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Edition Number : 1. Skip to main content. Search SpringerLink Search. Editors: David F. Birks Lecturer in Marketing 0. Buying options eBook EUR Softcover Book EUR Hardcover Book EUR Learn about institutional subscriptions. Table of contents 13 chapters Search within book Search. Front Matter Pages i-xxiv. Birks, Anthony Birts Pages Birks Pages Figure 9.

The large financing requirements created awareness of the importance of debt management operations to long-term fiscal sustainability and efficiency of the public financial management system.

The increased complexity of financial markets and the instruments that were developed also led to awareness of the need to professionalize the debt management function because general civil service skills were no longer sufficient to manage such complex portfolios.

One of the key areas in which debt management has improved is in risk management. The centralization of debt management operations into single institutional units and the implementation of debt databases that include all government debt liabilities have facilitated the introduction of a portfolio-based approach to debt management, something that was not possible under a fragmented structure.

Market risk can include the impact of interest rates, exchange rates, and the maturity structure of the debt portfolio on debt-servicing costs. Sophisticated modeling techniques are now being used by advanced DMOs, which have invested heavily in risk management specialists and systems.

DMOs have also been at the forefront in refining risk models to suit public sector requirements. One example is the development of cost-at-risk models derived from the value-at-risk models used by private sector financial institutions and asset managers to estimate the fiscal and budgetary risks associated with debt portfolios. Less-sophisticated debt managers have also begun to develop simplistic risk management capacity, often using scenario analysis and other basic modeling techniques to analyze the structure of their debt portfolios as an input to their debt management decision-making and strategy formulation processes.

As debt managers have become more sophisticated, and with the introduction of instruments such as derivatives, 5 repo agreements, 6 and increased use of bank deposits to invest surplus government cash, the need to develop credit risk management capacity has assumed greater importance.

This importance was heightened by the problems facing the banking industry following the crisis. Advanced economies have steadily refined their credit risk models using a variety of techniques first employed by the private sector. Unfortunately, the recent crisis has shown that some of the models used in the financial services industry did not provide the supposed protection because a number of erroneous assumptions were used as inputs.

The consequence of these shortcomings was a false sense of security and an absence of more subjective inputs into the risk management process.

The lessons from the recent crisis need to be learned, and government risk management practices need to be overhauled as in the private sector if such a crisis is not to recur. Emerging market economies and developing countries have traditionally had less need for sophisticated credit risk management procedures because their portfolios tend to be simpler and concentrated on the liability side credit risk is not a major issue if the entire portfolio is made up of borrowings and derivatives are not used.

Therefore, their credit risk modeling has been more rudimentary. However, as capacity and access to markets improve, the demand for more sophisticated credit risk modeling is likely to grow.

Building human capacity is a considerable problem given that risk management specialists are highly attractive to the private sector, and skill shortages in the public sector plague virtually all countries. Many of the advances in risk management capacity development in DMOs have resulted from a greater awareness of the fiscal risks inherent in debt and government guarantee portfolios and the need to minimize the volatility of budget performance resulting from fluctuations in debt-servicing costs.

Unlike most other budgetary expenditures, debt-servicing costs are difficult to influence internally because much of the volatility associated with these costs is determined exogenously through movements in international interest and exchange rates or in changes in international perceptions of the creditworthiness of individual sovereign borrowers; this latter factor has been spectacularly in evidence during the crisis.

Debt managers need to account for a variety of risks and to put procedures in place to minimize and monitor the risks in the portfolio. Box 9. Most advanced DMOs have procedures that apply to each stage of the risk management process.

Clear rules on how risks should be analyzed need to be approved by senior management, and good international practice would dictate that a specialized unit be established to monitor and report on risk to DMO senior management. Typically, exposure to market risk should be monitored frequently: advanced economies monitor market exposure on a real-time or, at the very least, a daily basis.

With modern IT systems, senior managers and controllers should have online access to market exposures, and clear limits on the level of acceptable exposure should be established by senior management. Breaches of these limits should require immediate explanation and correction. In a world in which many countries still operate cash-based budgeting and accounting systems, risk management requires a two-pronged approach.

Cost-at-risk models were developed by public sector debt managers for this purpose. These models show the extra cost that would need to be borne by the budget if certain defined risks were to materialize.

However, to ensure that annual budget figures are not being manipulated at the expense of the long-term economic portfolio value, guidelines must be in place for analyzing market risk, which will identify longer-term portfolio exposures.

As a consequence, risk managers in the most advanced DMOs analyze both cash- and market-based risk exposures. Market risk. In less-advanced debt management offices, simple deterministic models of the impact of the interest rate and exchange rate on debt-service costs are often used in addition to other basic scenario analysis. Advanced economies use value-at-risk or cost-at-risk and other techniques such as risk-adjusted performance measurement to measure the market risks inherent in the portfolio.

Credit risk. If government is in the position of being a creditor to another body usually a bank , it bears a risk that it will not have its asset paid back in full should that body fail. This risk is readily seen if government deposits cash in a bank, but derivative instruments can also embody significant credit exposure of the government to the counterparty.

This exposure is often difficult to detect and to quantify. Thus, credit risk assumes greater importance the more complex the portfolio becomes. The use of derivatives and other instruments with asset characteristics requires considerably more attention, and the need to monitor counterparty exposures is now an essential part of risk management operations. Regulatory and legal risk. The increasing complexity and volume of financial instruments has led to a wide range of regulatory and legal risks.

For example, many contracts for instruments currently being used by advanced and emerging market economies have not been tested in national courts. This type of risk is of particular concern for instruments that require collateralization, such as repo agreements and securitized instruments for which ownership of collateral may be disputed in the event of default on contractual obligations. Operational risk. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events Storkey, A key advance in debt management, in both developed and developing countries, has been the increased focus on the operational risks inherent in the debt management function.

Less-sophisticated DMOs may not have high risk management capacity, but simple analyses of the underlying exposures of the portfolio should be carried out to inform strategic decision making. For example, a basic prerequisite should be the requirement to report on the currency, interest rate, and maturity structure of the portfolio.

Credit risk should similarly be monitored see Box 9. As DMOs have become more professional, the pressure to measure debt manager performance has increased. Some countries, including Ireland and Sweden, use a benchmark portfolio as a yardstick against which actual performance is measured, whereas others, including the United Kingdom, make greater use of nonquantitative performance measures owing to the difficulty of creating a benchmark in a market in which the government is the largest player.

Many countries now consider a medium-term debt management strategy MTDS to be an essential tool for guiding debt management operations. In the s, access to capital markets, both domestic and international, was largely limited to the Organisation for Economic Co-operation and Development OECD countries and a few other large economies; most emerging market economies and developing countries were primarily relegated to concessional financing from international financial institutions.

Until the s, the ability to influence currency or interest rate composition was a luxury that only a few countries could claim. This situation has changed significantly. The increase in the number of countries developing and implementing an MTDS is attributable, to a large degree, to the increased access that emerging market economies precrisis had to international and domestic capital markets and hence greater choice in shaping their borrowing needs and portfolio compositions.

Developing nations e. The range of debt instruments has also greatly expanded, with international financial institutions offering greater flexibility in the choice of currency, maturity, and interest rate particularly for nonconcessional loans. Access to hedging instruments has expanded, and institutions such as the World Bank now offer hedging advice and instruments.

