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Essentials of Treasury Management, 5th Edition


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The Essentials of Treasury Management, 5th edition, was developed based on the results of the 2015 AFP tri-annual Job Analysis Survey. 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 fourth 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 fifth edition:

  • A growing emphasis on a global perspective throughout the chapters, which provides a broader coverage of the topics.
  • A reorganized chapter structure involving an upward shift in the chapters on financial accounting and reporting and financial planning and analysis. This reorganization should benefit CTP participants without a background in financial statement analysis or time value of money.
  • An effort to improve the flow and clarity of the text to improve retention of key topics.
  • Additional graphics to illustrate complex topics.
  • The Treasury Management Environment section is revised to reflect changes and/or reforms in
    • The ever-evolving legal and regulatory environment
    • Money market funds
    • Emerging payment methods
  • The Working Capital Management section is revised to reflect increased coverage of
    • Payment card industry data security standards (PCI DSS)
    • Fintech and distributed ledger technology
  • The Financial Reporting and Analysis section is updated with respect to
    • Changes in financial reporting standards (both GAAP and IFRS)
    • A strengthened discussion of capital budgeting metrics and choosing the appropriate discount rate
    • An enhanced focus on economic value added (EVA) as a performance measurement tool
  • The Financial Management section is updated with respect to
    • The calculation and discussion of duration, where the focus is now on the practical use of duration as a tool for evaluating the risk of bond portfolios
  • The Risk Management section is updated to include new exhibits related to
    • Value at Risk (VAR)
    • Enterprise Risk Management

As with any publication there are errors found after printing.  To view these corrections please see the most recent errata.

2017-2019 CTP Exam Knowledge Domains

Content AreaPercentage of Test Items
I. The Corporate Treasury Management Function22%
II. Cash and Liquidity Management26%
III. Working Capital Management22%
IV. Capital Markets and Funding15%
V. Treasury Operations and Controls15%

Essentials of Treasury Management, 5th 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 International Financial Markets
IV. U.S. Regulatory Environment
V. Tax Considerations
VI. Bankruptcy Laws
VII. 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 Electronic Funds Transfer (EFT) or Wire Transfer Systems
VI. Small-Value Transfer Systems
VII. Card Based Payment Systems
VIII. Summary
Appendix 4.1 – Check Return Reasons
Appendix 4.2 – Fedwire Format Example
Appendix 4.3 – FedGlobal ACH Payment Countries
Appendix 4.4 – 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 US
IV. Summary

Chapter 6: Capital Markets
I. Introduction
II. Overview of Capital Markets
III. Debt Market
IV. Equity (Stock) Securities
V. Summary
Appendix 6.1 – Listing of the World's Top 10 Stock Exchanges

Chapter 7: Relationship Management and Financial Service Provider Selection
I. Introduction
II. Relationship Management
III. FSP Selection and the Request for Proposal (RFP) Process
IV. Bank Compensation Practices
V. Assessing FSP Risk
VI. Summary
Appendix 7.1 – Sample Bank Scorecard
Appendix 7.2 – RFP Activity Information
Appendix 7.3 – Sample Uniform Bank Performance Report (UBPR)

Chapter 8: 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

Chapter 9: Financial Planning and Analysis
I. Introduction
II. Time Value of Money
III. Capital Budgeting
IV. Budgeting
V. Cost Behavior
VI. Financial Statement Analysis
VII. Performance Measurement
VIII. Summary

Chapter 10: 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. Multinational Working Capital Management Tools
X. Summary

Chapter 11: Working Capital Metrics
I. Introduction
II. Fundamental Working Capital Metrics
III. The Cash Conversion Cycle (CCC)
IV. Calculations for Trade Credit Decisions
V. Accounts Receivable (A/R) Monitoring
VI. Summary

Chapter 12:  Disbursements, Collections, and Concentration
I. Introduction
II. Disbursements
III Collections
IV. Concentration of Funds
V. Summary
Appendix 12.1 – US ACH Entry Class (SEC) Codes and Payment Types

Chapter 13: Short-Term Investing and Borrowing
I. Introduction
II. Managing Short-Term Investments
III. Pricing and Yields on Short-Term Investments
IV. Managing Short-Term Borrowing
V. Debt Financing
VI. Summary
Appendix 13.1 – Listing of Some Major Credit Rating Agencies

