List of Exhibits xvii
Foreword xxi
Acknowledgments xxiii
Chapter 1 A Cash Manager’s Perspective on Company Financials 1
Chapter Goals 1
Introduction 1
Interrelationship of the Operating, Cash, and Accounting Cycles 2
Important Metrics 3
Liquidity Ratios 3
Leverage Ratios 5
Capital Structure—Weighted Average Cost of Capital 5
Performance Measures 6
Efficiency Ratios 6
Risk-Adjusted Performance Measures 6
Risk Management 9
Worked Examples of Company Metrics 9
Practical Applications 11
Summary of Key Points 12
Chapter 2 It’s All About the Bottom Line! 13
Chapter Goals 13
Introduction 13
The Major Functions of Cash Management 14
Factors That Influence the Cash Manager’s Role 16
A Representative Organization Chart 16
Important Cash Management Concepts 17
Cash Flow Timeline 17
Financial Float 18
Availability 18
Finality 19
Opportunity Cost of Funds 20
Transaction Balances 20
Time Value of Money 20
Nature of Cash Flows 22
Practical Applications 22
Summary of Key Points 22
Chapter 3 Optimizing Liquidity 23
Chapter Goals 23
Introduction 23
Liquidity Management 23
Cash Is King 24
Float in the Financial Supply Chain 24
Sources and Uses of Liquidity 26
Optimizing Working Capital 26
Cash Conversion Cycle 27
Calculating How Much Liquidity a Company Needs 28
Costs of Too Little Liquidity 28
Working Capital Gap Management 29
Practical Applications 30
Summary of Key Points 30
Chapter 4 The United States Banking System 31
Chapter Goals 31
Introduction 31
Structure of the United States Banking System 31
Federal Reserve Bank 32
A Dual Banking System 32
Major Banking Legislation 33
Impact of Current Legislation 33
Nationwide Branching 33
Patriot Act 34
Sarbanes-Oxley Act 34
Check 21 35
Federal Reserve Regulations 35
Uniform Commercial Code 36
Practical Applications 37
Summary of Key Points 37
Chapter 5 Types of Payment Instruments 43
Chapter Goals 43
Introduction 44
Important Terminology 44
Clearing 44
Settlement 44
Real-Time Gross Settlement 44
Net Settlement Systems 44
Settlement Risk 45
Contents ix
Hybrid Settlement 45
Transaction Types 45
Payment Practices in the United States 45
Check Payments 47
Check Terminology 47
Characteristics of a Check 48
The Real Cost of Paying by Check 49
The Truth About Disbursement Float 50
The Check Clearing Process 50
Advantages and Disadvantages of Using Checks 54
Electronic Checks and the Role of Imaging and Truncation 54
Electronic Payments 55
The Fedwire Process 55
The Clearing House Interbank Payment System 56
The Automated Clearing House 58
Other Payment Types 61
Cash 61
Plastic: Charge, Credit, Debit, and P-Cards 61
Selection and Comparison of Payment Types 62
Practical Applications 63
Summary of Key Points 63
Chapter 6 Optimizing Cash Inflows—Part 1: Accounts Receivable 65
Chapter Goals 65
Introduction 65
Cash Inflow Float 65
Establishing a Credit Policy 66
The Five C’s of Credit Evaluation 67
Sources of Credit Information 67
The Credit Scoring Model 67
Terms of Sale 68
Terms of Sales 69
Discount Terms 69
Invoicing 70
The Accounts Receivable Process 71
Checklist for Automating Accounts Receivables Processing 72
Monitoring Accounts Receivable 73
How to Improve Accounts Receivable 74
Practical Applications 74
Summary of Key Points 75
Chapter 7 Optimizing Cash Inflows—Part 2: Collections 77
Chapter Goals 77
Introduction 77
Collection Float 78
Objectives of a Collection System 79
Explaining Funds Availability 79
Managing Collection Float 80
Types of Lockboxes 81
Lockbox Networks 81
How to Perform the Cost-Benefit Analysis of a Lockbox 82
Elements of Lockbox Pricing 83
Cost Comparison of Collection Methods 84
Recent Trends and Changes in Collections 85