However, these developments have also complicated the decision-making process. In the past the question was whether to borrow, but the current availability of broader choices now dictates that debt managers seek guidance on structuring their debt portfolios to meet underlying debt management objectives.

An MTDS examines the alternative options and assesses the risks and costs associated with different policy choices. An MTDS must be realistic and implementable. Many early attempts at an MTDS resulted in wish lists of desired portfolio outcomes, with little relationship to what was achievable based on the instruments available to the debt manager.

A concerted effort by donors, including the IMF and the World Bank, to educate debt managers in emerging market economies and developing countries is now resulting in the development of more realistic strategies IMF and World Bank , These inputs include cost and risk analysis, the macroeconomic framework, the annual borrowing requirement, the timing of government cash requirements and the sources of financing, and risk hedging.

Domestic capital market development concerns may also be an important element of the MTDS. The MTDS should be approved by government in some cases, by parliament to ensure that it has political legitimacy and that it offers the debt manager a blueprint for operations in the medium term. The MTDS should also be reviewed frequently at least semiannually , and regular monitoring of progress in implementing the strategy is essential to ensure that it remains relevant and reflects any changes in macroeconomic or macrofiscal policy.

Clear incentives must be in place to ensure that a realistic MTDS guides debt managers. In the absence of an MTDS, debt management operations run the risk of diverging from other fiscal policy objectives or may lack consistency with other macro objectives. A well-prepared, realistic MTDS guides the debt manager. Essentially, it becomes a reference point by which to justify performance. Since the early s, domestic government securities markets in advanced economies have changed significantly.

A trend toward introducing primary dealer systems 8 and increasing the size of benchmark bond issues see Box 9. Better and more integrated settlement and clearance systems have also encouraged foreign investors to enter domestic markets, further contributing to liquidity. The advent of the euro has had a profound impact on European bond markets.

Euro-area-wide trading and clearance platforms have been created, and the smaller countries in the euro area now have access to hedging instruments such as liquid futures and options that may not have been available in smaller-currency domestic markets. These developments have increased the international market profiles of domestic bond markets in smaller countries. Domestic markets in many of the larger emerging market economies in Latin America and Eastern Europe have grown considerably see Figure 9.

In Eastern Europe, new pools of domestic investors with longer-term investment horizons were also created by reforms to the pension and insurance industries; these pools will continue to grow and create natural demand for longer-dated government securities. Foreign investor appetite has also been a feature of the most successful market developments. Foreign investors bring international expertise to domestic markets and impose discipline on issuers to ensure that the domestic market complies with international standards.

These advantages, however, are tempered by the knowledge that foreign investors tend to be less attached to domestic markets and are quicker to exit during market turbulence, as experienced in the early days of the Asian financial crisis in the late s and the global financial and economic crisis.

However, on balance, the presence of foreign investors is beneficial to efforts to develop domestic markets. Technical characteristics of government securities. To attract foreign investors and to encourage secondary market trading, the conventions used in designing domestic securities should comply with international standards. Compliance with international conventions on settlement periods should also be ensured.

Foreign investors should not be penalized for investing, that is, taxes should not be withheld for nonresidents. Market liquidity ready and willing buyers and sellers at all times is essential to attract foreign investment and to encourage secondary market trading.

Strategies to achieve liquidity have included issuing benchmark bonds that can be tapped on an ongoing basis to create sufficient size to promote liquidity, and using bond buyback and switching programs.

However, even these policies may not be adequate in smaller countries where the market in its entirety may be too small for a liquid bond market to develop. Price transparency. Many countries have established primary dealer systems offering selected market makers typically banks rights and obligations to promote price transparency and improve liquidity in the market. Typical obligations of primary dealers, in return for concessions during bond auctions, include the need to quote prices on benchmark stocks and to maintain narrow bid-offer spreads.

Promotion of electronic trading and the posting of trading prices and volumes also help to improve price transparency. Marketing and investor relations strategies. Marketing and investor relations strategies are increasingly seen as vital to developing domestic bond markets. Some countries have gone so far as to establish investor relations offices Mexico and Turkey.

In a time of increased competition for foreign capital, a comprehensive marketing strategy will assume ever-increasing importance. Countries need to differentiate their products from those of similarly rated entities.

Market infrastructure and regulatory environment. Ensuring that clearing and settlement systems comply with international standards and, if possible, that domestic systems can connect to international payments systems is essential. The development of market infrastructure in emerging market economies and developing countries has been heavily emphasized in recent years, often with donor assistance.

Most countries now have at least a rudimentary system in place and many have a fully functioning, internationally recognized clearing and settlement architecture. The situation for some of the smaller emerging market economies and developing countries has not been as encouraging. Smaller countries face problems in attracting capital to domestic markets owing to lack of scale, which affects liquidity, and this difficulty is often exacerbated by the absence of a well-developed domestic investor base.

As a result, many smaller economies are finding it difficult to establish liquid markets, particularly at the longer end of the maturity spectrum. Some prerequisites for developing domestic bond markets are outlined in Box 9. For most emerging market economies and developing countries, the existence of a domestic government debt market is an important precondition for the growth of a broader domestic capital market. Therefore, although the primary objective may be to open up a new source of medium- to long-term government funding, the wider objective of helping to develop the broader financial sector infrastructure is a highly desirable coproduct.

Since the late s, governments in a number of developed countries appeared to have resolved many of their cash planning difficulties.

They can ensure that expenditures are accurately and realistically projected. They have complex revenue forecasting models that produce high-quality estimates of cash inflows. These improvements permit governments to predict their available cash balances with only marginal errors.

The remaining challenges in cash planning for these countries are in commitment controls, budget and TSA coverage, and uncharted fiscal risks. However, the recent financial crisis has uncovered some serious weaknesses in cash planning and management in several developed countries, particularly in the periphery of the euro area.

Although central government cash requirements can be forecasted reasonably effectively, if the whole of general government is not covered, sudden unexpected cash demands and shortages can arise. Without full coverage, cash managers are unaware of all potential demands on cash resources, and cannot readily calculate the required cash buffer to hold in the TSA to meet unexpected variations in expenditures or revenues. Thus, at some point the government cannot fulfill the short-term expenditure needs demanded by government policy priorities, resulting in the buildup of expenditure arrears.

Cash buffer calculations can be extremely complex mathematical exercises, often with probabilistic confidence levels derived from the statistical distribution of cash flow forecasting errors. However, such precise buffer calculations are not always necessary. Even in unusual situations, the calculation can be fairly straightforward.

In Iceland, for example, following the onset of its banking crisis in late , some large domestic bond auctions failed. The size of these immediate borrowing requirements was far greater than regular fluctuations in the TSA balance and might have caused severe problems in government business and debt servicing if the TSA had not already held a large cash reserve.

This reserve was at risk of being depleted by expenditure requirements during the crisis. It was recommended that the minimum cash buffer level be kept slightly above the size of the normal benchmark bond issue until the government securities market had stabilized and risk of further auction failure became insignificant.

Times of expected cash surpluses greater than the requisite buffer are often more difficult for the cash manager than shortages. A simple solution is for the CMU to deposit the surplus with commercial banks for the expected surplus period. This solution, however, ignores the monetary policy implications for the central bank or the credit risk to the government if the commercial bank were to fail.

