Fina 402 – Notes

 Short-term financial management: Utilization of firm’s CA and CL to maximize shareholder’s

wealth.
 Working Capital: (ex)
o Cash and equivalents
o AR
o Inventory
o AP
o Accruals
 Short term operating assets: Receivables and inventory
o Held for product shortages
 Short term operating liabs: accounts payables and accruals
 Short term Financial assets: cash and equivalents
o Work as a buffer against low future flows (due to decreased revenues, exchange rate
flucs)
o Payment method for daily transactions
 Firm liquidity: efficient and effective use of CA and CL
o Firm’s ability to:
 pay financial obligations
 strategic capital investments

Fina 420, 470, comm 401

Investment: fina 410, 411

Exam next week

8:30pm

1hr-1.5hrs

Short answers, 3 attributes ex.

Point form, avoid rewriting the sentence. Just state answer

Calculations (similar to practice problems posted on moodle)

Allow to go back and forth in exam

Lots of questions in the bank, divide by topic, shuffles and do not have the same exam, some may repeat
 Lecture 1: Liquidity Canadian, American Clearing, & SWIFT

 Liquidity
o Definition: Cash management is the process of collecting and managing cash flows.
o Optimize balances
 Account for forecasting
 Inflows – outflows = surplus that will be invested or overdraft that will
be covered by money market products or line of credit.
 Profit & Cash flow
o Evaluate if there is a cash movement attached to the revenue/expense
o Elements to evaluate:
 Timing
 Uncertainty (will we get the money at all?)
 Depreciation/amortization

 Banking Relations Canada:

o Accounts in CAD, US and other FX –
o Large number of cash management products, most of them having a web address. –
o Payment of interest on balances. –
o Agreement for overdraft coverage –
o Documentation is a MUST, time and expertise should be allocated accordingly
(remember it often takes longer that anticipated) just to open an account, everything
needs to be documented (frauds, more what if scenarios), when opening for corp, need
charter lots of docs with different laws.
 Large transactions/large corps have an office in Delaware, tax shelter. Not really
a physical place/building (no taxes for corporations in Delaware)
 Canadian clearing
o Clearing = money travelling Co. A paying Co. B
o Payments Canada* –
 Defines clearing rules (almost like laws, obeyed bcuz not many participants (12
financial institutions that are major/ incharge of clearing) –
 ACSS –
 LVTS
o Unique Canadian System 12 direct clearers Around 100 other indirect clearers that have
to maintain accounts with one of the 12 direct clearer. * Web address: www.payments.c
 Payments Canada
o Payments Canada is a not-for-profit association created in 1980 by an Act of Parliament.
The CPA’s mandate is:
 (a) to establish and operate national systems for the clearing and settlement of
payments and other arrangements for the making or exchange of payments;
 (b) to facilitate the interaction of its clearing and settlement systems and related
arrangements with other systems or arrangements involved in the exchange,
clearing or settlement of payments; and
 (c) to facilitate the development of new payment methods and technologies.
 Clearing and settlement systems
o Payment Canada operates several systems for the clearing and settlement of payments:
o ❖ the retail system know as the Automated Clearing and Settlement System (ACSS)
o ❖ the Large Value Transfer System (LVTS) soon to be replaced by Lynx in 2020
o ❖ the U.S. Bulk Exchange (USBE) system, a parallel system to the ACSS, is used for the
clearing of payment items in U.S. dollars. Settlement of USBE balances is carried out
through correspondent banks in New York.
 Clearing and settlement systems
o Remote transactions represent 90% of transaction value but 20% of volume
o Online transfers have the largest growth, it rose around 48%
o Cheque declined by 9% year to year, but it is still the mostly used by commercial
o Cash is still the most widely used payment method and represents around 13% of the
value
o Credit cards is about double the $ value than debit cards
 High Value Payment System LYNX
o Actually LVTS which is an electronic wire system that facilitates the transfer of
irrevocable payments in Canadian dollars across the country.
o Through LVTS, funds can be transferred between participating financial institutions
virtually instantaneously, and funds can be credited to the recipient’s account on a
timely basis. As all LVTS payments are immediately final and irrevocable.
o Lynx will achieve same but through ISO 20022 standards, due date 2020
o Lynx will achieve same than LVTS but through ISO 20022 standards, due date 2020
o Key Outcomes
 • Continue to ensure payments finality and settlement certainty
 • Flexibility for future technologies, including interfaces and APIs
 • Enhanced cyber security and resiliency capabilities
 • Enhanced safety and soundness
 CCIN Corporate Creditor Identification Number (CCIN)
o A Corporate Creditor Identification Number (CCIN) is a non-transferable identification
number assigned by Payment Canada to businesses, governments, and other billers to
facilitate the routing of bill payments to these organizations through their financial
institutions (FIs). A CCIN, which appears at the bottom of bills and invoices, allows
corporate creditors to be uniquely identified for the purpose of electronic bill payment
processing.
 Payments Canada Modernization
o A modern payments system is fast, flexible and secure, promotes innovation and
strengthens Canada's competitive position.
o The Vision identified eight needs of a modern payments system:
 Faster payment options
 Data-rich payments
 Transaction transparency
 Easier payments
 Cross-border convenience
  Activity-based oversight
 Open & risk-based access
 Platform for innovation
 WHAT CANADIANS NEED AND EXPECT FROM PAYMENTS
o Today, end users expect ‘instant’ and ‘always on’ experiences and, in many cases, near
real-time, data-rich payments. End users also want the ability to route payments using
readily available information, to receive notifications that describe payment status, and
to be able to initiate and receive payments 24/7/365.

