푒푑
= 푃푕푝750퐾 퐼푛푡푒푟푒푠푡 퐸푎푟푛푒푑+푃푕푝1.5푀 퐼푛푐푟푒푎푠푒 푖푛 푀푎푟푘푒푡 푉푎푙푢푒 표푓 푆푒푐푢푟푖푡푖푒푠 (푃푕푝10푀+푃푕푝15.5푀)/2
= 17.65% Earnings Rate on Invested Funds

Activity 2. (Continuation)
Account
Amount
Account Receivable
Php35,000,000.00
Inventory
Php42,500,000.00
Fixed Assets
Php20,500,000.00
Accumulated Depreciation
(Php650,000.00)
Loans
Php25,000,000.00
In what percentage is the Borrowing Base Usage of SM Prime Holdings, Inc.?
= 푃푕푝25,000,000.00 퐿표푎푛푠 푂푢푡푠푡푎푛푑푖푛푔 푃푕푝49,720,000.00 푇표푡푎푙 퐵표푟푟표푤푖푛푔 퐵푎푠푒
= 50.28% Borrowing Base Usage

“A perfect market is a district, small or large, in which there are many buyers and many sellers, all so keenly on the alert and so well acquainted in one another’s affairs that the price of a commodity is always practically the same for the whole of the district.” - Alfred Marshal, quoted in The Foreign Exchange Market in the United States, Federal Reserve Bank of New York, 1998.

THANK YOU!

141117 chapter 1. treasury management

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