The CMU needs to coordinate such actions carefully with the central bank. To ensure that government does not shoulder credit risk when placing deposits with commercial banks, CMUs often operate in the repo market. This market has developed to provide collateral to depositors in case of bank failure. The repo market allows short-term deposits to be made by one party e.

In many countries, repo markets have become very large and efficient, and governments can place large amounts of cash into the markets at good rates while taking little or no credit risk during the term of the deposit.

Efficient repo markets provide a seemingly ideal instrument for government deposits. During the recent crisis, however, several developed countries had great difficulty obtaining repo rates for their surplus cash. The credit crunch had so tightly restricted the supply of very high-quality collateral, such as government securities, that none was available against repo transactions. CMUs, such as that in France, either provided deposits to the commercial banks against no collateral or against much lower-quality bonds like mortgage-backed securities.

These activities were met with accusations that unofficial liquidity support had been provided to the banking system and came under intense scrutiny because such nontransparent actions were not considered to be part of the function of the CMU or of the government. Normally, the CMU will operate only in the domestic currency because the government has the highest domestic credit quality�being able to print money if necessary. If, however, foreign currency is maintained by the CMU, other securities might be available for short-term investment.

If the government holds surplus balances of certain liquid currencies U. These securities have no effect on domestic monetary policy or on the foreign exchange rate if the deposits are kept in their original currency. Many commodity-producing countries use this method of obtaining an adequate return on their surplus cash while maintaining sufficient liquidity for budgetary needs.

Another alternative for active management of surplus cash is to buy back already-issued government securities on the secondary market. This option is often less favored because it may affect monetary policy in the same way that deposits in commercial banks do. It also requires close coordination with government debt managers because the DMO may be reluctant to have its securities bought by the CMU, potentially causing market confusion or disrupting its planned bond auction calendar.

In developing countries, the CMU normally is advised to negotiate with the central bank for interest to be paid on deposits of its surplus cash resources.

These negotiations center on the tension between the extra costs to the central bank of draining monies deposited by the CMU in the banking system and the credit risk taken by the government when depositing with commercial banks. In several countries, for instance, Indonesia, the central bank has agreed to pay a market-related interest rate on specified surplus time deposits from the CMU.

Although this rate is slightly lower than the actual market rate available from commercial banks, this compromise adequately resolves the monetary policy�credit exposure tension.

In the early s, fragmentation of government debt portfolios across a number of institutions was relatively common, and domestic and external debt were often managed by different institutions. Foreign and domestic debt portfolios were also frequently shared between the central bank and the ministry of finance, and in some cases, individual budget units borrowed on their own behalf.

This fragmented approach to debt management had many negative consequences, including the absence of a coordinated borrowing and debt management strategy and inefficient costing and management of risks.

The problem also extended to the approval and monitoring of contingent liabilities, such as government guarantees, because sectoral ministries frequently managed their own portfolios, leading to the creation of many unquantified and unmonitored fiscal risks.

As a result, reporting and monitoring were often extremely complex, delayed, and prone to error. This fragmentation was one of the reasons for the emergence of DMOs. Other reasons included the need to improve professionalism owing to the increased complexity of financial markets and the need to separate debt management from monetary policy.

Although the concept of a dedicated DMO is not new�Sweden has had a debt agency for more than years�the number of specialized DMOs has increased significantly since the early s. The centralization of authority to borrow, monitor, and report on government debt portfolios has increased transparency, led to greater efficiency in debt management operations, and allowed countries to adopt portfolio-based techniques for debt management similar to those used by private sector institutional asset management companies.

Early examples of countries with independent DMOs include Ireland, Portugal, and Sweden; their institutional models were the most radical, with the DMO completely independent of the ministry of finance. The independent DMO was not the only model being considered as efforts to professionalize debt management operations gathered momentum in the late s and early s.

Although some countries, such as Hungary, followed the separate independent DMO route, others, including Colombia, France, Thailand, and Turkey, elected to develop the DMO as a division or directorate within the ministry of finance or treasury, similar to the early New Zealand model. Still others decided to establish separate DMOs reporting directly to the ministry of finance, and a small number of countries decided to retain the central bank as the primary debt manager.

The latter model has become uncommon as countries increasingly attempt to separate monetary and fiscal policy operations. Table 9. Legislation to establish an independent DMO was considered by the government in The precise institutional model, although important, was a secondary concern.

Of far greater importance was political awareness of the need to professionalize debt management operations within a single organizational unit and the commitment to meet the challenges that this would entail.

Political commitment was not easily forthcoming because many other fiscal issues concerned policymakers in an era of radical economic change.

This was, and continues to be, particularly so in emerging market economies, especially those directly affected by the breakup of the Soviet Union. In advanced economies, securing political commitment was also difficult for this relatively small area of fiscal policy, particularly if the scale of the debt portfolio was not at the forefront of the political agenda. As the role of the public debt manager became more refined during the course of the s, a number of rules and best practices emerged that have been followed by the more advanced DMOs.

The early innovations of DMOs, such as those in Austria, Ireland, New Zealand, and Sweden, resulted from recasting standard practices found in the private sector financial services industry to conform to the realities of public financial management.

Key rules include identification of debt management objectives, transparency and accountability of debt management operations, institutional frameworks that meet international standards, and a framework for medium-term strategic debt and risk management. This objective is often accompanied by a secondary objective of developing the domestic debt market to widen the pool of financing opportunities and to facilitate the development of domestic nongovernment capital markets. The internal organizational structures of DMOs have been predicated on the principle of separation of responsibilities.

Most advanced and emerging market DMOs pursue an organizational model that differentiates between transaction originators and transaction processors. This system is crucial to implementation of modern operational risk control processes and procedures. Advances in IT systems have played a major role in minimizing operational risk.

IT systems reduce the need for human intervention thereby reducing human error in transaction and settlement processing. Improvements in IT have also increased the transparency of debt management operations and greatly enhanced monitoring and analysis of government financial operations, thereby enhancing risk management capacity, particularly in advanced economies.

Emerging market economies and developing countries still need to develop their IT systems further; nevertheless, significant advances have been made since the early s. The establishment of specialized DMOs has had a profound effect on capacity.

Offices that were able to circumvent public sector pay guidelines e. However, those that did not have the same flexibility e. The experience to be gained in working in DMOs was also an attraction and could help to retain staff, at least while they built up their marketability. Front office. Responsible for primary issuance and execution of both domestic and external securities, and all other funding and portfolio management operations, including secondary market and derivative transactions.

Middle office 1. Responsible for policy and portfolio strategy development and accountability reporting. Middle office 2. Responsible for internal risk management: policies, processes, and controls. Middle office 3. Responsible for liaison and coordination with internal and external institutions; fiscal policy, monetary policy, and credit rating agencies. Back office. Responsible for transaction recording, reconciliation, confirmation, and settlement; maintenance of financial and accounting records and database management; coordination with ministry of finance budget execution and accounting functions.

These developments have been driven by incentives to generate budgetary savings and reduce fiscal risks through greater centralization of the debt management function.

Benefits also accrued from the perception in the capital markets of a more professional approach to debt management in those countries that had provided the necessary resources and political commitment.

The risk premiums associated with the sovereign market debt issued by these countries were significantly reduced. This chapter contends that coordinating cash and debt management is important to avoid conflict and achieve compatibility. Initial strategies to develop a professional approach to debt management focused almost exclusively on the liability side of the balance sheet.

