Optimization of the company's cash flow
This book is about the company's treasuries and financial management, more specifically; it shows how a company can manage its treasury in an efficient and short way.
This book is about the company's treasuries and financial management, more specifically; it shows how a company can manage its treasury in an efficient and short way.
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The <strong>Optimization</strong> <strong>of</strong> <strong>the</strong> Cash-Treasury for<br />
Didaou Fatima-zahra<br />
To cite this version:<br />
Didaou Fatima-Zahra, <strong>Optimization</strong> <strong>of</strong> Cash-Treasury– Accounting and Financial Management<br />
Université Hassan II – ENCG de Casablanca, 2016. English. <br />
ENCG is a National Moroccan school that teaches<br />
all sciences that are related to <strong>the</strong> economic and financial<br />
area <strong>of</strong> <strong>the</strong> world. Its main objective for <strong>the</strong> 5 th year<br />
students is to validate a certain number <strong>of</strong> researches<br />
related to <strong>the</strong> projects that <strong>the</strong> students <strong>of</strong> this year<br />
execute as a final study project. This project might be<br />
found at <strong>the</strong> ENCG’s archive or o<strong>the</strong>r personal sources.<br />
The elaboration <strong>of</strong> <strong>the</strong> project was based on <strong>the</strong><br />
environment <strong>of</strong> <strong>the</strong> company and <strong>the</strong> academic studies.<br />
The project is elaborated in collaboration with <strong>the</strong> Dr.<br />
GASSEI Karim teacher specialized in management and<br />
guiding researches at <strong>the</strong> ENCG School.<br />
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UNIVERSITY HASSAN II<br />
Student <strong>of</strong> <strong>the</strong> National School <strong>of</strong> Commerce and Management<br />
Financial Management and Accounting<br />
OPTIMIZATION<br />
OF CASH-<br />
TREASURY<br />
FOR<br />
RESEARCH FOR THE FINAL STUDY PROJECT<br />
PRESENTED IN PUBLIC BY<br />
DIDAOU Fatima-Zahra<br />
June 2016<br />
Jury:<br />
Mr. GASSEMI Karim:<br />
A full pr<strong>of</strong>essor joining <strong>the</strong> university in 2007, where he served as pr<strong>of</strong>essor <strong>of</strong> Management and Corporate Strategy.<br />
Dr. Gassemi Hold a PhD Degree from Pan<strong>the</strong>on Assas University and an MBA from Laval University. The recipient <strong>of</strong><br />
numerous pr<strong>of</strong>essional awards, Gassemi has published dozens <strong>of</strong> articles. He is also <strong>the</strong> coauthor <strong>of</strong> book,<br />
"Understanding <strong>the</strong> use and development <strong>of</strong> e-government platform in developing countries”. Dr. Gassemi’s recent<br />
research focuses on Cross Cultural Management, Corporate Strategy and <strong>the</strong> Networking Performance. Dr. Gassemi<br />
worked in <strong>the</strong> private sector as a consultant and PMO (Project Manager Officer). He conducts and deliver many<br />
studies.<br />
Mr.<br />
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FOREWORD<br />
Nor obtaining <strong>the</strong> diploma or <strong>the</strong> validation <strong>of</strong> <strong>the</strong> semester, <strong>the</strong> real success <strong>of</strong> <strong>the</strong> student is in <strong>the</strong> added<br />
value that it reports to its academic program and to <strong>the</strong> pr<strong>of</strong>essional field, <strong>the</strong> company.<br />
Nor <strong>the</strong> detention <strong>of</strong> significant liquidity, nor a positive working capital fund while affecting <strong>the</strong><br />
pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> company, guarantee its safety.<br />
The optimal <strong>cash</strong> management shows that contrary to common opinion, <strong>the</strong> objective <strong>of</strong> pr<strong>of</strong>itability does<br />
not preclude <strong>the</strong> objective <strong>of</strong> liquidity.<br />
Eventually, <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> funds applied is <strong>the</strong> guarantee <strong>of</strong> solvency. In <strong>the</strong> short period, <strong>the</strong> research<br />
<strong>of</strong> <strong>the</strong> volume <strong>of</strong> <strong>the</strong> minimum assets leads to reconcile <strong>the</strong> constraints <strong>of</strong> safety and pr<strong>of</strong>itability.<br />
Cash policy is based on <strong>the</strong> control <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> firm’s financial situation <strong>of</strong> <strong>the</strong> firm in all its<br />
aspects.<br />
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Ecole Nationale de Commerce et de Gestion de Casablanca<br />
Beau site, B.P 2725 Ain Sebaâ, Casablanca - Maroc Tél : (+212) 5 22<br />
66 08 52 Fax : (+212) 5 22 66 01 43<br />
© ENCGC - 2016<br />
Distributeur téléphonique exclusif du troisième opérateur national<br />
IWACO – SARL : 5.000.000 DH<br />
Lotissement LINA n°328 Sidi Maârouf – CASABLANCA<br />
05 29 029 444 / 06 46 111 202<br />
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Fatima-Zahra DIDAOU, student <strong>of</strong> <strong>the</strong> National School <strong>of</strong> Commerce and<br />
Management, specialized in <strong>the</strong> Financial and Accounting Management. Studied in<br />
<strong>the</strong> Khadija Oum al Mouminine High School, where I got my baccalaureate in <strong>the</strong><br />
Economic Science Management, and <strong>the</strong>n integrated <strong>the</strong> HASSAN II University<br />
where I’ve studied for two years <strong>the</strong> Economy and Management and achieved <strong>the</strong><br />
D.E.U.G Diplomat to attend after that <strong>the</strong> National School <strong>of</strong> Commerce and<br />
Management known as ENCG for master in finance.<br />
Member <strong>of</strong> <strong>the</strong> ENCATUS Club (SIFE earlier) and AGORA for great debators, and<br />
realized a certain number <strong>of</strong> researches in <strong>the</strong> Management and Finance <strong>of</strong><br />
Enterprises. I’ve attended <strong>the</strong> T-MAN HOLDING as an intern to study <strong>the</strong> financial<br />
management inside <strong>the</strong> group and inside <strong>the</strong> IWACO Company in a period <strong>of</strong> 5<br />
months and 19 days starting from January.<br />
Hoping that this project will be fruitful for all readers, it was destined to <strong>the</strong> students <strong>of</strong> <strong>the</strong> National School <strong>of</strong><br />
Commerce and Management to give <strong>the</strong>m a closer look to what a company’s Cash managing means, how it’s done<br />
and by whom. Also, to give <strong>the</strong> students a closer look to <strong>the</strong> real financial part <strong>of</strong> companies and mostly <strong>the</strong> important<br />
side.<br />
Bonne Lecture<br />
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This project research is dedicated to my parents<br />
For <strong>the</strong>ir endless love, support and encouragement<br />
To DIDAOU Abdelaziz, my fa<strong>the</strong>r<br />
To CHOKRI Zoubida, my mo<strong>the</strong>r.<br />
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ACKOWLEDGMENT<br />
»<br />
First and foremost, I have to thank my parents for <strong>the</strong>ir love and support throughout my life. Thank<br />
you both for giving me strength to reach for <strong>the</strong> stars and chase my dreams. My sister, bro<strong>the</strong>rs,<br />
and cousin Mohammed Chokri, deserve my wholehearted thanks as well.<br />
I would like to sincerely thank my supervisor in <strong>the</strong> company Mr FENJIRO Issam (Financial<br />
Director and Administrator), for his teaching, guidance and support throughout this study, and<br />
especially for his confidence in me. I would also like to thank Dr. GASSEMI Karim (my guru,<br />
academic supervisor, and teacher) for showing me <strong>the</strong> right path to make true this project,<br />
especially for following each step <strong>of</strong> making this project true and correcting my methodology <strong>of</strong><br />
working. His and Mr. FENJIRO’s comments and questions were very beneficial in my completion<br />
<strong>of</strong> <strong>the</strong> manuscript and especially at <strong>the</strong> interview time. I learned from <strong>the</strong>ir insight a lot. To my<br />
supervisor Mrs. ALAOUI Amal, I was grateful for <strong>the</strong> discussion and interpretation <strong>of</strong> some results<br />
presented in this research. Also, I would like to thank my guru, Mrs. GHAZALI Mbarka, I express<br />
my heartfelt gratefulness for her guide and support that I believed I learned from <strong>the</strong> best. Thanks<br />
to Mr. EL MANAR Mohammed for being helpful through <strong>the</strong> internship, thanks to Mr. BENNANI<br />
Fahd for allowing me to have <strong>the</strong> freedom inside <strong>the</strong> company to express my needs <strong>of</strong> asking<br />
questions and applying my knowledge.<br />
To all my friends and classmates, to Youssef Zineddine (Ex laureate <strong>of</strong> ENCG Finance, and risk<br />
manager at <strong>the</strong> COFACE company), thank you all for your understanding and encouragement in<br />
my many, many moments <strong>of</strong> crisis. Your friendship makes my life a wonderful experience. I cannot<br />
list all <strong>the</strong> names here, but you are always on my mind.<br />
Thank you, ALLAH, for always being <strong>the</strong>re for me, nothing <strong>of</strong> this would’ve been accomplished<br />
without your guidance and help.<br />
This research in only a beginning <strong>of</strong> my journey.<br />
Finally, I would like to leave <strong>the</strong> remaining space in memory <strong>of</strong> my uncle Mehdi CHOUKRI, a<br />
brilliant scholar, economic and fa<strong>the</strong>r.<br />
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LIST OF ACRONYMS AND ABBREVIATION<br />
• BMCI: Banque Marocaine pour le Commerce et l’Industrie:<br />
Moroccan Bank for Commerce and Industry<br />
• BMCE : Banque Marocaine pour le Commerce Extérieur :<br />
Moroccan Bank for Foreign Commerce<br />
• AWB : Attijari Wafa Bank<br />
• ST : Short Term<br />
• LT : Long Term<br />
• D.O.O: Date Of Operation<br />
• D.O.V: Date Of Value<br />
• T. : Turnover<br />
• F.C: Financial Costs<br />
• Q.I.S: Quarterly Interest Scale<br />
• T.T.C: Toute Taxe Comprise: All taxes are included<br />
• H.T.: Hors Taxes : Excluded Taxes<br />
• R.O.I: Return On Equity<br />
• D-C: Death-Center<br />
• SIT: Seasonal Index <strong>of</strong> Turnover<br />
• SIP: Seasonal Index <strong>of</strong> Purchases<br />
• W.C.F: Working Capital Fund<br />
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LIST OF TABLES AND FIGURES<br />
Table n°1: Assessments and Liabilities<br />
Table n°2: Company’s Balance Position<br />
Table n°3: Working capital’s needs in <strong>the</strong> <strong>cash</strong> calculations in H.T (Excluded Taxes)<br />
Table n°4: Documents analysis <strong>of</strong> <strong>the</strong> <strong>flow</strong>s and funds<br />
Table n°5: Composition <strong>of</strong> funds<br />
Table n°6: The in<strong>flow</strong>s charges structure<br />
Table n°7: Classification <strong>of</strong> <strong>the</strong> Funds applied and received<br />
Table n°8: Treasury Plan<br />
Table n°9: In<strong>flow</strong>s <strong>of</strong> IWACO during <strong>the</strong> 2014-2015<br />
Table n°10: Bank account movements on <strong>the</strong> D.O.O<br />
Table n°11: Bank account on <strong>the</strong> D.O.V<br />
Table n°12: Funding’s Distribution<br />
Table n°13: Structure <strong>of</strong> receipts <strong>of</strong> <strong>the</strong> firm<br />
Table n°14: Monthly sales and SIT and monthly purchases SIP<br />
Table n°15: Impact <strong>of</strong> seasonality <strong>of</strong> <strong>the</strong> Turnover on <strong>the</strong> Balance “Clients”<br />
Table n°16: Impact <strong>of</strong> Seasonality <strong>of</strong> <strong>the</strong> acts on <strong>the</strong> Balance “Providers”<br />
Table n°17: Charges in <strong>the</strong> index <strong>of</strong> <strong>the</strong> stock balance<br />
Table n°18: Monthly forecast evolution <strong>of</strong> <strong>the</strong> optimal circulating <strong>of</strong> <strong>the</strong> year 2016<br />
Table n°19: Simulated treasury’s <strong>cash</strong> plan 2016<br />
Table n°20: Company’s financial costs with <strong>the</strong> BU2<br />
Table n°21: Simulated sales <strong>of</strong> <strong>the</strong> merchandises for BU2<br />
Table n°22: Simulated purchases merchandises for BU2 and <strong>the</strong> financial Gain <strong>of</strong> supplier’s payment<br />
Table n°23: Cash treasury’s balance <strong>of</strong> BU2<br />
Table n°24: Treasury’s balance for <strong>the</strong> BU2<br />
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Figure n°1: Determination <strong>of</strong> <strong>the</strong> optimal capital compromises between solvency and pr<strong>of</strong>itability<br />
Figure n°2: Research’s Path Model<br />
Figure n°3: Structure <strong>of</strong> <strong>the</strong> Company<br />
Figure n°4: Waco’s in<strong>flow</strong>s in <strong>the</strong> BMCI account in <strong>the</strong> 2015<br />
Figure n°5: Iwaco’s in<strong>flow</strong>s in <strong>the</strong> AWB account in <strong>the</strong> 2015<br />
Figure n°6: Quarterly interest rate showing <strong>the</strong> bank account movements<br />
Figure n°7: Estimated in<strong>flow</strong>s <strong>of</strong> <strong>the</strong> treasury 2015<br />
Figure n°8: Variation <strong>of</strong> Idle costs over periods<br />
Figure n°9: Opportunity and overdraft’s Costs presentation<br />
Figure n°10: Area <strong>of</strong> concentration<br />
Figure n°11: Death-Center Turnover<br />
Figure n°12: Death-Center <strong>of</strong> Gocom<br />
Figure n°13: Death Center <strong>of</strong> IWACO<br />
Figure n°14: Seasonality variation <strong>of</strong> <strong>the</strong> Working Capital<br />
Figure n°15: IWACO’s daily balance 2016 simulated<br />
Figure n°16: Daily Balance <strong>of</strong> BU2<br />
Figure n°17: Daily Balance <strong>of</strong> IWACO and BU2<br />
Figure n°18: Treasury’s issue after BU1 and BU2 merged.<br />
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LIST OF ANNEXES<br />
ANNEXE n°1: Figure n°2 (Model <strong>of</strong> Research)<br />
ANNEXE n°2: Figure n°3 (Structure <strong>of</strong> <strong>the</strong> Company°<br />
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TABLE OF CONTENTS<br />
Foreword ........................................................................................................................................................................ 5<br />
Author ............................................................................................................................................................................. 8<br />
AKNOWLEDGMENTS ...................................................................................................................................................... 9<br />
LIST OF ACRONYMS AND ABREVIATIONS .................................................................................................................... 11<br />
LLISTS OF TABLES AND FIGURES .................................................................................................................................. 12<br />
LIST OF ANNEXES .......................................................................................................................................................... 14<br />
TABLE OF CONTENTS .................................................................................................................................................... 15<br />
ABSTRACT ..................................................................................................................................................................... 19<br />
KEY WORDS .................................................................................................................................................................. 19<br />
GENERAL INTRODUCTION ............................................................................................................................................ 20<br />
FIRST PART: THEORETICAL FRAMEWORK .................................................................................................................... 22<br />
CHAPTER 1: FINANCIAL EQUILIBRIUM OF THE FIRM AND CASH-TREASURY .............................................................. 23<br />
SECTION I: THE CONTROL OF THE FINANCIAL BALANCE ............................................................................................. 23<br />
I. The working capital fund, indicator <strong>of</strong> <strong>the</strong> financial balance .................................................................... 23<br />
A. The working capital fund, tool <strong>of</strong> financing <strong>the</strong> <strong>cash</strong> requirements ........................................................... 23<br />
1. The determination <strong>of</strong> <strong>the</strong> working capital fund ..................................................................................... 23<br />
2. The working capital fund is <strong>the</strong> measure <strong>of</strong> <strong>the</strong> trade-<strong>of</strong>f between pr<strong>of</strong>itability and solvency ............ 24<br />
B. The working capital fund is not a good indicator <strong>of</strong> solvency .................................................................... 25<br />
1. The meaning <strong>of</strong> working capital fund is not a good indicator <strong>of</strong> solvency…................................................... 25<br />
2. The limits <strong>of</strong> <strong>the</strong> meaning <strong>of</strong> <strong>the</strong> working capital fund is drawn from statistical observation ........................ 26<br />
C. The contribution <strong>of</strong> <strong>the</strong> concept <strong>of</strong> working capital need .......................................................................... 26<br />
1. The different conceptions <strong>of</strong> capital funds and expression <strong>of</strong> regulatory capital requirements .................... 26<br />
2. Calculation <strong>of</strong> working capital needs ............................................................................................................... 27<br />
II. Analysis <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> firm by <strong>the</strong> method <strong>of</strong> ratios .................................................................... 32<br />
A. Ratios <strong>of</strong> financial security .................................................................................................................. 32<br />
1. The so called ‘Solvency”, or long term financial security ............................................................. 32<br />
2. The so called “Liquidity-Ratios” ................................................................................................... 35<br />
B. Limitation <strong>of</strong> <strong>the</strong> method <strong>of</strong> ratios in <strong>the</strong> assessment <strong>of</strong> financial security ....................................... 37<br />
1. The limits <strong>of</strong> <strong>the</strong> descriptive value method <strong>of</strong> ratios ................................................................... 37<br />
2. The limits <strong>of</strong> <strong>the</strong> explanatory value <strong>of</strong> <strong>the</strong> method <strong>of</strong> ratios ....................................................... 37<br />
3. The limits <strong>of</strong> <strong>the</strong> normative value <strong>of</strong> <strong>the</strong> method <strong>of</strong> ratios .......................................................... 38<br />
4. Limits <strong>of</strong> <strong>the</strong> predictive value <strong>of</strong> <strong>the</strong> method <strong>of</strong> ratios................................................................. 39<br />
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SECTION II: THE CONDITIONS OF FINANCIAL EQUILIBRIUM ....................................................................................... 39<br />
I. The prospective analysis <strong>of</strong> <strong>the</strong> variations <strong>of</strong> <strong>cash</strong>: The explanation <strong>of</strong> <strong>the</strong> financial balance ................. 40<br />
A. The <strong>flow</strong> <strong>of</strong> fund accounting ............................................................................................................... 40<br />
1. Historic Flows ............................................................................................................................... 40<br />
2. The <strong>flow</strong>s <strong>of</strong> operations ................................................................................................................ 41<br />
B. Accounting <strong>flow</strong>s and Cash-Flow ........................................................................................................ 41<br />
1. The implicit assumptions <strong>of</strong> assimilation <strong>of</strong> accounting <strong>flow</strong>s to <strong>cash</strong>-<strong>flow</strong>s .............................. 41<br />
2. The limits to <strong>the</strong> assimilation <strong>of</strong> accounting <strong>flow</strong>s to <strong>cash</strong>-<strong>flow</strong>s................................................. 42<br />
C. The limits <strong>of</strong> analysis <strong>of</strong> <strong>the</strong> “Variations <strong>of</strong> Cash” .............................................................................. 43<br />
1. The array <strong>of</strong> variations <strong>of</strong> <strong>cash</strong> is actually a static document ...................................................... 43<br />
2. The array <strong>of</strong> changes in Cash is syn<strong>the</strong>tic document ................................................................... 44<br />
3. Array <strong>of</strong> financing and <strong>cash</strong> balance ............................................................................................. 44<br />
3.1. The Method “Revenue – Expenses” ..................................................................................... 46<br />
3.1.1. The principle <strong>of</strong> <strong>the</strong> method ..................................................................................... 46<br />
3.1.2. Limitations <strong>of</strong> <strong>the</strong> method ........................................................................................ 48<br />
3.2. Prediction method “Resources –Needs” .............................................................................. 49<br />
3.2.1. Presentation <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong> forecast in terms <strong>of</strong> “Resources and Needs” ........... 50<br />
3.2.2. Estimates <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s in terms <strong>of</strong> “Resources needs” .......................................... 51<br />
CHAPTER 2: MONETARY INFLOWS AND CASH-TREASURY .......................................................................................... 53<br />
SECTION I: MONETARY CASH OF THE FIRM ................................................................................................................. 53<br />
I. Preference for liquidity and inventory management ................................................................................ 53<br />
A. Ground for <strong>cash</strong>, and detention <strong>of</strong> liquidity ....................................................................................... 54<br />
1. The reasons for detention <strong>of</strong> liquidity .......................................................................................... 54<br />
2. The formalization <strong>of</strong> <strong>the</strong> monetary stock ..................................................................................... 54<br />
3. The structure <strong>of</strong> Cash ................................................................................................................... 54<br />
B. The essential variables involved in <strong>the</strong> determination <strong>of</strong> <strong>the</strong> optimal amount <strong>of</strong> <strong>cash</strong> ..................... 55<br />
1. The nature, behavior and volume <strong>of</strong> <strong>the</strong> <strong>cash</strong>-<strong>flow</strong>s ................................................................... 55<br />
2. Transaction costs and revenues associated with <strong>the</strong> “Securities” .............................................. 55<br />
3. The duration <strong>of</strong> <strong>the</strong> period <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s forecast ................................................................. 56<br />
4. Minimum critical balance <strong>of</strong> <strong>cash</strong> ................................................................................................. 56<br />
5. The chosen safety margin ............................................................................................................ 57<br />
C. Modelization <strong>of</strong> <strong>the</strong> company’s monetary in<strong>flow</strong>s management ....................................................... 57<br />