Expansion of Bank Networks 85
Impact of Check 21 88
Remote Deposit Capture 88
Rise of the Automated Clearing House 88
Improvements in Imaging 88
Use of the Internet 88
Integrated Receivables 88
Cash Management Tips for More Efficient Collections 89
Practical Applications 90
Summary of Key Points 90
Chapter 8 Optimizing Cash Inflows—Part 3: Concentration 91
Chapter Goals 91
Introduction 91
Concentration Float 92
Objectives of a Concentration System 92
Optimizing Liquidity 92
Information Float 93
Transfer Float 94
Making Concentration More Efficient 95
When to Use an Electronic Depository Transfer or a Wire 95
Using Appropriate Formats 96
Frequency of Transfers 96
Target Balances 96
Anticipating Deposits and Availability 96
Costs of Concentration 97
Optimizing Concentration 97
Practical Applications 99
Summary of Key Points 99
Chapter 9 Optimizing Cash Outflows 101
Chapter Goals 101
Introduction 102
Cash Outflow Float 102
Objectives of a Disbursement System 102
Considerations When Designing a Disbursement System 103
Specialized Disbursement Vehicles 103
Zero Balance Accounts 103
Controlled Disbursement 104
Payable Through Drafts 106
Multiple Drawee Checks 106
Sight and Time Drafts 106
Direct Deposit 106
Payroll Cards 107
Internet Payments 107
Comparison of Payment Costs 107
Considerations in Converting Paper to Electronic Payments 108
Factors Driving Migration 109
Barriers to Electronic Payments 109
Implementation of Electronic Payments 109
Outsourcing Disbursements 111
Cash Management Tips for More Efficient Disbursement 112
Trends in Payment Practices 113
Practical Applications 113
Summary of Key Points 113
Chapter 10 Fraud Prevention and Control 115
Chapter Goals 115
Introduction 115
Where Fraud Occurs 115
Fraud Detection 116
Fraud Prevention 117
What the Banks Are Doing 117
What the Company Can Do 118
Purchasing Cards 120
Securing PCs Physically 120
Resources 121
Practical Applications 121
Summary of Key Points 121
Chapter 11 Cash Forecasting 123
Chapter Goals 123
Introduction 123
Why Cash Forecasting Is Important 123
Key Drivers of Cash Forecasting 124
Sources of Data 125
Forecasting Methods 126
Short-Term Forecasts 126
Medium-Term Forecasts 127
Long-Term Forecasts 131
What to Consider When Designing a Forecasting System 132
Practical Applications 132
Summary of Key Points 133
Chapter 12 Short-Term Investing 135
Chapter Goals 135
Introduction 135
Investment Objectives 135
Developing Investment Policy Guidelines 136
What the Credit Ratings Mean 137
Instruments Used for Short-Term Investments 139
Government Issues 139
Bank and Broker Vehicles 141
Corporate Instruments 143
Risk and Return Comparison 144
Factors That Influence Investment Yields 145
Calculating and Comparing Yields 145
Investment Strategies 147
Is Outsourcing Right for Your Company? 147
Investment Tips for the Cash Manager 148
Practical Applications 149
Summary of Key Points 149
Chapter 13 Short-Term Borrowing 151
Chapter Goals 151
Introduction 151
Borrowing Objectives 151
Short-Term Borrowing Options 152
Short-Term Sources of Funds 152
Short-Term Borrowing Instruments 153
Factors that Influence the Cost of Borrowing 155
What to Look for in a Loan Agreement 158
Recommendations for Managing Short-Term Debt 159
Practical Applications 160
Summary of Key Points 160
Chapter 14 Doing Business Internationally 161
Chapter Goals 161
Introduction 161
Making International Payments 161
Paper Payments 163
Electronic Payments 163
Receiving Payments from Overseas 165
Payment by Check 165
Electronic Payments 166
What You Need to Know About Foreign Currency Accounts 167
Managing Foreign Exchange Exposure 169
FX Risk 169