Cash management was often neglected or carried out by other units in the treasury or ministry of finance, and in some cases by the central bank. This secondary status frequently led to suboptimal outcomes because cash and debt management operations were not coordinated or the objectives being pursued were not necessarily in line with fiscal and monetary policies. For example, tensions arise if the government debt manager is issuing debt in the market for market-development purposes at the same time that the cash manager is striving to place surplus funds into the market at a considerably lower deposit interest rate.

During the last 10�15 years, however, awareness has increased of the need to integrate the management of all government financial resources, especially cash management with debt management operations. This awareness has coincided with a greater understanding of the need to manage government assets and liabilities more professionally. As a consequence, the number of DMOs that have been assigned responsibility for cash management operations has increased significantly, including those in a number of euro area countries, and those in New Zealand, Sweden, and the United Kingdom.

The short end of the yield curve is frequently reserved for issuance of instruments connected with cash management operations whereas the longer end is reserved for debt management operations.

Integrating cash and debt management operations can ensure that strategies at different points in the yield curve do not conflict. Joint responsibility increases incentives to manage government financial resources as a portfolio.

Scarce financial sector resources are consolidated in one unit. Skilled professionals with financial market experience are in short supply in the public sector in most if not all countries. Therefore, establishing separate units to deal with market-related activities as has been the case in a few countries dilutes these already scarce resources. Information systems and transaction processing procedures are integrated. Many of the procedures and processes associated with managing transactions connected to financial assets and liabilities are similar.

Combining the functions allows the use of IT systems and back-office facilities, such as settlement and clearing operations, to be streamlined. On balance, an integrated approach to cash and debt management is the optimum institutional arrangement, although some countries have chosen to maintain separate units for cash and debt management e. This separated institutional arrangement can work, although it requires close coordination and communication.

However, this level of coordination is normally difficult to achieve. Emerging market economies and developing countries trying to implement effective cash planning and active cash management techniques face a number of challenges not evident in more advanced economies. A TSA structure and centralized payments system are often vehemently opposed by powerful figures and institutions within government, simply as a result of their not understanding the technicalities of the business process change.

Spending agencies often do not grasp that centralizing payments does not mean loss of control over execution of their approved budget during the fiscal year. Resistance to such changes is natural and can be overcome by education and training by the treasury or CMU.

However, negative reactions sometimes suggest that ulterior motives such as corrupt practices lie behind the unwillingness to cede control over cash resources.

Developing countries face an enormous undertaking in determining the number of government bank accounts in existence and then convincing the owners of the accounts to close them and pay the balances to the TSA. Nevertheless, it is achievable and has been successful to varying degrees in many countries.

As with implementation of many innovations, political will and support at the highest levels of government are necessary either to win over those with opposing viewpoints or to enact rules and regulations forcing government institutions to comply.

Central banks in developing countries might also resist moving government retail banking operations to the commercial banking sector. If the central bank has built a network of provincial branches specifically to serve the government, its reluctance to concede that its commercial bank competitors are more efficient is natural.

Modern communications and data processing technology can greatly assist the treasury in its cash management and accounting and reporting objectives. The CMU must make a detailed case to the minister of finance about the efficiencies to be gained from using modern methods.

Accurate cash planning can also be a difficult task in developing countries. Although the implementation of cash plans across line items of the budget is relatively simple and a model can be readily provided through technical assistance, a more substantive issue is the inability of the cash manager to obtain accurate, timely, and updated revenue and spending plans. The CMU is rarely provided with sufficient authority to demand these projections and improvements in their accuracy.

This problem relates both to rules and regulations that can be issued by the government and to the network of data providers in government agencies. The cash manager must be able to communicate directly with individuals in spending agencies that make cash flow estimates and those individuals must be held responsible for determining why errors in forecasts occur and how they can be rectified.

Difficult institutional and cultural changes may be required for this to happen. In many developing countries, certain preconditions for accurate cash planning do not exist. These preconditions can be related to efficient debt-recording databases, commitment controls, or coverage. As in developed countries, the cash plan must incorporate as many areas of fiscal risk as possible.

Public debt management in developing economies was rudimentary before the late s. Public sector borrowing mainly consisted of concessional debt from international financial institutions and bilateral credits from export credit agencies. Loan conditions tended to be inflexible and very little input from country authorities was permitted. Repayment problems in developing countries emerged in the late s and were soon followed by the growing awareness that debt relief would become a cornerstone of any strategy to kick-start economic growth in the developing world.

The debt-relief initiatives were accompanied by access to a more diverse range of funding as international financial institutions such as the World Bank increased the range of instruments and terms and conditions associated with their loans. Improved macroeconomic fundamentals resulting from debt-relief initiatives also resulted in improved credit standings, which attracted private sector investors, and for some countries, access to international capital markets became a reality in the s.

The need for developing countries to provide analyses of their debt portfolios to ensure compliance with the conditions of the HIPC Initiative and subsequent debt-relief initiatives led to a more widespread acknowledgment of the importance of consolidated debt recording and reporting. The many donor-financed projects to introduce debt-recording systems have greatly increased capacity in this area.

Some emerging market economies faced specific problems. For example, the need to fund large-scale infrastructure improvements required newly independent states to develop their debt management capacity quickly. Again, donors were very active in assisting emerging market economies to implement debt management solutions and to develop debt management capacity. These initiatives have had mixed results, although it is safe to say that debt management capacity in general is now significantly greater in most emerging market economies.

Problems remain, however. Legal frameworks for debt management, although improving, still require further strengthening, particularly in developing countries. The appropriate institutional setting for debt management operations, and training and retention of staff, remain major issues in both developing countries and emerging market economies.

Although debt management systems have improved in many countries, further work is required. In addition, many of the debt management systems implemented since still need to be integrated with other public financial management systems, and integration of debt management operations with cash management remains an issue in many countries, despite the obvious advantages outlined earlier.

Development of domestic government debt markets is still at an early stage except in the larger emerging market economies, and in many cases continuing reforms to the pension and insurance industries are required to create stable domestic demand for longer-maturity government securities.

In addition, moves to develop medium-term debt management strategies have not always been realistic, nor have they been accompanied by a sense of what is achievable at different stages of development. Further improvements in debt management operations in both emerging market economies and developing countries will require technical assistance and absorbing the lessons learned by advanced economies.

Continued investment in systems and people will be necessary to build on progress achieved to date. The consequences of the crisis for advanced economies will likely include a repricing of risk, especially for countries that experienced the worst of the crisis Greece, Ireland, Portugal, and Spain, among others , leading to higher borrowing costs in the medium term.

The funding requirements of some OECD countries, coupled with deteriorating macroeconomic conditions, are likely to lead to greater credit spreads for the foreseeable future. Debt managers will need to work harder to convince investors of the merits of investing in their bonds, and competition for capital is likely to exacerbate the spread differentials.

The crises will also have long-lasting effects on emerging market economies and developing countries. The volume of debt to be issued by advanced economies in the short to medium term will reduce the availability of international capital for countries with lower credit ratings and will likely result in higher borrowing costs for those who need to fund internationally.

An impact will also likely be felt on the development of domestic markets, with foreign investors demanding higher yields. Access to international markets will also depend on stronger marketing and more-intense investor relations strategies to differentiate credits and attract international demand. These implications increase the importance of the role of debt and cash managers as countries struggle to shake off the effects of the crisis.