o
 American Clearing
o Four systems –
 On-Us –
 Federal Reserve –
 Clearing Houses –
 Courier
 Federal Reserve wires (FED wires)
 o Federal Reserve wires are guaranteed by the FED. The account with the FED of the
originating financial institution is debited and the account of the beneficiary financial
institution is credited by the FED. The payment is final and irrevocable.
 NACHA, National Automated Clearing House Association
o The ACH Network provide for the interbank clearing of electronic payments for
participating depository financial institutions. ACH payments include:
 Direct Deposit of payroll, Social Security and other government benefits, and tax
refunds
 Direct Payment of such consumer bills as mortgages, loans, utility bills, and
insurance premiums
 In 2018, NACHA and the ACH Network moved around 23 billion electronic
payments each year representing a value of $51 trillion.
 On September 14, 2017 same day value ACH was launched.
 CHIPS, Clearing House Interbank Payments System
o CHIPS delivers wire transfer payments – in real time with finality. It processes over 95%
of the USD cross-border payments and an increasing volume of U.S. domestic payments.
o Leading banks, their correspondents and customers around the world count on CHIPS to
process more than $1.5 Trillion each day.
o CHIPS is operated by The Clearing House, which also provides ACH, paper check
exchange and check image exchange for financial institutions of all sizes.
 CHIPS, how it works:
o

 SWIFT, Society for Worldwide Interbank Financial Telecommunication

o SWIFT is the Society for Worldwide Interbank Financial Telecommunication, a member-
owned cooperative through which the financial world conducts its business operations
 with speed, certainty and confidence. More than 11,000 banking organisations,
securities institutions and corporate customers in over 200 countries trust them every
day to exchange millions of standardised financial messages.
o Swift provides the proprietary communications platform, products and services that
allow customers to connect and exchange financial information securely and reliably.
o SWIFT enables its customers to automate and standardise financial transactions,
 SWIFT
o The SWIFT Standards group maintains several important message standards. The SWIFT
MT standard, for instance, is used for international payments, cash management, trade
finance and treasury business. Working with the SWIFT community, SWIFT Standards
operates the annual maintenance process for MT, which ensures that the standard
evolves to meet changing market needs.
o SWIFT Standards, under contract to ISO, also maintains two open messaging standards:
ISO 15022, which is used for securities settlement and asset servicing, and ISO 20022,
which is scoped to all financial industry processes.
o The role of ISO 20022 is twofold: it is a methodology for creating financial messaging
standards, and it is a related body of content, which includes definitions of common
industry terms, and message definitions addressing an expanding range of business
areas, including payments, cash management, treasury, cards and securities.
 Swift
o FIN
 FIN is the longest established of all messaging services. It enables the exchange
of messages formatted with the traditional SWIFT MT standards
o InterAct
 Like FIN, InterAct enables the exchange of messages on a message-permessage
basis, and supports the exchange of proprietary formats between market
infrastructures and their customers. In addition, InterAct offers increased
flexibility, including store-and-forward messaging, real-time messaging, and
real-time query-and-response options.
o FileAct
 FileAct enables the transfer of files. It is typically used to transfer large batches
of messages, such as bulk payment files, very large reports, or operational data.
 Swift Cont’
o SWIFT gpi – the new standard in global payments – banks are now sending and
receiving funds quickly and securely to anyone, anywhere in the world, with full
transparency over where a payment is at any given moment.
o Speed
 Nearly 50% of SWIFT gpi payments are credited to end beneficiaries within 30
minutes and over 90% of gpi payments are credited within 24 hours
o Traceability
 With gpi you have a real-time, end-to-end view on your cross-border payments
and receive a confirmation the instant your beneficiary has been credited
o Transparency
  With gpi you have full visibility over the bank fees charged and FX rates applied
to your cross-border payments