FX Risk Management Policy 169
Developing an FX Hedging Strategy 170
International Trade Vehicles 172
Cash in Advance 173
Letter of Credit (L/C) 173
Documentary Collection 173
Counter Trade 173
Open Account 174
A Word on Notional Pooling 174
Improving International Payments 175
Practical Applications 176
Summary of Key Points 176
Chapter 15 Using Technology to Manage Treasury 177
Chapter Goals 177
Introduction 177
The Treasury Management System 178
Information Reporting 179
Internal Information 179
External Information 180
Transaction Initiation 182
Advanced and Specialized Modules 183
Options in Selecting a Treasury Management System 184
Type of System 184
Access Method 185
Internet-Based Systems 185
How to Select a Treasury System Vendor 186
Conduct a Vendor Search 186
Prepare Vendor Short List 187
The RFP Process 188
Preparing an RFP 188
Select a Vendor 189
Finalize the Details 190
A Word on Standardization 191
Practical Applications 191
Summary of Key Points 192
Chapter 16 Optimizing Banking Relationships 193
Chapter Goals 193
Introduction 193
Objectives of Bank Relationship Management 193
How Many Banks Are Enough? 194
Types of Banking Relationships 194
Standards for Evaluating Performance 195
Why Have a Service Level Agreement? 196
Key Items to Include in an SLA 196
Account Analysis 198
Reading the Account Analysis Statement 199
What to Check on the Account Analysis 201
Bank Compensation Practices 201
Negotiating Bank Fees 202
Practical Applications 203
Summary of Key Points 203
Chapter 17 The Bank Selection Process 205
Chapter Goals 205
Introduction 205
Selection of a Financial Services Provider 205
The RFP Process—Step 1: Prepare the RFP 206
Format of the RFP 206
Critical Selection Criteria 207
Sample RFP Questions 209
The RFP Process—Step 2: Analyze the Responses 211
Methodology for Evaluating Responses 211
The RFP Process—Step 3: The Presentation 211
The RFP Process—Other Considerations 213
Should You Use a Consultant? 213
How to Use an RFP Template 213
Pricing 213
Practical Applications 214
Summary of Key Points 214
Chapter 18 The Treasury Structure 215
Chapter Goals 215
Introduction 215
Organizational Design 216
Centralized Versus Decentralized Treasury Organization 217
Corporate Governance and Internal Control 220
Drafting Treasury Policy and Procedures 220
Roles and Responsibilities 222
Authority Limits 223
Management Reporting 224
Key Treasury Controls 225
Measurement and Management 226
Code of Conduct for Treasury 226
Treasury Audit 227
Performing a Review of the Treasury Function 228
Practical Applications 228
Summary of Key Points 230
Chapter 19 Outsourcing Treasury 231
Chapter Goals 231
Introduction 231
Progressive Centralization of Treasury 231
Shared Service Center 233
The In-House Bank 235
Outsourcing 236
Why Outsource? 237
What to Outsource? 238
The Virtual Treasurer 239
Selecting an Outsourcing Partner 239
Drawbacks of Outsourcing 243
How to Outsource Successfully 243
Practical Applications 244
Summary of Key Points 244
Chapter 20 The Way Forward 245
Chapter Goals 245
Introduction 245
Issues Facing Treasury 245
Summary of Treasury Best Practices 247
Company Financial Structure 247
The Banking Environment 247
Optimizing Liquidity 247
Collections and Concentration 248
Payments 248
Fraud Prevention 248
Doing Business Internationally 248
Banking Structure 249
Treasury Structure 249
Technology 249
Your Role as a Financial Professional 250
Practical Applications 250
Summary of Key Points 250
Appendixes
Useful Sources of Information 251
Useful Sources for Online Information 255
Lockbox Providers 259
Controlled Disbursement Providers 261
Sample Ethical Code 263
Index 265
