Topic 2: CFs and Cash Mgmt Flashcards
Cash flow forecast
Two Types: SHort term and Log Term
1. Describe
Short Term
- assist liquidity mgmt in ST ensuring day to day inflows/outflows are identified and efficiently mgd
Long Term
- More strategic and more of a longer term planning tool.
General guidance for CF forecast
- Generally forecast daily for 1st 5 - 6 weeks
- Weekly out to 3 months
- Produced weekly
- Extend beyond 1 month in the daily component, and beyond one turnover cycle in the weekly component
- Will need to smooth the ST forecast into the LT forecast
Items to include in forecast:
for INFLOWS & OUTFLOWS
- Cash / EFT receipts
- Acc rec / payable
- Other income / dividend pmts
- Tax receipts / tax pmts
- Interest receipts / pmts
- Treasury settlements
- Investment maturity / placement
- Debt issuance proceeds / maturity
- Asset divestment or acquisition/investment
Difficulties for CF forecasting
- Timing of pmts, receipts, clearing of pmts & receipts
- Multiple systems
- Care of broader business / lack of ownership
- General quality of data
- Level of granularity
- Knowing what to include
- Technical skills / experience / judgment of preparer
- Systems used to prepare forecast
- Measuring / improving accuracy
- How far to forecast
- global difficulties/complexities (bank accounts, # accounts, structure, time zones, currencies, in-country restrictions, multiple currency forecasting, systems, quality of data)
Implications of inaccurate forecasting
- Default on pmts (or late pmts)
- Fines, penalties, loss of value
- Loss of credibility
- Shorter pmt terms or loss of credit terms
- -ve impact on credit rating
- Higher costs
- Loss of investment income
- HIgher borrowing rates
- Missed deals or business opportunities
Bank accounts - Pooling & sweeping
- notional vs physical sweep
Notional vs physical sweep:
Physical
- Physically sweep end of day balances from local accounts to one central cash pool.. Local accounts left with zero cash balance. Balances swept back next morning.
- Intercompany loans and deposits are maintained for balances swept into centre
- All bank accounts do NOT need to be with one bank
-
NOTIONAL
- No physical movement. Balances are notionally aggregated.
- Can only be done with account with the one bank
- Bank calculates interest on net balance but funds remain in local bank account at end of day.
- Intercompany loans not required
- Some countries restrict this for tax reasons
Advantages of cash sweeping
- Reduced borrowing costs
- Increased investment returns
- Reduced transaction & bank account administration costs
- Improved line of site over Group cash
- More effective management of cash balances
- Improved control over group cash
Funding short term shortfalls in cash
- Overdraft
- Uncommitted facilities
- CP
- Revolving credit facility (backstop to CP facility)
- Bridge to bond
- Committed facilities
- Factoring
- Floor plan financing
- Early redemption / sale of investments
- Repurchase agreement
- Bank Bill Facility
Short Term FUnding Options
OPERATIONAL
OPERATIONAL
- Sweep / pool balances
- Access to non-centre cash
- Restructure accounts payable / receivable
- Reduce operational expenditure
- Reduce capex
ST Funding Options
OVERDRAFT
OVERDRAFT
- Maintain bank account in overdrawn position
- Committed facility generally used on ST basis
- Higher cost than alternatives
- Repayable on demand
ST Funding Options UNCOMMITTED FACILITY (6)
- Loan provided on availability basis
- Cannot be relied on as a reliable source of funds
- Generally done on a bilateral basis
- No commitment fees
- Cheaper to arrange
- Drawings generally short term (
ST Funding options
CP
COMMERCIAL PAPER
- Unsecured borrowing facility
- Discount securities are issued in the market
- Overnight to 270 days
- Highly liquid market
- Strong credit rating required
ST Funding Options
REVOLVING CREDIT FACILITY
REVOLVING CREDIT FACILITY
- Backstop (support) to commercial paper
- Secured backstop enables the issuer to borrow in adverse conditions
- Committed facility
- Required by ratings agencies
- Generally syndicated
- Fees paid upfront for commitment as well as when funds are drawn
- Restrictions on drawdown of funds
ST Funding Options
BRIDGE TO BOND FACILITY
BRIDGE TO BOND FACILITY
- ST bridging finance
- Utilised until capital markets issues can be put in place
- Generally used for acquisition financing
- Fees are payable but are often incorporated as a package in the bond issue
- ST facility, generally less than 1 month
ST Funding Options
COMMITTED FACILITY
COMMITTED FACILITY
- GUaranteed amt of funds available to be drawn down.
