Liquidity Management

Question 1

What is liquidity –> 3 conditions
Minimise what?
Maximise what?

Answer 1

Having funds to meet all known and unknown commitments
->in the right currency
->in the right place
->at the right time
Minimise costs of funds and debit interest
Maximise use of surplus funds and interest earnings

Question 2

3x Case studies of firms that went into administration

Answer 2

House of Fraser August 2018 -> No cash due to no online presence -> tried CVA with creditors but still issues -> Sold to Mike Ashley to take out of admin for £90m
-> Sears: 3.5K US stores to 695 in 2017 / sold 100s of stores and real estate to try to pay debts / filed bankruptcy in October 2018 / liquidating
BHS -> Dominic Chappel / SPG called in loan £35M to put into admin Duff and Phelps / debts overall 1.3B /

Question 3

2 things to balance

Answer 3

Costs and benefits of liquidity (cash in bank) v. costs and benefits of lacking liquidity (overdrafts/shortage of funds)

Question 4

External ways to improve liquidity

Answer 4

Borrowing

Question 5

Internal ways to improve liquidity

Answer 5

Inventory control (JIT) / receivables control, Short term inventory and payable managemnet, better cash control, good invoicing

Question 6

4 ways to maximise liquidity

Answer 6

1. Accurate MI for D makers
2. Optimising net working capital
3. Reduce control and manage risk
4. Reduce transaction and bank fees

Question 7

Two techniques of cash concentration/pooling

Answer 7

Physical Sweep and notional pooling

Question 8

What is a physical sweep

• balance types
• pros and cons

Answer 8

-Several subsidiary banks and at the end of each day ecah goes into a master bank account
-ZERO BALANCE / MIN BALANCE / TRIGGER BALANCE
+If net positive pay no overdraft fees +make larger payments
-Regulatory issues / relationship / red tape / loss of control / reporting / setup and transfer cost

Question 9

What is notional pooling

• pre pool steps
• post pool steps
• pros and cons

Answer 9

-Funds dont move / bank calculates on a net level / credit balances offset debt balances / bank uses net cash position to understand interest paid/rec’d
PRE POOL: 1. Work out total positive and total negative accounts 2. apply interest figure to positive and overdraft fee to negative 3. work out net cost
POST POOL: 1. net position 2. apply interst if +ve or overdraft if -ve

Question 10

Evaluation + and -

Answer 10

+Amount of cash and time held for impact rate - pooling lets hit better band

• Country by country considerations: U.S. doesn’t allow notional pooling
• WHT key - some jurisdictions see intra-company payment as inter-company
• Huge requirements: Pooling agreement, cross guaruntees, legal right sendoff, tax, calculations, board resolutions
• Careful of critique
• Bank charges
• cutoff times

Question 11

Starbucks

Answer 11

£4.5m tax on £162m profits

14yrs up to 2012 paid £8.6m despite £3B in sales

Question 12

4 pooling types

Answer 12

single currency single country, multi-currency single country, multi country single currency, multi-currency multi-country

Question 13

Cannabis industry

Answer 13

29 states legal but illegal wider, cash only business, regulation against who banks can lend to. Issue for cannabis co.’s
“Safe Banking Act”

Question 14

Basel III

Answer 14

Global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. 
2010, still being implemented
Liquidity 8% of CAs
-ST funds less value to banks
-Makes pooling more expensive for banks