Lecture 2: SEPA & Other countries payment tools

 SEPA Overview
o The Single Euro Payments Area (or “SEPA” for short) is where more than 520 million
citizens, over 20 million businesses and European public authorities can make and
receive payments in euro under the same basic conditions, rights and obligations,
regardless of their location.
o Cross-border or domestic – the accounts of both the payer and payee must be in SEPA
country
o The introduction of the euro has helped to make cash payments anywhere in the euro
area just as easy as at home.
o Covers 36 countries
o Has replaced all domestic low value payment systems since August 2014. by money
market products or line of credit.
 The introduction of SEPA gives these advantages:
o ◦ Use your debit card anywhere in the euro area
o ◦ Better cross-border bank transfers
o ◦ Direct debits from anywhere in the euro area
o ◦ Only one bank account needed for the whole euro area
o ◦ Lower prices for basic payment services in high-cost countries
o ◦ Transparent pricing and no hidden charges
 In addition, for corporations:
o ◦ Direct debits from anywhere in the euro area
o ◦ Handle all euro payments from a single bank account
o ◦ Only one terminal for payment cards
 The payments are in EUR but, at each bank’s option, the funding or receiving account does not
have to be in EUR
o ◦ Either the originating or the receiving bank can or will handle any required foreign
exchange
 In non-EMU countries such as the UK, Switzerland, Czech Republic, etc., registered banks are
required to receive SEPA payments (credit or debits) but are not required to offer the
origination of SEPA payments

 SEPA - Features
o Bulk or single payments
o Payment instructions (formats) are in XML
o Handled like ACH transactions, i.e., transactions are stored and then forwarded
 o Each side pays their own fees; fees are not deducted from the payment amount
 ◦ If agreed between the receiving bank and the beneficiary, the fees payable by
the beneficiary may be deducted from the SEPA Credit Transfer
o Unlimited transaction amounts
o The originating bank must credit the beneficiary bank: ◦
 Effective Jan 1, 2012 it became mandatory to abide by the 1 banking business
day rule
o The beneficiary bank must credit the payment to the beneficiary’s account on the day it
receives credit from the payer’s bank. In other words: no float
o 140 characters of structured or unstructured remittance data; the beneficiary bank may
opt to provide the remittance data on paper or electronically
 Originators and originator banks may recall payments provided: ◦
o They are duplicate payments ◦
o Are a result of a technical problem ◦
o Are fraudulent ◦
o Had been sent to the clearing house less than 10 banking business days ago and not
processed yet
 If funds have already been credited to the beneficiary, the beneficiary’s bank can send back
recalled payments or unauthorised SEPA payments for up to 13 months provided: ◦
o Local laws allow ◦
o There are sufficient funds available ◦
o The beneficiary consents, if such a consent is necessary locally

 Benefits of SEPA
o Collecting regular payments such as subscriptions. For companies collecting regular
payments such as membership or subscription organisations SEPA Direct Debit has three
important advantages:
 Control – Using SEPA Direct Debit enables merchants to ensure that customers
will pay their bills on time every month.
 Retention rates – Using SEPA Direct Debit eliminates failed payments due to
card expiry or cancellation. It also increases customer loyalty by offering a
convenient “set it and forget it” payment method.
 Reduced admin – Using SEPA Direct Debit reduces the admin time involved in
chasing and inputting updates to card details.
 Simplicity, convenience and cost-effectiveness are the three core benefits of .
 Consumers can now rely on one payment account and card to make euro
payments wherever they are in Europe, which provides them peace of mind
when they are travelling in Europe or making online purchases on websites
based in other countries.
 Equally, enterprises see increased business opportunities and can more easily
access a broad European market. As they do not have to deal with multiple
payment card standards for euro payments, they save time and money
 SEPA – Other payment types
o SEPA Cards: card payments (credit or debit) ◦
  enabled consumers to use the same cards they use in their own country for
purchases everywhere in Europe. Payments in euro
o SEPA Mobile: mobile payments
 ◦ Under development
o SEPA Cash:
 ◦ Improve cross-national handling of EUR cash
 ◦ Under development
 M-Pesa African Mobile Payment
o M-Pesa is a virtual banking system that provides transaction services through a SIM
card.
o Users can make payments and transfer money to vendors and family members with
SMS messages.
o The money that needs to be stored is given to the kiosk attendant, who transfers the
amount in digital form to the user’s M-Pesa’s account.
o The phone numbers act as account numbers. After settlement, both parties receive an
SMS notification with the full name of the counterparty and the amount of funds
deposited or withdrawn from the user’s account.
o April 2020, Safaricom and Visa announced a partnership. This will be used to expand M-
Pesa to online transaction

 Digital Payments
o In digital payments, the payer and payee both use digital/electronic modes to send and
receive money.
o The global digital payments market was valued at USD 3885.57 billion in 2019, and is
expected to reach USD 8686.68 billion by 2025.
o Top Leading Companies of Global Digital Payments Market are Ant Financial Services
Group, Visa inc, Google Pay, Tencent Holdings Ltd, AliPay (China) Internet Technology
Company, Paypal Inc, Starbucks Corp, Apple Inc, Samsung Pay, Square Inc, Samsung
electronics ltd, Venmo Inc, Mastercard Inc, Zelle LLP ...
 Digital Payment in China – 2018
o Alipay
o Tenpay
o Online bank transfer
o CC pmt