Efficient and effective management of public financial assets and liabilities will be a crucial element of country strategies to achieve fiscal sustainability and return to normal growth paths in the medium term. The improvements made in the past 20 years must be built upon to ensure government debt and cash managers are sufficiently equipped to carry out their functions.

The range of technological innovations and instruments available to cash and debt managers has increased considerably, but not without creating greater challenges. These include ensuring that proper controls and risk management processes are in place to allow for the achievement of specific debt and cash management strategies within wider fiscal policy objectives. Advanced economies have actively pursued proper processes. Further capacity building will be required in developing countries as their interactions with market-based instruments increases.

The argument that an integrated approach to cash and debt management, in most institutional settings, is preferable to a more fragmented approach is difficult to refute except for reasons of institutional or political expediency. Most private sector treasury operations manage their financial assets and liabilities on an integrated basis and the public sector environment should be no different. The proper institutional setting for a debt management office, however, is very country specific and depends on, among other factors, the political environment, the legal framework, and the achievable level of sophistication of debt and cash management operations.

It is difficult to foresee how profoundly the aftermath of the global financial and economic crisis will affect the future roles of the debt and cash manager. Debt and cash managers are likely to increase in importance as they grapple with high levels of indebtedness, a more risk-averse investor base, and increased competition for access to the capital markets as they seek to ensure that government liquidity is maintained. These daunting challenges in countries across the development spectrum argue even more forcefully for an integrated and professional approach to financial asset and liability management.

Cambodia and Lebanon are starting to use basic trend extrapolation from historical averages, whereas Australia, for instance, has very sophisticated mathematical forecasting models. Derivatives are agreements that shift risk from one party to another.

The value of a derivative is derived from the value of an underlying price, rate, index, or financial instrument. Derivatives allow specific financial risks to be traded in financial markets in their own right. There are two broad classes of financial derivatives: forward-type contracts, including swaps e. Repo or repurchase agreements are the sale of securities with an agreement to buy back the security at a later date at an agreed-on price.

One party receives a cash loan while the counterparty receives securities for an agreed-on period of time. In Ireland precrisis , a benchmark portfolio approved by the government, against which the performance of the debt manager was measured, was deemed to be the de facto debt strategy. The benchmark was reviewed annually to ensure it met the guidelines laid down by the minister of finance and other fiscal policy objectives.

Central banks sell debt instruments to the banking system if liquidity levels are considered to be too high, and it must pay market interest on these instruments. This is a simplistic description because in certain instances the central bank may want money to return to the banking system, for example, if tax revenue collections have been unexpectedly large.

This was a common problem in countries that relied heavily on project financing from international financial institutions for sector-specific projects. Frequently, the central fiscal authorities were only marginally involved if at all.

The Swedish National Debt Office has been in existence for more than years. The New Zealand Debt Management Office was established in the s but is not institutionally independent of the ministry of finance.

Some of the earliest proponents of professionalization of the debt management function, including Ireland and New Zealand, were faced with critical economic challenges in the s and with unsustainable sovereign debt levels. Many other advanced economies started to look at this issue only in the late s or early s when their debt problems became more acute e.

Implementation of these systems is often funded by donors. All Rights Reserved. Topics Business and Economics. Banks and Banking. Corporate Finance. Corporate Governance. Corporate Taxation. Economic Development. Economic Theory. Economics: General. Environmental Economics. Exports and Imports. Finance: General. Financial Risk Management. Foreign Exchange. Industries: Automobile. Industries: Energy. Industries: Fashion and Textile. Industries: Financial Services.

Industries: Food. Industries: General. Industries: Hospital,Travel and Tourism. Industries: Information Technololgy. Industries: Manufacturing. Industries: Service. Information Management. International Economics. International Taxation. Investments: Bonds. Investments: Commodities. Investments: Derivatives. Investments: Energy. Investments: Futures. Investments: General. Investments: Metals.

Investments: Mutual Funds. Investments: Options. Investments: Stocks. Islamic Banking and Finance. Money and Monetary Policy. Natural Resource Extraction. Personal Finance -Taxation. Production and Operations Management. Public Finance. Real Estate.

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The operating cash flows ratio OCF measures a company's ability to generate the resources required to meet its current liabilities. The ratio reveals how much the enterprise is generating cash from its operations to take care of its current liabilities.

Ratio 1. And, the fact that going concern is at risk if the abnormality is not corrected quickly. The higher the ratio, the more the firm is at ease on the debt on its balance sheet. However, when the CCD is less than 1. Cash current debt ratio is a variant of acid-test ratio to measure liquidity. It reveals the relationship between the cash available for debt servicing to the debt principal, interest, lease payable.

It shows ability to generate cash to cover debt. It measures time span in days between cash disbursement and cash collection. Cash conversion cycle assist on credit purchase and credit sales policies to enhance cash management. There is no best way of evaluating financial performance and there are advantages and disadvantages in using earnings per share or cash flows as the basis of measurement. It is generally useful to use both. The company market capitalization is divided by operating cash flow.

Some analyst use free cash flows in the denominator in place of operating cash flow. The closing price of the stock on a particular day is usually share price. It is a valuable ratio for a company that is publicly traded. It shows how a firm can efficiently transform sales to cash. The Cash Flows Margin ratio is an important ratio as it expresses the relationship between cash generated from operations and sales.

Every enterprise needs cash to discharge obligations to owners, creditors, government, and invest on capital assets and expansion. The denominator comes from the Income Statement. Larger percentage indicates better ability of the firm to translate sales into cash. A pattern of receivables that rise significantly faster than sales may be indicative of aggressive revenue recognition.

It might also reveal the implementation of lower credit standards as a ploy to capture less creditworthy customers to creatively boast earnings. Like debt to assets ratio, cash flows from operations to average total assets ratio measures the solvency, ability to pay debts and ensure going concern. The cash flows from operations to average total liabilities ratio is better, it measures ability over a period of time rather than at a point in time.

The higher the ratio, the better the firm is financially flexible and able to discharge its obligation to creditors.

This ratio allows for comparing earnings to cash flows, increasing earnings and decreasing cash flows is an indication of decrease in earnings in the future. The occurrence of increasing earnings combined with decreasing cash flows imply accounting shenanigans, or cash management problems such as cash conversion cycle problem, poor credit control and management; accounts receivables could increase because customers do not have the cash to pay.

An unforeseen sales slowdown could push inventory levels up. However, these events can also foretell an earnings slowdown.

The denominator is the change in operating cash flows, which is found right on the cash flows statement, represents in a company's accounting earnings adjusted for non-cash items and changes in working capital.

Earnings management can be detected with the use of net income to operating cash flows ratio If the ratio falls below 1. In this case, the company is either creative in reporting or the cash management needs overhauling. It is critical that cash flow from operations not lag behind net income for an extended period of time.

Whenever a company is not collecting the cash related to its reported earnings, then it calls into question the quality of those earnings. If net income to operating cash flows ratio was employed; big corporate failures like W. Grant, Chrysler would have been averted. This ratio is necessary on the premise that there is a problem of possibility of understatement of uncollectable debts when bad debt reserves are out pacing receivables.

The most often adjusted account by external auditors is receivables accounts and the associated reserves. To calculate this figure, a company's accounts receivable balance for the end of a certain period is divided by average sales per day during the same period. When DSOs are increasing, then in most cases the company should book a similar increase in bad debt reserves. If it does not, then that could serve as an important warning sign.