1. The concept <strong>of</strong> “Cash Reserve” rethink ........................................................................................ 58<br />
1.1. The failures <strong>of</strong> analysis to prove <strong>the</strong> existence <strong>of</strong> reserves inside IWACO’s treasury ........... 58<br />
1.2. Dsynchronization <strong>of</strong> <strong>cash</strong> <strong>flow</strong> and liquidity detention ......................................................... 59<br />
1.3. The assumption <strong>of</strong> <strong>the</strong> unexpected and <strong>the</strong> detention <strong>of</strong> liquidity ....................................... 60<br />
2. The treasury-<strong>cash</strong> funding using <strong>the</strong> stock management ............................................................ 61<br />
2.1. The “Transfer Policy” as an equilibrium tool <strong>of</strong> <strong>cash</strong>-treasury: Transfer inert-agencies ....... 61<br />
2.2. The assumption <strong>of</strong> <strong>the</strong> homogeneous nature <strong>of</strong> <strong>the</strong> funds ................................................... 62<br />
CHAPTER 3: METHODOLOGY OF THE STUDY ............................................................................................................... 64<br />
I. Presentation <strong>of</strong> <strong>the</strong> study .......................................................................................................................... 64<br />
II. Data collection tools .................................................................................................................................. 67<br />
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SECOND PART: THE PRACTICE OF THE CASH TREASURY OPTIMIZATION INSIDE IWACO’S COMPANY ..................... 69<br />
CHAPTER 4: GENERAL PRESENTATION OF THE COMPANY IWACO ............................................................................ 70<br />
I. Internal environment ................................................................................................................................ 70<br />
A. Organizational structure ..................................................................................................................... 70<br />
B. Organization and functions ................................................................................................................. 72<br />
II. External environment ................................................................................................................................ 73<br />
A. Company’s operating field .................................................................................................................. 73<br />
1. Market .......................................................................................................................................... 73<br />
2. Supplier: WANNA Corporate ........................................................................................................ 74<br />
3. Client ............................................................................................................................................. 74<br />
B. Dynamical competition ....................................................................................................................... 75<br />
CHAPTER 5: THE MINIMIZATION OF THE VOLUME OF MONETARY ASSETS .............................................................. 76<br />
SECTION I: INFLOWS GLOBAL MANAGEMENT ............................................................................................................ 76<br />
I. The control <strong>of</strong> <strong>cash</strong> <strong>flow</strong> and cost savings ................................................................................................. 76<br />
A. Formalization <strong>of</strong> <strong>the</strong> Idle <strong>cash</strong> ............................................................................................................. 76<br />
1. The lack <strong>of</strong> blank balances ............................................................................................................ 76<br />
2. The fear <strong>of</strong> <strong>the</strong> debit balances ...................................................................................................... 78<br />
3. The importance <strong>of</strong> unused funds and its consequences .............................................................. 78<br />
B. The unnecessary costs <strong>of</strong> <strong>the</strong> idle funds ............................................................................................. 80<br />
1. The structure <strong>of</strong> <strong>the</strong> cost <strong>of</strong> money .............................................................................................. 80<br />
2. Scales <strong>of</strong> interest quarterly........................................................................................................... 80<br />
3. The assessments <strong>of</strong> costs in <strong>the</strong> traditional <strong>cash</strong>-management .................................................. 84<br />
3.1. The analysis <strong>of</strong> <strong>the</strong> conditions <strong>of</strong> bank .................................................................................. 87<br />
3.1.1. Expressed as a percentage <strong>of</strong> banking conditions: Rates ......................................... 87<br />
3.2. The costs <strong>of</strong> banking services ................................................................................................. 88<br />
3.2.1. Offer <strong>of</strong> <strong>the</strong> company to <strong>the</strong> bankers ....................................................................... 88<br />
3.2.2. Operating account measures <strong>the</strong> company’s <strong>of</strong>fer to its bankers............................ 89<br />
SECTION II: CASH FLOW FORECASTING ....................................................................................................................... 90<br />
I. Analysis <strong>of</strong> <strong>the</strong> Cash <strong>flow</strong>s ......................................................................................................................... 90<br />
A. Treasury-data collection system ......................................................................................................... 90<br />
B. Knowledge <strong>of</strong> <strong>the</strong> structure <strong>of</strong> <strong>cash</strong> receipts and disbursements ...................................................... 92<br />
1. The structure <strong>of</strong> receipts <strong>of</strong> <strong>the</strong> firm ............................................................................................ 92<br />
2. The structure <strong>of</strong> <strong>the</strong> disbursement <strong>of</strong> IWACO .............................................................................. 93<br />
C. The reduction <strong>of</strong> uncertainty in certain movements <strong>of</strong> funds ............................................................ 93<br />
1. Sensitivity analysis ........................................................................................................................ 94<br />
2. The streamlining <strong>of</strong> procedures for billing and recovering .......................................................... 95<br />
3. The centralization <strong>of</strong> liquidity management ................................................................................ 97<br />
II. The reasoned slowdown <strong>of</strong> <strong>the</strong> settlement <strong>of</strong> debts ................................................................................ 97<br />
A. The rational establishment <strong>of</strong> due dates ............................................................................................ 97<br />
B. The choice <strong>of</strong> <strong>the</strong> payment instruments ............................................................................................. 98<br />
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CHAPTER 6: TREASURY AND FINANCIAL POLICY OF THE FIRM ................................................................................... 98<br />
SECTION I: THE CONDITIONS OF THE COMPANY’S LIQUIDITY .................................................................................... 98<br />
I. The management <strong>of</strong> <strong>cash</strong> <strong>flow</strong> .................................................................................................................. 98<br />
A. Control <strong>of</strong> <strong>the</strong> formalization <strong>of</strong> <strong>cash</strong>-<strong>flow</strong>s ......................................................................................... 98<br />
1. The conditions <strong>of</strong> formalization <strong>of</strong> <strong>cash</strong>-<strong>flow</strong>s ............................................................................. 98<br />
2. The effects <strong>of</strong> investment on <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s.............................................................................. 101<br />
B. Investment <strong>of</strong> <strong>cash</strong>-<strong>flow</strong>s .................................................................................................................. 104<br />
1. Cash-treasury and investment policies, BU1 and BU2 ............................................................... 104<br />
2. Definition <strong>of</strong> <strong>the</strong> BU2 .................................................................................................................. 108<br />
SECTION 2: EVALUATION OF FINANCIAL SITUATION OF THE FIRM .......................................................................... 108<br />
A. Arbitration <strong>of</strong> <strong>the</strong> financial position <strong>of</strong> <strong>the</strong> <strong>cash</strong> ............................................................................................ 108<br />
1. Creation <strong>of</strong> a new treasury: BU2’s treasury ............................................................................................ 111<br />
2. Evaluation <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> firm after BU2 integration .................................................. 113<br />
3. The merging <strong>of</strong> <strong>the</strong> two treasuries; BU1 and BU2 ................................................................................... 115<br />
B. Consequences <strong>of</strong> merging <strong>the</strong> two treasuries; BU1 and BU2 ........................................................................ 115<br />
1. Effect <strong>of</strong> synergy ...................................................................................................................................... 115<br />
2. Global treasury’s issue: <strong>Optimization</strong> ...................................................................................................... 116<br />
3. Impacts <strong>of</strong> <strong>the</strong> merging ........................................................................................................................... 117<br />
C. Recommendations ......................................................................................................................................... 117<br />
CONCLUSION .............................................................................................................................................................. 119<br />
BIBLIOGRAPHY ............................................................................................................................................................ 122<br />
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ABSTRACT<br />
Inside a world full <strong>of</strong> banking institutions, corporation, investments, brokers, dealers, providers…in a world where<br />
everybody’s looking for making pr<strong>of</strong>it, conflicts takes part and impact negatively <strong>the</strong> waiting results. Each one’s trying<br />
harder to make his own part <strong>of</strong> <strong>the</strong> cake bigger than <strong>the</strong> o<strong>the</strong>r, making struggles for o<strong>the</strong>rs and taking advantage <strong>of</strong><br />
<strong>the</strong> minimum <strong>of</strong> opportunities, some <strong>of</strong> <strong>the</strong>m realize that <strong>the</strong> main objective <strong>of</strong> all this isn’t necessarily following where<br />
<strong>the</strong> opportunity shows or where <strong>the</strong> gain is more pr<strong>of</strong>itable, but more; where <strong>the</strong> <strong>flow</strong>s can stay on <strong>the</strong> market for <strong>the</strong><br />
longest period.<br />
The main objective <strong>of</strong> this project research is to eventually prove <strong>the</strong> point that pr<strong>of</strong>it can be made by a company’s<br />
own money and still can resist <strong>the</strong> biggest crisis. Here, <strong>the</strong> result <strong>of</strong> this research is to show that <strong>the</strong> company can be<br />
delegated to manage its inside <strong>cash</strong> <strong>flow</strong>s or as called in this book “Treasury” in a simple operation called “<strong>Optimization</strong><br />
<strong>of</strong> <strong>the</strong> Cash-Treasury”.<br />
KEY WORDS<br />
Treasury, Cash-treasury, In<strong>flow</strong>s, Out<strong>flow</strong>s, Liabilities, Assets, Turnover, Investment, Risk, <strong>Optimization</strong>, Arbitration,<br />
Minimization, Maximization, Fund, Working Capital Fund, Ratio, Solvency, Liquidity, Forecast, Flows, Balance,<br />
Securities, Value, Prediction, Variation, Resource, Needs, Estimation, Stock, Volume, Reserve, Transfer, Equilibrium,<br />
Supplier, Provider, Interest, Funds, Savings, Cost, Idle <strong>cash</strong>, Bank, Rates, Structure, Services, Due date, Value date,<br />
Slowdown, Debts, Loans, Credit, Debit, Cash.<br />
Page 19 <strong>of</strong> 124
The treasury <strong>of</strong> a company can be analyzed as <strong>the</strong> global materials and resources that <strong>the</strong> company has in front <strong>of</strong> all<br />
kind <strong>of</strong> contracted engagements. The main situation <strong>of</strong> <strong>the</strong> company’s <strong>of</strong>ten related to <strong>the</strong> conditions <strong>of</strong> liquidity that<br />
<strong>the</strong> company acquires by <strong>the</strong> time, and that’s what expresses <strong>the</strong> term <strong>of</strong> “The Solvency” defined as <strong>the</strong> ability <strong>of</strong> an<br />
economic agent to confront his debts and loans with <strong>the</strong> exact payment conditions at <strong>the</strong> due date. The optimal<br />
management <strong>of</strong> <strong>the</strong> treasury is based on forecasting, controlling, and handling correctly <strong>the</strong> dimensions and dates <strong>of</strong><br />
liabilities and those <strong>of</strong> spontaneous availabilities as a result <strong>of</strong> <strong>the</strong> company’s functioning system and to procure at<br />
<strong>the</strong> same time <strong>the</strong> optimal duration <strong>of</strong> costs and complementary availabilities that are needed. In o<strong>the</strong>r meaning, <strong>the</strong><br />
mean objective <strong>of</strong> <strong>the</strong> treasury if to make available <strong>the</strong> liquidity that <strong>the</strong> company needs at <strong>the</strong> exact time with <strong>the</strong><br />
minimum <strong>of</strong> costs.<br />
The control <strong>of</strong> <strong>the</strong> turnover’s liquidity is <strong>the</strong> main objective <strong>of</strong> <strong>the</strong> “Treasury’s Policy” or “Policy <strong>of</strong> Cash”, which makes<br />
<strong>the</strong> goal <strong>of</strong> this research that I’ve worked on inside <strong>the</strong> IWACO’s company; to define <strong>the</strong> content <strong>of</strong> such a policy and<br />
how it works. For that, it’s required that we determine <strong>the</strong> methodological approach <strong>of</strong> <strong>the</strong> problem before<br />
describing <strong>the</strong> means and tools <strong>of</strong> actions and <strong>the</strong> conditions <strong>of</strong> implementation to achieve optimum management.<br />
In <strong>the</strong> finance traditions, managing <strong>the</strong> <strong>cash</strong> <strong>of</strong> a firm boils down to <strong>the</strong> two following activities:<br />
Check <strong>the</strong> level <strong>of</strong> <strong>the</strong> Cash<br />
Maintain <strong>the</strong> creditworthiness (Solvency)<br />
The <strong>cash</strong> level is monitored from <strong>the</strong> study <strong>of</strong> <strong>the</strong> accounting Balance. “The Receipts” and “Treasury” refer to <strong>the</strong><br />
same reality. Cash is analyzed as a result <strong>of</strong> <strong>the</strong> activity. In o<strong>the</strong>r words, <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s <strong>of</strong> a business at a given time<br />
is <strong>the</strong> difference, at this date, between:<br />
Its working capital which is <strong>the</strong> part <strong>of</strong> <strong>the</strong> permanent capitals not absorbed by <strong>the</strong> financing <strong>of</strong> securities<br />
and real estates and <strong>the</strong>refore available to finance <strong>the</strong> requirements related to <strong>the</strong> operating cycle.<br />
And its needs in working capital (FDR) which is linked to <strong>the</strong> operating cycle.<br />
On a specified date, when <strong>the</strong> working capital (FDR) is greater than <strong>the</strong> working capital needs; <strong>the</strong> <strong>cash</strong> <strong>flow</strong> or <strong>the</strong><br />
Cash Treasury is positive. On <strong>the</strong> contrary, if <strong>the</strong> Working Capital Fund (WCP or FDR) is insufficient <strong>cash</strong>, <strong>the</strong> Treasury<br />
<strong>cash</strong> becomes negative. Maintaining solvency that assures <strong>the</strong> settlement <strong>of</strong> receivables results, meanwhile, from<br />
<strong>the</strong> financial decisions taken in <strong>the</strong> short term. This action Is divided into two components:<br />
First; <strong>the</strong> determination <strong>of</strong> a certain level <strong>of</strong> <strong>cash</strong> to jeep for reasons <strong>of</strong> transaction or suppliers’ payments,<br />
finance and speculation.<br />
Second; <strong>the</strong> choice <strong>of</strong> <strong>the</strong> best method <strong>of</strong> financing <strong>cash</strong> deficits that may appear.<br />
The objective <strong>of</strong> solvency would be easily reached if <strong>the</strong> company could have a large <strong>cash</strong> liquidity position providing<br />
a wide margin <strong>of</strong> safety and a 0.05% gain from <strong>the</strong> suppliers. Yet, any detention <strong>of</strong> currency entails costs: pr<strong>of</strong>itability<br />
and solvency appear as two antagonistic terms.<br />
Every year, thousands <strong>of</strong> companies are facing <strong>cash</strong> difficulties. The phenomenon can affect not only small and<br />
medium-sized or even unpr<strong>of</strong>itable companies. Liquidities<br />
Each year thousands <strong>of</strong> companies are facing <strong>cash</strong> difficulties. The phenomenon can affect not only small and<br />
medium-sized or even unpr<strong>of</strong>itable companies. Liquidity difficulties grows with <strong>the</strong> evolution <strong>of</strong> modern economies.<br />
But we can also assume that <strong>the</strong> <strong>cash</strong> management requires greater rigor on <strong>the</strong> practical level and a new approach<br />
at <strong>the</strong> <strong>the</strong>oretical level. For a long time, in fact, <strong>the</strong> economic situation had made easier <strong>the</strong> payment <strong>of</strong> debts and<br />
repayment <strong>of</strong> loans by companies that had got into debt. However, since 20 years <strong>cash</strong> <strong>flow</strong> problems are one <strong>of</strong> <strong>the</strong><br />
bottlenecks <strong>of</strong> business activity. The number <strong>of</strong> those facing "wall <strong>of</strong> money" continues to increase. Four phenomena<br />
are in this respect to take into account.<br />
Firstly, even if currently <strong>the</strong> cost <strong>of</strong> money is experiencing a net relaxation, gave first-order importance to<br />
<strong>the</strong> follow-up <strong>of</strong> two accounts “receivable and suppliers” it means inter-firm trade credit.<br />
Then, economic conditions, in particular consumption, following <strong>the</strong> oil shocks, unemployment,<br />
technological innovations and relocations, makes <strong>the</strong> requirements <strong>of</strong> turnover’s liquidity harder to master.<br />
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In addition, <strong>the</strong> monetary risk is always present: If inflation has no longer in recent years in our industrial<br />
economies a devastating effect, <strong>the</strong> exchange rate risk due to <strong>the</strong> floating <strong>of</strong> currencies remains a factor <strong>of</strong><br />
insecurity.<br />
Finally, <strong>the</strong> money market risks, including <strong>the</strong> risk <strong>of</strong> rate have led to <strong>the</strong> development <strong>of</strong> protection<br />
techniques, real 'financial engineering' in <strong>the</strong> service <strong>of</strong> <strong>the</strong> <strong>cash</strong> management.<br />
In <strong>the</strong> light <strong>of</strong> <strong>the</strong>se facts it is necessary to redefine <strong>the</strong> data and objectives <strong>of</strong> an optimal management <strong>of</strong> <strong>the</strong><br />
Treasury. The need <strong>of</strong> this reflection is tw<strong>of</strong>old:<br />
From a practical point <strong>of</strong> view we will analyze <strong>the</strong> causes <strong>of</strong> <strong>the</strong> difficulties <strong>of</strong> <strong>cash</strong> when <strong>the</strong> company is pr<strong>of</strong>itable<br />
and growing. We will not discuss <strong>the</strong> financial consequences <strong>of</strong> a reduction <strong>of</strong> <strong>the</strong> level <strong>of</strong> activity whose cause is<br />
ei<strong>the</strong>r a general economic crisis, or a weakening <strong>of</strong> demand for <strong>the</strong> product. In <strong>the</strong> first case, it’s a situation largely<br />
exceeding <strong>cash</strong>-<strong>flow</strong> problems. In <strong>the</strong> second case, it is to find ano<strong>the</strong>r market or to disappear. Genuinely, companies<br />
that are "sick <strong>of</strong> <strong>the</strong>ir own <strong>cash</strong>" are generally expanding and with an important short term debt. Even when <strong>the</strong><br />
economic situation is positive, such companies have deadline problems that can become very serious.<br />
A <strong>cash</strong> crisis revealed weaknesses in <strong>the</strong> management <strong>of</strong> <strong>the</strong> firm, because any act <strong>of</strong> management translates to<br />
inputs and outputs <strong>of</strong> liquidity. We show that any <strong>cash</strong> crisis relates to one <strong>of</strong> <strong>the</strong> following two cases:<br />
Short-term <strong>cash</strong> crises, on one hand, caused by <strong>the</strong> lack <strong>of</strong> synchronization between <strong>the</strong> in<strong>flow</strong> and out<strong>flow</strong><br />
<strong>of</strong> funds <strong>flow</strong>s;<br />
The structural crises <strong>of</strong> <strong>cash</strong>, on <strong>the</strong> o<strong>the</strong>r hand, resulting from <strong>the</strong> absence <strong>of</strong> concordance between <strong>the</strong><br />
overall stability <strong>of</strong> <strong>the</strong> funding and <strong>the</strong> overall period <strong>of</strong> recovery <strong>of</strong> <strong>the</strong> use <strong>of</strong> <strong>the</strong> funds.<br />
Cash management is <strong>the</strong>refore widely beyond <strong>the</strong> short-term. It is an economic study <strong>of</strong> <strong>the</strong> financing needs <strong>of</strong> <strong>the</strong><br />
company and is located in <strong>the</strong> hinge <strong>of</strong> <strong>the</strong> financial problems and operating problems. Cash Treasury is not <strong>the</strong><br />
balance <strong>of</strong> <strong>cash</strong> <strong>flow</strong>, but <strong>the</strong> syn<strong>the</strong>sis <strong>of</strong> all company policies. The <strong>cash</strong> management plays an essential role in <strong>the</strong><br />
life <strong>of</strong> companies.<br />
From a <strong>the</strong>oretical point <strong>of</strong> view, <strong>the</strong>n, we will highlight that optimal <strong>cash</strong> management through a systemic approach<br />
<strong>of</strong> financial management. Cash policy is conditioned by <strong>the</strong> basic financial choices:<br />
Choice <strong>of</strong> <strong>the</strong> structure <strong>of</strong> liabilities, or funding policy,<br />
Choice <strong>of</strong> <strong>the</strong> structure <strong>of</strong> assets, or investment policy.<br />
The optimum <strong>of</strong> management is defined by <strong>the</strong> close compatibility between liquidity and pr<strong>of</strong>itability. The short term<br />