 Cashless: Sweden first (by 2022)

o Many issues with taxi drivers, lots of lobbying to get rid of cash, started process
o 10 years no more cash, coins and bills will disappear

Lecture 2: Cash, Gift Cards & Smart Safes

 Cash: Cost of Handling
o Ordering cash either from an armored car or directly from the bank
o Depositing cash
 o Preparing deposits and accounting for them
o Sending through an armored company or going to the bank
o Issue with value date if using the night deposit option
o Storing cash in a safe location within the premises
o For an average retailer having five cashiers, employees spend 15 hours per day
managing cash.
o Cost of errors
o Security procedures have to be implemented
o The average bank note is touched a minimum of five times within your store before it is
deposited.
o Most often, two employees are required to count all money exchanges in store
throughout the day.
o Grocery business: Cutting the Costs of Cash:
 Sepa & Cash
o Why should Europe move from cash to electronic payments:
https://www.europeanpaymentscouncil.eu/what-we-do/sepa-cash “The SEPA project
and the EPC’s drive to improve payments harmonisation and innovation in Europe both
encourage a shift from cash to electronic payments.”
 Reasons:
 Cash is one of the most expensive payment instruments


 Smart safe
o A Smart safe is a physical safe which has additional features that allow to track cash
inflow and outflow. It electronically confirms balances with the Bank. These advanced
safes allow corporations to monitor cash at every step of the handling process. These
safes give clear visibility into the flow of cash at all times.
o stand doesn’t have to come, bring to financial center, automatically money comes to
account, but physically stays in the safe.
o Merchant keeps on premises, saves on space, saves on security, hires money armour car
to come less & knows exactly. , knows how much coins needs to bring
 In addition to the security aspect of a cash safe the “smart safe” has these additional features: ◦
o Daily electronic transfer of the balance amount from the safe to the financial
institution. This amount is used to credits the company’s bank account ◦
o Real time information: the company knows at all time how much is in the safe as well as
the composition (notes and coins) ◦
o Saving time: The time to manually process cash is substantially decreased. Less time
spent verifying money counts, closing out registers, and pursuing error and theft
investigations ◦
 o Total accuracy: Increasing accuracy as the smart safe does the counting for each deposit
and can assign it to various individuals. ◦
o Security: The smart safe’s primary job is to keep money secure. Its bill validator is even
trusted by banks and armored car services.

Lecture 3: Cash flow & Terms of Payment

o Holding cash 3 reasons to hold cash:
o Transaction: to be able to pay when deadline arrives without waiting for inflow of cash
o Precaution: for unexpected needs
o Speculation: allows to move quickly and benefit from opportunities

o Cash flow cycle of a Business:

o Corps push from 30days to 45 days, because clients get stressed to pay

o Cash conversion Cycle: (35 day cycle) day 30 to 75

o Days inventory + days receivables - days payable
o Days inventory: raw mat to manufacturered goods
o Days receivables: when client pays
o Days payable: when you need to pay for raw mats
o Inverted cash conversion cycle: ex. Costco, sells goods in 15 days and can pay suppliers in 30
days
Ratios:

o Days inventory held (DIH) Average delay that the inventory is held for: Inventory / Cost of goods
sold/365
o Days sales outstanding (DSO) Average delay to collect account receivables Account
Receivables/Sales/365
o Days payables outstanding (DPO) Average delay to pay the suppliers: Accounts payables/Cost of
goods sold/365

o Days sales outstanding (DSO)

o Cash Flow
o In order to free cash from the cycle we could: ◦
 Decrease CCP*, this means that we would shorten the period where financing is
requested ◦
 At best we could have a negative CCP which means that money (A/R’s) is
collected before suppliers are paid (A/P’s)
 Therefore decrease DIH & DSO and increase DPO
 * CCP= cash conversion period
o Financing CCP – how to finance?
o In order to finance CCP companies usually draw of their operating line of credit
o This line can be: ◦
 committed, which means that the Financial Institution that provides it is
engaged if certain conditions are met; (fees attached, standby fee) as long as
conditions are met, ex. Maintain ratios
 Uncommitted, means that the Financial Institution can cancel it without prior
notice, right away 48hrs to repay. Don’t sleep well at night
o Financing CCP – operating line
o Usually the Financial institution will require the Operating facility to be guaranteed
either by: ◦
 Accounts receivables, some may be carved out (look at example)
 who owes you money, up to standards, depends on the client. Will they
pay back ?
 Inventory, depending on the nature its value will need to be assessed
 In both cases above a % (depends on how strong your company) usually 50-60,
strong companies are 90% called margin will be applied to defined the amount
of the collateral. For example, if the total inventory is $100M and the margin is
60% the corporation can get $60M operating line of credit against its inventory.