Bad debt reserve account is on balance sheet. Any receivable written off during a period depletes bad debt reserve balance, while additional provision increases the balance. Normally, like in the golden rule of double entry, increase in reserve leads to corresponding increase in bad debt expenses during reporting period.

The numerator is right on cash flows statement, while the denominator is on the face of balance sheet. It shows the destination of the company. Enterprises should strive to improve operating cash flows to total assets ratio for the sustainability of the organisation. Analysis of cash ratios over a period of years allows trailing historical trends and variability in the ratios over time.

Ratios can be used to identify aspects of an enterprise that require profound investigation 5 Cash Management and Fraud According to International Standard on Auditing ISA , an important management responsibility is to establish and maintain internal control on an ongoing basis. Hence, the accuracy and completeness of the accounting records are the responsibility of the Company's management. Even though internal control over financial reporting may appear to be well designed and effective, controls that are otherwise effective can be overridden by management in every entity.

Because management is primarily responsible for the design, implementation, and maintenance of internal controls, the entity is always exposed to the danger of management override of controls, whether the entity is publicly held, private, not-for-profit, or governmental. When the opportunity to override internal controls is combined with powerful incentives to meet accounting objectives, senior management may engage in fraudulent financial reporting.

Thus, otherwise effective internal controls cannot be relied upon to prevent, detect, or deter fraudulent financial reporting perpetrated by senior management AICPA; Organisation should use as little number of banks as possible that suits nature of business, and requirements to achieve enhanced manageable cash.

The more banks an organisation maintains, the more the cost of servicing the accounts and the more the control system is weakened. Management of many bank accounts can be cumbersome; reconciliation of accounts, correspondences like cheques confirmation, ledger accounting, and preparation of cash position, among many others.

Dormant bank accounts, if not closed or regularly monitored, can constitute serious internal control threat for the reason that such accounts can be exploited for nefarious purposes. To trim down or select banks, management should consider qualitative factors, such as competitive advantages of bank, proximity to business, client-ship, as well as quantitative factors like bank charges, interest charges, withdrawal charges etc.

Bank could be disproportionate in charging charges and interest; the organisation can recover the overcharge through bank interest and charges audit with the assistance of experts. There are many ways to a true; quality accounting requires preparing schedules, statements, summaries, registers, analysis, reports to corroborate accounts. Enterprise need to maintain at least two kinds of cashbook record � ledger cashbook and treasury cashbook, for the purposes of arithmetical and accounting control, fraud prevention, availability of comparable record to reconcile and adjust intentional and unintentional errors.

Ledger record is for financial reporting while treasurer cashbook is a memorandum record. Aside the aforementioned collaboration, cash position report is another level of cashbook accounting that serves as a decision support tool.

As employee, particularly one that handles cash gets used to a system, such employee attains exclusive understanding of the system and the loopholes therein. The tendency to commit irregularities is heighted, such that professional on normal course of duty is very likely not to detect consequential irregularities.

Good internal control arrangement reduces premeditated and inadvertent errors to the minimum. Enterprise should maintain optimal level of office cash to reduce cost, and risks associated with going to bank too often for reimbursement.

Cash management requires working out cash requirement for a week base on the cash budget, cash position reports, creditors awaiting payments and other realities of business.

There should be a threshold, payments outside petty cash threshold items should be made with negotiable instrument or transfer to enhance control, reduce volume of cash in hand transactions, and avert cumbersome record keeping. Good finance practice is to release confirmed cheque so that cheques get cleared on time to allow beneficiaries access to fund.

Additional costs such as commission, lead-time, interest on bank draft, transport cost, security hazard of carrying cash. Some organisations by nature of operation maintain high sum of cash in hand. Such organisation should make additional security arrangement; aside private office security, additional arrangement of keeping one or two police from nearest police station on payroll will drastically avert burglary and robbery.

It is noteworthy to mention that petty cash is the most susceptible accounts of all cash accounts to fraud; therefore, there should be strong, strict, consistent control. Personnel in charge should not be allowed to be in charge for too long, because exclusive understanding and awareness of loopholes can be too costly for organisation. Cash theft has variety, such as understated sales, sales register manipulation, skimming, collection procedures, false entries to sales account, theft of cheques received, cheques for currency substitution, lapping accounts, inventory padding, theft of cash from register, and deposit lapping.

Similarly, fraudulent disbursements can be personal purchases with company funds, returning merchandise for cash, false refunds, deposits in transit, small disbursements, check tampering, billing schemes, and false voids. It is appalling how often organizations rely utterly on external auditors to improve internal control system.

Management should ensure that internal controls system guarantee the cash. In addition, the cash balances are properly described and classified and adequate disclosures are made of restricted or committed funds and of cash not subject to immediate withdrawal. Operating cash flows mirror the sustainable cash generating ability more than the others categories; hence, financial analysts consider operating cash flows as a leading signal of liquidity sustainability.

Accounting standards are flexible on certain issues. Accountants can work within the standards, by taking advantage of the flexibility in accounting standards, or work out of the standards to prepare cash flows statement.

Manipulation by taking opportunity of accounting standards only increase reported cash flow but factually overstate sustainable cash flow position. Creativity comes in when instruments with fixed maturity date, not held to take advantage of short-term price swings are classified as operating rather than investing activities. This is common with non-financial enterprises because such cash equivalents are not part of their normal operation.

Obliquely, financing cash flows can be coined as part of operating cash flows by manipulating reported operating activities, thereby overstating sustainable cash flows reported.

Financing cash inflow can be moved to operating activities by increasing trade and non-trade creditors, overdrafts. The qualities of cash flows is in operating and free cash flows, which is cash flows after deducting investing cash flows from operating cash flows and show the cash available to pay the financier of the enterprise.

Imagine enterprise with no cash available to pay shareholders and creditors but claim to be highly profitable. Therefore, cash is a better measure of performance in the end than profitability. However, there is a need to avoid the agency cost of free cash flows by financing projects earning low returns.

One major challenge about cash flows statement is that auditors do not carry out detail examination as done for revenue and balance sheet accounts. There are many intricacies behind every amount on the face of cash flows statement. This gives the preparers of financial statements opportunity to take advantage of this lapse.

An enterprise could utilise factoring to drive up cash balance on the financial statements. It is noteworthy that poor cash flows while the two other financial statements composites are good is a signal that there is a smoke. Courteous e-mails, telephone calls, Short Message Service SMSs , visits to express appreciation are treasured gift of gratitude and kindness.

A dedicated well- polished professional s can handle credit control function adequately, and bring into play timely follow up that closes the gap in a professional manner that does not present an outlook of pestering. Close working relationship with bankers is pertinent for cash management. Ability of a treasury person to work into the bank and come out with result is a measure of efficiency. In organisation, staff and management are less concern about how finance is managed; their important concern is timely provision of cash for remuneration, operations, projects, office maintenance, and others as need arise.

The survival of every firm depends greatly on cash inflow. The person that experienced it best tells Story. This will give opportunity of deferring payments, working capital option, without adverse consequences. A business can create a good reputation or otherwise through management of creditors. Equally as in normal principal-agent relationship, no principal will be happy on the news of bad treatment of her contractors by her agent. Building and maintaining good reputation is paramount for sustainability of business.