- Can be done bilateral, club or syndicate basis
- Commitment fees are payable regardless of whether facility is used
- More onerous to establish in terms of documentation
- Drawings generally longer term (up to 7 years)
ST Funding Options
EARLY REDEMPTION / SALE OF INVESTMENTS
EARLY REDEMPTION / SALE OF INVESTMENTS
- Outright sale of securities held for investment purposes (eg CP, bonds etc)
- Recalling fixed term deposits prior to maturity
- Capital losses or penalty charges may apply
ST Funding Options REPURCHASE AGREEMENTS (3)
REPURCHASE AGREEMENTS
- Securities are sold with the commitment to buy them back at a future date
- Highly liquid market for specific types of instruments
- Generally ST in nature
ST Funding Options
RESTRUCTURING OF ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE
RESTRUCTURING OF ACCOUNTS PAYABLE AND ACCOUNTS RECEIVABLE
AP
- One-off. Delay a series of payment for ST
- Ongoing - work to extend pmt terms on a wholesale basis
AR
- Offer discount if accounts paid early
- Paying interest when accounts paid early
ST Funding Options
FACTORING
FACTORING
- Accts Rec’ble sold to financial institution for agreed % of FV
- $ rec’d upfront, financier is paid direct from customers
- Discount applied depends on credit worthiness of customers
- Can be expensive form of funding
- Company loses control of the collection process
ST Funding Options
FLOOR PLAN FINANCING (2)
REDUCTION TO OP EX / CAP EX (1)
FLOOR PLAN FINANCING 1. Fin Instn funds the purcahse of specific assets that sit on the floor (eg cars) 2. Fin Instn is repaid when assets sold REDUCTION TO OP EX / CAP EX 1. Cuts to op or cap ex
Why forecast cash
- Meet day to day pmts
- max return on investment
- Min borrowing costs
- Understand when new funding facilities are required
- Plan for future debt repayments & significant payments such as tax & dividends
- Track performance against annual budgets and broader business forecasts
- Make strategic decisions
- Identify currency exposures
- Manage credit risk
Factors affecting decision on measure to adopt to fund ST shortfall (6)
- Amount
- Term
- Borrowing facilities available / in place
- LT options
- Credit rating
- Debt strateg6
Investment of Surplus funds
BANK TERM DEPOSITS (5)
BANK TERM DEPOSITS
- Fixed rate deposit paying interest on maturity
- Set terms up to 12 mths
- Penalties to redeem prior to maturity
- Generally for smaller amts dealt in local branch
- For smaller or medium sized companies dealt in local branch
Investment of Surplus funds
MONEY MARKET DEPOSITS WITH BANKS (5)
MONEY MARKET DEPOSITS WITH BANKS
- Dealt directly with bank dealing room
- Fixed rate based on term to maturity
- Highly flexible
- Penalties apply to redeem funds prior to maturity
- For professional market parcels, dealt in a variety of currencies
Investment of Surplus funds
BANK BILLS
CP ISSUED BY OTHER BORROWERS
ST GOVT PAPER
BANK BILLS
- Discounted securities up to 180 days issued by banks, highly liquid
CP ISSUED BY OTHER BORROWERS
- Discounted sec’s issued by non banks up to 270 days (30 - 60 is most liquid). Highly liquid, variety of highly rated lenders
ST GOVT PAPER
- Discounted securities issued by govt or semi govt authorities, highly liquid, lower rate than CP
Investment of Surplus Funds
MONEY MARKET FUNDS(6)
MONEY MARKET FUNDS
- Managed funds that invest in a variety of instruments
- Highly liquid, can take very large amts on deposit
- Some are avail on call
- Generally invest in a specific asset class
- Lower credit risk due to diversity
- Can charge high fees
Investment of Surplus Funds REPURCHASE AGREEMENT (3)
REPURCHASE AGREEMENT
- Securities are purchased with the commitment to sell them back at a future date
- Highly liquid for specific types of securities
- Generally ST in nature
Factors affecting choice of product for investment of surplus funds (6)
- Amount
- Term
- Availability of products
- Credit rating of products
- Access to the invested funds
- Company’s investment policy