Name 0-30 30-40 60-90- 90+ Total

A 100 0 0 0 100
B 200 0 0 25 225
C 500 0 0 0 500
D 100 200 400 1000 1700
2525
o D = all 90+ paid this week, paid 2x a year, rich corp
o C = always pay their bills, or could be a new company, check their corp. do your research on
their financials
o B = 90+ could be discrepancy in colour of product, wont pay till its fixed
o * have to look at details, targets? Reluctant to finance?

o Standby fee on committed line

o On the unused portion of a committed line of credit sometimes the financial institution
will charge a fee (standby fee).
o This fee covers the cost of capital necessary to maintain the credit available.
 o Finan insti has to keep some $ for committed lines, kept on the side. Cant be loaned.
Cover UNUSED portion

o Aging Schedule – how late you A/R are

o Is a list of the percentage and/or amounts of outstanding A/R classified as current or
past due.
o Separates A/R into current and past due receivables in 30-day increments (on a
customer or aggregate basis) and can determine the percent past due
o Used primarily to identify past due accounts.
o Can be prepared at the aggregate level or customer-by-customer.
o Subject to distortions due to sales variations.

o A/R Financing
o Unsecured Bank Borrowing
o Secured Bank Borrowing
o Captive Finance Company
o Third Party Financing Institutions (not rly good idea)
o Credit Card Factoring
o Private Label Financing
o Reasons to Offer Credit
o Competition (look at market share, where are you? How many days are average in
industry?)
o Market Share
o Promotion
o Credit Availability to Customers (charge for going over limit, can you afford that?
o Customer Convenience (can accept cash for small farm, P&W can you externd terms of
payment?)
o Profit
o Cost Associated With a Credit Policy
o Credit Department Costs (who paid who didn’t)
 o Credit Evaluation Costs
o A/R Carrying Cost – interest rate, a lot of money in you a/r
o Discounted Payments – pretty expecnsive
o Selling and Production – expensive, collection agency
o Cost Collection Expenses
o Bad Debts
o Analysis of Credit Extension – entend credit period from 30 to 45 days

o Terms of payment
o Before selecting a term of payment goals have to be defined, here are a few examples:
 ◦ Accelerate the collection of A/R’s
 ◦Increase sales ◦
 Decrease marginal accounts ◦
 Spread the financing ◦
 Decrease inventory
o More goals : ◦
 Become more competitive ◦
 Increase market share ◦
 Make sales force more accountable ◦
 Credit availability to customers ◦
 Customer Convenience
o Objectives of Credit Management
 Creating, preserving, and collecting A/R.
 Establishing and communicating credit policies.
 Evaluation of customers and setting credit lines.
 Ensuring prompt and accurate billing.
 Maintaining up-to-date records of accounts receivables.
 Initiating collection procedures on overdue accounts.
o Here are some terms of payment:
 ◦ Cash before delivery (CBD) – highly perishable item, cant go back to get
merchandise (cash b4 manufacture and b4 selling product) ex. Plane ticket,
strawberries, online deliveries before shipment, as a guarantee, customized
products/personalized, cannot be erased. Will ask for deposit
 Cash on delivery (COD) ◦ items like, pizza delivery person at the door
  Consignment ◦ ex. Putting ur guitar on display, then when they sell it. Play it
again, sell skis. Take your name, if you sell it, they keep a percentage. Some
places theres a voucher, GameStop gives you credit. If doesn’t sell, goes back to
you. Large ticket item, and you’re not willing to pay for it. Like jewllry, lend
40rings, as you sell it, then you can pay. Fill shelves, take back what does sell last
week (magazines) and reduce from payment. Pay with what is being sold.
Barcode
 Open Account – you’re good for 25,000$
 Money discount ◦ - if you pay within certain # of time, you get a rebate
 Ex. 2 – net 30 days terms of payment
 Invoice = 100$
 If you pay within 10 days the amount is $98 , therefore 2$ rebate
 If you pay within 10 – 30 days, you pay 100$
 Roughly 18x 2%= 36% yearly for them to pay 20 days faster (expensive
discount!)
 Volume discount ◦
 Summer, end of season sale, get rid of items. Discount on all items, ex
BOGO. Get 10$ and gets rid of 2x inventory
 Floor financing (car industry) ◦
 Parking lot is full of old cars, needs to fill up parking lot. End of szn, end
of cycle, want to get them out the door so willing to pay price to get rid
of them
 Seasonal dating
 Ex. Winter ski equipment, in sept-oct. 7days to have products on shelve,
true purchase, will give an

o Annualized Cost of Trade Credit

 Example Assuming terms of 2/10, net 45, the cost of not taking the discount can
be determined as follows: saves 35 days
 Conclusion: If the company can borrow at less than 21.28%, it should do so and