Who knows, your creditors can be your brand ambassadors and can have enormous influence on your business. Furthermore, creditors are the next source of financing enterprise after shareholders; future negotiation with the creditors could be impaired. It is wise to organise payment logically. Entities owe smallest debts are often the most restless; they spread default news, aggravate situation and can de-market quick and fast.

They should be paid-off as soon as possible. Listening skill is imperative, cash management practice demand careful listening to external and internal clarifications and utilising the information in prioritisation. A listening finance is a great finance. Besides, profit is short term and therefore imposes myopic insight into business vision.

While cash is like blood, profit is like water to every enterprise. Organization could utilize the duo as performance metrics. However, better decision would be made using cash when liquidity is the key limiting factor. Profit, alongside other variables such as cash management, is the determinant of cash flows. Enterprise can operate where profitability is dying, but cannot continue as a going concern with no cash because bills cannot be paid with profit, but profitability will catch up eventually when margin loss stifles out cash.

The ravaging global meltdown is a result of every individual selling without recourse to corporate governance, credit risks, profitability, until the liquidity disappeared completely from the market. Net cash flows is a more appropriate measure of profitability in the end because in the long term it is accurately done; for a good enterprise, in the end, cash flows must be positive. The two basic underlying assumptions of financial reporting are accruals and going concern.

The real measure of organisation performance is cash. Organisational performance is evaluated by ability and certainty to generate cash. Profitability is not all that matters; cash-generating capability is germane, a profitable venture that generates less cash than the cash consume is a bubble. That is, Cash flow is a major determinant of going concern status of enterprise. While cash is essential for organisation survival and short-term nature, profitability is a basic requirement for growth and development in the long term.

A good cash management function is analogous to the three Rs Risk, Return, and Relationship ; Risk � risk of cash management, Return � Profitability, Relationship - Cash and Profitability relationship. Poor cash management can lead to increase expenses like finance charges, extra inventory cost.

External and internal business environments influence cash requirements and inflow of organisation; so, enterprise should revise cash- management strategy as realities demands on regular basis. During the period of pressure on cash, profit is adversely affected. This is common at the inception of new business, restructuring exercise, business usual season of low cash inflow, period of business expansion, and others.

Every organisation requires strong cash management. To keep company afloat in hard times, cash management is vital, not accounting profit. The most important work of Finance Chief in a more difficult macro- economic environment is to ensure that the company has good cash management to be financially healthy, and meet obligations at any time. The opportunity of capital market for funds may not be available every time in the future, as we are presently experiencing, cash management functions will be the redeeming feature and would be more important and appreciated.

For strategic control purpose, cash report forms actual to be compared with cash forecast to enhance system as compared to result-oriented style. To perk up net cash flow, disbursement procedures should be enhanced by continuously keeping an eye on account payable on a regular weekly or monthly schedule, constant evaluation and taking advantage of discounts for early payment, pay as close to the due date as possible.

Cash flows differ from profit by timing differences, which impinge on capital assets generating income in the future and working capital utilisation.

In the end, there is a positive correlation between profitability and net operating cash flow. Thus, analysis of the relationship between profitability and net operating cash flow can reveal creative accounting. The main issue on foreign currency management is hedging of exposure to adverse foreign exchange difference and encouragement of currency speculation for profit.

Generally, foreign exchange risk hedging is either forward contract or option rate. Other strategies are protection clause on sale price in foreign currency or adjusted exchange rate moves outside a defined range; invoicing in a strong currency; and pricing policy, by building extra profit margin into selling price to act as a cushion in the event that exchange rates move adversely.

Another example is the opportunity to transfer cash above the statutory limit as invisible transaction. To hedge losses that can result from foreign exchange transactions, multinational organisation should settle intercompany indebtedness through intercompany accounts and settle the net payable through foreign exchange.

In a trade incident, a company made a remarkable saving by transferring fund, even above statutory limit, as invisible transaction, and avoided hassles of buying foreign currency and restriction of maximum fund transfer limitation. Generally, cash management measurement basis is historical cost, but foreign exchange accounting is not.

Reporting of foreign currency transactions should be at the current spot rate, rates of exchange at the date of the transaction or a reasonable approximated average. While non- monetary assets and liabilities items should be reported at the historical cost exchange rate at the date of the transaction , monetary assets and liabilities and cash flows items should be reported using the closing foreign exchange rate.

Foreign exchange reporting impacts three items, namely; foreign currency transaction, foreign operations and exchange rate translation difference. In summary, the manual for foreign exchange cash management reporting is the International Accounting Standard IAS 21 and other associated International Financial Reporting Standard IFRS interpretations Generating revenue and incurring expense in foreign currency lead to fluctuations and associated risks which could impact an enterprise.

Besides, the nature and operations of foreign currency transactions give way for complex situations that could harbour irregularity. It is a complex and evolving aspect of finance that is on reducing cash conversion cycle to achieve efficiency and effectiveness in the management of the most liquid asset of every entity through forecasting and planning, internal control, cash management tools, and other models. Cash flows ratios, that are recently popularised, assist management and financial analysts to decipher the facts behind the figures on the financial statements.

This ratios are so powerful that they can reveal SWOT strengths, weaknesses, opportunities and threats , errors, creativity and avert corporate failures. Management should institute sturdy internal control. Safeguard of cash comes in strongly because an entity can only manage what it has.

The five components of control namely; control environment, risk assessment, information system, control activities, and monitoring control should be in place to ensure cash is safeguarded. Management should be wary about an employee, particularly the one in charge of cash, getting exclusive understanding and capacity on the system as this can heighten the tendency to commit irregularities. Countless number of corporate failures were a result of imprudent management of cash.

Accountant could be skimpy, they could work within the accounting standard or work out of accounting standards to increase reported cash flows. Hence, the sustainability cash flows position would be distorted not enhanced. Similarly, close working relationship with bankers is pertinent for cash management. Though treasury is powerful, it should rather be used to build an adoring brand for the entity before stakeholders.

Furthermore, Profitability as the acme of organisational success has imposed myopic insight into business vision. Net cash flows, in collaboration with profitability, are a more appropriate measure of performance, particularly in this period when global melt down is ravaging.

This paper recommends that business survival rest heavily on liquidity; therefore, organisations should give cash management serious attention and consider cash management a strategic partner within the business. New start- ups must give cash management serious attention; possibly, it should be placed ahead of profitability.

Secondly, organisations should have a dedicated module for the purpose of cash management because accrual accounting is not apt for cash management. Beside the usual accrual basis of accounting, a secondary accounting subsystem base on cash basis to aid forecasting and planning, enterprise approach, strategic business decision, cash flows analysis, and maximise returns on cash, should be operated as standalone or intergraded into the system like Enterprise Resource Planning ERP system.

Inventiveness stem from order and routine, simplicity is the ultimate sophistication; finance with cash management built on a dedicated cash basis is flexible, speedy, and shows where cash is coming from and where it is going. Small enterprises can take advantage of the robust in database management software by deploying the likes of Microsoft Access and utilise analytical powers of Microsoft Excel to manage cash.

Furthermore, because cash is a better indicator of performance reality, there should be an increase disclosure of operating cash flows i. This will afford the users of financial statements the opportunity to see the realities behind the figures on cash flows statements. Baharom, K.

Connellan, M. In CTS, the presenting bank captures the data on MICR band and the images of cheque using their Capture system and has to meet the specifications and standards prescribed for data and images. The collecting bank sends the data and captured images duly signed and encrypted to clearing house for onward transmission to paying bank d. This all reduces the incidence of cheque misuse, tampering and alterations. The technology allows MICR readers to scan and read the info directly into a data- collection device.

