MN10311WorkingCapitalRepairedx

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10 Νοε 2013 (πριν από 3 χρόνια και 8 μήνες)

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WORKING CAPITAL
MANAGEMENT



2

AGENDA




Working Capital, Definition


Float and Value Dating


Payment and Collection Instruments


Short
-
Term Investing


Short
-
Term Borrowing


3

Working Capital


Working Capital


All the items in the short
term part of the balance sheet


e.g. cash, short term debt, investments,
inventory, debtors (receivables), payables
(creditors) etc


Net Working Capital is the difference between
Current Assets and Current Liabilities


Cash Management, Liquidity Management


Interconnected terms.

4

CORPORATE DEFINITION OF
CASH MANAGEMENT



The effective planning, monitoring and
management of liquid / near liquid
resources including:


Day
-
to
-
day cash control


Money at the bank


Receipts


Payments


S
-
T investments and borrowings

5

CASH MANAGEMENT
ENVIRONMENT

MANAGE
FUNDS
EXCESS/
SHORTFALL
DISBURSE
FUNDS
COLLECT
FUNDS
TRACK
TRANSACTIONS
& BALANCES
CUSTOMER
ACCOUNT
BANKER’S PERSPECTIVE

6

BANK DEFINITION OF CASH
MANAGEMENT


The effective planning, monitoring and
management of liquid / near liquid resources
including:


Provision of bank accounts


Deposit / withdrawal facilities


Provision of information regarding bank
accounts and positions


Money transfers and collection services


Investment facilities


Financing facilities


Pooling and netting

7

BENEFITS OF GOOD CASH
MANAGEMENT




C
ontrol of financial risk


O
pportunity for profit


S
trengthened balance sheet


I
ncreased customer, supplier, and
shareholder confidence


8

WORKING CAPITAL

Managing Liquidity

Source: Essentials of Managing Corporate Cash

9

DEFINITION OF LIQUIDITY



Having sufficient funds available to meet all
foreseen and unforeseen obligations




Liquidity has costs



Cash is unproductive



Spread between borrowing and deposit rates
and between long and short term rates

10

NEED FOR LIQUIDITY


Day to day transactions


Precautionary balances


Compensating balances


Obtaining discounts


Acid tests


Favourable opportunities


Overall avoiding bankruptcy!




11




THE CASH GENERATOR / ABSORBER






PROFIT?



CASH BALANCE?

Stock

Purchases

Sales

12

Operating Cycle


Purchase

Resources Pay Sell on Credit Receive Cash


Inventory Conversion Receivables Conversion



Payables Period Cash Conversion Cycle





Operating Cycle





From:Fundamentals of Contemporary Financial Management, 2
nd

ed


, by Moyer, McGuigan and Rao

13

The Various Cycles


Inventory Conversion


Inventory

x 365


Cost of Goods Sold


Payables Conversion


Payables/Creditors

x 365


Cost of Goods Sold


Receivables Conversion


Receivables/Debtors

x 365


Turnover


anb

14

Balance Sheet

Short Term Items

Current assets
2011

2010

Inventories 1,910 1,903

Trade and other receivables 1,713 1,625

Current tax assets 13
-

Other financial assets 43 78

Cash and short term assets

733

917


4,412 4,523


Current liabilities

Short term borrowings 355 555

Trade and other payables 1,690 1,735

Current tax liabilities 121 44

Other financial liabilities 119 13

Short term provisions

82

130


1,367 2,477

Turnover 9,577

Cost of goods sold 8,943 Work out the CCC for 2011



anb

15

Operating Cycle


Purchase

Resources Pay Sell on Credit Receive Cash


Inventory Conversion 78 days Receivables Conversion


65 days


Payables Period Cash Conversion Cycle


69 days 74 days




Operating Cycle


143




From:Fundamentals

of Contemporary Financial Management, 2
nd

ed


, by Moyer,
McGuigan

and
Rao

16

Cash Conversion


We need to consider control in all areas of
working capital to maximise return, reduce
cost.


Some areas are not controlled by the Finance
Function


Stock/inventory


Some areas have shared control


payables
and receivables


Some areas are controlled by the Finance
Function


short term borrowing and
investment

17

Float


Any delay in the process of converting
materials and labour to receipt of
payment involves cost, float cost.