solvency should not depend on <strong>the</strong> detention <strong>of</strong> <strong>cash</strong> but on serious forecasts, on one hand, <strong>the</strong> behavior <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
<strong>flow</strong> in <strong>the</strong> short term and even in <strong>the</strong> very short term, and, secondly, <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> turnover’s structure which<br />
affects <strong>the</strong> formation <strong>of</strong> <strong>the</strong>se <strong>flow</strong>s. On <strong>the</strong> long term only high pr<strong>of</strong>itability ensures <strong>the</strong> company a volume <strong>of</strong> selffinancing<br />
compatible with a debt policy that provides <strong>the</strong> firm with new resources. Any investment causes <strong>the</strong><br />
immobilization <strong>of</strong> funds but its pr<strong>of</strong>itability should allow for restoration <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> firm<br />
We will show that investment policy that generates <strong>the</strong> best overall liquidity <strong>of</strong> <strong>the</strong> company is <strong>the</strong> optimal and most<br />
cost-effective choice. Optimal <strong>cash</strong> management is a management that maximizes both liquidity and pr<strong>of</strong>itability.<br />
The management <strong>of</strong> <strong>the</strong> Treasury, i.e. <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> firm, revolves <strong>the</strong>refore around three actions:<br />
An economic action, whose purpose is to maintain <strong>the</strong> closest bank balance <strong>of</strong> zero by control <strong>of</strong> entry and<br />
<strong>cash</strong> <strong>flow</strong>;<br />
A structural action, whose purpose is to control <strong>the</strong> potential for <strong>the</strong> recovery <strong>of</strong> liquidity <strong>of</strong> <strong>the</strong> assets <strong>of</strong> <strong>the</strong><br />
company by <strong>the</strong> mastery <strong>of</strong> allocation <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s, by a fair assessment <strong>of</strong> <strong>the</strong> needs for working capital<br />
and <strong>the</strong>ir adequate funding.<br />
A monetary action, by setting up a protection against <strong>the</strong> variation in <strong>the</strong> purchasing power <strong>of</strong> <strong>the</strong> currency<br />
and money markets risk.<br />
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Part I: The Theoretical Framework<br />
Page 22 <strong>of</strong> 124
A good financial situation is characterized by <strong>the</strong> ability to maintain a level <strong>of</strong> liquidity sufficient for <strong>the</strong> turnover in<br />
order to ensure <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> company. It is <strong>the</strong> result <strong>of</strong> <strong>the</strong> opposition between <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> assets and<br />
<strong>the</strong> payment <strong>of</strong> debt. That is why one <strong>of</strong> <strong>the</strong> fundamental concerns <strong>of</strong> <strong>the</strong> financial manager is <strong>the</strong> control <strong>of</strong> <strong>the</strong><br />
financial equilibrium <strong>of</strong> <strong>the</strong> firm. The Working Capital Fund and <strong>the</strong> ratios are <strong>the</strong> most commonly used balance<br />
measuring instruments. But controlling <strong>the</strong> financial balance through <strong>the</strong>se instruments remains insufficient to<br />
explain it. Also, should complete this first analysis by financial movements that led to <strong>the</strong> fund balance. This second<br />
analysis allows to enjoy <strong>the</strong> <strong>cash</strong> position at a given time, to anticipate movements to come, and hence, have <strong>the</strong><br />
necessary information to where appropriate, take <strong>the</strong> necessary corrective actions.<br />
SECTION 1: THE CONTROL OF THE FINANCIAL BALANCE.<br />
The control <strong>of</strong> <strong>the</strong> financial balance is limited in general to <strong>the</strong> consideration <strong>of</strong> <strong>the</strong> Working Capital Fund and <strong>the</strong><br />
calculation <strong>of</strong> a number <strong>of</strong> ratios.<br />
I - THE WORKING CAPITAL FUND, INDICATOR OF THE FINANCIAL BALANCE.<br />
All <strong>the</strong> instruments <strong>of</strong> assessment <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> a firm, working capital is most <strong>of</strong>ten used by both <strong>the</strong><br />
executives <strong>of</strong> <strong>the</strong> company and its bankers. But this notion gives rise to a plurality <strong>of</strong> definitions whose vagueness is<br />
a frequent source <strong>of</strong> ambiguity and confusion. The Working Capital Fund is part <strong>of</strong> <strong>the</strong> permanent capital which<br />
finances <strong>the</strong> operating cycle. It expresses <strong>the</strong> "ability to <strong>cash</strong>" <strong>of</strong> <strong>the</strong> firm and appears as <strong>the</strong> source <strong>of</strong> funding <strong>of</strong> <strong>the</strong><br />
<strong>cash</strong> requirements.<br />
A - THE FUND OF WORKING CAPITAL, TOOL OF FINANCING THE CASH REQUIREMENTS.<br />
According to <strong>the</strong> basic and traditional financial balance principle. The different values <strong>of</strong> assets must always be<br />
funded by capital remaining at <strong>the</strong> disposal <strong>of</strong> <strong>the</strong> firm for a time at least equal <strong>the</strong>ir life expectancy. Thus capital<br />
constituting by definition <strong>of</strong> <strong>the</strong> long term jobs should not be financed by short-term loans might not be re-appointed<br />
or disappearing <strong>the</strong>mselves.<br />
However this balance is fragile. Need to consolidate as a margin <strong>of</strong> safety: <strong>the</strong> Working Capital Fund.<br />
1 - THE DETERMINATION OF THE WORKING CAPITAL FUND.<br />
Working capital is calculated in two ways<br />
Permanent capital on net surplus assets;<br />
Current assets - short term (after allocation <strong>of</strong> pr<strong>of</strong>it) debts.<br />
1.1 - THE REFERENCE TO PERMANENT CAPITAL.<br />
The existence <strong>of</strong> a positive working capital means that a portion <strong>of</strong> current assets is supported by long term capital<br />
The requirements <strong>of</strong> bearings are <strong>the</strong> part <strong>of</strong> <strong>the</strong> cyclical needs whose funding is not provided by cyclic resources but<br />
by <strong>the</strong> Working Capital Fund, and, if <strong>the</strong> WCF is insufficient by short-term loans. The array <strong>of</strong> needs and resources<br />
can <strong>the</strong>n be written as follow in table n°1:<br />
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ASSETS<br />
Need in Working Capital Cash<br />
Cash Fund (surplus)<br />
LIABILITIES<br />
Working Capital Cash<br />
Cash Fund (deficit)<br />
It follows "<strong>the</strong> fundamental relationship <strong>of</strong> <strong>cash</strong>":<br />
CASH = WORKING CAPITAL - NEEDS IN WORKING CAPITAL FUND.<br />
The Working Capital Fund and <strong>the</strong> working capital needs are most <strong>of</strong>ten positive. It may be that one or <strong>the</strong> o<strong>the</strong>r, or<br />
both, are negative. Negative working capital is a need that must be financed. Negative working capital needs<br />
compose resources for <strong>the</strong> company. If <strong>the</strong> financing needs <strong>of</strong> <strong>the</strong> operation are greater than <strong>the</strong> Working Capital<br />
Fund, <strong>the</strong> <strong>cash</strong> <strong>flow</strong> is negative. Therefore, <strong>the</strong> fundamental relationship to write:<br />
1.2 - THE REFERENCE TO SHORT-TERM DEBT.<br />
WORKING CAPITAL = WORKING CAPITAL NEEDS +/- CASH<br />
The justification for <strong>the</strong> Working Capital Fund, as an indicator <strong>of</strong> <strong>the</strong> gap between current assets and short-term<br />
liabilities is based on <strong>the</strong> <strong>the</strong>sis <strong>of</strong> <strong>the</strong> automatic liquidation <strong>of</strong> debts in <strong>the</strong> short term. According to this <strong>the</strong>sis, <strong>the</strong><br />
accumulated stocks to confront seasonal demands are fully funded by <strong>the</strong> short term loans. The use <strong>of</strong> <strong>the</strong>se<br />
'temporary' stocks will cause <strong>cash</strong> <strong>flow</strong> that become available for <strong>the</strong> reimbursement <strong>of</strong> <strong>the</strong>se loans. The idea <strong>of</strong><br />
'automatic liquidation' has been extended to <strong>the</strong> whole <strong>of</strong> <strong>the</strong> surplus <strong>of</strong> <strong>the</strong> values <strong>of</strong> working capital term debt. In<br />
o<strong>the</strong>r words, capital circulating 'temporary' would be funded by <strong>the</strong> immediate liabilities and <strong>the</strong> 'remaining'<br />
circulating capital through ongoing resources: The Working Capital Fund.<br />
The Working Capital Fund is <strong>the</strong>refore a margin <strong>of</strong> safety: it corresponds to <strong>the</strong> losses that can undergo a company<br />
unless it is required to sell a portion <strong>of</strong> its assets or borrowing. In <strong>the</strong> absence <strong>of</strong> this margin, <strong>the</strong> deflation <strong>of</strong> shortterm<br />
loans resulting from a cause, for example, <strong>of</strong> a momentary decrease in activity, plunges <strong>the</strong> company into a<br />
crisis <strong>of</strong> <strong>cash</strong> by putting in a State <strong>of</strong> cessation <strong>of</strong> payments.<br />
2 - THE WORKING CAPITAL FUND IS THE MEASURE OF THE TRADE-OFF BETWEEN PROFITABILITY AND SOLVENCY.<br />
The decrease in working capital leads to an increase in <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> company but at <strong>the</strong> same time an<br />
increase in <strong>the</strong> risk <strong>of</strong> insolvency and vice versa.<br />
2.1 - AN INCREASE OF PROFITABILITY.<br />
At an equal amount, loans in <strong>the</strong> medium and long term are generally more expensive than short-term loans. Indeed:<br />
On <strong>the</strong> one hand, interest paid on long-term loans are generally higher than those paid on short-term loans.<br />
On <strong>the</strong> o<strong>the</strong>r hand, <strong>the</strong> rigidity <strong>of</strong> long-term borrowing makes <strong>the</strong>ir jobs more expensive than those in <strong>the</strong><br />
short term. In addition, <strong>the</strong> ratio "results / Capital" will be higher.<br />
2.2 - AN INCREASE OF THE RISK OF INSOLVENCY.<br />
The company increases its risk when it increases its short-term funding commitments in <strong>the</strong> long term. In <strong>the</strong> event<br />
<strong>of</strong> non-renewal <strong>of</strong> short-term loans, <strong>the</strong> importance <strong>of</strong> its <strong>cash</strong>-<strong>flow</strong> problems will be proportional to <strong>the</strong> share <strong>of</strong> <strong>the</strong><br />
short-term in its resources. The cost <strong>of</strong> <strong>the</strong> risk <strong>of</strong> insolvency can range from <strong>the</strong> high price <strong>of</strong> requested assistance<br />
<strong>of</strong> extreme urgency until <strong>the</strong> bankruptcy.<br />
B - THE WORKING CAPITAL FUND IS NOT A GOOD INDICATOR OF SOLVENCY.<br />
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Experience and observation prove that one cannot make no serious value judgment on <strong>the</strong> creditworthiness <strong>of</strong> a<br />
company to <strong>the</strong> only consideration <strong>of</strong> its working capital.<br />
1 - THE MEANING OF WORKING CAPITAL LIMITS FROM THE EXPERIENCE.<br />
Nor <strong>the</strong> volume or composition, nor <strong>the</strong> meaning <strong>of</strong> <strong>the</strong> working capital fund variation indicate with certainty <strong>the</strong><br />
liquidity <strong>of</strong> <strong>the</strong> company.<br />
1.1 - VOLUME OF THE WORKING CAPITAL FUND AND CASH.<br />
While a well-balanced financial structure, i.e. representing a positive working capital fund, is usually an index <strong>of</strong> good<br />
management, a presumption <strong>of</strong> difficulties arises from imbalance mixed with fixed assets greater than permanent<br />
resources. In fact, <strong>the</strong> level <strong>of</strong> <strong>the</strong> Working Capital Fund largely depends on <strong>the</strong> way in which <strong>the</strong> assets is managed.<br />
Very fleshed out, it can mean that assets are not sufficiently renewed and capital assets are excessive, reflecting an<br />
underutilization <strong>of</strong> permanent capital. Conversely, <strong>the</strong> narrowness <strong>of</strong> <strong>the</strong> Working Capital Fund may sometimes<br />
explained by <strong>the</strong> very particular nature <strong>of</strong> certain business activity. The amount <strong>of</strong> <strong>the</strong> Working Capital Fund is thus<br />
determined by <strong>the</strong> characteristics <strong>of</strong> <strong>the</strong> cycle <strong>of</strong> exploitation and management which strongly influence <strong>the</strong> level <strong>of</strong><br />
<strong>the</strong> working capital needs. As a general rule, over <strong>the</strong> duration <strong>of</strong> <strong>the</strong> operating cycle is long, as <strong>the</strong>se needs are high<br />
and more fund bearing found in <strong>the</strong> balance sheet must be important.<br />
A company with a high working capital is not necessarily an easy <strong>cash</strong> treasury if its working capital needs are most<br />
important. Conversely, a company with a low, or even negative working capital, is not necessarily a tight <strong>cash</strong><br />
treasury.<br />
1.2 - COMPOSITION OF THE WORKING CAPITAL FUND AND CASH.<br />
The banker is concerned to <strong>the</strong> relative proportion <strong>of</strong> equity and terms <strong>of</strong> debts. The vulnerability <strong>of</strong> a company<br />
grows with <strong>the</strong> importance <strong>of</strong> its debt. More <strong>the</strong> firm is indebted more abilities <strong>of</strong> additional debt are limited, ceteris<br />
paribus. This is why calculating its own capital is recommended. The Working Capital Fund is equal to <strong>the</strong> difference<br />
between equity and net fixed assets and indicates <strong>the</strong> degree <strong>of</strong> financial independence <strong>of</strong> <strong>the</strong> firm. But a positive<br />
own Working Capital Fund may also imply that <strong>the</strong> firm is unable to finance its operating using only borrowed<br />
resources cycle, and <strong>the</strong>refore has a more restricted room for maneuver to finance its investment cycle.<br />
To finance its investments a company cannot and must not rely only on itself. It would judge favorably companies<br />
that invest little and unfavorably dynamic companies. However, if <strong>the</strong> bankers more <strong>of</strong>ten advise <strong>the</strong> use <strong>of</strong> mediumterm<br />
and long-term financing, <strong>the</strong>y recommend in order to preserve <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> company, a certain balance<br />
in <strong>the</strong> Working Capital Fund.<br />
A unanimously accepted empirical rule specifies that foreign long-term capital should not exceed balance sheet <strong>the</strong><br />
equity.<br />
1.3 - CHANGES IN WORKING CAPITAL AND CASH.<br />
One might be tempted to judge favorably a company whose capital increases and unfavorably <strong>the</strong> one that it<br />
decreases. However, working capital <strong>of</strong> a company may drop without that <strong>the</strong> situation it deteriorates. This may<br />
simply mean that <strong>the</strong> company has invested without external assistance through its bloated <strong>cash</strong>. Conversely, <strong>the</strong><br />
swelling <strong>of</strong> <strong>the</strong> Working Capital Fund may reflect <strong>the</strong> formation <strong>of</strong> idle <strong>cash</strong>. Therefore to analyze <strong>the</strong> underlying<br />
factors <strong>of</strong> such movements to interpret wisely.<br />
2 - THE LIMITS TO THE MEANING OF THE WORKING CAPITAL FUND IS DRAWN FROM STATISTICAL OBSERVATION.<br />
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Statistical observation confirms <strong>the</strong> reduced scope <strong>of</strong> <strong>the</strong> concept <strong>of</strong> working capital as a criterion <strong>of</strong> solvency and<br />
more generally financial equilibrium <strong>of</strong> <strong>the</strong> firm.<br />
2.1 - THE LINK BETWEEN THE VALUE OF THE WORKING CAPITAL FUND AND THE SECTOR OF ACTIVITY PROVES TO<br />
BE FAIRLY LOOSE.<br />
This observation occurs both in <strong>the</strong> work <strong>of</strong> MADER than in those <strong>of</strong> <strong>the</strong> “Caisse Nationale des Marchés de l’Etat”.<br />
Certainly, <strong>the</strong> Working Capital Fund appears different on average from one sector to ano<strong>the</strong>r, but within a single<br />
industry <strong>the</strong> dispersion <strong>of</strong> values remains very strong (from 53% to 187%). Cannot <strong>the</strong>refore speak <strong>of</strong> a 'normal'<br />
working for a specific sector capital.<br />
2.2. THE WORKING CAPITAL FUND ALSO VARIES WITH THE SIZE OF THE COMPANY, VALUED BY THE TURNOVER.<br />
However it is impossible to identify a link between <strong>the</strong> growth <strong>of</strong> <strong>the</strong> firm and <strong>the</strong> Working Capital Fund. In any sector<br />
we notice regardless <strong>of</strong> <strong>the</strong> size <strong>of</strong> <strong>the</strong> company, measured by turnover, a growth or a continuous decrease in working<br />
capital.<br />
The limits <strong>of</strong> <strong>the</strong> concept <strong>of</strong> working capital as an indicator <strong>of</strong> balance can be understood as follows: working<br />
capital reveals <strong>the</strong> importance and <strong>the</strong> composition <strong>of</strong> <strong>the</strong> stable financial tools that <strong>the</strong> company affected<br />
to finance <strong>the</strong> operating cycle.<br />
It is <strong>the</strong>refore clear that <strong>the</strong> amount <strong>of</strong> <strong>the</strong> working capital <strong>of</strong> a company varies with its sector <strong>of</strong> activity and its sales<br />
business but also from one company to ano<strong>the</strong>r. The financing <strong>of</strong> <strong>the</strong> operation and growth is a matter <strong>of</strong> choice to<br />
each contractor.<br />
Face to comparable constraints (operating cycle, growth, markets, banking system, etc.) makers respond in a<br />
personal and original manner. Therefore, it cannot be said a priori by a simple calculation if such working capital is<br />
sufficient or not because needs vary according to turnover, <strong>the</strong> economic circumstances <strong>of</strong> <strong>the</strong> time, <strong>the</strong> nature <strong>of</strong><br />
<strong>the</strong> activity, and in <strong>the</strong> same branch <strong>of</strong> activity according to <strong>the</strong> commercial policy <strong>of</strong> <strong>the</strong> leaders. The study <strong>of</strong> <strong>the</strong><br />
<strong>cash</strong> <strong>of</strong> a firm <strong>the</strong>refore implies <strong>the</strong> joint study <strong>of</strong> <strong>the</strong> working capital and working capital needs Fund<br />
C - THE CONTRIBUTION OF THE CONCEPT OF WORKING CAPITAL NEEDS.<br />
At <strong>the</strong> inadequacy <strong>of</strong> <strong>the</strong> notion <strong>of</strong> 'found' working capital in <strong>the</strong> balance sheet, financial analysts have sought to<br />
determine <strong>the</strong> "optimum" amount <strong>of</strong> permanent funds to <strong>the</strong> regular functioning <strong>of</strong> <strong>the</strong> company.<br />
1 - THE DIFFERENT CONCEPTIONS OF CAPITAL FUNDS AND EXPRESSION OF REGULATORY CAPITAL REQUIREMENTS.<br />
The evolution <strong>of</strong> <strong>the</strong> designs demonstrates progress in <strong>the</strong> assessment <strong>of</strong> regulatory capital.<br />
1.1 – THE TOTAL WORKING CAPITAL, OR GROSS WORKING CAPITAL.<br />
It is <strong>the</strong> widest concept since it encompasses all <strong>of</strong> <strong>the</strong> current assets. From <strong>the</strong> point <strong>of</strong> view <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong><br />
firm, total working capital measures <strong>the</strong> importance <strong>of</strong> resources requires <strong>the</strong> company to finance all <strong>of</strong> its operating<br />
expenses when it has no possibility <strong>of</strong> recourse to short-term credit. In addition, to ensure <strong>the</strong> finance <strong>of</strong> its<br />
operations <strong>the</strong> company has short-term capital that him are made by its customers (instalments), its suppliers,<br />
various and its bankers. In front <strong>of</strong> and <strong>the</strong> inadequacy <strong>of</strong> this conception <strong>of</strong> operating needs, it introduces <strong>the</strong><br />
concept <strong>of</strong> "exposure".<br />
1.2 - THE INVENTORY TOOL STOCK<br />
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Whereas part <strong>of</strong> stocks was practically incompressible and in fact was also indispensable to <strong>the</strong> company than its<br />
industrial assets, it came to argue that <strong>the</strong> working capital fund should be sufficient to finance this minimum stock<br />
called from "exposure" or “Inventory tool stock” or “Stock-Outil” in French. This note is based although partial.<br />
Indeed, <strong>the</strong>re is nothing limiting <strong>the</strong> analysis to only stocks; It is set in <strong>the</strong> same way a position 'customers-tool',<br />
'debtors divers tools or “Diverse Inventory Tool Stock”, etc. In o<strong>the</strong>r words, <strong>the</strong> working capital fund should cover a<br />
fraction, or even all, <strong>of</strong> circulating assets ei<strong>the</strong>r incompressible or permanent.<br />
1.3 - The Working Capital Funds<br />
Needs in working capital <strong>of</strong> a company represent working capital necessary for this company so that taking into<br />
account <strong>the</strong> needs and resources related to <strong>the</strong> operation, <strong>the</strong> <strong>cash</strong> is not negative. The cycle <strong>of</strong> operating a business,<br />
in fact, generates both (stocks, credit-clients, etc.) needs and resources (credit-suppliers etc...). Comparing <strong>the</strong>se<br />
needs and resources, it determines <strong>the</strong> volume <strong>of</strong> <strong>the</strong> funds needed to ensure <strong>the</strong> proper functioning <strong>of</strong> <strong>the</strong> company.<br />
2 - Calculation <strong>of</strong> working capital needs.<br />
The proposed methods can be grouped into three categories:<br />
Ma<strong>the</strong>matical methods based on <strong>the</strong> optimization <strong>of</strong> <strong>the</strong> couple "security-pr<strong>of</strong>itability."<br />
Banking methods that use <strong>the</strong> balance sheet (Accounting);<br />
The methods <strong>of</strong> calculation from <strong>the</strong> operating account, or “methods <strong>of</strong> Accountants” or “Expert-Accounting<br />
Methods”<br />
2.1 - Ma<strong>the</strong>matical calculation <strong>of</strong> <strong>the</strong> optimum <strong>of</strong> <strong>the</strong> Working Capital Fund:<br />
This calculation can be approached in three ways:<br />
(a) The <strong>the</strong>oretical optimal working capital fund will be <strong>the</strong> one for which <strong>the</strong> marginal pr<strong>of</strong>itability and <strong>the</strong> marginal<br />
cost <strong>of</strong> <strong>the</strong> corresponding insolvency risk will be equal. Thus, a reduction in working capital will result in:<br />
An increase in <strong>the</strong> pr<strong>of</strong>itability obtained by overriding <strong>the</strong> short term to long term;<br />
And by an increase in <strong>the</strong> cost <strong>of</strong> <strong>the</strong> risk <strong>of</strong> insolvency.<br />
In fact this calculation has only a very limited operational scope:<br />
First, it seems very difficult, if not impossible, to assign practice <strong>of</strong> subjective probabilities and <strong>the</strong> specific<br />
costs to <strong>the</strong> different possibilities <strong>of</strong> having <strong>cash</strong> difficulties.<br />
Then this method is that an indirect reference to <strong>the</strong> needs <strong>of</strong> operation (in <strong>the</strong> assessment <strong>of</strong> <strong>the</strong> risk), <strong>the</strong>n<br />
<strong>the</strong> level <strong>of</strong> <strong>the</strong> working capital fund depends on <strong>the</strong> importance and <strong>the</strong> nature <strong>of</strong> <strong>the</strong>se needs;<br />
Finally, <strong>the</strong> substitution <strong>of</strong> loans long-term by a short term ones leads not necessarily an improvement in<br />
