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Essentials of Treasury Management, 4th Edition

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The Essentials of Treasury Management, 4th edition, was developed based on the results of the 2012 AFP tri-annual Job Analysis Survey of 1,000+ treasury professionals about their functional responsibilities. Using those findings, a panel of subject matter expert volunteers guided the editors/authors in writing the text. It reflects the principals and practices used by corporate finance and treasury professionals to optimize cash resources, maintain liquidity, ensure access to short-term and long-term financing, judge capital investment decisions and control exposure to financial risk. Mastery of the functions, processes and best practices defined in this work ensures that professionals are prepared to meet the demands of corporate treasury job responsibilities. This is demonstrated through attainment of the Certified Treasury Professional (CTP) credential.

 This newly reorganized text updates the third edition to reflect the many changes that have taken place in the last three years to the responsibilities of treasury management professionals.

 Here's some of what's new in the 20 chapters of the fourth edition:

  • The material provided is broader in scope with a continued emphasis on a global perspective throughout the book.
  • The material has been expanded to 20 chapters and reorganized to help provide a more intuitive flow by grouping related material by subject matter. In addition to a general introduction to Treasury Management, major sections of the book now include:
    • The Treasury Management Environment
    • Working Capital Management
    • Risk Management
    • Financial Management
  • The Treasury Management Environment section contains an updated discussion of the legal and regulatory environment, including an overview of the current status of SEPA, Basel and Dodd-Frank along with updated overviews of financial markets, payments systems and relationship management.
  • The Working Capital Management section has been reorganized and expanded to include a broader discussion of supply chain management and working capital metrics.
  • Cash Forecasting is now a separate chapter to focus more on the issues involved in this critical discipline.
  • The Treasury Technology chapter includes an updated discussion of Treasury Management Workstations, ISO20022 and ANSI X9 BTRS (Balance and Transaction Reporting Standard).
  • The Payments Chapter has been expanded to include expanded remittance information and ISO20022
  • The Risk Management Section includes a broader discussion of risk and more information on the need for well-developed policies and procedures along with an example based on the development of a short-term investment policy.
2014-2016 CTP Exam Knowledge Domains

Content AreaPercentage of Test Items
I. The Corporate Treasury Management Function16%
II. Cash and Liquidity Management25%
III. Working Capital Management22%
IV. Capital Markets and Funding13%
V. Treasury Operations and Controls15%
VI. Corporate Finance Management9%
Essentials of Treasury Management, 4th Edition Chapters
Introduction to the Study of Treasury Management
I. Introduction
II. The Evolving Role of the Treasury Professional
III. Organization of Essentials of Treasury Management
IV. Summary

Chapter 1: The Role of Treasury Management
I. Introduction
II. The Role and Organization of Treasury Management
III. Finance and Treasury Organization
IV. Corporate Governance
V. Summary

Chapter 2: Regulatory and Legal Environment
I. Introduction
II. General Regulatory Environment
III. Primary Regulators and Standard Setters of Global Financial Markets
IV. U.S. Legal and Regulatory Environment
V. Bankruptcy (Insolvency)
VI. Summary
Appendix 2.1: SEPA Member States

Chapter 3: Banks and Financial Institutions
I. Introduction
II. Financial Institutions: Functions and Services
III. Summary

Chapter 4: Payment Systems
I. Introduction
II. Payment Systems Overview
III. Cash Payments
IV. Check-based Payments
V. Large-Value Funds Electronic Transfers (Wire Transfer)
VI. Small-Value Transfer or Automated ClearingHouse Systems (ACH)
VII. Card Based Payment Systems
III. Summary
Appendix A – FedGlobal Countries
Appendix B – Check Return Reasons
Appendix C – Fedwire Format Example
Appendix D - Banking and Payment Systems Information for Selected Countries

Chapter 5: Money Markets
I. Introduction
II. Global Money Markets
III. Short-Term Money Markets in the United States
III. Summary

Chapter 6: Capital Markets
I. Introduction
II. Overview of Capital Markets
III. Debt Market A. Medium- and Long-Term Borrowing
IV. Equity (Stock) Securities
VI Summary
Appendix 6.1: Listing of the World's Top 10 Stock Exchanges

Chapter 7: Relationship Management and Vendor Selection
I. Introduction
II. Relationship Management
III. Vendor Selection Process
IV. Bank Compensation Practices
V. Assessing Service Provider Risk
VI. Summary
Appendix 7.1 RFP Activity Information
Appendix 7.2 Sample Bank Scorecard
Appendix 7.3 Sample UBPR

Chapter 8: Introduction to Working Capital Management
I. Introduction
II. Overview of Working Capital
III. The Working Capital Cash Conversion Cycle (CCC)
IV. How Changes in Current Accounts Impact External Financing
V. Working Capital Investment and Financing Strategies
VI. Management of Credit and Accounts Receivable (A/R)
VII. Management of Inventory
VIII. Management of Accounts Payable (A/P)
IX. Multi-national Working Capital Management Tools
X. Summary

Chapter 9: Working Capital Metrics
I. Introduction
II. Basic Financial Concepts
III. Working Capital Metrics
IV. Cash Conversion Cycle (CCC)
V. Cash Discount Calculations
VI. Accounts Receivable (A/R) Monitoring and Control
VII. Collections and Concentrations Calculations
VIII. Summary

Chapter 10:  Collections, Concentration and Disbursements
I. Introduction
II. Disbursements
III Collections
IV. Concentration of Funds
V. Payments Fraud
VII. Summary
Appendix A: US ACH Standard Entry Class (SEC) Codes and Payment Types