use the borrowed funds to pay early and take the discount
o Cost of Trade Credit
 From a seller’s viewpoint, the cost of the discount must be weighted against the
benefit of receiving early payment.
 From buyer’s viewpoint, the cost of trade credit is an opportunity cost.
  A buyer should take the discount if its cost of borrowing is less than the cost of
foregoing the discount.
 Alternatively, a buyer should forego the discount if investment rates are higher
than the cost of foregoing the discount.
o Definition of terms of payment
 Consignment: merchandise left at the retail store that will be paid for if and
when sold.
 Open account: credit margin granted to a client.
 Floor financing: in the car industry, gradual payment of inventory by the
dealership to the supplier.
 Seasonal dating: in seasonal merchandise, period of time granted to pay the
invoice.
o Lambda Refined current ratio
o Takes into consideration: ◦
 All sources of liquid assets ◦
 Uncertainty ◦
 Time period
o What is prob that cA is > than CL in dollars ? considers unsed line of credit. More info of
liquidity

Lecture 4: Valuation, Inventory & Collection

o Inventory
o 3 Basic Types of inventory: - any could be worth the most
 Raw material (RMI) ◦
 Work-in-progress (WIP) ◦
 Finished goods (FGI)
o Why hold inventory: -
 Transaction motive – someone placed in order need to fill
 Precautionary motive –
 Speculative motive
o Cost of Managing Inventory
o Total Cost: Total cost of ordering inventory + Total cost of holding inventory
o Ordering Inventory: Order cost (per item) * # of orders
o Holding inventory: Holding cost (per item) * average inventory balance
 T : total inventory units demanded
 Q: order quantity
 F: fixed order cost, per order
 H: holding cost, per unit
 Total Cost: (F * T/Q) + (H * Q/2)
o Optimal Quantity to Order
o Economic order Quantity (EOQ):  [ 2 X T X F ] / H
 T = fixed cost per year
  F= demand in units per year
 H= carrying cost per unit per year
 Underlying Assumptions of EOQ:
 The ordering cost is constant.
 The rate of demand is constant
 The lead time is fixed
 The purchase price of the item is constant i.e. no discount is available
 The replenishment is made instantaneously, the whole batch is
delivered at once
o Re-order point
o You need to account for: ◦
 The time it takes to get your items selected ◦
 The packing time ◦
 The shipping time
o Reorder point: (lead time X average daily usage) + safety stock
o Safety Stock: (Maximum daily usage x Maximum lead time in days ) Minus ( Average
daily usage X Average lead time in days )
o Valuation
o Simple Interest Case PV : (FVn)/[1 + (k * n/365)]
 FVn : future value received in period n
 k: interest rate earned per year
 n: number of days
o Collection, Credit (Trade vs Bank)
o Attribute:
 length of time
 security
 amount involved
 resources transferred
o Motives:
 financial
 operating
 contracting
 o Credit Extension

o Credit Standards
o The 5 C’s of credit: ◦
 Character ◦
 Capital ◦
 Capacity ◦
 Conditions ◦
 Collateral
o Credit Scoring Model
o A credit score is a numerical expression based on a statistical analysis of a person's
credit files (Wikipedia)
o List of variables with weighting associated to each that will be used to assess “quality” of
client.
o Benefits: speed, consistency, can be automated
o Challenges: Based on historical data, Accuracy of information