pr<strong>of</strong>itability: <strong>the</strong> real cost <strong>of</strong> short-term bank loans is closely dependent on <strong>the</strong>ir use (here again we must<br />
know <strong>the</strong> nature <strong>of</strong> <strong>the</strong> needs).<br />
(b) The <strong>the</strong>oretical optimal working capital fund depends on two contradictory costs: <strong>the</strong> cost <strong>of</strong> debt, C1, and <strong>the</strong><br />
cost <strong>of</strong> additional short-term loans requested emergency, C2.<br />
The function <strong>of</strong> <strong>the</strong> total cost <strong>of</strong> a certain level <strong>of</strong> working capital, C = C1 + C2 is represented by Figure 1 following:<br />
Page 27 <strong>of</strong> 124
Figure n°1: Determination <strong>of</strong> optimal capital compromise between solvency and pr<strong>of</strong>itability.<br />
The C function passes through a minimum when its derivative with respect to <strong>the</strong> Working Capital Fund is zero. This<br />
method <strong>of</strong> calculation is thus similar to <strong>the</strong> previous. The same criticism can be formulated in its regard.<br />
(c) Optimize <strong>the</strong> use <strong>of</strong> <strong>the</strong> Working Capital Fund.<br />
This approach is original to <strong>the</strong> extent that it reverses <strong>the</strong> terms <strong>of</strong> problem (1). The selected objective is maximization<br />
<strong>of</strong> benefit based on a constraint, <strong>the</strong> Fund available bearing or '<strong>cash</strong> '. In <strong>the</strong>se circumstances, for example if <strong>the</strong><br />
production function is represented by:<br />
C = 20 + 5 (x)<br />
(Total cost = fixed costs + unit variable costs multiply by <strong>the</strong> quantity produced), and <strong>the</strong> available capital funds and<br />
150 maximum production will be:<br />
150 = 20 + 5(x)<br />
x = 26 units<br />
If it is assumed that <strong>the</strong> unit selling price is 10, and that <strong>the</strong> revenue (or turnover) function has <strong>the</strong> form:<br />
R = 10 (x)<br />
The maximum benefit allowed by <strong>the</strong> available working capital fund will be:<br />
P = R - C = 10 x - (20 + 5 x) or P = 110 (1)<br />
The marginal benefit will represent <strong>the</strong> maximum price that can pay <strong>the</strong> company for additional funds required for<br />
<strong>the</strong> production <strong>of</strong> one unit more.<br />
As can be seen, <strong>the</strong> interest <strong>of</strong> this model lies in its didactical value. It has <strong>the</strong> merit to describe <strong>the</strong> relationships<br />
between <strong>the</strong> operational needs and <strong>the</strong> Working Capital Fund. But it seems devoid <strong>of</strong> practical interest because <strong>the</strong><br />
simplifying assumptions on which it is based, as well as elsewhere, because <strong>the</strong> methodology adopted. We can take<br />
<strong>the</strong> same approach in <strong>the</strong> context <strong>of</strong> 'ma<strong>the</strong>matically' more complex situations:<br />
When functions are not linear (<strong>the</strong> cost equation becomes<br />
Page 28 <strong>of</strong> 124
C = ax² + bx + c<br />
When <strong>the</strong> demand and costs are uncertain (introduction <strong>of</strong> probability distributions relating to <strong>the</strong><br />
application and costs);<br />
When <strong>the</strong> firm decided to stockpile;<br />
When <strong>the</strong> firm produces two products, or more...<br />
This model, <strong>the</strong> same interests and <strong>the</strong> same limitations are attached only to <strong>the</strong> above. Operationally no decisive<br />
progress was actually performed.<br />
2.2- BANK METHOD OF CALCULATION OF THE WORKING CAPITAL FUND REQUIREMENT.<br />
Having outlined <strong>the</strong> principles <strong>of</strong> <strong>the</strong> method we show its limits.<br />
(a) THE PRINCIPLES OF THE METHOD.<br />
The value <strong>of</strong> <strong>the</strong> needs in working capital <strong>of</strong> a company on a fixed date is equal to <strong>the</strong> difference between <strong>the</strong> amount<br />
<strong>of</strong> its cyclical needs and its cyclic resources:<br />
Working capital needs = cyclical needs - cyclic resources<br />
The difficulty <strong>of</strong> calculating is, on <strong>the</strong> one hand, <strong>the</strong> distinction that must be between <strong>the</strong> posts at <strong>the</strong> bottom <strong>of</strong> <strong>the</strong><br />
balance sheet that are directly related to <strong>the</strong> operating cycle and those who are not, and, secondly, in various<br />
adjustments to made indispensable by <strong>the</strong> abnormal considered position value. Thus, a post from <strong>the</strong> bottom <strong>of</strong> <strong>the</strong><br />
balance sheet will be included in <strong>the</strong> calculation <strong>of</strong> working capital needs if it has <strong>the</strong> following characteristics:<br />
-It renews itself cyclically.<br />
-It is related to <strong>the</strong> operation <strong>of</strong> <strong>the</strong> business cycle;<br />
-It corresponds to a normal activity <strong>of</strong> <strong>the</strong> company.<br />
In light <strong>of</strong> <strong>the</strong>se remarks <strong>the</strong> bottom <strong>of</strong> <strong>the</strong> balance sheet is as follows in table n°2:<br />
Table n°2: Company’s composition <strong>of</strong> balance<br />
NEEDS<br />
I. CYSLICAL NEEDS :<br />
II.<br />
RESSOURCES<br />
CYCLICAL Resources<br />
-Values <strong>of</strong> operating: normal stock.<br />
-Customers.<br />
-Notes receivable: part not available immediately<br />
(effects to more than 3 months).<br />
-Various and regularization accounts: claims related to<br />
<strong>the</strong> cycle manufacturing (payments tax, VAT to be<br />
recovered).<br />
-Suppliers and notes payable: share <strong>of</strong> debts to<br />
suppliers <strong>of</strong> materials and goods whose duration is<br />
normal.<br />
-Various and regularization accounts: part <strong>of</strong> <strong>the</strong> cyclerelated<br />
debts<br />
- Manufacture-sale purchase (provision for tax on<br />
companies, VAT payable, payroll...) whose duration is<br />
normal.<br />
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III.<br />
Cash Needs<br />
IV.<br />
Resources <strong>cash</strong><br />
– Receivable: part available immediately.<br />
-Securities. -Values <strong>of</strong> operation: hand voluntarily<br />
surplus stock.<br />
-Various and regularization accounts: claims not related<br />
to <strong>the</strong> cycle manufacture-sale (advance to third parties).<br />
-Cash and banks.<br />
– Banks and funding agencies.<br />
- Notes payable: mobilized credits, suppliers <strong>of</strong> capital<br />
(share <strong>of</strong> debts <strong>of</strong> which <strong>the</strong> duration is abnormal).<br />
-Various and regularization accounts: share <strong>of</strong> debts<br />
related to <strong>the</strong> purchase, manufacture and sale cycle and<br />
whose duration is abnormal, and debts not related to<br />
this cycle (advances <strong>of</strong> o<strong>the</strong>rs...)<br />
b) LIMITATIONS OF THE METHOD.<br />
The calculation <strong>of</strong> <strong>the</strong> needs in working capital from <strong>the</strong> balance sheet accounts has three essential defects. This<br />
method does not allow to know <strong>the</strong> variations <strong>of</strong> <strong>the</strong> needs in working capital during <strong>the</strong> operating cycle. It gives <strong>the</strong><br />
date <strong>of</strong> preparation <strong>of</strong> <strong>the</strong> balance sheet <strong>the</strong> value <strong>of</strong> <strong>the</strong> needs. In addition, it seems very difficult to split <strong>the</strong> value<br />
'normal' and 'abnormal' value <strong>of</strong> a balance sheet item. Finally, it is nei<strong>the</strong>r logical nor appropriate to make<br />
adjustments <strong>of</strong> accounts in such a calculation. At wanting to "file <strong>the</strong> abnormal" one loses sight <strong>of</strong> <strong>the</strong> reality <strong>of</strong> <strong>the</strong><br />
operating cycle.<br />
Anyway even a mean value <strong>of</strong> working capital needs remains insufficient data to resolve <strong>the</strong> problem <strong>of</strong> liquidity;<br />
and, <strong>the</strong> following method is no exception to this last criticism.<br />
2.3- THE METHOD OF CALCULATION OF WORKING CAPITAL REQUIREMENTS, KNOWN AS 'METHODS OF<br />
ACCOUNTANTS'.<br />
This method evaluates <strong>the</strong> needs not in absolute terms but in number <strong>of</strong> days <strong>of</strong> sales.<br />
(a) PRINCIPLES OF THE PROCEDURE.<br />
All positions <strong>of</strong> assets and current liabilities are characterized by two variables:<br />
Time <strong>of</strong> rotation <strong>of</strong> <strong>the</strong> account (or "time to <strong>flow</strong>", noted TE), on <strong>the</strong> one hand,<br />
And its ratio <strong>of</strong> structure, i.e. his report to turnover (or "weighting factor", noted PO), on <strong>the</strong> o<strong>the</strong>r hand.<br />
Therefore, to assess <strong>the</strong> needs in working capital must be:<br />
Calculate <strong>the</strong> time <strong>of</strong> rotation <strong>of</strong> each <strong>of</strong> <strong>the</strong> positions which constitute <strong>the</strong> values <strong>of</strong> bearing, TE;<br />
Calculate structure ratios in each <strong>of</strong> <strong>the</strong>se positions, PO;<br />
Finally, express each item in days <strong>of</strong> sale, TE x PO.<br />
We calculate <strong>the</strong> timing <strong>flow</strong>s in days, by dividing <strong>the</strong> value <strong>of</strong> <strong>the</strong> position considered on <strong>the</strong> balance sheet by <strong>the</strong><br />
daily average amount <strong>of</strong> <strong>the</strong> corresponding operation <strong>flow</strong> (stocks and purchases, customers and sales, etc...). For<br />
example, suppose that <strong>the</strong> average stock for <strong>the</strong> exercise <strong>of</strong> such society amounted to 3000; its average daily<br />
purchases to be 100, and <strong>the</strong> average daily sales <strong>of</strong> 125; that finally <strong>the</strong> ' clients ' and 'suppliers' in <strong>the</strong> balance sheet<br />
amounted respectively to 6250 and 6000. Yields:<br />
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The “Stocks” <strong>flow</strong> time:<br />
Average Stock<br />
=<br />
3000<br />
Daily Purchase 100<br />
30<br />
Flow time <strong>of</strong> <strong>the</strong> “Customers” position:<br />
Customers<br />
=<br />
6250<br />
Daily Sales 125<br />
Flow time <strong>of</strong> <strong>the</strong> “Providers” position:<br />
=<br />
50<br />
Suppliers 6000<br />
Daily Purchase<br />
=<br />
100<br />
=<br />
60<br />
Weighting is <strong>the</strong> amount <strong>of</strong> <strong>the</strong> corresponding position from <strong>the</strong> operating account for 1 F <strong>of</strong> Sales H.T<br />
The Stocks position:<br />
The Customers position:<br />
Purchase<br />
=<br />
100<br />
= 0.80<br />
Sales H.T 125<br />
Sales T.T.C<br />
=<br />
150<br />
= 1.20<br />
Sales H.T 125<br />
The Suppliers Position:<br />
Sales T.T.C<br />
=<br />
120<br />
= 0.96<br />
Sales H.T 125<br />
The calculation table needs <strong>cash</strong> for working capital, expressed in days <strong>of</strong> turnover excluding taxes, will be as follows:<br />
Table n°3: Working Capital’s needs in <strong>cash</strong> calculated in H.T.<br />
POSTES<br />
T.E P.O Value <strong>of</strong> needs in <strong>the</strong> Working<br />
(days) (Coeff.) Capital<br />
Assets Liabilities<br />
Stocks 30 0.80 24<br />
Costumers 50 1.20 60<br />
Suppliers 60 0.96 57.6<br />
Total 24 57.6<br />
Final Balance 26.4<br />
The balance, 26.4 days, represents <strong>the</strong> amount <strong>of</strong> <strong>the</strong> needs in working<br />
capital expressed in number <strong>of</strong> days Sales H.T.<br />
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) LIMITATIONS OF THE METHOD.<br />
This method leads to significant results when using mean values for <strong>the</strong> year in question, and not <strong>the</strong> values from <strong>the</strong><br />
balance sheet. Indeed, does not represent that <strong>the</strong> particular situation <strong>of</strong> <strong>the</strong> day <strong>of</strong> <strong>the</strong> preparation <strong>of</strong> <strong>the</strong> balance<br />
sheet, but in no case a<br />
Average. In o<strong>the</strong>r words, it would be risky and dangerous to interpret a result based on values extracted from <strong>the</strong><br />
balance sheet. But <strong>the</strong> main criticism that can be made is that this calculation assumes a perfectly regular activity<br />
over time. However, even without mentioning <strong>the</strong> firms <strong>the</strong> seasonal operation, all companies are experiencing<br />
fluctuating more or less pronounced, more or less regular cycle.<br />
Changes in sales and purchases have <strong>the</strong> effect to oscillate <strong>the</strong> working capital needs. Therefore, this method<br />
provides no knowledge <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> real needs for working capital. Therefore, it does not operate an<br />
efficient distribution <strong>of</strong> <strong>the</strong> views <strong>of</strong> <strong>the</strong> solvency between bearing (or permanent resources for <strong>the</strong> financing <strong>of</strong> <strong>the</strong><br />
operating cycle) and 'passive <strong>cash</strong>' (or short dull <strong>of</strong> <strong>cash</strong> resources).<br />
If real working capital <strong>of</strong> <strong>the</strong> company is equal to its average requirements, excesses <strong>cash</strong> at certain times,<br />
interspersed with shortcomings at o<strong>the</strong>r times <strong>of</strong> <strong>the</strong> year occur. Even where <strong>the</strong>se fluctuations would be provided<br />
through a <strong>cash</strong> budget, it is unlikely that <strong>the</strong> financing <strong>of</strong> <strong>the</strong> operating cycle is optimum. Without perfect knowledge<br />
<strong>of</strong> changes in <strong>the</strong> needs during <strong>the</strong> operating cycle, this optimum we repeat, cannot be achieved. Funding cannot be<br />
considered, nor be found ignoring <strong>the</strong> nature and evolution <strong>of</strong> <strong>the</strong> particular need to which it relates; <strong>the</strong> actual cost<br />
will not be more in <strong>the</strong>se conditions, appreciated.<br />
II - ANALYSIS OF THE LIQUIDITY OF THE FIRM BY THE METHOD OF RATIOS.<br />
The ratios method provides a second category <strong>of</strong> instruments for measuring <strong>the</strong> financial balance.<br />
The <strong>cash</strong> <strong>of</strong> a firm, i.e. its security situation, depends on inputs and outputs <strong>of</strong> funds from <strong>the</strong> transformation <strong>of</strong> <strong>the</strong><br />
elements <strong>of</strong> assets and liabilities. The confrontation <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> jobs and <strong>the</strong> chargeability <strong>of</strong> <strong>the</strong> resources is a<br />
series <strong>of</strong> indices for assessing <strong>the</strong> financial balance. However, <strong>the</strong> ratios method has a number <strong>of</strong> limitations that hold<br />
both its fundamental principles, and how to use it.<br />
A - RATIOS OF FINANCIAL SECURITY.<br />
Traditionally, <strong>the</strong>re are <strong>the</strong> ratios <strong>of</strong> long-term financial security, or ratios so-called "solvency" and <strong>the</strong> ratios <strong>of</strong><br />
financial security in <strong>the</strong> short term, or so-called "liquidity" ratios.<br />
1 - THE SO-CALLED RATIOS "SOLVENCY", OR LONG-TERM FINANCIAL SECURITY.<br />
Solvency is here understood as <strong>the</strong> ability <strong>of</strong> a company to pay its debts in <strong>the</strong> medium and long term.<br />
From this point <strong>of</strong> view, a company is solvent if its assets are greater than its debt; in o<strong>the</strong>r words, if it’s net position<br />
is positive. Although very general and does not allow to give a measure <strong>of</strong> immediate capacity <strong>of</strong> regulation, this<br />
definition is useful for identifying <strong>the</strong> degree <strong>of</strong> third parties including Bankers Trust, to <strong>the</strong> firm.<br />
In this regard, it uses three types <strong>of</strong> ratios: working capital ratios, ratios <strong>of</strong> financial autonomy and <strong>the</strong> General<br />
solvency ratio.<br />
1.1 - WORKING CAPITAL RATIOS.<br />
They are numerous and complement each o<strong>the</strong>r.<br />
Ratio:<br />
CURRENT ASSETS / SHORT TERM DEBTS<br />
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It indicates to what extent <strong>the</strong> realizable assets within one year cover debt maturing in one year at <strong>the</strong> most. Greater<br />
than 1, it reveals <strong>the</strong> existence <strong>of</strong> net working capital. It is <strong>the</strong>refore an indicator <strong>of</strong> safety.<br />
It is <strong>of</strong>ten supplemented by <strong>the</strong> following ratio:<br />
Ratio: NET WORKING CAPITAL - CURRENT ASSETS<br />
Which shows <strong>the</strong> share <strong>of</strong> common needs financed from <strong>the</strong> resources <strong>of</strong> a certain nature <strong>of</strong> stability. Its complement<br />
to 1 evaluates <strong>the</strong> external resources (suppliers, State, bankers, etc.). The company will in principle solvent until<br />
losses, or sustainable asset, risks to which working capital assets do not reach <strong>the</strong> value <strong>of</strong> <strong>the</strong> ratio.<br />
These two ratios are interpreted in <strong>the</strong> same way as <strong>the</strong> Working Capital Fund. A low value can mean <strong>the</strong> approach<br />
to serious <strong>cash</strong>-<strong>flow</strong> problems, unless <strong>the</strong> company benefits as is <strong>the</strong> case <strong>of</strong> trading Affairs, lengthy delays on <strong>the</strong><br />
part <strong>of</strong> suppliers compared to inventories and receivables with rapid rotation. Conversely, a too high ratio when <strong>the</strong><br />
operating cycle does not, perhaps index too large or poorly employed stable resource base which weigh on <strong>the</strong><br />
pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> business.<br />
A third ratio with a meaning close to <strong>the</strong> above must be cited. He compares <strong>the</strong> net funds to stocks:<br />
FUND NET WORKING CAPITAL / STOCKS<br />
Depending on whe<strong>the</strong>r <strong>the</strong> net funds more or less covers stocks, <strong>the</strong> enterprise funds more or less feasible and<br />
available values using its short-term debts. Some bankers use <strong>the</strong> following rating: 100% fine 66 50% pretty much<br />
mediocre 33% dangerous 0% situation <strong>of</strong> liquidity.<br />
In this regard, it uses three types <strong>of</strong> ratios: working capital ratios, ratios <strong>of</strong> financial autonomy and <strong>the</strong> General<br />
solvency ratio.<br />
1.2 - WORKING CAPITAL RATIOS.<br />
They are numerous and complement each o<strong>the</strong>r.<br />
Ratio:<br />
CURRENT ASSETS / SHORT TERM DEBTS<br />
It indicates to what extent <strong>the</strong> realizable assets within one year cover debt maturing in one year at <strong>the</strong> most. Greater<br />
than 1, it reveals <strong>the</strong> existence <strong>of</strong> net working capital. It is <strong>the</strong>refore an indicator <strong>of</strong> safety. It is <strong>of</strong>ten supplemented<br />
by <strong>the</strong> ratio:<br />
NET WORKING CAPITAL / ASSETS CIRCULATING<br />
Which shows <strong>the</strong> share <strong>of</strong> common needs financed from <strong>the</strong> resources <strong>of</strong> a certain nature <strong>of</strong> stability. Its complement<br />
to 1 evaluates <strong>the</strong> external resources (suppliers, State, bankers, etc.).<br />
The company will in principle solvent until losses, or sustainable asset, risks to which working capital assets do not<br />
reach <strong>the</strong> value <strong>of</strong> <strong>the</strong> ratio.<br />
These two ratios are interpreted in <strong>the</strong> same way as <strong>the</strong> Working Capital Fund. A low value can mean <strong>the</strong> approach<br />
to serious <strong>cash</strong>-<strong>flow</strong> problems, unless <strong>the</strong> company benefits as is <strong>the</strong> case <strong>of</strong> trading Affairs, lengthy delays on <strong>the</strong><br />
part <strong>of</strong> providers compared to inventories and receivables with rapid rotation. Conversely, a too high ratio when <strong>the</strong><br />
operating cycle does not, perhaps index too large or poorly employed stable resource base which weigh on <strong>the</strong><br />
pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> business.<br />
A third ratio with a meaning close to <strong>the</strong> one above must be cited. It compares <strong>the</strong> net funds to stocks:<br />
Page 33 <strong>of</strong> 124
FUND NET WORKING CAPITAL / STOCKS<br />
Depending on whe<strong>the</strong>r <strong>the</strong> net funds more or less covers stocks, <strong>the</strong> enterprise funds more or less feasible and<br />
available values using its short-term debts. Some bankers use <strong>the</strong> following rating:<br />
- 100% fine<br />
- 66 50% pretty much mediocre<br />
- 33% dangerous<br />
- 0% winding-up situation<br />
The Ratio <strong>of</strong> <strong>the</strong> Financial Autonomy:<br />
The objective is to find to what extent <strong>the</strong> company is dependent on its creditors. The structure <strong>of</strong> liabilities and <strong>the</strong><br />
importance <strong>of</strong> self-sufficiency are good indicators <strong>of</strong> solvency <strong>of</strong> <strong>the</strong> company.<br />
Debt, said, must balance risk and pr<strong>of</strong>itability.<br />
The Ratio:<br />
EQUITY / LIABILITIES<br />
Commonly referred to as 'financial autonomy ratio' is even better that it is higher. The lack <strong>of</strong> equity is <strong>of</strong>ten <strong>the</strong><br />
source <strong>of</strong> <strong>cash</strong> <strong>flow</strong> for <strong>the</strong> company. Bankers require traditionally as:<br />
EQUITY / CAPITAL<br />
It is not, in principle, less than 50%. Indeed, at <strong>the</strong> bottom <strong>of</strong> this threshold, <strong>the</strong>y consider <strong>the</strong> company as vulnerable<br />
as too dependent on third parties. On <strong>the</strong> contrary, a high value indicates <strong>the</strong> existence <strong>of</strong> a potential debt.<br />
Sometimes used to express <strong>the</strong> same idea, <strong>the</strong> ratio:<br />
To 1 below, <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> firm is compromised.<br />
EQUITY - DEBT TO MEDIUM AND LONG TERM<br />
But it is not enough to maintain a certain ratio between equity capital and borrowed; It must at <strong>the</strong> same time that<br />
<strong>the</strong> resources released by <strong>the</strong> operation to deal normally with loads <strong>of</strong> debt. In this regard, <strong>the</strong> ratio:<br />
CASH / CURRENT LIABILITIES<br />
Measures <strong>the</strong> power <strong>of</strong> <strong>the</strong> company to "ignore" its creditors.<br />
Similarly, <strong>the</strong> ratio<br />
MEDIUM AND LONG TERM FINANCIAL DEBTS / CASH FLOW<br />
Gives <strong>the</strong> number <strong>of</strong> exercises necessary to repay financial liabilities through operating resources, ceteris paribus.<br />
The previous ratios may be complete by:<br />
TURNOVER / TOTAL LIABILITIES<br />
That provides ano<strong>the</strong>r approach <strong>of</strong> <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> company and by:<br />
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RESULTS + FINANCIAL INTERESTS / FINANCIAL INTERESTS<br />
Which allows to calculate <strong>the</strong> capacity <strong>of</strong> <strong>the</strong> firm to face, each fiscal year, and <strong>the</strong> consequences <strong>of</strong> its policy <strong>of</strong> debt.<br />
A nearby ratio <strong>of</strong> above:<br />
NET RESULTS + FINANCIAL EXPENSES (MT AND LT) / EQUITY + DEBT (MT AND LT)<br />
Evaluates <strong>the</strong> weight <strong>of</strong> debt which can compromise <strong>the</strong> pr<strong>of</strong>itability but also <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> company.<br />
Finally, include <strong>the</strong> ratio:<br />
NET DEBT - TURNOVER INCLUSIVE OF TAX<br />
That shows if <strong>the</strong> company uses all <strong>the</strong> possibilities <strong>of</strong> credit which it can benefit. In particular, <strong>the</strong> contractor may<br />
deem it is found to be short <strong>of</strong> <strong>cash</strong>, he has managed to take advantage <strong>of</strong> its ability to borrow for its bankers Fund<br />
which he missed.<br />
1.3- THE GENERAL SOLVENCY RATIO.<br />
It is expressed by <strong>the</strong> relation:<br />
ASSETS TOTAL / TOTAL DEBT<br />
And joined <strong>the</strong> concept <strong>of</strong> "net position". It is above all an indicator <strong>of</strong> liquidation that interests especially <strong>the</strong> banker.<br />
