GF583 Unit 10 Distributor Treasury Operations Report Example

About $718,000 a Year Once the Overlaps Are Netted: A Unit 10 Treasury Operations Report for a Distributor

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Purdue University Global

GF583: Treasury Management I

Unit 10 Treasury Operations Report

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[Date]

The distributor and every figure are composite and illustrative, carried from earlier units; the articles and textbooks cited are real.

Summary

Six recommendations, taken together, are worth about $718,000 a year. Two decisions are requested: approve the bank restructuring, and renew the revolving credit line without adding a commercial paper program. The largest single item is ending the earnings credit arrangement at the lead bank, worth about $290,000 a year after tax.

The Measures Table

Eight figures describe the treasury's position and will be tracked quarterly.

1. Cash conversion cycle: 45.1 days on average balances, about 40.9 at year end. Of that, about 6.8 days depend on one manufacturer's extended terms.

2. Collection float on checks: 4.8 days today; about 2.7 with a lockbox and about 1.0 for clinics moved to electronic payment.

3. Check share of receipts: 34 percent; target 20 percent within a year.

4. Peak forecast borrowing: about $52.3 million in week seven, about $67.8 million if the largest customer delays payment for three weeks.

5. Revolver headroom at peak: about $198 million of the $250 million line.

6. Surplus earnings rate: about 4.2 percent on layered placements against 3.6 percent in the sweep.

7. Bank fees paid in cash: about $0 today, about $460,800 a year after the switch at the lead bank, offset by fund income.

8. Forecast accuracy: weekly receipts within 5 percent of forecast in at least ten of thirteen weeks.

Collections

The analysis of check float found roughly $10.6 million of clinic payments tied up in the mail, processing and bank clearing on an average day, costing about $426,000 a year. Moving clinic groups that already pay others electronically to ACH saves about $115,000 a year net. A lockbox for the remaining checks adds about $19,000 a year in float value net of fees, plus about $55,000 from redeploying one processing position. Together: about $189,000. Adding the two routes' stand-alone values, about $216,000, would double count the checks that move to electronic payment.

Payments

Paying the six largest manufacturer invoices by scheduled wire on their due dates, instead of mailing checks five days early, saves about $168,000 a year in revolver interest. Paying late is ruled out because the largest manufacturer's 120-day pre-season terms depend on prompt payment and are worth about $2 million a year in financing (Petersen & Rajan, 1997).

The Forecast

The thirteen-week forecast, built on a seven-week collection curve, shows borrowing peaking at about $52.3 million in week seven, when a vaccine invoice, payroll and an estimated tax payment fall on one Friday. A stress test in which the largest customer stops paying for three weeks lifts the peak by about $15.5 million. The more important lesson from that test was commercial rather than financial: a pause by a large customer can signal a demand for longer terms or a credit problem, so the forecast now shows the five largest customers' receipts separately (Stone & Wood, 1977).

Surplus Placement

Matching each block of post-quarter surplus to the day it is needed, Treasury bills for cash present all eleven days, a government fund for nine-day cash and overnight repurchase agreements for five-day cash, earns about $8,500 more per quarter than the sweep, about $34,000 a year.

Borrowing

A commercial paper program would save about $21,700 over a six-month season at today's spreads, but borrowing peaks in May, so the company would depend on paper buyers in exactly the month when a loss of access would hurt most. A three-week rise of two points in paper rates at the peak would cost about $55,000. The recommendation is to renew the revolver alone and revisit paper if average borrowing exceeds about $75 million (Kacperczyk & Schnabl, 2010).

Banks

Ending the earnings credit arrangement at the lead bank, keeping $5.0 million for operations and investing about $18.0 million in a government fund, is worth about $290,000 a year after tax. Closing the fifth bank, which has no credit role, saves about $37,200. The payroll bank's thin fee income makes it the lender most likely to cut its commitment at renewal, so the report recommends moving some ACH business to it.

Each recommendation was valued on its own in earlier units, but two of them act on the same checks, so the report counts their combined effect once; reporting the simple sum would have overstated the treasury's gains by about $27,000 a year.

Summary of Value

1. Collections, ACH and lockbox combined: about $189,000.

2. Payment timing: about $168,000.

3. Surplus layering: about $34,000.

4. Bank fee arrangement: about $290,000 after tax.

5. Closing the fifth bank: about $37,200.

6. Commercial paper: not recommended, so no value counted.

Total: about $718,000 a year.

Risks to the Plan

Clinic groups may move to electronic payment more slowly than assumed. The manufacturer could change its pre-season terms regardless of how promptly the company pays. Fund yields will fall if short-term rates fall, shrinking the bank-fee gain. Each risk would reduce the total but not reverse any recommendation.

Implementation Timeline

The bank fee change and the Bank E closure can be completed within one quarter. The ACH program for clinic groups starts this quarter and should reach most eligible customers within six months. The lockbox follows once ACH enrollment stabilizes. Payment timing changes take effect with the next manufacturer invoice. Surplus layering begins with the next quarter-end.

How Progress Will Be Reported

Each quarter the treasury will report the eight measures above, the value captured against each recommendation's estimate, and any change in assumptions such as fund yields or clinic enrollment.

What the Report Does Not Cover

Three topics are outside this report's scope: foreign currency exposure, which is small because nearly all sales and purchases are in dollars; insurance and risk transfer, handled by the risk manager; and long-term capital structure, which the chief financial officer will address at the revolver renewal. Each could affect treasury operations, and each will be noted in the next report if it changes.

Staffing

None of the recommendations requires new staff. The lockbox frees one processing position, which will move to customer payment enrollment during the ACH rollout, and the bank restructuring reduces the number of accounts the team reconciles each day from twenty-two to fifteen.

Decisions Requested

Approve the bank restructuring and the move to hard-fee billing at the lead bank, and renew the revolving credit line without a commercial paper program. The remaining recommendations fall within the treasury's existing authority (Bragg, 2010).

References

Bragg, S. M. (2010). Treasury management: The practitioner's guide. Wiley.

Kacperczyk, M., & Schnabl, P. (2010). When safe proved risky: Commercial paper during the financial crisis of 2007-2009. Journal of Economic Perspectives, 24(1), 29-50. https://doi.org/10.1257/jep.24.1.29

Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. The Review of Financial Studies, 10(3), 661-691. https://doi.org/10.1093/rfs/10.3.661

Stone, B. K., & Wood, R. A. (1977). Daily cash forecasting: A simple method for implementing the distribution approach. Financial Management, 6(3), 40-50. https://doi.org/10.2307/3665255