Treasury Management and Financial Risk: Key Concepts and Instruments

Treasury Management

Process of managing a company's liquidity, funding, and financial risk.

Liquidity Management

Ensuring sufficient cash to meet obligations.

Working Capital

Difference between current assets and current liabilities.

Cash Management

Collecting, managing, and investing cash efficiently.

Treasurer

Officer responsible for liquidity, investments, and risk management.

Controller

Manages accounting and financial reporting.

Centralized Treasury

Headquarters handles all treasury functions.

Decentralized Treasury

Subsidiaries manage their own treasury operations.

Shared Service Center (SSC)

Centralized unit for processing financial transactions.

ERP (Enterprise Resource Planning)

Integrated system managing financial and operational data.

Financial Market

Where financial instruments are traded.

Money Market

Short-term debt instruments (<1 year).

Capital Market

Long-term financing instruments (>1 year).

Primary Market

New securities issuance.

Secondary Market

Trading of existing securities.

Liquidity

Ease of converting an asset to cash without loss.

Interest Rate

Cost of borrowing funds.

Yield Curve

Graph showing interest rates vs. maturities.

Nominal Rate

Quoted rate before inflation.

Real Rate

Adjusted for inflation.

Risk Premium

Extra return for taking risk.

Central Bank

Controls monetary policy and money supply.

Monetary Policy

Government control over interest rates and money supply.

Current Assets

Cash, receivables, inventory.

Current Liabilities

Payables, short-term debt.

Operating Cycle

Time from inventory purchase to collection of receivables.

Cash Conversion Cycle (CCC)

Measures working capital efficiency. CCC = Days Inventory + Days Receivables - Days Payables.

Float

Time difference between transaction initiation and completion.

Collection Float

Delay in receiving cash.

Disbursement Float

Delay in paying out cash.

Net Float

Collection float − disbursement float.

Cash Position

Available funds to meet immediate needs.

Concentration

Moving cash from branches to a central account.

Disbursement

Paying out funds to meet obligations.

Zero Balance Account (ZBA)

Account that maintains zero balance by automatic transfers.

Notional Pooling

Offsetting balances without physical transfers.

Physical Pooling

Actual transfer of funds between accounts.

Target Balance

Minimum balance to cover routine needs.

Liquidity Forecasting

Predicting future cash flows for planning.

Short-Term Investment Policy

Defines guidelines for excess cash investment.

Bank Sweep Account

Automatically moves funds to/from investments daily.

Short-Term Investment

Investing excess cash in low-risk, liquid assets.

Money Market Instrument

Short-term debt, such as T-bills, CP, CDs.

Repurchase Agreement (Repo)

Sale and future repurchase of securities.

Commercial Paper (CP)

Unsecured short-term promissory note by corporations.

Certificate of Deposit (CD)

Bank-issued time deposit with fixed maturity.

Bankers' Acceptance (BA)

Time draft guaranteed by a bank.

Line of Credit (LOC)

Borrower can draw funds as needed.

Revolving Credit

Continuous borrowing and repayment option.

Prime Rate

Benchmark interest rate set by banks.

LIBOR / SOFR

Reference rate for global loans and derivatives.

Cost of Funds

Weighted average rate paid for borrowed funds.

Operating Cash Flow

Cash generated from operations.

Float Management

Reducing delays in cash movement.

Procure-to-Pay Cycle

Process from purchasing goods to payment.

Order-to-Cash Cycle

Process from customer order to cash collection.

Restrictive Strategy

Low current assets, high risk, high return.

Relaxed Strategy

High current assets, low risk, lower return.

Credit Management

Setting terms and limits for customer credit.

A/R Management

Monitoring receivables for timely collection.

A/P Management

Managing payables and disbursements efficiently.

Netting

Offsetting intercompany payables and receivables.

Re-Invoicing Center

Subsidiary handling internal trade payments.

In-House Bank

Central entity for managing group-wide payments.

Current Ratio

Current Ratio = Current Assets / Current Liabilities.

Quick Ratio

Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

Net Working Capital (NWC)

Current Assets − Current Liabilities.

Cash Turnover Ratio

360 ÷ CCC (number of cycles per year).

Days' Sales Outstanding (DSO)

Average days to collect A/R.

Trade Credit Discount

Reduction offered for early payment.

Annualized Cost of Trade Credit

Cost = ((1 - D) / D) × (360 / (N - T)).

Aging Schedule

Categorization of receivables by due dates.

A/R Balance Pattern

Tracks changes in payment behavior.

Forecasting

Estimating future cash inflows/outflows.

Short-Term Forecast

Daily to monthly.

Medium-Term Forecast

3-12 months.

Long-Term Forecast

Beyond one year.

Certain Receipts

Interest, rent, taxes.

Predictable Receipts

Payroll, sales.

Unpredictable Receipts

Repairs, claims.

Pro Forma Statements

Projected income and balance sheet to estimate cash.

Percentage-of-Sales Method

Links forecasted sales to expected cash impact.

Interest Rate Risk

Rate changes affecting debt/investments.

FX Risk

Currency changes impacting value of assets/liabilities.

Hedging

Using derivatives to offset financial risks.