2 - THE SO-CALLED "LIQUIDITY RATIOS» (FINANCIAL SECURITY IN THE SHORT TERM).<br />
The liquidity <strong>of</strong> a company shall be understood as its ability to fulfil in a timely manner, its commitments in <strong>the</strong> short<br />
term using its operating resources. We will not return to <strong>the</strong> said ratio "<strong>of</strong> General liquidity", or "working capital<br />
fund", already cited:<br />
ASSETS OF ROLLING / BEARING ASSETS<br />
Short-term liabilities contains elements <strong>of</strong> variable liquidity. Thus stocks are considered much less liquid than<br />
receivables; also uses <strong>the</strong> said ratio "<strong>of</strong> <strong>cash</strong>":<br />
VALUES ACHIEVABLE AND AVAILABLE - SHORT TERM DEBTS<br />
That excludes <strong>the</strong> operation values. Less than 1, it indicates <strong>the</strong> possibility <strong>of</strong> future Cash-Flow difficulties. This ratio<br />
can be improved if we know <strong>the</strong> calendar <strong>of</strong> deadlines:<br />
AVAILABLE + REALIZABLE VALUES ON N DAYS / PAYMENTS ON (N) DAYS<br />
It takes <strong>the</strong> name <strong>of</strong> "ratio <strong>of</strong> <strong>cash</strong> at maturity. It is much more significant than <strong>the</strong> first.<br />
However <strong>the</strong> scope <strong>of</strong> <strong>the</strong>se last three ratios is very limited because <strong>of</strong> <strong>the</strong>ir static nature. Indeed, <strong>the</strong>y cannot<br />
account for <strong>the</strong> commitments to be born. In addition, <strong>the</strong> structure <strong>of</strong> <strong>the</strong> operating cycle affects <strong>the</strong> value <strong>of</strong> such<br />
ratios: for example <strong>the</strong> ratio <strong>of</strong> <strong>cash</strong> to a supermarket will be weak without this indicates <strong>cash</strong> difficulties. Finally,<br />
<strong>the</strong>ir evolution over time will be not more interesting ins<strong>of</strong>ar as <strong>the</strong> balance sheet is a snapshot <strong>of</strong> <strong>the</strong> operating<br />
cycle.<br />
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The liquidity <strong>of</strong> a company is a temporal phenomenon: <strong>the</strong> <strong>cash</strong> receipts and disbursements ranged in time. «Kinetic»<br />
ratios reflect this factor. They measure <strong>the</strong> rotation <strong>of</strong> <strong>the</strong> main components <strong>of</strong> <strong>the</strong> operating cycle: stocks,<br />
customers, suppliers. With regard to inventories, calculate <strong>the</strong> following ratios:<br />
For an industrial company <strong>the</strong> rotation <strong>of</strong> raw stock is expressed by:<br />
AVERAGE STOCK OF MATERIALS OF THE YEAR / MATERIALS CONSUMED OF THE YEAR<br />
By multiplying <strong>the</strong> result by 360, we get <strong>the</strong> number <strong>of</strong> days during which <strong>the</strong> stock covers <strong>the</strong> needs. Such a ratio<br />
appropriate to determine <strong>the</strong> rotation <strong>of</strong> current products.<br />
When <strong>the</strong> rotation <strong>of</strong> products, it is <strong>the</strong> result <strong>of</strong> <strong>the</strong> ratio:<br />
AVERAGE STOCK OF FINISHED PRODUCTS VALUED AT COST PRICE / YEAR COST OF PRODUCTS SOLD IN<br />
THE YEAR<br />
Multiplied by 360, it gives <strong>the</strong> average time in days, necessary for <strong>the</strong> marketing <strong>of</strong> finished products. This ratio is an<br />
index <strong>of</strong> potential ease <strong>of</strong> <strong>cash</strong> to <strong>the</strong> extent, in fact, where it indicates <strong>the</strong> time required for <strong>the</strong> stock turns into<br />
receivables, and, <strong>the</strong>refore, in availability. Its meaning is much more reliable in <strong>the</strong> case <strong>of</strong> commercial enterprises<br />
than in <strong>the</strong> case <strong>of</strong> industrial enterprises. A breakdown <strong>of</strong> costs by nature is always difficult to achieve. Moreover, it<br />
will only sometimes <strong>the</strong> ratio:<br />
AVERAGE INVENTORY AT COST / TURNOVER H.T.<br />
The finished product sold gives rise to claims that <strong>the</strong> time limit for processing <strong>cash</strong> is provided by <strong>the</strong> ratio:<br />
CLAIMS AGAINST CUSTOMERS OF YEAR-END 360 X / ANNUAL SALES INCLUSIVE OF TAX (T.T.C)<br />
That can occur in a more refined way as follows:<br />
(CLAIMS / TURNOVER INCLUSIVE OF TAX OF THE LAST QUARTER)<br />
X 90 (D)<br />
The comparison <strong>of</strong> <strong>the</strong> period <strong>of</strong> Regulation granted to customers at <strong>the</strong> time <strong>of</strong> credit grant providers to get an idea<br />
on <strong>the</strong> <strong>cash</strong> position.<br />
The item 'suppliers' turnover ratio will be calculated in <strong>the</strong> same way:<br />
Or even better:<br />
(VENDORS + NOTES PAYABLE / PURCHASES INCLUSIVE TAXES) X 360 J.<br />
(SUPPLIERS (VENDORS) + NOTES TO PAY) / PURCHASES INCLUSIVE TAXES OF LAST QUARTER<br />
The <strong>cash</strong> balance is a perfect 'harmony' between rotation <strong>of</strong> stocks, clients’ debts and suppliers’ debts, ceteris<br />
paribus (1). Inside this company, <strong>the</strong>y complement this list by <strong>the</strong> calculation <strong>of</strong> o<strong>the</strong>r kinetic ratios such as:<br />
That indicates <strong>the</strong> potential for liquidity on equity,<br />
ANNUAL SALES H.T / EQUITY<br />
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ANNUAL SALES H.T / NET FIXED ASSETS And<br />
ANNUAL SALES H.T / ASSETS OF BEARING WHICH ARE INTERPRETED IN A SIMILAR WAY.<br />
However, <strong>the</strong> balance sheet where you pull <strong>the</strong> data necessary for <strong>the</strong> construction <strong>of</strong> all <strong>of</strong> <strong>the</strong>se ratios is a static<br />
document that mask changes in activity that may occur during <strong>the</strong> period. This observation led us to discuss <strong>the</strong><br />
limitations <strong>of</strong> ratios.<br />
B - LIMITATIONS OF THE METHOD OF THE RATIOS IN THE ASSESSMENT OF FINANCIAL SECURITY.<br />
In France, <strong>the</strong> method <strong>of</strong> ratios is very widely used. Known precautions to be taken during calculations:<br />
Rules for evaluating <strong>the</strong> positions laid down in advance; -do compare really comparable activities;<br />
Calculations always at <strong>the</strong> same dates;<br />
Take into account in <strong>the</strong> interpretation <strong>of</strong> currency depreciation.<br />
It is also known that a ratio taken individually presents only little interest. These are usually comparative studies <strong>of</strong><br />
'batteries' <strong>of</strong> ratios which are realized:<br />
Considering <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> results in time or compared with o<strong>the</strong>r undertakings;<br />
By comparing ratios-goals, means <strong>of</strong> <strong>the</strong> same industry ratios, or ratios-standards.<br />
However, an analysis <strong>of</strong> <strong>the</strong> financial equilibrium in terms <strong>of</strong> ratios is facing a series <strong>of</strong> difficulties that restrict <strong>the</strong><br />
scope. These difficulties arise at <strong>the</strong> level <strong>of</strong> <strong>the</strong> functions that it claims assume: description, explanation, and<br />
standard, forecast.<br />
1 - THE LIMITS OF THE DESCRIPTIVE VALUE METHOD OF RATIOS.<br />
Ratios reflect only imperfectly <strong>the</strong> economic reality. We have already pointed out, <strong>the</strong>y have defects in <strong>the</strong> balance<br />
sheet where you pull information critical to <strong>the</strong>ir development: asset turnover, debts in <strong>the</strong> short term, customers,<br />
suppliers, etc. The balance sheet describes <strong>the</strong> turnover <strong>of</strong> <strong>the</strong> company at any given time and can account for<br />
changes in activity during <strong>the</strong> year. It does not even represent a middle state but a particular State <strong>of</strong> <strong>the</strong> conduct <strong>of</strong><br />
<strong>the</strong> operation. This defect is less sensitive in <strong>the</strong> case where <strong>the</strong> company has a fairly regular activity. But are <strong>the</strong>re<br />
many companies experiencing no period peak or by <strong>the</strong>ir slowdown? The realization <strong>of</strong> a monthly balance sheet<br />
redressing this problem. But such work is not within <strong>the</strong> reach <strong>of</strong> all companies<br />
In addition, <strong>the</strong> balance sheet is a document that adds monetary units to different purchasing power. In periods <strong>of</strong><br />
significant changes in <strong>the</strong> value <strong>of</strong> <strong>the</strong> currency, <strong>the</strong> ratios lose much <strong>of</strong> <strong>the</strong>ir meaning. Finally, <strong>the</strong> assessment is<br />
before all a tax account, and one can wonder about <strong>the</strong> economic value <strong>of</strong> <strong>the</strong> information it gives.<br />
2 - THE LIMITS OF THE EXPLANATORY VALUE OF THE METHOD OF RATIOS.<br />
The interpretation <strong>of</strong> ratios is always difficult because <strong>the</strong> obtained reports show what happened, and not why. In<br />
addition, changes in <strong>the</strong> value <strong>of</strong> a ratio is likely to come ei<strong>the</strong>r from <strong>the</strong> variation <strong>of</strong> <strong>the</strong> numerator or <strong>the</strong><br />
denominator; <strong>the</strong> same value ratios represent frequently situations economically or financially very dissimilar, or, on<br />
<strong>the</strong> o<strong>the</strong>r hand, <strong>the</strong> change in <strong>the</strong> value <strong>of</strong> a ratio may occur although <strong>the</strong> gap between its constituent elements<br />
remained constant. Where <strong>the</strong> idea <strong>of</strong> group ratios according to a certain logic which would facilitate <strong>the</strong>ir<br />
interpretation.<br />
Pyramid analysis is a technique for <strong>the</strong> study <strong>of</strong> <strong>the</strong> causes <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> a determined situation. The principle<br />
<strong>of</strong> this type <strong>of</strong> analysis is to introduce <strong>the</strong> interdependence <strong>of</strong> <strong>the</strong> results brought by <strong>the</strong> ratios and lead to an<br />
explanation beyond <strong>the</strong> simple observation. Such an approach is an interesting way to use <strong>the</strong> method <strong>of</strong> <strong>the</strong> ratios.<br />
Page 37 <strong>of</strong> 124
It should be noted that <strong>the</strong> chain <strong>of</strong> causality is not clear: <strong>the</strong> number and nature <strong>of</strong> <strong>the</strong> selected relationships remain<br />
quite arbitrary; <strong>the</strong>y vary also from one author to ano<strong>the</strong>r.<br />
3 - THE LIMITS OF THE NORMATIVE VALUE OF THE METHOD OF RATIOS.<br />
In order to make a judgment on <strong>the</strong> management <strong>of</strong> a company, it is convenient to dispose <strong>of</strong> reference standards.<br />
Among <strong>the</strong> many possibilities for <strong>the</strong> development <strong>of</strong> standards, <strong>the</strong> financial analyst uses most commonly ei<strong>the</strong>r<br />
pr<strong>of</strong>essional standards or standards «models».<br />
3.1 - THE REFERENCE TO PROFESSIONAL STANDARDS.<br />
The calculation <strong>of</strong> pr<strong>of</strong>essional standards is <strong>the</strong> fact, ei<strong>the</strong>r large companies with a service <strong>of</strong> documentation and<br />
studies, Federations or unions, ei<strong>the</strong>r from private, public and parasternal bodies, or even spreadsheets plants.<br />
These studies are from larger or smaller samples <strong>of</strong> firms engaged in <strong>the</strong> same business. Within each sector <strong>of</strong> activity<br />
are calculated average reports for <strong>the</strong> whole sector, as well as by family <strong>of</strong> companies (or subsector). At <strong>the</strong>se average<br />
ratios will be compared to <strong>the</strong> enterprise in question ratios. It is not so for <strong>the</strong> latter to set goal value <strong>of</strong> such average<br />
ratio, but ra<strong>the</strong>r to seek an explanation <strong>of</strong> <strong>the</strong> observed differences.<br />
At <strong>the</strong> present moment, as a result, <strong>the</strong> company has a mass <strong>of</strong> valuable information on <strong>the</strong> performance <strong>of</strong><br />
competing firms (concurrent) or o<strong>the</strong>r firms from <strong>the</strong> same group (T-mantis, MATHE…). By confrontation, <strong>the</strong><br />
contractor can highlight some shortcomings <strong>of</strong> management that do not appear in simple individual analysis. This<br />
may be <strong>the</strong> case, for example, <strong>of</strong> <strong>the</strong> progressive emergence <strong>of</strong> a fiscal imbalance likely to jeopardize <strong>the</strong> safety <strong>of</strong><br />
<strong>the</strong> firm within months, or most certainly in <strong>the</strong> years to come.<br />
However, may be from this type <strong>of</strong> references identify financial principles fundamental and, consequently, a course<br />
<strong>of</strong> action? We risk not take reality for <strong>the</strong> optimum?<br />
3.2 - THE REFERENCE TO STANDARD MODELS OF MANAGEMENT.<br />
Some specialized agencies have implemented "statistical processing chains" that allow to build 'business models'<br />
characterized by a battery <strong>of</strong> ratios. The method consists in <strong>the</strong> establishment <strong>of</strong> ratios-types that reflect <strong>the</strong> 'average'<br />
situation <strong>of</strong> <strong>the</strong> sector <strong>of</strong> activity. Indeed, each type ratio represents an average calculated from <strong>the</strong> ratios <strong>of</strong> a<br />
number <strong>of</strong> companies forming a representative sample.<br />
These models constructed for <strong>the</strong> set <strong>of</strong> a pr<strong>of</strong>ession are an interesting reference for <strong>the</strong> company. The ratios <strong>of</strong> <strong>the</strong><br />
company are reported to standard ratios in <strong>the</strong> sector <strong>of</strong> activity; calculate and report:<br />
R = RATIO OF THE COMPANY / RATIO- TYPE<br />
The position <strong>of</strong> <strong>the</strong> undertaking is syn<strong>the</strong>sized by <strong>the</strong> sum <strong>of</strong> <strong>the</strong> ratios obtained; each <strong>of</strong> <strong>the</strong>m is assigned a weight<br />
that takes into account <strong>the</strong> importance attached to each <strong>of</strong> <strong>the</strong> criteria. The situation <strong>of</strong> <strong>the</strong> firm is considered<br />
satisfactory if <strong>the</strong> end result is higher than 100%.<br />
This method has, however, a great deal <strong>of</strong> arbitrariness in its development:<br />
Arbitrariness in <strong>the</strong> choice <strong>of</strong> <strong>the</strong> characteristic ratios <strong>of</strong> a situation (in our example, <strong>the</strong> solvency <strong>of</strong> <strong>the</strong><br />
company),<br />
Arbitrary in <strong>the</strong> choice <strong>of</strong> weights, and, <strong>the</strong>refore, arbitrary in <strong>the</strong> judgment on <strong>the</strong> company.<br />
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4 - LIMITS THE PREDICTIVE VALUE OF THE METHOD OF RATIOS.<br />
Some authors have questioned whe<strong>the</strong>r ratios could not be used as predictive tools. Two research was primarily<br />
conducted.<br />
Firstly, on <strong>the</strong> difficulties <strong>of</strong> <strong>cash</strong> forecasting;<br />
And secondly, on <strong>the</strong> prediction <strong>of</strong> bankruptcy <strong>of</strong> enterprises.<br />
4.1 - RESEARCH ON THE FORECAST OF CASH DIFFICULTIES.<br />
The sample <strong>of</strong> selected companies was divided into two groups: on <strong>the</strong> one hand, companies having <strong>cash</strong> <strong>flow</strong> for a<br />
certain period ("bad companies"), and, on <strong>the</strong> o<strong>the</strong>r hand, companies did not have difficulty during this same period<br />
("good companies"). From <strong>the</strong> financial statements <strong>of</strong> companies established prior to <strong>the</strong> period under review, <strong>the</strong><br />
authors have attempted to discern what <strong>the</strong> ratios were different from a group <strong>of</strong> companies to ano<strong>the</strong>r. The results<br />
were not conclusive. For a large number <strong>of</strong> companies studied <strong>the</strong> considered ratios did not foresee any difficulties<br />
<strong>of</strong> <strong>cash</strong>.<br />
4.2 - RESEARCH ON THE PREDICTION OF BANKRUPTCY OF ENTERPRISES.<br />
The study involved a sample <strong>of</strong> 83 industrial enterprises that had gone bankrupt during <strong>the</strong> period 1946-1965, and<br />
33 companies who had experienced financial difficulty. Twenty-two ratios were calculated from financial statements<br />
<strong>of</strong> 5 years preceding <strong>the</strong> bankruptcy <strong>of</strong> "bad companies". However, <strong>the</strong> predictive ability <strong>of</strong> this combination <strong>of</strong> ratios<br />
declined very quickly as soon as it was to predict <strong>the</strong> bankruptcy in more than a year. In o<strong>the</strong>r words, this analysis<br />
noted bankruptcy more that she did. O<strong>the</strong>r studies have been carried out (3), but it does not seem that <strong>the</strong> use <strong>of</strong><br />
ratios as a tool for forecasting gave great satisfaction.<br />
Handle <strong>cash</strong> using <strong>the</strong> ratios method does not seem to lead to clear conclusions. In <strong>the</strong>se circumstances, decisionmaking<br />
is difficult. Ultimately, all <strong>the</strong> criticism that can be made against it come back to say that <strong>the</strong> method places<br />
<strong>the</strong> company in liquidation situations. It disregards <strong>the</strong> dynamic aspect <strong>of</strong> <strong>the</strong> operation and in particular <strong>the</strong> <strong>cash</strong><br />
management.<br />
SECTION 2: THE CONDITIONS OF FINANCIAL EQUILIBRIUM.<br />
Analysis <strong>of</strong> financial transactions that led to <strong>the</strong> fund balance allows to enjoy <strong>the</strong> <strong>cash</strong> position at a time given to<br />
anticipate <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds to come, and, <strong>the</strong>refore, to have sufficient information to initiate any corrective actions.<br />
To define <strong>the</strong> conditions <strong>of</strong> <strong>the</strong> financial balance, <strong>the</strong> managers <strong>of</strong> <strong>the</strong> company will have to attempt a detailed<br />
reconstruction <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>flow</strong> <strong>of</strong> <strong>cash</strong> receipts and disbursements through <strong>the</strong> firm or likely to occur<br />
during <strong>the</strong> reporting period. From this reconstruction or <strong>the</strong> anticipation <strong>of</strong> changes in <strong>cash</strong>, <strong>the</strong>y will be able to<br />
exercise permanent surveillance <strong>of</strong> <strong>the</strong> periodic adjustment entries and <strong>cash</strong> induced by <strong>the</strong> operation <strong>of</strong> <strong>the</strong> business<br />
However a full record <strong>of</strong> <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> is difficult to achieve because <strong>of</strong> <strong>the</strong> multiplicity <strong>of</strong> payment and<br />
recovery operations. In addition, such work would be awkward because <strong>of</strong> <strong>the</strong> pr<strong>of</strong>usion <strong>of</strong> raw and indiscriminate<br />
information that it would bring in. Also, traditionally, it’s preferred to use an indirect analysis <strong>of</strong> changes in <strong>cash</strong><br />
through <strong>the</strong> global <strong>flow</strong>s affecting <strong>the</strong> elements <strong>of</strong> <strong>the</strong> turnover <strong>of</strong> <strong>the</strong> firm. Indeed, any recipe or any expenditure<br />
affects <strong>the</strong> volume or <strong>the</strong> composition <strong>of</strong> <strong>the</strong> assets or <strong>the</strong> liabilities. The variation <strong>of</strong> elements <strong>of</strong> assets and liabilities<br />
between <strong>the</strong> beginning and <strong>the</strong> end <strong>of</strong> a period is a consequence <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>flow</strong> <strong>of</strong> funds during this<br />
period. An analysis <strong>of</strong> <strong>the</strong>se movements <strong>of</strong> funds will show where <strong>the</strong> contractor decided to commit capital, reduce<br />
its investments, to obtain additional capital, reduce its debts...The turnover <strong>of</strong> <strong>the</strong> company will be <strong>the</strong> trace <strong>of</strong> <strong>the</strong>se<br />
movements <strong>of</strong> funds that pass through <strong>the</strong> Fund. In o<strong>the</strong>r words, <strong>the</strong> study <strong>of</strong> heritage mutations to trace <strong>cash</strong>, and<br />
variations in <strong>the</strong>se terms to understand <strong>the</strong> current situation <strong>of</strong> <strong>cash</strong> or to anticipate its future location. The analysis<br />
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<strong>the</strong>refore behave both in a retrospective perspective and from a forward-looking perspective. The following synoptic<br />
table consolidates <strong>the</strong> various financial documents that are reached:<br />
Financial and accounting<br />
records<br />
'direct' Impact <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds<br />
on <strong>the</strong> heritage <strong>of</strong> <strong>the</strong> firm (jobs and<br />
long-term resources)<br />
"indirect" Impact <strong>of</strong> <strong>the</strong> <strong>flow</strong><br />
<strong>of</strong> funds on <strong>the</strong> heritage <strong>of</strong> <strong>the</strong><br />
firm (operating cycle)<br />
Retrospective records<br />
Prospective Documents<br />
Balance Sheet – Table <strong>of</strong> funding<br />
(or in’s and out’s) pr<strong>of</strong>it and loss<br />
Income Statements<br />
account<br />
Documents de synthèse :<br />
Tableau des variations d’encaisse<br />
Plan funding<br />
Operating Budget<br />
(or investment)<br />
Syn<strong>the</strong>sis Documents:<br />
<strong>cash</strong> (annual)<br />
Budget forecast (monthly) <strong>cash</strong> Positions<br />
Balance-Sheet Forecast<br />
Forecasted Income Statements<br />
TABLE n° 4: Documents analysis <strong>of</strong> <strong>flow</strong>s <strong>of</strong> funds.<br />
I - THE RETROSPECTIVE ANALYSIS OF THE VARIATIONS OF CASH: THE EXPLANATION OF THE FINANCIAL BALANCE.<br />
The fact that a company continues to exist is pro<strong>of</strong> that financial balance has been achieved so far. This finding does<br />
not, however, to assess <strong>the</strong> conditions in which <strong>the</strong> credit has been provided. Admits so commonly a double interest<br />
in an ex-post variation <strong>of</strong> <strong>cash</strong> consideration:<br />
Firstly, it is <strong>the</strong> instrument <strong>of</strong> an explanatory study <strong>of</strong> <strong>the</strong> movements <strong>of</strong> funds passed;<br />
On <strong>the</strong> o<strong>the</strong>r hand, it provides a means <strong>of</strong> control <strong>of</strong> <strong>the</strong> forward-looking management <strong>of</strong> <strong>cash</strong>.<br />
Financial analysis known at <strong>the</strong> present time, reconstruct variations in <strong>cash</strong> in a real summary table <strong>of</strong> <strong>cash</strong> from <strong>the</strong><br />
General accounting data.<br />
A - THE FLOW OF FUND ACCOUNTING.<br />
The General Ledger are two types <strong>of</strong> accounts:<br />
The "balance" accounts, or accounts heritage,<br />
The "accounts", or accounts operating, and <strong>the</strong>refore, two types <strong>of</strong> <strong>flow</strong>s:<br />
1. The economic stream,<br />
2. Operation <strong>flow</strong>s.<br />
1 - HISTORIC FLOWS.<br />
The turnover <strong>flow</strong>s correspond to movements <strong>of</strong> funds affecting <strong>the</strong> balance sheet items. Their identification and<br />
<strong>the</strong>ir measurement are carried out by <strong>the</strong> comparison <strong>of</strong> various successive balance sheets. In this regard, we divide<br />
heritage <strong>flow</strong>s into two categories:<br />
1. 1 ° 'jobs' carried out by <strong>the</strong> company during <strong>the</strong> period under review; <strong>the</strong>y correspond ei<strong>the</strong>r to <strong>the</strong> assets<br />
increases, decreases in liabilities.<br />
2. 2 ° 'resources' obtained by <strong>the</strong> company during <strong>the</strong> same period; They include ei<strong>the</strong>r increases in liabilities<br />
