WORKING CAPITAL (CASH) MANAGEMENT TRAINING COURSE

Working Capital Metrics

Working capital management refers to the firm’s use of current assets and current liabilities. In Module Two, you will learn working capital man­agement is important as it impacts a firm’s liquidity, efficiency, and overall health. This module discusses several key metrics that provide treasury professionals with the tools needed to assess the effectiveness of working capi­tal management practices.

The working capital metrics described in this module allow the user to determine the:

• composition of current assets relative to current liabilities.
• dependence on short-term and long-term financing for funding current assets.
• length of time that funds are held in operating working capital.
• appropriate payment decisions when offered a trade credit discount.
• the financial impact of extending a discount to customers.
• the proportion of accounts receivable (AIR) that are past due.

Specific metrics covered include the current ratio, quick ratio, cash conversion cycle, and cash turnover. Although a general discussion of the cash conversion cycle is presented in the previous module, the current module provides a more detailed discussion of the associated calculations. The module closes by examining specific calculations that are helpful when managing the use of trade credit financing.

Disbursements, Collections, and Concentration

Disbursements, collections, and concentration refer to the movement of funds throughout the various working capital accounts. Subsequently, these aspects represent the primary types of cash management services offered by banks to their customers. It is important to note that a given firm’s cash disbursement represents another firm’s cash collection. As a result, many of the same banking services and products are relevant to disbursements and collections. Concentration refers to funds’ movement throughout the firm’s various accounts following cash collection into one centralized account.

Module Three opens with a discussion of products and services commonly used by treasury professionals to disburse funds. The disbursements section also describes tools used to deter payments fraud. Next, the module describes key aspects related to collections, including lockboxes and international collection issues. The module closes with a discussion of cash concentration, including the concepts of notional and physical pooling.

Short Term Investing and Borrowing

The previous module described the importance of the collections, concentration, and disbursement policies in allowing the treasury department to determine the firm’s current liquidity position. Once the liquidity position is known, treasury personnel can determine whether the firm has either excess cash available or a cash deficit.

Module Four begins with key issues related to short-term investing. Since the short-term investment portfolio consists of excess cash the firm may require for future liquidity management purposes, most treasury professionals focus on preserving principal instead of seeking higher yields by taking on more risk. For this reason, the vast majority of the short-term investment portfolio will consist of money market securities with a maturity of one year or less.

Next, the module describes pertinent short-term borrowing topics, which may be required when the firm has a cash deficit. Specifically, the characteristics of several short-term borrowing instruments are covered, as well as the calculations involved in determining the effective borrowing cost for lines of credit and commercial paper. The module closes with a discussion of credit ratings and the agencies that provide them.

Cash Flow Forecasting

The goal of cash flow forecasting is to optimize future cash resources. In Module Five, you will learn cash flow forecasting assists a treasury professional in planning cash management activities. These activities include scheduling cash concentration transfers, funding disbursement accounts, making short-term investing and borrowing decisions, managing target balances for bank compensation purposes, managing covenant restrictions, and abiding by regulatory requirements. Despite its importance, cash flow forecasting remains an inexact science, primarily because of forecast cash assumptions. For this reason, the assumptions underlying the cash forecast should be reviewed and updated frequently with the most current and complete information available.

Cash forecasts are different from the broader financial models that are often used for financial planning and analysis. Cash forecasts are more concerned with cash flow projections than accounting state­ments that must comply with US GAAP (US Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) requirements.

Cash flow forecasting requires a treasury professional to take four essential steps:

• Establish assumptions.
• Estimate future cash inflows and outflows.
• Generate a pro forma cash position.
• Identify how to finance cash deficits or invest cash surpluses. The shortfall or surplus is measured relative to the predetermined, minimum desired target cash balance.

This module describes the benefits of cash flow forecasting and the types of forecasts commonly performed by the treasury function. Next, the module provides an overview of the forecasting process and introduces some principal cash flow forecasting methods. The module concludes with a discussion of best practices in treasury forecasting.

Technology of Treasury

The treasury function manages its diverse responsibilities using various forms of technology. While many treasury professionals still rely on spreadsheets and personal computers, the available technology has grown to include:

• treasury management systems (TMSs),
• bank-specific workstations,
• cloud-based systems,
• company-wide enterprise resource planning (ERP) systems,
• and e-commerce.

The use of technology allows treasury professionals to promptly retrieve, review, analyze, and transmit large amounts of financial data while minimizing the potential for operational and financial errors. Further, tech­nology provides a standardized way to interact with various internal and external entities, including account­ing, payables, receivables, corporate finance units, and financial institutions. Technology also helps facili­tate visibility in treasury operations and allows organizations to leverage external capabilities, such as SWIFT, market-rate providers, and online portals. Reliance on technology does, however, require an increased level of at­tention to controls and security to safeguard against intrusion and fraud.

Module Six introduces some of the basics of information management and technology as they apply to treasury, including a discussion of security, treasury applications, technology platforms, and information technology poli­cies. Next, the module provides a detailed look at TMS functionality and cost. The module concludes with an overview of some of the issues associated with e-commerce and mobile or electronic banking, including a discus­sion of common information standards important to treasury.