Chapter 14: Cash Flow Forecasting
I. Introduction
II. Purpose of Cash Flow Forecasting
III Issues and Opportunities in Forecasting
IV. Types of Forecasts
V. The Forecasting Process
VI. Forecasting Methods
VII. Best Practices for Cash Forecasting
VIII. Summary

Chapter 15: Technology in Treasury
I. Introduction
II. Information Technology for Treasury
III Treasury Management Systems (TMSs)
IV. E-Commerce
V. Summary

Chapter 16: Enterprise Risk Management
I. Introduction
II. General Risk Management
III. Enterprise Risk Management
IV. Operational Risk Management
V. Disaster Recovery and Business Continuity
VI. Managing Insurable Risks
VII. Summary
Appendix 16.1 – Disaster Recovery (DR) Checklist
Appendix 16.2 – Types of Insurance Coverage

Chapter 17: Financial Risk Management
I. Introduction
II. Overview of Financial Risk Management
III. Managing Financial Risk
IV. Derivative Instruments Used as Financial Risk Management Tools
V. Foreign Exchange (FX) Risk Management
VI. Currency Derivatives Used to Hedge Foreign Exchange (FX) Exposure
VII. Interest Rate Exposure and Risk Management
VIII. Commodity Risk Exposure
IX. Other Issues Related to Financial Risk Management
X. Summary

Chapter 18: Treasury Policies and Procedures
I. Introduction
II. Overview of Treasury Policies and Procedures
III. Guidelines for Creating Policies and Procedures
IV. Policy Development Example: Short Term Investment Policy
V. Overview of Key Treasury Policies
VI. Summary
Appendix 18.1 – Sample Short-Term Investment Policy

Chapter 19: Long-Term Investments
I. Introduction
II. Valuation of Capital Market Securities
III. Managing Capital Market Investments
IV. Summary

Chapter 20: The Capital Structure Decision and Management
I. Introduction
II. Capital Structure
III. Raising and Managing Long-Term Capital
IV. The Weighted Average Cost of Capital (WACC)
V. Lease Financing
VI. Equity Financing and Management
VII. Miscellaneous Corporate Finance Topics
VIII. Summary


Essentials of Treasury Management, 5th edition, Chapter 11: Working Capital Metrics 


This section of the chapter presents fundamental metrics used to assess the efficiency of working capital management. These include the current ratio, quick ratio, and net working capital. These metrics collectively provide information regarding the firm’s default risk (i.e., the risk of nonpayment by a borrower), which is why they are commonly referenced in debt covenants. Working capital metrics are also used internally to assess performance, adjust payment terms, forecast cash flows, and manage liquid resources. Understanding the firm’s working capital position and related funding requirements provides the treasury professional with information necessary to make strategic decisions concerning short-term investments, borrowing, credit terms, and resource allocation. A number of working capital surveys are published annually. These survey results include metrics by industry and region, as well as trends in working capital.

When interpreting these metrics, it is important to realize that there is no right or wrong number for a particular metric. Instead, it is important to:

  • Determine the metric’s trend as well as to understand the factors underlying the trend.
  • Realize that these metrics vary by industry and by country. Consequently, these metrics should be compared between firms operating in the same industry in similar countries.

A. Current Ratio

The current ratio is defined as total current assets divided by total current liabilities. This measure is intended to represent the ratio of liquid (or current) assets that are expected to become cash in one year or less to short-term (or current) liabilities that are due in one year or less. That is, the current ratio measures the degree to which a firm’s current obligations are covered by current assets. Using the financial statements from Chapter 8, Financial Accounting and Reporting, the current ratio is calculated as:

This value for the current ratio implies that the firm’s current assets are 2.35 times current liabilities. An alternative, yet consistent, interpretation is that the firm carries $2.35 of current assets for each $1 of current liabilities.

A higher current ratio generally indicates less default risk for creditors. For example, suppose that sales drop due to either increased competition or a decline in overall economic activity. Under these conditions a firm with a larger current asset base is better positioned to meet its current liabilities.

B. Quick Ratio

The quick ratio (i.e., the acid test ratio) is defined as the sum of cash, short-term investments, and accounts receivable, divided by total current liabilities. As with the current ratio, a higher value for the quick ratio implies less risk for creditors.

The quick ratio is a more stringent measure of liquidity than the current ratio, as it excludes inventory due to that current asset’s lower liquidity. The quick ratio also excludes prepaid expenses, which have little to no likelihood of converting to cash. The quick ratio is calculated as follows:

The firm has $1.32 of liquid assets for each $1 of current liabilities. By definition, the quick ratio will not exceed the current ratio.