or decreases <strong>of</strong> assets<br />
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This opposition led to <strong>the</strong> establishment <strong>of</strong> an array <strong>of</strong> jobs and resources, or "Table <strong>of</strong> funding". The role <strong>of</strong> this<br />
financial document is to allow <strong>the</strong> control <strong>of</strong> financing <strong>of</strong> <strong>the</strong> firm conditions. In its most simplified form, <strong>the</strong> table <strong>of</strong><br />
funding is reduced to a differential review and is as follows in Table n°5, Composition <strong>of</strong> Funds:<br />
2 - THE FLOW OF OPERATIONS.<br />
FUNDS APPLIED<br />
FUNDS RECEIVED<br />
Increase <strong>the</strong> Assets’ Account Increase <strong>the</strong> Liabilities Account<br />
Decrease <strong>the</strong> Liabilities Account Decrease <strong>the</strong> Assets’ Account<br />
Table n°5: Composition <strong>of</strong> Funds<br />
Financial <strong>flow</strong>s <strong>of</strong> exploitation arise from <strong>the</strong> operating cycle, i.e., procurement transformation and <strong>flow</strong> operations.<br />
These <strong>flow</strong>s are grouped in <strong>the</strong> statements <strong>of</strong> income into two headings: <strong>the</strong> charges and income for <strong>the</strong> period<br />
The accounting distinction between heritage and streams <strong>of</strong> exploitation should not lose sight <strong>of</strong> <strong>the</strong> close<br />
relationship between <strong>the</strong>se two types <strong>of</strong> movements. Indeed:<br />
1. Flows generated by <strong>the</strong> operating cycle cause variation in current assets and liabilities positions in <strong>the</strong> short<br />
term.<br />
2. "Allocations to depreciations and Provisions" link also exploitation and heritage.<br />
3. Finally, <strong>the</strong> operating result reached by <strong>the</strong> confrontation <strong>of</strong> <strong>flow</strong>s <strong>of</strong> loads and products represents:<br />
An increase <strong>of</strong> <strong>the</strong> heritage <strong>of</strong> <strong>the</strong> firm, if it is positive;<br />
Ei<strong>the</strong>r a loss <strong>of</strong> substance heritage, if it is negative.<br />
General Accounting <strong>the</strong>refore allows a syn<strong>the</strong>tic reconstruction <strong>of</strong> movements <strong>of</strong> economic <strong>flow</strong>s and operation feed,<br />
using <strong>the</strong> table <strong>of</strong> funding, and <strong>the</strong> statements <strong>of</strong> income. In <strong>the</strong>se circumstances <strong>the</strong> 'table <strong>of</strong> changes in <strong>cash</strong> will be<br />
as follows:<br />
OUTFLOWS<br />
INFLOWS<br />
Increase <strong>of</strong> Assets’ Accounts Increase <strong>of</strong> Liabilities Account<br />
Funding Table<br />
Decrease <strong>of</strong> liabilities’ Accounts Decrease <strong>of</strong> assets’ Account<br />
Income Account Charges Revenue<br />
TABLE 6: Table <strong>of</strong> <strong>the</strong> INFLOWS’ changes Structure<br />
Means in o<strong>the</strong>r terms, that is a simple approximation table <strong>of</strong> funding and <strong>the</strong> statements <strong>of</strong> income <strong>of</strong> <strong>the</strong> period<br />
considered. To what extent this analysis in terms <strong>of</strong> accounting <strong>flow</strong> helps to explain variations registered at <strong>the</strong> level<br />
<strong>of</strong> <strong>the</strong> <strong>cash</strong> position <strong>of</strong> <strong>the</strong> company.<br />
B - ACCOUNTING FLOW AND CASH FLOW.<br />
The table <strong>of</strong> changes in <strong>cash</strong> assimilated accounting <strong>flow</strong>s to <strong>cash</strong> <strong>flow</strong>s. This assimilation is based on a number <strong>of</strong><br />
implicit assumptions and faces a number <strong>of</strong> limitations.<br />
1 - THE IMPLICIT ASSUMPTIONS OF ASSIMILATION OF ACCOUNTING FLOWS TO CASH FLOWS.<br />
These assumptions are six in number:<br />
1 - Any increase in assets (excluding <strong>cash</strong>) involves a disbursement.<br />
2 - Any decrease in liabilities involves a disbursement.<br />
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3 - Any increase in liability involves a <strong>cash</strong> receipt.<br />
4 - Any decrease in assets involves a <strong>cash</strong> receipt.<br />
5 - Any charge involves a disbursement.<br />
6 - Any product involves a <strong>cash</strong> receipt.<br />
But <strong>the</strong>se implicit assumptions are patently unrealistic.<br />
2 - THE LIMITS TO THE ASSIMILATION OF ACCOUNTING FLOWS TO CASH FLOWS.<br />
The causes <strong>of</strong> <strong>the</strong> gap between accounting and <strong>cash</strong> <strong>flow</strong>s result from <strong>the</strong> implicit assumptions. There are three:<br />
Firstly, <strong>the</strong> <strong>flow</strong>s recorded by <strong>the</strong> General Ledger do not match all transactions between <strong>the</strong> company and its<br />
environment.<br />
Then <strong>the</strong>re is regulation time.<br />
Finally, <strong>the</strong> various results that a company may release its operations do not necessarily cause body<br />
movements.<br />
2.1 - FLOW ACCOUNTING AND MONETARY EXCHANGE WITH THIRD PARTIES.<br />
Flows recorded by <strong>the</strong> General Ledger are not all exchanges between <strong>the</strong> company and its environment. A job or a<br />
load do not necessarily give rise to a disbursement; similarly, a resource or a product do translate not always by a<br />
<strong>cash</strong> receipt.<br />
(a) Funds applied and Funds received do not necessarily correspond to <strong>cash</strong> receipt and disbursement <strong>flow</strong>s.<br />
The changes that affect <strong>the</strong> balance sheet <strong>of</strong> a company can have two origins: <strong>the</strong>y may be <strong>the</strong> result, in <strong>the</strong> first<br />
place, <strong>of</strong> transactions between <strong>the</strong> company and a third part (customers, suppliers, bankers, etc.). In this case, Funds<br />
Applied (such as acquisition <strong>of</strong> assets, debts, etc.) and Funds Received (such as capital increase by contribution <strong>of</strong><br />
money, credits, etc.) necessarily imply INFLOWS and OUTFLOWS. Secondly, <strong>the</strong> variations <strong>of</strong> certain balance sheet<br />
items may only be <strong>the</strong> result <strong>of</strong> a game <strong>of</strong> accounting entries. Funds Applied and Received have <strong>the</strong>refore no direct<br />
monetary consideration: it is <strong>the</strong> case <strong>of</strong> depreciation operations, establishment <strong>of</strong> provisions, revaluation <strong>of</strong> assets,<br />
etc. These resources result from accounting <strong>flow</strong>s and non-misleading no <strong>cash</strong> <strong>flow</strong> that would alter <strong>the</strong> amount <strong>of</strong><br />
<strong>cash</strong>.<br />
(b) Expenses and products do not necessarily correspond to <strong>cash</strong> receipt and disbursement <strong>flow</strong>s.<br />
Can be distinguished in this regard, <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s <strong>of</strong> operating non-monetary operation <strong>flow</strong>s. In <strong>the</strong> case <strong>of</strong><br />
depreciation, for example, credited to income allocations give rise to no disbursement.<br />
2.3 - TAKING INTO ACCOUNT DELAYS IN REGULATION.<br />
The reconstruction <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>cash</strong> requires taking account <strong>of</strong> shifts between <strong>flow</strong> <strong>of</strong> operations and <strong>cash</strong><br />
<strong>flow</strong>s related to <strong>the</strong> phenomenon <strong>of</strong> credit (credit to debtors and credit by creditors). Thus to calculate <strong>the</strong> amount<br />
<strong>of</strong> <strong>the</strong> <strong>cash</strong> receipts on sales, for example, can use <strong>the</strong> following procedure:<br />
SALES FOR THE YEAR,<br />
+ Receipts on sales from <strong>the</strong> previous year,<br />
- Credits granted on sales <strong>of</strong> this fiscal year and not yet expired at <strong>the</strong> end <strong>of</strong> <strong>the</strong> latter.<br />
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It will similarly be to calculate <strong>the</strong> amount <strong>of</strong> <strong>the</strong> disbursements on purchases:<br />
PURCHASES OF FISCAL,<br />
+ Disbursements on purchases from <strong>the</strong> previous year,<br />
- Credits obtained on purchases this fiscal year and not yet expired at <strong>the</strong> end <strong>of</strong> <strong>the</strong> latter.<br />
The same technique is valid for any stream operating with a period <strong>of</strong> regulation.<br />
2.4 - RESULTS AND FUND MOVEMENTS.<br />
Operating income that comes from <strong>the</strong> comparison between loads and products <strong>of</strong> <strong>the</strong> year does not imply a specific<br />
<strong>cash</strong> <strong>flow</strong>. On <strong>the</strong> o<strong>the</strong>r hand, o<strong>the</strong>r elements <strong>of</strong> <strong>the</strong> income statement reflected <strong>cash</strong> transactions by <strong>the</strong> company,<br />
including outside <strong>the</strong> scope <strong>of</strong> its current operations:<br />
Grants received <strong>of</strong>f-farm, income taxes, etc. Accounting information is <strong>the</strong>refore sufficient to replenish <strong>the</strong> <strong>cash</strong> <strong>flow</strong><br />
through <strong>the</strong> company, on condition however a few corrections, to go from accounting <strong>flow</strong>s to <strong>cash</strong> <strong>flow</strong>s.<br />
The difficulties traditionally described in <strong>the</strong> assessment <strong>of</strong> <strong>cash</strong> movements which we have just resumed remain<br />
despite everything technical. They can be largely mitigated, we have seen, by easy to make corrections. It is possible<br />
<strong>the</strong>n, to set a rigorous process for establishing an array <strong>of</strong> variations <strong>of</strong> realistic <strong>cash</strong> from conventional accounting<br />
documents. It is not <strong>the</strong> same with o<strong>the</strong>r more fundamental difficulties which limit <strong>the</strong> table <strong>of</strong> changes in <strong>cash</strong> in his<br />
role as indicator ex post conditions <strong>of</strong> realization <strong>of</strong> <strong>the</strong> balance <strong>of</strong> <strong>cash</strong>.<br />
C - THE LIMITS OF ANALYSIS OF THE "VARIATIONS OF CASH”.<br />
The inadequacies <strong>of</strong> <strong>the</strong> 'table <strong>of</strong> changes in <strong>cash</strong>’ as an indicator <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s through <strong>the</strong><br />
company is due to its very nature. One may wonder, indeed, how a document static and syn<strong>the</strong>tic can account for a<br />
phenomenon such as <strong>cash</strong> <strong>flow</strong>, composite and dynamic by nature.<br />
1 - THE ARRAY OF VARIATIONS OF CASH IS ACTUALLY A STATIC DOCUMENT.<br />
Contrary to what one might think, this document is not truly kinetic, and still less dynamic. It merely, as <strong>the</strong> result<br />
account, save <strong>the</strong> aggregate value over a given period, two sets <strong>of</strong> <strong>flow</strong>s: <strong>the</strong> outputs and inputs <strong>of</strong> funds. The balance<br />
indicates <strong>the</strong> variation <strong>of</strong> <strong>cash</strong> for <strong>the</strong> period. Knowing <strong>the</strong> value and <strong>the</strong> causes <strong>of</strong> <strong>the</strong> increase or decrease <strong>of</strong> <strong>cash</strong><br />
from its initial level is ultimately quite poor teaching. Because, although knowing <strong>the</strong> nature and <strong>the</strong> value <strong>of</strong><br />
responsible for <strong>the</strong> movements <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s, nothing is known about <strong>the</strong> reality <strong>of</strong> <strong>the</strong>ir behavior: speed, rhythm,<br />
<strong>flow</strong>, composition, and timeline. Without perfect knowledge <strong>of</strong> <strong>the</strong> respective conduct <strong>of</strong> <strong>the</strong> <strong>flow</strong>s <strong>of</strong> entries and<br />
exits <strong>of</strong> funds in time, one cannot truly appreciate <strong>the</strong> way in which <strong>the</strong> balance <strong>of</strong> <strong>cash</strong> has been provided during<br />
<strong>the</strong> period.<br />
Therefore, from <strong>the</strong> point <strong>of</strong> view <strong>of</strong> <strong>the</strong> <strong>cash</strong> management, it seems not appropriate and efficient aggregate <strong>flow</strong>s<br />
to learn a lesson on <strong>the</strong>ir behavior towards <strong>the</strong> financial equilibrium <strong>of</strong> <strong>the</strong> firm. It would be much more interesting<br />
and operational, to identify exactly how <strong>the</strong> recipes are presented (or arise) against expenditures at <strong>the</strong> time. Might<br />
think that adopting a time scale more reduced (e.g. month), it would have "<strong>of</strong> extremely close States <strong>of</strong> <strong>the</strong> heritage<br />
<strong>of</strong> <strong>the</strong> company" which would lead to "a very fine analysis <strong>of</strong> historic <strong>flow</strong>s" and on a statement "almost continuous<br />
evolution <strong>of</strong> <strong>cash</strong> ' (1). This remark seems unsatisfactory for two reasons<br />
Firstly, such calculations performed monthly can present serious practical difficulties <strong>of</strong> implementation.<br />
Relatively few companies have at <strong>the</strong>ir disposal for as short a period necessary accounting documents<br />
(balance sheet, statements <strong>of</strong> income, let alone table <strong>of</strong> funding). In addition, <strong>the</strong> timeline for completion<br />
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may reduce <strong>the</strong> value <strong>of</strong> this work. Finally, <strong>the</strong> cost <strong>of</strong> construction <strong>of</strong> <strong>the</strong> table <strong>of</strong> changes in <strong>cash</strong> is not to<br />
neglect.<br />
Secondly, it should be noted that it seems hardly possible to descend to <strong>the</strong> bottom <strong>of</strong> a month. However, in<br />
30 days <strong>cash</strong> can go through different situations. This method will never provide a detailed analytical<br />
information and accurate actual <strong>cash</strong> movements.<br />
2 - THE ARRAY OF CHANGES IN CASH IS A SYNTHETIC DOCUMENT.<br />
The user may also go fur<strong>the</strong>r than it’s possible for him in breaking down <strong>the</strong> basic accounts, it will never reach <strong>the</strong><br />
knowledge <strong>of</strong> <strong>the</strong> actual movement <strong>of</strong> <strong>cash</strong>. In this area, it does not seem possible to make <strong>the</strong> economy <strong>of</strong> an<br />
analytical and chronological <strong>of</strong> <strong>cash</strong> <strong>flow</strong> statement. As we shall see, this is <strong>the</strong> only way towards a master's degree<br />
in <strong>the</strong> economic balance <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>. On <strong>the</strong> o<strong>the</strong>r hand, jobs and resources table can be an instrument <strong>of</strong><br />
interesting control at <strong>the</strong> level <strong>of</strong> <strong>the</strong> <strong>cash</strong> management.<br />
3 - ARRAY OF FINANCING AND CASH BALANCE.<br />
By definition, jobs and resources table is <strong>the</strong> tool <strong>of</strong> <strong>the</strong> realization <strong>of</strong> <strong>the</strong> investment and financing plan. It ensures<br />
that no distortion has occurred between <strong>the</strong> capital growth and <strong>the</strong> terms <strong>of</strong> its funding: it is <strong>the</strong> variation <strong>of</strong> working<br />
capital which is at <strong>the</strong> center <strong>of</strong> <strong>the</strong> analysis. However we have shown <strong>the</strong> link between working capital and <strong>cash</strong>:<br />
Therefore:<br />
Cash = working capital - needs for working capital.<br />
Change in <strong>cash</strong> balance = (+) change in working capital (-) change in working capital needs.<br />
The Funds Applied and Received Table can be broken down into two parts:<br />
FUNDS APPLIED<br />
FUNDS RECEIVED<br />
I – Fixed Funds Applied <strong>of</strong> <strong>the</strong> Exercise II - Ressources de financement de l’exercice :<br />
- Permanent Assets<br />
-Auto finance<br />
- Loans and Securities<br />
- Transfer <strong>of</strong> assets<br />
- Loans’ Repayment<br />
- Loans<br />
(+) Change in Working Capital (-)<br />
(= II – I)<br />
III – Circulating Funds Applied<br />
- Operating values<br />
- Realizable Values<br />
IV – Short term Funds Received<br />
Long-term Debts<br />
(+) Funds’ changes (-)<br />
(Bank Credit) = (II + IV) - ( I + III) (Bank Loan)<br />
(+) Changes in Operating capital Requirements<br />
(-) (= IV - III)<br />
Table n°7: Classification <strong>of</strong> Funds Applied and Received<br />
Variation <strong>of</strong> <strong>the</strong> Working Capital Fund provides both <strong>the</strong> balance <strong>of</strong> jobs and resources <strong>of</strong> <strong>the</strong> two parts <strong>of</strong> <strong>the</strong> table.<br />
Cash balance depends not only on <strong>the</strong> balance <strong>of</strong> <strong>flow</strong>s <strong>of</strong> exploitation but also <strong>of</strong> <strong>the</strong> financial structure <strong>of</strong> <strong>the</strong><br />
company. The table <strong>of</strong> funding highlights <strong>the</strong>refore, ex-post, <strong>the</strong> conditions under which <strong>the</strong> financial balance for a<br />
given period is carried out. It allows to know <strong>the</strong> nature and <strong>the</strong> value.<br />
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However, this document syn<strong>the</strong>sizes that variations aggregated on a space <strong>of</strong> time. It does not reveal how <strong>the</strong><br />
financial balance has been maintained throughout <strong>the</strong> period. In o<strong>the</strong>r words, how <strong>the</strong>y covered <strong>the</strong> assets’ needs.<br />
Indeed, <strong>the</strong>ir coverage depends on <strong>the</strong> importance <strong>of</strong> <strong>the</strong> Fund bearing and <strong>the</strong> possibilities <strong>of</strong> short-term debt, i.e.<br />
<strong>of</strong> <strong>the</strong> policy <strong>of</strong> investment and financing <strong>of</strong> <strong>the</strong> firm. The difficulties <strong>of</strong> approach to <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> and<br />
changes in working capital needs will appear in predictive analysis <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s.<br />
1 - THE ANTICIPATION OF THE CONDITIONS FOR THE FINANCIAL BALANCE: CASH FLOW FORECASTING.<br />
The traditional techniques <strong>of</strong> management planning provide, from <strong>the</strong> consolidation <strong>of</strong> forecast <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s,<br />
financing plans and budgets <strong>of</strong> <strong>cash</strong>. The procedure which leads to <strong>the</strong> assessment <strong>of</strong> <strong>cash</strong> forecasting involves three<br />
essential steps:<br />
1 ° <strong>the</strong> first stage presents turnover expected movements.<br />
This evolution is traced in a funding plan which includes:<br />
In 'planned jobs', assets increases and decreases in liabilities;<br />
In 'Predicted Funds Applied', liability increases and decreases <strong>of</strong> assets.<br />
He translated <strong>the</strong> management constraints and choices <strong>of</strong> <strong>the</strong> contracted entrepreneur concerning both <strong>the</strong><br />
operation and development <strong>of</strong> <strong>the</strong> company. From <strong>the</strong>se forward-looking changes and taking into account <strong>the</strong><br />
balance at beginning <strong>of</strong> period, establishing <strong>the</strong> forecast supply balance, instrument <strong>of</strong> control. It allows to compare<br />
<strong>the</strong> financial situation envisaged at <strong>the</strong> end <strong>of</strong> <strong>the</strong> baseline period. An audit <strong>of</strong> <strong>the</strong> whole is possible through <strong>the</strong> <strong>cash</strong>:<br />
It is calculated in <strong>the</strong> forecast supply balance by difference between <strong>the</strong> Working Capital Fund and <strong>the</strong><br />
forecasted working capital requirements;<br />
It appears clearly in <strong>the</strong> financing plans, as can realize in <strong>the</strong> following document<br />
Treasury<br />
Treasury<br />
Years 20… 20… 20… 20.. Total<br />
Investment Program………………..………………..………………………..<br />
Last year Investment program product………………..………………<br />
Diverse charges………………..………………..………………..………………<br />
Extra need <strong>of</strong> funds………………..………………..………………………….<br />
Reconstitution <strong>of</strong> working capital fund………………..……………….<br />
Due date <strong>of</strong> Loan………………..………………..………………..…………….<br />
Due date <strong>of</strong> O<strong>the</strong>r loans………………..………………..……………………<br />
Dividends distribution………………..………………..……………………….<br />
Reimbursement <strong>of</strong> loan………………..………………..…………………….<br />
Total Needs<br />
Increase in Turnover………………..………………..………………………..<br />
New associates’ funds………………..………………..………………………<br />
Diverse resources………………..………………..…………………………….<br />
Self-financing before distribution………………..………………………<br />
Working capital funds………………..………………..………………………<br />
Short term loans………………..………………..………………..…………….<br />
O<strong>the</strong>r long term loans ………………………………..……………………….<br />
Total Resources<br />
Difference<br />
Accumulated Difference<br />
Table n°8: Treasury’s Plan<br />
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2 ° <strong>the</strong> second step focuses on <strong>the</strong> anticipation <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> operations for <strong>the</strong> coming year:<br />
Loads,<br />
Products,<br />
Forecast operating income.<br />
These <strong>flow</strong>s are grouped in 'operating budgets. From <strong>the</strong>se data <strong>the</strong> "provisional result account' is constructed <strong>of</strong> <strong>the</strong><br />
reporting period.<br />
3 ° <strong>the</strong> last stage <strong>of</strong> <strong>the</strong> predictive analysis led to <strong>the</strong> consolidation <strong>of</strong> forecast <strong>cash</strong> <strong>flow</strong> in "Cash Budget".<br />
In reality, <strong>the</strong> adjustment <strong>of</strong> revenues and expenditures at <strong>the</strong> lowest cost requires a genuine “estimated <strong>cash</strong><br />
device”. Movements <strong>of</strong> funds that affect availability are <strong>the</strong> result <strong>of</strong> a company given or received by <strong>the</strong> company.<br />
These commitments are generally classified under two headings:<br />
1. Commitments <strong>of</strong>f-operation:<br />
*Firstly, investment, <strong>the</strong> origin <strong>of</strong> acquisition expenses, and,<br />
*On <strong>the</strong> o<strong>the</strong>r hand, <strong>the</strong> financial transactions which include essentially financing transactions, repayment<br />
<strong>of</strong> loans and payment <strong>of</strong> dividends.<br />
2. Commitments <strong>of</strong> exploitation: from <strong>the</strong> normal and common activity company, originally <strong>of</strong> revenue and<br />
operating expenses.<br />
The <strong>cash</strong> budget is over a given period, generally <strong>the</strong> month and year, <strong>the</strong> anticipation <strong>of</strong> <strong>the</strong> movement which may<br />
modify <strong>the</strong> <strong>cash</strong> position. There are two types <strong>of</strong> conventional and complementary methods for <strong>the</strong> preparation <strong>of</strong><br />
<strong>the</strong> <strong>cash</strong> <strong>flow</strong> forecast:<br />
Method “recipes – expenditure”,<br />
The method “resources – needs”.<br />
3.1 - THE METHOD “REVENUE – EXPENSES”.<br />
Simple in principle, it is more difficult to implement.<br />
3.1.1- THE PRINCIPLE OF THE METHOD.<br />
As its name implies, this method consists <strong>of</strong> a comprehensive census entries and liquidity out<strong>flow</strong>s. Then arise <strong>the</strong><br />
problem <strong>of</strong> <strong>the</strong> census period and forecast technique.<br />
1 - DETERMINATION OF THE HORIZON AND NO CASH FORECASTING.<br />
Practitioners call:<br />
'Horizon', <strong>the</strong> overall period <strong>of</strong> anticipation, and,<br />
«No», <strong>the</strong> subdivision <strong>of</strong> <strong>the</strong> horizon.<br />
The <strong>cash</strong>-<strong>flow</strong> forecasts generally cover a year, with a not monthly. Sometimes <strong>the</strong>y are on a shorter term. But to<br />
ensure <strong>the</strong> financial balance for <strong>the</strong> coming months does not <strong>of</strong>fsets that arise inevitably between <strong>the</strong> inputs and<br />