Baumol model
 Lec 5: Treasury Management

 Table of content
o Sources of cash flow/ Usage of cash flow
o Establishment of financial forecast
o Treasury budget
o Data collection
o Judgemental approaches
o Extrapolative forecasting (time series methods)
o Causal approaches
o Distribution approaches
 Sources of cash flow
o 3 sources of treasury flows
 Operation → products and expenses
 Investment → acquisition and sales
 Financing → issue and reimbursement
 Usage of cash flows
o Operation
 ◦ Suppliers accounts
 ◦ Current expenses
o Financial
 ◦ Debt repayment
 ◦ Acquisition
 Establishment of financial forecast
o Treasurer’s goals :
 Forecast flow of funds :
 Balance sheet
 Other tools
 Forecast the timimg of fund flow
 Assess the level of available funds and short-term debt availability.
 Define the level of rounding, consolidation and sensitivity of the forecast
 Complexity
o Geographical location of the users
o Currencies
o Systems used – where is the data is from, one system from resume, another one to
verify the credential, about 66 systems to complete the profile
o Knowledge of data: how often
o Frequency of updating:
o External factors: interest rates, foreign exchange, economic conditions, now covid
 Treasury Budget : 4 STEPS (what goes in and out)
o 1. Sales forecast
  → one of the most difficult task. Usually performed by the marketing/sales
department
 Ex: look at heating last year
 **UNDERSTANDING OF FORECASTING ON EXAM
o 2. Forecast of inflows
o 3. Forecast of outflows
o 4. Calculation of cash flow at the end of the month and decision to borrow (short cash)
or invest (long cash)
 Various levels in treasury forecast planning
1. Treasury forecast
a. Forecast of resources based on a few years
2. Treasury Budget (cash)
a. Refined treasury forecast on a shorter period
3. Daily follow-up
 Treasury cash budget
o Anticipate and negotiate short term financing • (GO BEFORE YOU NEED THE MONEY)
o Anticipate excesses and overdrafts •
o Select the most appropriate financing or investment vehicle •
o Ensure the follow up of objectives; measure differences between expectation and actual
results → take action and appropriate corrective measures
 Treasury Cash Budget In summary
o The main tool to manage cash flow. Allows to indicate at which point the company will
have eccesses and shortages of cash and when external financing will be necessary. The
liquidity problem is present in most corporations and is a moving target.
 Treasury forecast
o 1. Inflows
o 2. Outflows
o 3. Treasury flow (inflow - outflow)
o 4. If # 3 negartive, need financing if # 3 positive can invest
o 5. Borrow or invest
o 6. Indirect fees 7. Balance of account
 Treasury forecast • Depreciation • Fiscal implication • Taxes Other elements to consider:
 Data Collection
o Qualitatives
 ◦ Based on jugement of individuals ◦ Data collection individual or in group.
 Quantitatives ◦ Analysis of historical data: ◦ Averages (simple, moving …) ◦ Linear
Regression simple or multiple
 Data Collection Intuitive
o ◦ Forecast based on knowledge gained through experience Formal ◦ Based on
knowledge of business as well as an analytical examination of historical data ◦ Generally
involves the use of mathematical models Implicit ◦ Derived from information which is
implied, understood or suggested but not specifically expressed Explicit ◦ Forecast
derived from information which is clear and concise
 o https://medium.com/@mahzeb/what-is-a-cash-flow-forecasting-d0633f8327d5

 Judgemental approaches
o Individual
 ◦ Provided by one person
o Committee
 ◦ Forecast developed through a series of meetings
o Delphi
 ◦Information collected and discussed anonynmously
 Extrapolative forecasting (or time series forecasting) It assumes that all variables remain
constant over the short term forecasting horizon. Assumes a relationship exists between current
data and historical data
 Extrapolative forecasting (or time series forecasting) continued Some techniques:
 ◦ Trend: simple moving average, weighted moving average (works in stable environments)
 ◦ Exponential smoothing: with an alpha coefficient (quality of data, not how much data, tall ppl
were rare back then)
 ◦ Decomposition:
o ◦ Random component, chance that variation is due to unexplained forces
o ◦ Seasonal component (hot coco and ice cream)
o ◦ Cyclical component, the long run change is associated with the general pattern of the
business/economic cycle (could be weeks,months etc)
 Causal Approaches
o Simple regression ◦ Y = a + bX (1 variable)
o Input-output models ◦
 Based on the concept that a given level of sales or services requires a specified
level of inputs
 Cross Impact analysis
  ◦ Based on the compilation of events which may have an impact on the
future cash flows (sales of masks went up in feb)

 Distribution Approaches (good with cheques)

o Based on single variable ◦
 Interval flow t = (proportion) t (period total)
o Based on multiple variables ◦
 Interval flow tw = (proportion)tw (period total)

 Conclusion
o Identify cash drivers in your company
o Apply "how to" techniques for forecasting individual cash flow line items
o Learn statistical techniques for dealing with cash flow uncertainties; both on-going and
one-time events
o Investigate techniques for both predicting the year-end cash balance and reconciling it
to the short-term cash forecast
o Explore how to perform and interpret cash forecast variance analyses
 Why APIs matter: NETWORK EFFECT
o For CASH VISIBILITY
 Real-time bank reporting and payments
 Instant reporting into investments, borrowing
 On-demand cash flow updates from ERP
 Market data and calculations in real-time

 APIS
o APIs enable a single platform to interconnect with multiple systems, services, and
information sets without having multiple logins or data control issues.
o Ex: banks, ERPs, trading platforms, market data
 Benefit of Cash Visibility
o Reduce idle cash
 o Invest cash for longer and in higher yield instruments
o Use cash for early payment programs
o Reduce number of bank accounts and bank fees
 How to achieve visibility (daily cash)
o 2 choices to achieve 100% visibility
 1. Manually login to every bank, multiple times per day
 Automate bank connectivity
o Automating connectivity
 1. IT can do it for you
 Outsource connectivity to third party – and let them connect to and monitor
your banks (via FTP, API, SWIFT, regional protocol like EBICS or EDITRAN, etc.)
o DATA VISUALIZATION
 Differs from reporting
 Visualize information to find new conclusions
 Easier to identify patterns
 On-demand drill down into problem areas
 See visibility and uncover gaps
o Robotic Process Automation (RPA)
 Robotics is the next gen of automation for software applications
 Robotic software will automate repeatable predictable treasury tasks
 Best applications:
 Replicating manual clicks
 Data entry across multiple systems (eg. Logging into ERP, copying data
to TMS)
o ARTIFICIAL INTELLIGENCE (AI)
 Limitation of toay’s bots is what can be programmed by a person, they are not
“intelligent” since they do what they’re told.
 Artificial intelligence uses “machine Learning »
 Software learns by analyzing data
 Develop new rules – eg. Reconciling transactions
 Instantly find exceptions – e.g. bank statements, payments
 Builds forecasts – eg. Predict invoice clear dates 2

