Title Details

Michele Allman-Ward has worked for a number of the most prominent commercial banks leading cash management and treasury-related businesses for more than 25 years. She now runs her own consulting company, Allman-Ward Associates, Inc., working worldwide with companies, professional associations and banks. She specializes in strategic planning, business development and training, with particular emphasis on international cash and treasury management. She also works closely with both the Association for Financial Professionals (US) and the Association of Corporate Treasurers (UK) in developing and teaching their respective cash management certification programs, the CTP and the Cert ICM. Her previous books are The Essentials of Managing Corporate Cash (Wiley) and U.S. Cash Management: A Guide for the European Treasurer (Treasury Today Publications).

Peter Allman-Ward has worked with leading investment banks in a financial management capacity, most recently as Chief Financial Officer of Wedbush.

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