A MICR code line structure: 1. Cheque serial number of 6 numeric digits preceded and followed by a delimiter. The alpha-numeric prefix to the serial number should be printed outside the code line in close proximity, just above the read-band in normal ink. The first 3digits numeric represents city, the next 3digits abbreviation-alpha code indicate the bank and last 3 indicates the unique branch code. It is unique. Allotment of branch codes is by the President of the Clearing house of which the bank is a member 3.

Account number field, consisting of 6 digits followed by a delimiter, is an optional field. In case of Govt. Cheques issued by RBI alone, the account number is of 7digits. The Govt. Transaction code field comprises of 2 digits in all instruments except Govt. Control documents, batch and block tickets have 3digit representation in the transaction code field.

Amount field, it is the last field and consists of 13 digits bounded on both sides by a delimiter. The amount is encoded in paisa without the decimal point. The name of the bank and branch to be incorporated in the enclosed space.

Format of Local Clearing Stamp 3. What is Speed Clearing? Speed clearing refers to collection of outstation cheques a cheque drawn on non-local bank branch through the local clearing.

It facilitates collection of cheques drawn on outstation core- banking-enabled branches of banks, if they have a net-worked branch locally. Why Speed Clearing?

The collection of outstation cheques, earlier required movement of cheques from the Presentation center city where the cheque is presented to Drawee center city where the cheque is payable which increases the realization time for cheques.

Speed Clearing aims to reduce the time taken for realization of outstation cheques. What was the process followed by banks for collection of outstation cheques before the introduction of Speed Clearing? This bank branch is called the Presenting branch. The branch providing the collection service is called the Collecting branch.

On receipt of the cheque, the Collecting branch use to present the physical instrument in local clearing at the drawee bank branch location through its branch at the drawee bank branch location. Once the cheque was paid, the Collecting branch use to remit the proceeds to the Presenting branch.

This, in short, is the process of Collection before the introduction of Speed Clearing. In the absence of a clearing arrangement at the Destination center, the Presenting branch was sending the cheque directly to the Destination branch for payment. How long does it take for getting credit of an outstation cheque sent on Collection basis?

How does the Local Cheque Clearing work? Local Clearing handles only those cheques that are drawn on branches within the jurisdiction of the local Clearing House. Generally, the jurisdiction is determined taking into account the logistics available to physically move to and from the Clearing House. How does the Speed Clearing work? In CBS environment, cheques can be paid at any location obviating the need for their physical movement to the Drawee branch. Cheques drawn on outstation CBS branches of a Drawee bank can be processed in the Local Clearing under the Speed Clearing arrangement if the Drawee bank has a branch presence at the local center.

When will the beneficiary get funds under Speed Clearing? What are the charges for cheques cleared through Speed Clearing? With effect from April 1, , no charges will be payable for cheques of value up to and including Rs. Charges fixed should be reasonable, computed on a cost-plus-basis and not as an arbitrary percentage of the value of the instrument and to be levied in an upfront manner with due dissemination to the customers of such charges. How is Speed Clearing an improvement over collection basis?

Further Savings Bank customers need not incur any service charge for collection of outstation cheques value up to Rs. RTGS system is meant for large valued transactions. The min. Email comes from Bank 4 times in a day � ,,,PM b. After posting in SAP, one of the following message is shown � - 31 Bytes �means Successful - 61 Bytes �means One or more errors in file - 30 Bytes �means Whole file error d.

Then mail is send to related or associated team with attached file of RTGS received in mail. Inward transaction- Free, no charge to be levied. Amount to be remitted b. Name of the beneficiary bank and branch d. IFSC code of the receiving branch e. Name of the beneficiary customer f. Demand drafts are marketed as a relatively secure method for cashing checks.

The major difference between demand drafts and normal checks is that demand drafts do not require a signature in order to be cashed. The company does not have a standard credit policy that could be applied to all customers. Instead, distinct credit terms are offered to each group depending upon various factors such as the product, place, price, demand and competition. Earlier these stockiest used to enjoy 5 days of credit period but now the company has decreased the time frame to one day.

For new stockiest, sales are normally made on demand draft basis. If a Stockists cheque bounces, then the party has to make payment only by demand-draft. Such stockiest may be allowed a credit period of up to 10 days.

SAP Cash Management is used to monitor cash flows and to ensure that you have sufficient liquidity to cover your payment obligations. For example, the liquidity forecast - in a medium to long term liquidity trend - integrates expected incoming and outgoing payments in financial accounting, purchase and sales. Cash concentration can be found in the Planning topic.

Planning also deals with the payment program, payment requests, bill of exchange presentation, memo record and telephone list. The Tools topic covers the distribution to cash management systems.

You can use this to obtain relevant information in connection with customer and vendor cash flows. The structure of the cash position and business transactions that affect the cash position are also described here. SAP Cash Management uses the cash position to reflect movements in bank accounts, while movements in the sub ledger accounts are represented using the liquidity forecast.

Further topics include: Payment advice journal entered and changed planned items , Compare and check and Reconciliation with cash management. Market data can be transferred using the file interface, real-time data feed or via the spreadsheet. The areas Worklist and Change master record are also described here. The following sub-process will now present the cash receipt in Cash Management Position and those changes in the planning totals connected to the cash receipt, which are formed through open billings.

If the date you entered as the planning date falls on a public holiday, the incoming payment is reproduced on the next working day dependent on the value date.

The system displays the bank accounts on which the cash receipts are recorded. You should be able to find the incoming payment you posted in the list of displayed documents on the Line Items Module Pool Screen.

The sum displayed has once again been reduced exactly by your billing amount as this is henceforth already displayed as an incoming payment on the bank account. This opened up SAP to a whole new customer base.

Fully understands and is satisfied with all features of services offered b. He is solely responsible for the accuracy, completeness and timeliness of instructions in line with that specified by the bank from time to time. Also customer agrees to provide the Priority Payments File not later than the agreed cut-off date and time, which is subject to change from time to time. What are the products offered under Collection Services that you can use?

Master Account- It is any Customer Account with the bank into which payments by Payer using a distinct Virtual Account number is to be credited. Inward Payment Services Channel Financing - The service under which the bank would provide info on the payments received and outstanding for the Customer based on the info received from the customer and the actual payments received in its account.

P2E Migration Program- This service assists Corporate in shifting their payments and receivables from paper mode to electronic mode thereby offering the process and cost efficiency benefits. PSBC- Pre-signed Blank Cheques issued in favor of Company and submitted to bank as per applicable terms on which amount payable and Cheque date is left blank.

PDC- Post Dated Cheque issued in favor of Company with future date and submitted to the bank for collection as per applicable terms. This has reduced the average collection period as compared to the time it would take if customer cheques were first received at head office and then sent for outstation clearing thereby increasing the velocity of cash inflows.

These steps have resulted in reducing the cost of interest to the company. When the company has surplus funds, it invests the same in short-term investments or instruments like mutual funds and government securities. Here computer software such as SAP is used to perform core operations of banking like a. Recording transactions b. Interest calculations c. Customer Records d. Balance of payments e. All the services in the Cash Management System have benefitted the corporate office and banking facilities by- a.

Shorter Clearing cycle b. Superior verification and reconciliation process c.