Similarly, any delay in making payments
will also give rise to float but this time to
our advantage


What is float?

18

FLOAT


Definition of
bank

float


The time lost between a payor making a payment and a
beneficiary receiving value



Cost of Float


principle amount due x
no of days

x cost of funds


360 or 365





19

WHY DOES FLOAT OCCUR?



Deliberately


Inefficiency


Logistical situations


Compensation mechanism

20

STAGES OF FLOAT

Function


Float


Responsibility


1
.

Order

received


Production

float


2
.

Goods

dispatched


System

float


3
.

Invoice

issued


Credit

period


4
.

Payment

due


Customer

float


5
.

Payment

made


Postal

float


6
.

Payment

received


System

float


7
.

Payment

banked


Bank

float


8
.

Funds

available


Concentration

float


9
.

Funds

to

correct

account


Information

float


10
.

Advice

of

availability






Supplier



Supplier



Supplier



Buyer



Buyer/

postal

service



Supplier



Banks



Banks



Banks





21

Controlling Float


We need to look at controlling /
influencing float in three areas



* Ourselves



* Our Customers



* Our Banks

22

RECEIVABLES AND PAYABLES
MANAGEMENT


Good receivables and payables
management aids in:


Cash flow forecasting


Long
-
term funding and investment
decisions


Reduced risk of bad debts


Stronger liquidity


Stronger balance sheet ratios

23

RECEIVABLES IMPACT

Important because of costs arising from


Float


Bad debts


Management time


Legal fees


And


Impact on analysts and creditors

24

RECEIVABLES MANAGEMENT 1


Clear instructions



Method of payment



Documentation



Account structures



Terms of Trade



25

INTERNATIONAL TRADE
PAYMENTS


Terms of trade

Settlement


Open account


Clean collection


Documentary collection


Against payment


Against acceptance


Revocable documentary letter of credit


Irrevocable documentary letter of credit


Unconfirmed


Confirmed


Advance payment

26

RECEIVABLES MANAGEMENT 2



Penalties


Post dated cheques


Legal process


Internal process


Stop supply



But do not forget
Relationship



27

HOW TO

REDUCE/CONTROL FLOAT


Your Own Actions


Change own systems



Educate customers



Include costs in prices



Negotiate with bank


28

Controlling Float


Payment Methods


Payment methods are important
because of


-

Cost


-

Risk


-

Value Dating


-

Finality

VALUE DATING


29

Value

The moment when funds cease to be useable to the
originating party and instead become useable funds to
the beneficiary in the sense of reducing an overdraft or
accruing interest

30

VALUE DATING


Forward

Value Dating

The time between a bank being notified of a
transaction in favor of a customer and the
customer receiving future value for the item



Back

Value Dating

The time between a bank being notified of a
transaction to the customer’s account and the
item being valued on a date prior to the date of
the transaction

AVAILABILITY

The time when the beneficiary actually


has
access to the
funds
i.e. to use to


make
a payment


31

32

FINALITY

The time after which a payment is
considered to become irrevocable and
cannot be returned without the
permission of beneficiary account
holder.

33

DOMESTIC PAYMENT
INSTRUMENTS


Paper
-
based


Cash


Cheques


Bank transfers or giros


Postal giros


Bills of exchange


Promissory notes


Banker’s drafts

Search for ‘APACS’ on the internet

34

DOMESTIC PAYMENT
INSTRUMENTS


Electronic


Funds transfer


Urgent wires


Standard EFT


Automated clearing house payments


Standing order


Direct Debit


Electronic bills of exchange


Plastic (credit, charge, cheque guarantee, cash
dispenser, debit)


Financial EDI

Look up ‘
Voca
’ on the internet, used to be
BACS

Faster pay


35

CROSS
-
BORDER PAYMENTS


Paper
-
based


Foreign currency cheques


Banker’s drafts


Giros (Credit transfer)


Documentary collections


Cheque negotiations


36

CROSS
-
BORDER PAYMENTS


Electronic


Using correspondent banks


Using a global or pan
-
regional bank


Cross
-
border systems

-
TARGET

-
EBA EURO 1

-
EBA Step 1

-
CHAPS euro (NewCHAPS)

-
RTGS
plus



(EAF2)


Credit cards


Direct debits

37

Controlling Float


Bank Services


Lockbox


Intervention accounts


Remote disbursement


Controlled disbursement


Direct collections


Efficient collections structure

38

PAYABLES



Critical questions:


What is due?