Lec 13: FRAUD

 Cybercrime , Money Laundering & Fraud

 Cybercrime
 a criminal activity or a crime that involves the Internet, a computer system, or
computer technology, including but not limited to theft of data, fraud or
unlawful disruption to business operations”
o The Facts:
 • Has surpassed illegal drug trafficking as a criminal moneymaker
 • Estimated impact global cost: $400USD Billion
  • Identity theft occurs every 3 seconds
 • 73% of companies were targets of payments fraud in 2018
 • Wire fraud accounts for almost 48% of fraud attempts
 Cybercrime poses a real and persistent threat to business
 Cybercriminals
o Increasingly part of highly complex cybercriminal networks that include individuals from
across the globe
o • Are patient and sophisticated
o • Often view what they do as a career versus a crime
o • Have access to significant funding and expertise
o • Increasingly focused on technology, people and process vulnerabilities
o It is estimated that 50-80% of all cyber-attacks involve insiders, most commonly by an
email message that asks the user to click a link or open an attachment
 Money Laundering
o Three stages of money laundering:
 Placement (placing proceeds of crime into the financial system), ex: open a
charity
 Layering (moving money within the system to disguise audit trail as well as the
source and ownership of funds)
 Integration (moving laundered money out of the financial system and back into
the economy as legitimate funds)
o 10,000$ deposit, from business need to disclose where did it come from (ex: big
wedding) exempted industry: retail, restauratns, etc like Costco Walmart, usual business
 Bribery and Corruption
o Include schemes such as:
 Kickbacks, I owe you
 shell company schemes, use different addresses, just a building
 bribes to influence decision-making, give me contract, ill give you something, If
you don’t do this, ill disclose info about u
 manipulation of contracts, something that will favour you, need 3 layer
windows, and you produce those windows
 substitution of inferior goods, montreal roads, giving bad earphones, cost less
for the customer
 Emerging E-mail
o A sophisticated scam to trick legitimate users into initiating unauthorized wire transfers
o Fraudsters are flexible and may attempt to use the other payment methods commonly
used by the victim
o Targets businesses working with foreign suppliers or businesses that regularly perform
wire transfer payments
o Targets businesses of all sizes and has been reported in 80 countries
o There has been a 340 percent increase in identified victims and losses since January
2015
o Responsible for over $2.1 billion in identified fraudulent payments between October
2017 to August 2019
 o Payments appear authorized and the sender may actually confirm instruction when
called by bank’s fraud department
 Phishing
o 1.User receives an e-mail or pop-up
o 2.Email explains some “Urgent” situation (sense of emergency)
o 3.User clicks on one of the links
o 4.Enter personal/financial details into injected device
o 5.Fraudster uses compromised credentials
 Online scams that trick individuals into disclosing personal or financial
information
 How to Recognize a Phishing E-mail
o Generic or odd salutation “Dear Client”
o Call to action“Our Audit Department has detected a problem with your account”

o Creates a sense of urgency “You have 24 hours to verify your account and transactions”

o Hyperlink is not what it appears or requests to run an executable

 Financial statement fraud: ENRON
o It is the manipulation of financial statements in order to create financial opportunities
for an individual or entity
o Even if several laws were passed in recent years it seems that corporations keep
innovating in this field.
 Levels of Web
 WWW: Regular web that people surf everyday, represents around 4% of total web
 Deep Web: Corporate sites that cannot be accessible by regular search but often can be
reached by direct web address, represents around 90% of total web
 Dark Web: Web sites that require specific softwares where illicit/illegal activities happen,
represents around 6% of total web

 Ransomware
o Malware that encrypts files and databases and keeps them locked until the victim
pays a ransom, typically in the digital currency bitcoin
o Has become a significant threat to businesses and individuals
o Represents a new economic model: It cuts out the middleman, by selling access to
information back to the person they stole it from
o Ransomware: Should Banks Prepare to Pay or Be Ready to Refuse?
http://www.americanbanker.com/news/bank-technology/ransomware-should-
banks-prepare-to-pay-or-be-ready-to-refuse-1092265-1.html
o New variant identified in early 2016 was responsible for infecting an estimated
100M computers a day
o Can be spread through removable USB or external hard drives and can infect
network drives
o