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Essentials of Treasury Management, 4th Edition eBook

AFP Guide to Account Analysis Cover

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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.

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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.