When is it due?


Where should the payment be sent?


How should the payment be sent?


Are there funds to cover the
payment?


Is the payment properly authorized?

39

PAYABLES MANAGEMENT


The flip side of the coin


So


Hang on to it


Consider float versus control


Account structures


Discounts



But do not forget
Relationship

40

SHORT
-
TERM INVESTING



The Decision Process


How much do I have to invest per
currency?


How long do I have to invest it?


Where are the funds located?


What is my appetite for risk?


41

INVESTMENT GUIDELINES


What are the company’s policies
regarding:


Currency exposure and hedging


Banks used and limits


Investment instruments and limits


Use of automated sweep accounts


Bank / investment ratings


42

FACTORS IN CHOOSING
INVESTMENTS



The need to make an adequate return


The need to take into account areas of
risk


Credit risk


Interest rate risk


Capital risk


Market risk


The need to consider liquidity

43

HOW RATES ARE QUOTED


At a discount: Instrument issued at less
than 100%


Coupon: Specific interest payments
made at specific times


Yield to redemption: Interest payments
over the lifetime of the instrument and
principal repaid may be greater or less
than 100%

44

SHORT
-
TERM INVESTMENTS


Commercial paper (CP)


Banker’s acceptances (BAs)


Repurchase agreements


Certificates of deposit (CDs)


Money market funds


Treasury instruments (bills, notes,
bonds)

45

INVESTMENT DECISION PROCESS

Monitor cash flow forecasts
annually / quarterly / monthly / weekly / daily
Determine:
Amount / currency
{
Now and at
Duration / location
{
period end
Investment action
Confirmation
Recording / monitoring / reporting
Liquidation
INVESTMENT
DECISION
Identify surpluses
External Factors:
Interest rates / trends
Currency exchange rates
Economic factors
Availability
Internal policy covering
Investment types
Risk
Ratings
Time frames
Liquidity
Performance objectives
Funding subsidiaries
Tax
46

SHORT
-
TERM FUNDING
INSTRUMENTS


Internal short
-
term funding


Least expensive source of funding


Cross
-
border and cross
-
currency intra
-
group
financing can be difficult


External short
-
term funding


Can act as a built
-
in hedge if sourced in the
same currency


Can be inexpensive to borrow local currency
in the currency center

47

SHORT
-
TERM BORROWING



The Decision Process


How much needs to be financed and in
what currency?


How long does the deficit need to be
financed?


Where does it need it be financed?


What is the maximum level of funding
needed?


48

FACTORS AFFECTING
BORROWING


These factors affect both amount
available and cost


Financial strength of the company


Key covenants


Industry


Available guarantee or security


Company’s ability to repay on time from
bank’s perspective

49

THE FINANCING DECISION
PROCESS

Monitor cash flow forecasts

annually / quarterly / monthly / weekly / daily

Determine:

Amount / currency

Duration / location

Financing action

Documentation

Recording / monitoring / reporting

Liquidation

FINANCING DECISION

Identify deficits

External Factors:

Interest rates / trends

Currency exchange rates

Economic factors

Liquidity of market

Internal policy covering

Borrowing internally

Instruments

Financing policy

Existing limits

Performance objectives

Existing facilities

Balance sheet/ratio impact

Tax

50

U.S. SHORT
-
TERM INVESTMENTS


Commercial paper (CP)


Banker’s acceptances (BAs)


Repurchase agreements


Certificates of deposit (CDs)


US Treasury instruments (bills, notes,
bonds & STRIPS)

51

INTERNATIONAL SHORT
-
TERM
INVESTMENTS


Banker’s Acceptances


Commercial paper


Euro


GBP


Treasury bills


Certificates of deposit


GBP


Eurodollar

52

BILLS OF EXCHANGE


Foreign currency


Commercial


GBP


Eligible


Ineligible


Trade bills

53

FACTORS IN CHOOSING
FUNDING


Are all
-
in borrowing costs being
offered?


Does the bank require security?


What are the terms and conditions?


Is interest able to be offset on tax
returns?

54

OTHER SOURCES OF
FUNDING


Factoring


Invoice discounting


Trade bills


Acceptance credits