outputs daily Fund. Very short-term forecasts are to coincide payment options and regulations to operate.<br />
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The <strong>cash</strong> has <strong>the</strong>n for each day (or week, etc.) and by account, expenditure to be carried out and <strong>the</strong> recipes to make.<br />
Experience shows that very few companies are in as fine forecast entries and <strong>cash</strong>. Indeed, such rigor and such details<br />
in <strong>the</strong> analysis <strong>of</strong> revenues and expenditures require an administrative organization <strong>of</strong> seizure and treatment <strong>of</strong><br />
unique information relating to <strong>the</strong> movement <strong>of</strong> funds, dissociated from <strong>the</strong> classical book recording.<br />
2 - THE DEVELOPMENT OF THE CASH FLOW FORECAST.<br />
An undertaking given or received by <strong>the</strong> company does result in a <strong>cash</strong> <strong>flow</strong> only after a certain period <strong>of</strong> time. Provide<br />
<strong>the</strong> amount and <strong>the</strong> date <strong>of</strong> <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> <strong>the</strong>refore represents a tw<strong>of</strong>old problem. The establishment <strong>of</strong><br />
<strong>the</strong> forecast data is discussed in two complementary ways:<br />
Budgetary accounting, and<br />
Accrual <strong>of</strong> liabilities.<br />
(a) BUDGETARY ACCOUNTS:<br />
The estimates are based on assumptions <strong>of</strong> activity and <strong>the</strong>refore present a random character.<br />
1 ° THE FORECAST REVENUE:<br />
They are essentially original sales receipt. For retail business that sells <strong>cash</strong> forecast revenue is equal to that <strong>of</strong> sales.<br />
In <strong>the</strong> case <strong>of</strong> businesses that sell on credit, a statistical analysis to determine <strong>the</strong> spread <strong>of</strong> <strong>cash</strong> receipts from sales<br />
<strong>of</strong> <strong>the</strong> period. With regard to sale on command, usually accompanied by payment by instalment, forecast revenue<br />
occurs at two levels. The firm orders, should refer to <strong>the</strong> manufacturing schedule in order to set <strong>the</strong> dates <strong>of</strong> different<br />
maturities. Planned orders, to establish a <strong>the</strong>oretical schedule, with all <strong>the</strong> inaccuracies that entails. O<strong>the</strong>r receipts<br />
have various sources:<br />
Accessories operating revenues;<br />
Field exploitation operations;<br />
Financial transactions.<br />
Their spread in time depends on <strong>the</strong> terms <strong>of</strong> <strong>the</strong> contracts, <strong>the</strong> activity <strong>of</strong> <strong>the</strong> company, or its strategy. It supports<br />
some approximation due to <strong>the</strong>ir relative importance.<br />
2 ° THE FORECAST SPENDING:<br />
Prediction <strong>of</strong> disbursements is more difficult because <strong>of</strong> <strong>the</strong> wide variety <strong>of</strong> loads. The relationship between <strong>the</strong><br />
commitment <strong>of</strong> expenditure and <strong>the</strong> corresponding disbursement varies depending on <strong>the</strong> nature <strong>of</strong> <strong>the</strong> load. In this<br />
regard, expenditures are classified into four categories:<br />
Spending on purchases <strong>of</strong> goods,<br />
Expenditures on normal operating expenses,<br />
Expenditure on financial operations<br />
On investments.<br />
Prediction <strong>of</strong> supply-related disbursements can be difficult due to <strong>the</strong> uncertainty that sometimes prevails on <strong>the</strong><br />
period <strong>of</strong> delivery or billing. In this case <strong>the</strong> problem can be solved if you have a past experience, by an approach<br />
similar to that <strong>of</strong> <strong>the</strong> forecast revenue. The forecast spending on normal operating expenses is made from <strong>the</strong>ir<br />
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grouping by nature. In principle <strong>the</strong> frequency and <strong>the</strong> time limit for payment are well known. Quite <strong>of</strong>ten, <strong>the</strong>re<br />
remains uncertainty as to <strong>the</strong> amount that can be still quite close. The forecast <strong>of</strong> expenditure on financial and<br />
investment operations stems from <strong>the</strong> financing plan. The liabilities accounting complete this approach.<br />
(b) ACCRUAL OF LIABILITIES:<br />
Accounting for commitments is intended to allow adjustment <strong>of</strong> budget estimates. It is based on achievements: <strong>the</strong><br />
commitments received or given. It reveals from <strong>the</strong> source, variances between budgeted or revenue incurred or<br />
budgeted spending and expenditures<br />
Non-operation movements are not fix. Any company is able to identify all born commitments and <strong>the</strong>ir impact on<br />
<strong>cash</strong> <strong>flow</strong> accurately. Movements <strong>of</strong> farms, on <strong>the</strong> contrary, are analyzed globally, comparing <strong>the</strong> development over<br />
time <strong>of</strong> <strong>the</strong> commitments <strong>of</strong> expenditure and revenue from a common date.<br />
Two parameters influence <strong>the</strong> movements <strong>of</strong> availability:<br />
The amount <strong>of</strong> <strong>the</strong> commitment,<br />
The time between <strong>the</strong> birth <strong>of</strong> commitment and its transformation into <strong>cash</strong>.<br />
These information are only averages but resulting from <strong>the</strong> comparison between commitments and payments<br />
actually made. The same analysis is performed for <strong>cash</strong> receipts. We will <strong>the</strong>n search for "equalities between money<br />
supply" regardless <strong>of</strong> conduct specific to each elementary operation constituting those 'masses '. Also has interest in<br />
<strong>the</strong> continuation <strong>of</strong> <strong>the</strong> analysis, to seek <strong>the</strong> causes <strong>of</strong> <strong>the</strong> dispersion <strong>of</strong> individual behavior around <strong>the</strong>se averages to<br />
avoid errors <strong>of</strong> forecasts. The gap analysis allows any time corrective actions necessary to ensure <strong>the</strong> solvency <strong>of</strong> <strong>the</strong><br />
firm.<br />
The method <strong>of</strong> forecast revenues-expenses, despite his great interest does not fully satisfaction.<br />
3.1.2 - LIMITATIONS OF THE METHOD.<br />
Experience shows that this method has major shortcomings. We will make in this regard four remarks.<br />
1 - THE CASH FLOW FORECASTS ARE UNCERTAIN.<br />
But this uncertainty does not have <strong>the</strong> same nature as it's more or less distant horizon data.<br />
(a) THE DATA IN THE VERY SHORT TERM:<br />
Most operations that result in a movement <strong>of</strong> <strong>cash</strong> are already involved. As a result, <strong>the</strong> Treasurer may <strong>the</strong>oretically<br />
have all necessary information. In fact, it will have that mass <strong>of</strong> information. First, because <strong>the</strong> internal information<br />
<strong>of</strong> a business system is generally not organized so all this mass information arrive. Then, it can appear to <strong>the</strong> eyes <strong>of</strong><br />
those responsible for <strong>the</strong> cost <strong>of</strong> <strong>the</strong> transmission <strong>of</strong> <strong>the</strong> information is disproportionate to <strong>the</strong> gain (or <strong>the</strong> economy)<br />
expected a certain forecast. It should be noted that <strong>the</strong> improvement <strong>of</strong> <strong>the</strong> input <strong>of</strong> information is <strong>the</strong> condition first<br />
<strong>the</strong> realization <strong>of</strong> good <strong>cash</strong> <strong>flow</strong> forecast<br />
In addition, <strong>the</strong> cost <strong>of</strong> a bad <strong>cash</strong> management can be as compromise or at least strongly affects <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong><br />
<strong>the</strong> firm. Anyway, <strong>the</strong> use <strong>of</strong> certain statistical forecasting techniques can replace when necessary, expensive looking<br />
for additional information about committed transactions.<br />
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(b) SHORT-TERM DATA:<br />
Beyond <strong>the</strong> very short term (one month) <strong>the</strong> income-expenditure method proves quite coarse. Indeed, <strong>the</strong><br />
information for <strong>the</strong>se <strong>flow</strong>s are not always available. Operations that will result in <strong>cash</strong> receipts and disbursements<br />
in <strong>the</strong> coming months may not have been still incurred. Yet <strong>the</strong> knowledge <strong>of</strong> potential imbalances is indispensable.<br />
The Treasurer will be able to intervene to modify as appropriate, <strong>the</strong> date <strong>of</strong> commitment <strong>of</strong> operations to adjust<br />
input stream and output stream. Similarly <strong>the</strong> bank credits may be obtained in favorable terms if <strong>the</strong>y are applications<br />
several months in advance.<br />
Beyond <strong>the</strong> very short term (one month) <strong>the</strong> income-expenditure method proves quite coarse. Indeed, <strong>the</strong><br />
information for <strong>the</strong>se <strong>flow</strong>s are not always available. Operations that will result in <strong>cash</strong> receipts and disbursements<br />
in <strong>the</strong> coming months may not have been still incurred. Yet <strong>the</strong> knowledge <strong>of</strong> potential imbalances is indispensable.<br />
The Treasurer will be able to intervene to modify as appropriate, <strong>the</strong> date <strong>of</strong> commitment <strong>of</strong> operations to adjust<br />
input stream and output stream. Similarly <strong>the</strong> bank credits may be obtained in favorable terms if <strong>the</strong>y are applications<br />
several months in advance.<br />
The resources-needs method, which we'll talk about, is better suited to such an analysis. It indeed makes it possible<br />
to explain <strong>the</strong> causes <strong>of</strong> variation in <strong>cash</strong>. The analysis in terms <strong>of</strong> revenue-expenditure <strong>the</strong>n finds its justification in<br />
<strong>the</strong> framework predetermined by <strong>the</strong> resource-needs method.<br />
2. FORECASTING BEGINS WITH A BETTER CAPTURE OF INFORMATION.<br />
Only an appropriate organization may allow <strong>the</strong> Treasurer to ga<strong>the</strong>r information essential to good forecasts.<br />
Moreover, anyone in <strong>the</strong> company whose actions or decisions have an impact on <strong>the</strong> inputs or outputs <strong>of</strong> funds must<br />
be sensitized to <strong>the</strong> problems <strong>of</strong> <strong>cash</strong>. It is to this extent that it will effectively contribute to <strong>the</strong> improvement <strong>of</strong> <strong>the</strong><br />
input <strong>of</strong> information<br />
3 - THE TRACKING OF CASH FLOWS MUST BE HELD IN 'VALUE DATE '.<br />
The movement <strong>of</strong> bank accounts follow special rules should know. There is always a lag between <strong>the</strong> date <strong>of</strong> <strong>the</strong><br />
transaction and <strong>the</strong> date <strong>of</strong> registration <strong>of</strong> <strong>the</strong> transaction to <strong>the</strong> account by <strong>the</strong> Bank (discounts after <strong>the</strong>ir effective<br />
date and before withdrawals are entered). Ignore <strong>the</strong> day <strong>of</strong> value system is to expose to heavy financial loads:<br />
unnecessary interest, financing <strong>of</strong> a fictional overdraft, occult idle <strong>cash</strong> cost.<br />
4 - 'REVENUE-EXPENDITURE' PREDICTION METHOD CAN LEAD TO AN OPTIMUM FINANCING OF CASH<br />
REQUIREMENTS.<br />
Optimum financing is an effective funding directed at <strong>the</strong> lowest cost. For this it must be adapted to <strong>the</strong> nature,<br />
volume and duration <strong>of</strong> <strong>the</strong> needs. However, <strong>the</strong> traditional method <strong>of</strong> forecast revenue-expenditure leads nei<strong>the</strong>r<br />
to <strong>the</strong> knowledge <strong>of</strong> <strong>the</strong> daily variation <strong>of</strong> <strong>the</strong> bank balance, so <strong>the</strong> <strong>cash</strong> requirements in <strong>the</strong> very short term, nor to<br />
<strong>the</strong> knowledge <strong>of</strong> needs <strong>of</strong> bearing, so short-term <strong>cash</strong><br />
3.2 - PREDICTION METHOD 'RESOURCES-NEEDS '.<br />
Cash <strong>flow</strong> forecasts are obtained by a projection in time equation:<br />
Cash = working capital fund - working capital needs.<br />
Forecast changes in <strong>cash</strong> will <strong>the</strong>refore appear as <strong>the</strong> difference between projected changes in working capital and<br />
planned changes in working capital needs.<br />
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The advantage <strong>of</strong> this method is to explain <strong>the</strong> causes <strong>of</strong> variation in <strong>cash</strong> which are to be found in <strong>the</strong> Working<br />
Capital Fund, <strong>the</strong>mselves conditioned by changes in <strong>the</strong> operation <strong>of</strong> <strong>the</strong> undertaking.<br />
3.2.1 - PRESENTATION OF THE CASH FLOW FORECAST IN TERMS OF 'RESOURCES AND NEEDS'.<br />
Short-term <strong>cash</strong> forecasts are generally presented in one <strong>of</strong> <strong>the</strong> three following forms:<br />
Estimated Balance<br />
Adjusted earnings<br />
Variation <strong>of</strong> working capital.<br />
These three possible presentations use <strong>the</strong> same forward-looking information; ei<strong>the</strong>r variation estimated.<br />
G = gross fixed assets,<br />
S = stocks,<br />
R = realizable customers (third party receivables and short term loans).<br />
C = <strong>cash</strong>,<br />
Cp = capital permanent (capital, reserves and long-term loans),<br />
D = depreciation,<br />
ST = short-term debt (third-party accounts payable and short-term borrowings),<br />
F = pr<strong>of</strong>its,<br />
1 – ESTIMATE:<br />
i.e., <strong>the</strong> estimate and <strong>the</strong> projected income statement data<br />
The presentation takes <strong>the</strong> following form:<br />
Or, what amounts to <strong>the</strong> same,<br />
G + S + R + C = Cp + D + ST + F<br />
(G - D) + S + R + C = Cp + ST + f<br />
Should be to estimate as accurately as possible <strong>the</strong> movements <strong>of</strong> each workstation for <strong>the</strong> next (month or year)<br />
period. The Cash is obtained by difference.<br />
2 - ADJUSTED INCOME:<br />
The relationship becomes:<br />
3 - The variation <strong>of</strong> <strong>the</strong> Working Capital Fund.<br />
This time <strong>the</strong> relationship is written:<br />
And highlights <strong>the</strong> change in working capital:<br />
C = F + D + ST + Cp - (G + S + R)<br />
C = F + D + Cp - G - (S + R - ST)<br />
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These three presentations are well only one and <strong>the</strong> same method <strong>of</strong> approach to <strong>the</strong> <strong>cash</strong> <strong>flow</strong> forecast in terms <strong>of</strong><br />
resources and jobs. The value <strong>of</strong> this method obviously lies in <strong>the</strong> method <strong>of</strong> calculation <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>the</strong><br />
elements <strong>of</strong> <strong>the</strong> heritage.<br />
3.2.2 - ESTIMATES OF CASH FLOW IN TERMS OF 'RESOURCE NEEDS.<br />
The problem may be considered in two ways:<br />
Ei<strong>the</strong>r, <strong>the</strong> extrapolation <strong>of</strong> <strong>the</strong> commitments passed; although, again, <strong>the</strong> estimation <strong>of</strong> future working capital<br />
requirements.<br />
1 - THE EXTRAPOLATION OF THE ACTUAL COMMITMENTS.<br />
This approach is <strong>the</strong> easiest to follow natural route but is limited in scope.<br />
(a) THE PRINCIPLE:<br />
It is to analyze <strong>the</strong> impact <strong>of</strong> revenues and expenditures on <strong>the</strong> elements <strong>of</strong> <strong>the</strong> heritage. Knowing <strong>the</strong> past, operating<br />
and non-operating, commitments on draws up accounts <strong>of</strong> outcome <strong>of</strong> <strong>the</strong> coming months.<br />
From <strong>the</strong>se result accounts estimates and informed about <strong>the</strong> terms <strong>of</strong> payment as a whole, it is developing a <strong>cash</strong><br />
budget in terms <strong>of</strong> expenditure and revenue. It is possible to draw up an estimate for <strong>the</strong> month to come, and hence<br />
calculate <strong>the</strong> movement <strong>of</strong> working capital needs and possibly that <strong>of</strong> <strong>the</strong> Working Capital Fund, justifying <strong>the</strong> final<br />
<strong>cash</strong> position.<br />
(b) THE SCOPE OF EXTRAPOLATION OF THE COMMITMENTS:<br />
Taking into account <strong>the</strong> various methods <strong>of</strong> payment commonly used, it is hardly possible to predict a significant <strong>cash</strong><br />
beyond <strong>the</strong> second coming month position. Therefore, this procedure cannot be validly applied in <strong>the</strong> case <strong>of</strong><br />
companies having a fairly regular activity if you want to anticipate <strong>the</strong> financial balance in <strong>the</strong> coming months. Any<br />
change in operating conditions may be taken into consideration that in <strong>the</strong> realization <strong>of</strong> <strong>the</strong> commitments. However,<br />
few companies are able to predict accurately <strong>the</strong> commitments coming due to <strong>the</strong> large number <strong>of</strong> factors which<br />
give rise to and modulate <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s transiting by <strong>the</strong> company: competition, economic situation, social climate,<br />
price, etc. This explains <strong>the</strong> inaccuracy <strong>of</strong> thus established forecasts for <strong>the</strong> balance <strong>of</strong> <strong>cash</strong> beyond 30 to 60 days,<br />
and even sometimes below, if <strong>the</strong> time between commitment and corresponding <strong>cash</strong> movement is short.<br />
In this regard, it would seem much more efficient, ra<strong>the</strong>r than "guess" <strong>the</strong> appearance <strong>of</strong> speculative money <strong>flow</strong>s,<br />
estimated using statistical methods and simulation future working capital requirements.<br />
2 - ESTIMATE OF FUTURE WORKING CAPITAL REQUIREMENTS:<br />
Knowledge says changes in <strong>cash</strong> and <strong>flow</strong>s that cause has no meaning that daily and value date. The tools are:<br />
accounting for commitments and taking account <strong>of</strong> <strong>the</strong> conditions <strong>of</strong> Bank.<br />
The aim is: control <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> inputs and outputs <strong>of</strong> funds, in order to minimize <strong>the</strong> <strong>cash</strong> and financing at <strong>the</strong><br />
lowest cost lack <strong>of</strong> irreducible synchronization between receipts and disbursements. To <strong>the</strong> - beyond <strong>the</strong> very short<br />
term <strong>cash</strong> <strong>flow</strong> is impossible and unnecessary. Indeed, what matters <strong>the</strong>n, resides in <strong>the</strong> apprehension <strong>of</strong> <strong>the</strong> heritage<br />
movement, and in particular items that fluctuate according to <strong>the</strong> pace and nature <strong>of</strong> cycle operation, or even<br />
according to <strong>the</strong> situation: <strong>the</strong> active and <strong>the</strong> passive circulating; or working capital needs. The evolution <strong>of</strong> <strong>the</strong><br />
working capital needs, in light <strong>of</strong> available working capital, is empower <strong>the</strong>mselves to an optimal choice <strong>of</strong> <strong>the</strong><br />
financial structure <strong>of</strong> <strong>the</strong> firm, in a monetary environment national and international given.<br />
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The nature and duration <strong>of</strong> <strong>the</strong> funding must correspond exactly to <strong>the</strong> nature and <strong>the</strong> duration <strong>of</strong> <strong>the</strong> need to<br />
finance. Hence <strong>the</strong> need to be able to measure:<br />
Firstly, <strong>the</strong> needs permanent financing (fixed assets and current assets), as well as <strong>the</strong> needs transitional<br />
(current assets mainly);<br />
And secondly, <strong>the</strong> stability <strong>of</strong> <strong>the</strong> financial resources available to <strong>the</strong> firm (equity and external competition<br />
<strong>of</strong> all origins).<br />
Ins<strong>of</strong>ar as <strong>the</strong> contractor will be able to adjust to each o<strong>the</strong>r, it reconciles <strong>the</strong> objectives, required until <strong>the</strong>re as<br />
antagonistic, solvency and pr<strong>of</strong>itability.<br />
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Manage <strong>cash</strong> consists, in <strong>the</strong> traditional design, on determining <strong>the</strong> amount <strong>of</strong> <strong>cash</strong> to hold at <strong>the</strong> beginning <strong>of</strong> <strong>the</strong><br />
period which, taking into account <strong>the</strong> revenue and expenditure <strong>of</strong> <strong>the</strong> global businesses that <strong>the</strong> company exercises,<br />
will be necessary for <strong>the</strong> implementation <strong>of</strong> <strong>the</strong> budget. Theoretical solutions to this question found in <strong>the</strong> literature,<br />
are many and varied. This is explained by <strong>the</strong> relative ease with which one can model optimization problems, thanks<br />
to <strong>the</strong> existence <strong>of</strong> ma<strong>the</strong>matical tools <strong>of</strong> investigation already in use also. In this case, <strong>the</strong> authors have transposed<br />
<strong>the</strong> logic <strong>of</strong> analysis <strong>of</strong> <strong>the</strong> inventory control, quantitative analysis <strong>of</strong> <strong>the</strong> Keynesian approach <strong>of</strong> 'preference for<br />
liquidity.<br />
This problem is equivalent to setting <strong>the</strong> conflict between, on <strong>the</strong> one hand, excessive <strong>cash</strong> that involves an<br />
opportunity cost, and, on <strong>the</strong> o<strong>the</strong>r hand, insufficient <strong>cash</strong> resulting in a cost <strong>of</strong> insolvency. However, although<br />
appealing intellectually, this approach is based on a number <strong>of</strong> explicit and implicit assumptions that practice<br />
business is not checked. Maintaining important liquidity goes against <strong>the</strong> objective <strong>of</strong> cost-effectiveness ins<strong>of</strong>ar as<br />
<strong>the</strong> funds tied up in liquid assets have in general no, or very low pr<strong>of</strong>itability. In addition, a plentiful <strong>cash</strong> cannot be<br />
in any case, contrary to what was long stated, as <strong>the</strong> guarantee <strong>of</strong> financial security <strong>of</strong> a company, i.e. nor as a<br />
guarantee <strong>of</strong> its solvency, nor as <strong>the</strong> insurance <strong>of</strong> its autonomy.<br />
The security <strong>of</strong> a business depends above all on <strong>the</strong> <strong>cash</strong> <strong>flow</strong> released that it is capable <strong>of</strong> secreting, or if one prefers<br />
its potential to restore liquidity. Its pr<strong>of</strong>itability is <strong>the</strong>refore <strong>the</strong> necessary condition for its security. But we will see<br />
that this condition is not sufficient. Solvency and pr<strong>of</strong>itability do oppose no more long term in <strong>the</strong> short term.<br />
The company must exercise a tight administrative control to manage its <strong>cash</strong> <strong>flow</strong>. The synchronization <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
<strong>flow</strong>s and <strong>the</strong> choice <strong>of</strong> day to day financing, on <strong>the</strong> one hand ensures <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> firm and on <strong>the</strong> o<strong>the</strong>r to<br />
improve its pr<strong>of</strong>itability. Indeed control <strong>of</strong> <strong>cash</strong> forecasting, financing in <strong>the</strong> short term, as well as <strong>the</strong> coordination<br />
<strong>of</strong> banking to aim at <strong>the</strong> reduction <strong>of</strong> monetary assets to zero. This is what we will show in <strong>the</strong> three sections that<br />
follow.<br />
In o<strong>the</strong>r words, a company that has permanently <strong>cash</strong> void or fluctuating slightly around zero can be considered, in<br />
<strong>the</strong> first analysis, financially well managed. This means, all o<strong>the</strong>r things being equal, as makers:<br />
