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By: KLIEF T. AMORES, 2014

TREASURY MANAGEMENT AND RELATED CONCEPTS

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o Introduction to Treasury Management

o Cash Management o Cash Transfer Methods o Cash Forecasting o Cash Concentration

o Working Capital Management

o Credit Management o Receivables Management o Inventory Management o Working Capital Metrics

Course Outline

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o Financing o Debt Management o Equity Management

o Investment Management

o Risk Management

o Foreign Exchange Risk Management o Interest Risk Management o Operation Risk Management o Operational Considerations

Course Outline

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o Financial and Regulatory Influences

o Clearing and Settlement Systems

o Treasury Technology and Systems

Course Outline

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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

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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

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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

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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

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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

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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

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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.


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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


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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

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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

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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

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Relationship Bank Relations

Bank Account Analysis Type of Fees

Bank Account Management

Loan Covenants

Collateral

Bank Relations

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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

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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.

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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.

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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

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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.

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Treasury Management System (TMS)

Application Service Provider (ASP)

Treasury Metrics Earnings Rate on Invested Funds Borrowing Base Usage Percentage Other Metrics

Treasury Outsourcing

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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.


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People Roles and

Responsibilities

Segregation & Controls

Key Performance Measurement

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Process Business Process

Understanding

Business Process Reengineering

Policies, Procedures & Reporting

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Treasury Management System (TMS) Technology

System

Identification, Evaluation & Selection

System Implementation

System Audit & Review

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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)

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Earnings Rate on Invested Funds

=𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 + 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑

Borrowing Base Usage Percentage

=𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑏𝑙𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 + (𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑥 𝐴𝑙𝑙𝑜𝑤𝑎𝑏𝑙𝑒 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒)

Other Metrics

Bad Debts as A Percentage of Sales Transaction Error Rate Cost of Outside Services Unhedged Gains and Losses

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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?

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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?

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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.?

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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?

=𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 + 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑠 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑

=𝑃𝑕𝑝750𝐾 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 + 𝑃𝑕𝑝1.5𝑀 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

(𝑃𝑕𝑝10𝑀 + 𝑃𝑕𝑝15.5𝑀)/2

= 17.65% Earnings Rate on Invested Funds

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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?

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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.?

=𝑃𝑕𝑝25,000,000.00 𝐿𝑜𝑎𝑛𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝑃𝑕𝑝49,720,000.00 𝑇𝑜𝑡𝑎𝑙 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝐵𝑎𝑠𝑒

= 50.28% Borrowing Base Usage

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“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.

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THANK YOU!

141117chapter1-141205052421-conversion-gate01

Documents

o financial

achievement of treasury

treasury team

o introduction

eact treasury controls

treasury reporting compliance

cash equivalents cash

related concepts ba