Chapter 11: Short-Term Investing and Borrowing
I. Introduction
II. Managing Short-Term Investments
III. Pricing and Yields on Short-Term Investments
IV. Managing Short-Term Financing
V. Debt Financing
V. Summary
Appendix 11A: Listing of Some Major Credit Rating Agencies

Chapter 12: Long-Term and Capital Investments
I. Introduction
II. Managing Capital Market Investments
III. Valuation of Long-Term Securities
VI Summary

Chapter 13: Cash Forecasting
I. Introduction
II. Purpose of Cash Forecasting
III Issues and Opportunities
IV. Types of Forecasts
V. The Forecasting Process
VI. Forecasting Methods
VII. Best Practices of Cash Forecasting
VIII. Summary

Chapter 14: Information Technology in Treasury
I. Introduction
II. Information Technology for Treasury
III Treasury Management Systems (TMS)
IV. eCommerce
V. Summary

Chapter 15: Operational and Enterprise Risk Management
I. Introduction
II. General Risk Management
III. Enterprise Risk Management (ERM)
IV. Operational Risk Management
V. Disaster Recovery and Business Continuity
VI. Insurance Management
VII. Summary
Appendix 1 Types of Insurance Coverage
Appendix 2 Disaster Recovery Checklist

Chapter 16: Financial Risk Management
I. Introduction
II. Overview of Financial Risk Management in Treasury
III. Derivative Instruments Used as Financial Risk Management Tools
IV. Foreign Exchange (FX) Risk Management in Treasury
V. Currency Derivatives Used to Hedge Foreign Exchange (FX) Exposure
VI. Interest Rate Exposure and Risk Management
VII. Commodity Price Exposure
VIII. Other Issues Related to Financial Risk Management
IX. Summary

Chapter 17: Treasury Policies and Procedures
I. Introduction
II. Overview
III. Process for Creating Policy Guidelines and Procedures
IV. Short Term Investment Policy Development
V. Overview of Key Treasury Policies and Considerations
VI. Summary
Appendix 17.1: Sample Short-Term Investment Policy

Chapter 18: Financial Accounting and Reporting
I. Introduction
II. Accounting Concepts and Standards
III. Financial Reporting Statements
IV. Accounting for Derivatives, Hedges and Foreign Exchange (FX) Translation
V. Accounting for U.S. Governmental and Not-For-Profit (G/NFP) Organizations
VI. Summary
Appendix 18.1: Listing of Selected ASC Topics

Chapter 19: Financial Planning and Analysis
I. Introduction
II. Cost Behavior
III. Decision Evaluation
IV. Developing Operating and Financial Budgets
V. Financial Statement Analysis
VI. Performance Measurement
VII. Financial Analysis and Rating Agencies
VIII. Summary

Chapter 20: Financial Decisions and Management
I. Introduction
II. Capital Structure of a Company
III. Raising and Managing Long-Term Capital
IV. Cost of Capital and Firm Value
V. Lease Financing and Management
VI. Equity Financing and Management
VII. Other Topics in Financial Decisions
VIII. Summary

As with any new publication, errors were discovered in the Essentials of Treasury Management, 4th Edition after printing. The most up-to-date version of the errata sheet can always be found here.


Essentials of Treasury Management, 4th edition, Chapter 9: Working Capital Metrics 


This section of the chapter presents a number of metrics that are used to measure and monitor working capital. In using these metrics, it is important to realize that there is no right or wrong number for a particular metric. The important issue is the direction the metric is moving over time (i.e., is it improving or getting worse). For example, if the current ratio is going down, the company is becoming less liquid, which may be a problem. It is important for management to compare metrics from period to period and understand why they are changing.

It is also important to realize that metrics vary by industry and by country. For example, days' sales outstanding (DSO) of 45 days would be very commonplace in the United States, but would be extremely good in France, where a DSO of 60+ is much more the norm. As a result, when evaluating or comparing metrics, it is important to compare metrics between comparable companies in similar geographies. Just as with credit ratings, there are a number of companies that provide comparative ratios for use in analyzing financial statements and working capital.

Current Ratio

The current ratio is defined as total current assets divided by total current liabilities. It is therefore the ratio of cash and assets expected to become cash in one year or less, to short-term liabilities that must be paid in one year or less. This ratio measures a company's ability to meet its current obligations or the degree to which current obligations are covered by current assets. The current ratio can be calculated as follows:

In the above example, the firm has $2.35 of cash and short-term assets for each dollar of short-term liabilities. A decline in overall economic activity or a competitive shock can slow sales. Accounts receivable and inventory would convert into cash more slowly, but the short-term liabilities must be paid on schedule. Therefore, the current ratio implies a higher level of safety when liquid assets are a greater multiple of current liabilities.

Quick Ratio

The quick ratio is defined as cash plus short-term investments and accounts receivable, divided by total current liabilities. It is also known as the acid test ratio because it is a more stringent measure of liquidity than the current ratio. The quick ratio, which measures the degree to which a company's current liabilities are covered by its most liquid current assets (i.e., cash and assets that will convert to cash most quickly), is calculated as follows:

Inventory is not included in the numerator because it is not a financial asset like accounts receivable, as it may deteriorate or become obsolete. Unlike accounts receivable, which have an associated payment term, the receipt of cash from inventory is uncertain because sales of inventory are not known with assurance. Compared to accounts receivable, inventory is a step further away from becoming cash since, in most cases, it must convert to an account receivable and then the account receivable must convert to cash.

Prepaid expenses are assets that will not convert to cash, so they are excluded from the numerator.  The firm has $1.32 of cash and very liquid assets for each dollar of short-term liabilities.  Again, a higher ratio is associated with greater safety.