Master <strong>cash</strong> <strong>flow</strong>s<br />
Effectively reallocate <strong>cash</strong> <strong>flow</strong> released in pr<strong>of</strong>itable jobs,<br />
Enjoy more than just <strong>the</strong>ir funding needs,<br />
Negotiate <strong>the</strong> best terms <strong>of</strong> Bank.<br />
I’ll try to show in this part that by minimizing <strong>the</strong> volume <strong>of</strong> monetary assets, <strong>the</strong> company reconciles <strong>the</strong> objectives<br />
<strong>of</strong> security and pr<strong>of</strong>itability. This goal will be achieved in conditions <strong>of</strong> liquidity and pr<strong>of</strong>itability by an extensive<br />
improvement <strong>of</strong> <strong>cash</strong> forecasting.<br />
SECTION 1: MONETARY CASH FROM THE FIRM.<br />
The company’s business activity must keep a certain "stock <strong>of</strong> currency", to deal with all moment to <strong>the</strong> expenses<br />
that it must or wish to achieve.<br />
I - PREFERENCE FOR LIQUIDITY AND INVENTORY MANAGEMENT.<br />
If we could predict <strong>the</strong> future perfectly, and disbursements were synchronized to <strong>the</strong> receipts, it would be<br />
unnecessary to provide a pool <strong>of</strong> means <strong>of</strong> Exchange.<br />
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A - Grounds for <strong>cash</strong>, and <strong>the</strong> formalization <strong>of</strong> a monetary stock.<br />
1 - THE REASONS FOR DETENTION OF LIQUIDITY.<br />
Expressed in terms <strong>of</strong> financial management <strong>the</strong>se reasons can be defined as follows:<br />
1. The transaction pattern meets <strong>the</strong> daily needs <strong>of</strong> funds, in order to address <strong>the</strong> pr<strong>of</strong>essional exchanges<br />
caused by <strong>the</strong> cycle <strong>of</strong> exploitation (supply, production and marketing expenses), and <strong>the</strong> payment <strong>of</strong><br />
financial charges, taxes and dividends.<br />
2. The precautionary reason justifies <strong>the</strong> <strong>cash</strong> intended to deal with <strong>the</strong> unpredictable expenses such as those<br />
resulting from fires, accidents, trial, decrease <strong>of</strong> activity, etc.<br />
3. The reason for funding is <strong>the</strong> reason for <strong>the</strong> accumulation <strong>of</strong> funds to undertake a major expense, such as an<br />
investment.<br />
4. The reason for speculation, finally, responds to <strong>the</strong> concern to take advantage <strong>of</strong> a momentary advantage<br />
(advantageous investment, <strong>the</strong> market, information requirements, etc.).<br />
These <strong>cash</strong> requirements will be all <strong>the</strong> less important that <strong>the</strong> forecast <strong>of</strong> <strong>flow</strong>s will be less uncertain. Similarly, <strong>the</strong><br />
ability to borrow at any time also reduces <strong>the</strong> need to keep <strong>cash</strong>. Finally, we know that it is not useful to keep all <strong>of</strong><br />
<strong>the</strong> <strong>cash</strong> in <strong>the</strong> form <strong>of</strong> immediate <strong>cash</strong>. A party may be held in <strong>the</strong> form <strong>of</strong> "investment securities".<br />
The Keynesian approach <strong>of</strong> <strong>the</strong> preference for liquidity is now widely adopted by financial companies. Hold a stock<br />
<strong>of</strong> currency to ensure against <strong>the</strong> lack <strong>of</strong> synchronization between <strong>the</strong> in<strong>flow</strong> and out<strong>flow</strong> <strong>of</strong> funds <strong>flow</strong>s.<br />
2 - THE FORMALIZATION OF THE MONETARY STOCK.<br />
It is precisely because <strong>the</strong>se <strong>flow</strong>s are naturally purchase that <strong>the</strong> company must provide a pool <strong>of</strong> means <strong>of</strong><br />
Exchange. The origin may be <strong>the</strong> result <strong>of</strong> a phenomenon or event known, random, or ignored by <strong>the</strong> Treasurer. In<br />
those circumstances it must be able to have funds at <strong>the</strong> appropriate time to respond to different types <strong>of</strong> stress<br />
resulting:<br />
Ei<strong>the</strong>r, commercial or industrial operations which he did not control,<br />
Ei<strong>the</strong>r <strong>of</strong> financial transactions which it has not always control.<br />
The Treasurer will organize its intervention from three forms <strong>of</strong> <strong>cash</strong>:<br />
Immediate availability,<br />
Securities <strong>of</strong> investment<br />
Bank credit in <strong>the</strong> short term.<br />
3 - THE STRUCTURE OF CASH.<br />
The composition <strong>of</strong> <strong>the</strong> <strong>cash</strong> depends on <strong>the</strong> grounds for detention <strong>of</strong> liquidity. In this regard we note that a portion<br />
<strong>of</strong> <strong>the</strong> <strong>cash</strong> to a character <strong>of</strong> 'reserves' and it has three main destinations: to face big spending some to be carried<br />
out in <strong>the</strong> immediate future (pattern <strong>of</strong> funding), enable <strong>the</strong> company to benefit from <strong>the</strong> investments (basis <strong>of</strong><br />
speculation), and respond to unpredictable expenses (reason for caution) without delay.<br />
"Transaction" <strong>cash</strong> is more difficult to grasp. Indeed, if meant by 'transactions' series <strong>of</strong> financial <strong>flow</strong>s generated by<br />
current operations, it must be admitted that <strong>the</strong> nature <strong>of</strong> <strong>the</strong>se transactions varies one firm to ano<strong>the</strong>r. It is <strong>the</strong><br />
financial <strong>of</strong>ficer responsibility <strong>the</strong> task <strong>of</strong> defining <strong>the</strong> concept <strong>of</strong> "transaction" on <strong>the</strong> basis <strong>of</strong> its own goals. In fact,<br />
<strong>the</strong> limit is not as sharp between <strong>the</strong> different types <strong>of</strong> balances economic literature can be implied. The idea <strong>of</strong><br />
'reserve' is present in <strong>the</strong> pattern <strong>of</strong> transaction.<br />
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Anyway many authors have developed models <strong>of</strong> management relating to so-called 'transaction' <strong>cash</strong>, ei<strong>the</strong>r to socalled<br />
<strong>cash</strong> <strong>of</strong> "precaution". Cash transaction is directly attached to <strong>the</strong> operations <strong>of</strong> <strong>the</strong> operating cycle, while <strong>cash</strong>'s<br />
caution is justified by unforeseen and significant expenses having a character <strong>of</strong> protection against depreciation,<br />
losses and risks.<br />
B - THE ESSENTIAL VARIABLES INVOLVED IN THE DETERMINATION OF THE OPTIMAL AMOUNT OF CASH.<br />
We examine successively <strong>the</strong> following five decision factors:<br />
The nature, behavior and <strong>the</strong> volume <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s.<br />
Revenues and transaction costs, related to <strong>the</strong> securities.<br />
The length <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>’s forecast period.<br />
The value <strong>of</strong> <strong>the</strong> minimum balance critical <strong>cash</strong>.<br />
The cost <strong>of</strong> breakdown <strong>of</strong> <strong>cash</strong>.<br />
1- THE NATURE, BEHAVIOR AND VOLUME OF THE CASH FLOWS.<br />
A portion <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s for <strong>the</strong> budgeted period is <strong>the</strong> result <strong>of</strong> decisions taken by <strong>of</strong>ficials <strong>of</strong> <strong>the</strong> firm during this<br />
period; ano<strong>the</strong>r part is generated by decisions taken during previous periods. Naturally <strong>the</strong> Treasurer will honor all<br />
expenses incurred by <strong>the</strong> managers within <strong>the</strong>ir budget, even though <strong>cash</strong> must fall below zero. There is a category<br />
<strong>of</strong> <strong>cash</strong> on which <strong>the</strong> Treasurer has no control. Similarly, payments <strong>of</strong> claims by <strong>the</strong> customers, as well as sales in <strong>cash</strong><br />
during <strong>the</strong> period, represent receipts on which <strong>the</strong> Treasurer has no power.<br />
Such financial <strong>flow</strong>s correspond to a type <strong>of</strong> transactions to which <strong>the</strong> attitude <strong>of</strong> <strong>the</strong> Treasurer is purely passive. On<br />
<strong>the</strong> o<strong>the</strong>r hand, two sets <strong>of</strong> transactions are normally controlled by <strong>the</strong> head <strong>of</strong> <strong>the</strong> Treasury. These are, firstly, shortterm<br />
loans and <strong>the</strong>ir repayment, and <strong>the</strong> purchase and sale <strong>of</strong> securities. Therefore, at <strong>the</strong> level <strong>of</strong> <strong>cash</strong> INFLOWS,<br />
we can distinguish three kinds <strong>of</strong> financial transactions:<br />
Loans’ reimbursement and repayment <strong>of</strong> short-term funds;<br />
Purchases and sales <strong>of</strong> securities;<br />
All o<strong>the</strong>r transactions.<br />
The first two are controllable by <strong>the</strong> financial controller; <strong>the</strong> third, on <strong>the</strong> o<strong>the</strong>r hand, is sustained and sometimes<br />
even random. Consequently four groups <strong>of</strong> financial transactions will play on <strong>the</strong> level <strong>of</strong> INFLOW <strong>cash</strong>:<br />
Loans and repayments <strong>of</strong> funds lent to short term (non-random <strong>flow</strong>);<br />
Purchases and sales <strong>of</strong> securities (non-random <strong>flow</strong>);<br />
O<strong>the</strong>r random transactions;<br />
O<strong>the</strong>r transactions.<br />
The first two groups will be tools for balance between <strong>the</strong> hands <strong>of</strong> <strong>the</strong> Treasurer.<br />
2 - TRANSACTION COSTS AND REVENUES ASSOCIATED WITH THE "SECURITIES".<br />
Treasurer who behaves rationally, is expected to invest its funds that are Free <strong>of</strong> any sort <strong>of</strong> engagements in <strong>the</strong> form<br />
<strong>of</strong> "investment securities" (or even in <strong>the</strong> form <strong>of</strong> escrow account in Bank). These values should have <strong>the</strong><br />
characteristic to be bought and sold quite quickly and quite easily, and a probability <strong>of</strong> low loss. Transaction costs<br />
relating to <strong>the</strong> purchase and sale <strong>of</strong> <strong>the</strong> securities represent a small percentage <strong>of</strong> <strong>the</strong> amount <strong>of</strong> <strong>the</strong> transaction. But<br />
<strong>the</strong>se costs can be higher than gross income whereas, especially if <strong>the</strong> period <strong>of</strong> detention <strong>of</strong> <strong>the</strong> security is short. In<br />
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addition, <strong>the</strong>se costs become very important accumulated over several periods. The securities revenue is eventually,<br />
ei<strong>the</strong>r it was an interest or dividend, increased or decreased <strong>of</strong> <strong>the</strong> added or minced value realized on <strong>the</strong> sold<br />
security.<br />
3 - THE DURATION OF THE PERIOD OF THE CASH FLOW FORECAST.<br />
Banks ask daily accounts to <strong>the</strong>ir customers on <strong>the</strong> status <strong>of</strong> <strong>the</strong>ir bank balances. Interest expense, for example, apply<br />
every day. It does not seem possible, obviously, to change this state <strong>of</strong> affairs. Also, predictive analysis <strong>of</strong> <strong>the</strong> situation<br />
<strong>of</strong> <strong>cash</strong> must be daily and conducted value dates. The timing <strong>of</strong> <strong>the</strong> debt structure has a fundamental importance<br />
in this regard. So if we succeed to concentrate <strong>cash</strong> on some days, revenues will remain only random <strong>flow</strong>s. And, if<br />
you can know <strong>the</strong> probability distribution <strong>of</strong> income over <strong>the</strong> period <strong>of</strong> time that separates two liquidity out<strong>flow</strong>s, it<br />
can extend <strong>the</strong> forecast period. A longer forecast period allows to reduce <strong>the</strong> time devoted to <strong>the</strong> analysis <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
position in reducing <strong>the</strong> frequency <strong>of</strong> labor, and <strong>the</strong>refore, <strong>the</strong> administrative costs...<br />
4 - MINIMUM CRITICAL BALANCE OF CASH.<br />
It is <strong>the</strong> value <strong>of</strong> <strong>the</strong> <strong>cash</strong> below which <strong>the</strong> cost <strong>of</strong> "<strong>cash</strong> break" begins to run.<br />
1 - The value <strong>of</strong> <strong>the</strong> minimum balance is critical.<br />
This value is <strong>the</strong>oretically zero. Many entrepreneurs while significantly above zero. Four essential reasons for this<br />
behavior:<br />
a) The fear <strong>of</strong> <strong>the</strong> overdraft.<br />
The fear <strong>of</strong> <strong>the</strong> overdraft encourages <strong>the</strong> Treasurer to maintain a minimum <strong>cash</strong> positive. Is requires no always<br />
enough if <strong>the</strong> detention <strong>of</strong> idle funds is not more expensive than any discovered him.<br />
b) The requirements <strong>of</strong> <strong>the</strong> banker.<br />
It is in <strong>the</strong> interest <strong>of</strong> <strong>the</strong> banker to get as strong as possible <strong>the</strong> deposit accounts. This provides, effectively, a mass<br />
<strong>of</strong> resources which he can benefit by placing <strong>the</strong>m in <strong>the</strong> very short term money market for example. Understandably<br />
so that <strong>the</strong> quality <strong>of</strong> <strong>the</strong> services that a bank can <strong>of</strong>fer a company (loans, credits, etc.) will depend on <strong>the</strong> average<br />
minimum balance <strong>of</strong> account it holds.<br />
c) The reasons for "reservations" we have already analyzed).<br />
d) The negligence <strong>of</strong> people in charge when <strong>the</strong>y ignore to form idle <strong>cash</strong> which <strong>the</strong>n is a sign <strong>of</strong> over-funding <strong>of</strong><br />
<strong>the</strong> activity.<br />
The Company should add a fifth reason: "minimum liquidity clause.<br />
All <strong>the</strong>se reasons are all <strong>the</strong> more critical that <strong>the</strong> company has several bank accounts.<br />
2 - Failure to observe <strong>the</strong> critical minimum engages costs.<br />
There are two ways to break this minimum and <strong>the</strong>refore to show breakdown <strong>of</strong> <strong>cash</strong> costs.<br />
(a) In <strong>the</strong> first place, <strong>the</strong> balance may actually fall below <strong>the</strong> critical minimum. In this case <strong>the</strong> incurred expenses<br />
may be tw<strong>of</strong>old:<br />
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Ei<strong>the</strong>r <strong>the</strong>y consist on interest or o<strong>the</strong>r financial costs to <strong>the</strong> amount <strong>of</strong> <strong>the</strong> loan intended to restore <strong>the</strong><br />
minimum <strong>cash</strong>;<br />
Or, if <strong>the</strong> Bank grants overdraft, charges will be formed by financial charges which evaluation is set by <strong>the</strong><br />
banking regulation.<br />
(b) The critical minimum is not respected, in <strong>the</strong> second place, if <strong>the</strong> Treasurer decides to postpone <strong>the</strong> payment<br />
<strong>of</strong> overdue debts. In this case <strong>the</strong> costs come from renunciation <strong>of</strong> any discounts (<strong>cash</strong> discount, or on invoice),<br />
and <strong>of</strong> a possible deterioration <strong>of</strong> <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> company reputation.<br />
5 - THE CHOSEN SAFETY MARGIN.<br />
There is a relationship between <strong>the</strong> cost <strong>of</strong> breakdown <strong>of</strong> <strong>cash</strong> and <strong>the</strong> level <strong>of</strong> <strong>cash</strong> on hand at <strong>the</strong> beginning <strong>of</strong><br />
period. More <strong>the</strong> initial <strong>cash</strong> in<strong>flow</strong> is important more <strong>the</strong> cost <strong>of</strong> failure is low: firstly, because <strong>the</strong> probability <strong>of</strong><br />
being overdrawn decreases, <strong>the</strong>n, because <strong>the</strong> amount likely overdraft is lowest. In addition, this safety margin<br />
should be even higher that <strong>the</strong> dispersion <strong>of</strong> <strong>the</strong> probability distribution <strong>of</strong> expected net <strong>cash</strong> <strong>flow</strong>s will be strong.<br />
One sees immediately that this margin affects <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> company. Preserved in <strong>the</strong> form <strong>of</strong> <strong>cash</strong> funds<br />
have only a low return or not return at all. In addition, <strong>the</strong> firm supports <strong>the</strong> financial burden associated with<br />
resources forming <strong>the</strong> counterpart <strong>of</strong> this <strong>cash</strong>.<br />
The choice <strong>of</strong> a margin <strong>of</strong> safety depends on arbitration that will make <strong>the</strong> leaders between risk and pr<strong>of</strong>itability.<br />
C – MODELIZATION OF THE COMPANY’S MONETARY INFLOWS MANAGEMENT.<br />
The companies’ <strong>cash</strong> can be speculated to a monetary stock whose level depends on a number <strong>of</strong> variables. As in <strong>the</strong><br />
determination <strong>of</strong> <strong>the</strong> optimum volume <strong>of</strong> a stock <strong>of</strong> goods, two contradictory objectives guide <strong>the</strong> decision maker:<br />
pr<strong>of</strong>itability and safety.<br />
Searching for a better pr<strong>of</strong>itability led <strong>the</strong> Treasurer to minimize its <strong>cash</strong>. However, a certain amount <strong>of</strong> <strong>cash</strong> is<br />
necessary to <strong>the</strong> survival <strong>of</strong> <strong>the</strong> company. The establishment <strong>of</strong> <strong>the</strong> optimum volume <strong>of</strong> <strong>cash</strong> is based on comparison<br />
<strong>of</strong> <strong>the</strong> costs associated with each <strong>of</strong> <strong>the</strong> two objectives<br />
The cost <strong>of</strong> breakdown <strong>of</strong> <strong>cash</strong>, on <strong>the</strong> one hand, which breaks down into:<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Loss <strong>of</strong> purchasing opportunities,<br />
Loss <strong>of</strong> <strong>the</strong> 0.05% gain for <strong>the</strong> company;<br />
Obligation to borrow at high rates (Loans),<br />
Deterioration <strong>of</strong> <strong>the</strong> credit <strong>of</strong> <strong>the</strong> company,<br />
Possible insolvency,<br />
Affects <strong>the</strong> company’s reputation for <strong>the</strong> bankers;<br />
Etc.<br />
And, on <strong>the</strong> o<strong>the</strong>r hand, <strong>the</strong> cost <strong>of</strong> bloated <strong>cash</strong> which includes:<br />
<br />
<br />
The waiver to possible pr<strong>of</strong>its and remuneration,<br />
Vulnerability to monetary erosion and, where applicable, <strong>the</strong> exchange rate.<br />
The assessment <strong>of</strong> <strong>the</strong>se costs, and consequently, <strong>the</strong> optimal level <strong>of</strong> <strong>cash</strong> corresponding to <strong>the</strong> minimum <strong>of</strong> <strong>the</strong>se<br />
costs is difficult to achieve. Indeed, most <strong>of</strong> <strong>the</strong>m depend on <strong>the</strong> opportunities available to <strong>the</strong> company. More<br />
difficult, perhaps, is to maintain <strong>the</strong> <strong>cash</strong> at its optimum level because <strong>of</strong> <strong>the</strong> large number <strong>of</strong> variables, sometimes<br />
Page 57 <strong>of</strong> 124
andom, involved, and determine <strong>the</strong> <strong>cash</strong> receipts and disbursements. Based on <strong>the</strong>se considerations many models<br />
were built by <strong>the</strong> company’s financial managers: The Director <strong>of</strong> <strong>the</strong> Financial Direction and <strong>the</strong> Treasurer, to<br />
determine <strong>the</strong> optimal amount <strong>of</strong> <strong>cash</strong> to hold and define its management.<br />
If <strong>the</strong>se management <strong>of</strong> <strong>cash</strong> effort are always <strong>the</strong> same fundamental objective (ensuring better safety for <strong>the</strong><br />
greatest possible pr<strong>of</strong>itability), <strong>the</strong>y differ on many points: <strong>the</strong> choice <strong>of</strong> <strong>the</strong> simplifying assumptions <strong>of</strong> real business<br />
inside <strong>the</strong> company, <strong>the</strong> use <strong>of</strong> <strong>the</strong> ma<strong>the</strong>matical tools <strong>of</strong> investigation, etc. No monetary <strong>cash</strong> management model<br />
retains all <strong>the</strong> decision factors we have previously analyzed. The inaccuracy <strong>of</strong> responses bring <strong>the</strong>se models precisely<br />
depends on <strong>the</strong> translation <strong>of</strong> data in transaction and <strong>the</strong>ir treatment.<br />
The limits <strong>of</strong> <strong>the</strong> management <strong>of</strong> <strong>cash</strong> in terms <strong>of</strong> stocks.<br />
All models responded only imperfectly to <strong>the</strong> questions posed by <strong>the</strong> resolution <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong> problems. Of course,<br />
at <strong>the</strong> level <strong>of</strong> concepts and <strong>the</strong>ir formulation <strong>the</strong>ir contribution is not negligible. They have, indeed, highlighted a<br />
number <strong>of</strong> relations, procedures, treatments and investigative tools useful in <strong>the</strong> decision-making. Thus, <strong>the</strong> cost <strong>of</strong><br />
idle funds and <strong>the</strong> cost <strong>of</strong> failure <strong>of</strong> <strong>cash</strong> provide two guides effective management for <strong>the</strong> Treasurer. Similarly,<br />
optimization, simulation, and probability are o<strong>the</strong>r instruments at <strong>the</strong> disposal <strong>of</strong> <strong>the</strong> person in charge. However,<br />
each model ignores some important aspects <strong>of</strong> liquidity management and focuses on o<strong>the</strong>rs who do not fully<br />
replicate reality. In addition, <strong>the</strong>y have never been <strong>the</strong> subject sufficiently rigorous experimental verifications.<br />
Derived from reflections on <strong>the</strong> "<strong>the</strong>ory <strong>of</strong> <strong>the</strong> demand for money by firms", <strong>the</strong>y are ultimately as "simple analytical<br />
curiosities."<br />
The analogy with inventory management models remains very limited both to explain <strong>the</strong> rational training <strong>of</strong> <strong>cash</strong><br />
Stock<br />
Cash only to describe <strong>the</strong> rational realization <strong>of</strong> <strong>the</strong> financing <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
Supply. We will try to show <strong>the</strong> shortcomings <strong>of</strong> <strong>the</strong>se management models in two respects:<br />
That <strong>the</strong> concept <strong>of</strong> <strong>cash</strong> liquidity<br />
And that <strong>of</strong> <strong>the</strong> financing <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
1 - THE CONCEPT OF 'CASH-RESERVE' RETHINK.<br />
The increasing sophistication <strong>of</strong> <strong>the</strong> models is accompanied by <strong>the</strong> gradual replacement <strong>of</strong> <strong>the</strong> objective "optimal<br />
financing" than "<strong>the</strong> optimal <strong>cash</strong>.<br />
First, no empirical assay was able to demonstrate <strong>the</strong> existence <strong>of</strong> a <strong>cash</strong> incorporated for reasons <strong>of</strong> "reserve". Then<br />
<strong>the</strong> practice business teaches that <strong>the</strong>re are o<strong>the</strong>r means <strong>of</strong> protection against liquidity difficulties.<br />
1.1. THE FAILURES OF ANALYSIS TO PROVE THE EXISTENCE OF RESERVES INSIDE IWACO’S TREASURY<br />
All <strong>the</strong> analyzing work inside <strong>the</strong> treasury tend to show that <strong>the</strong> level <strong>of</strong> <strong>cash</strong> is function <strong>of</strong> <strong>the</strong> rate <strong>of</strong> interest and<br />
<strong>the</strong> volume <strong>of</strong> transactions. More specifically, <strong>the</strong> demand for money would vary inversely to <strong>the</strong> rate <strong>of</strong> interest and<br />
would be subject to economies <strong>of</strong> scale.<br />
1 - The nature <strong>of</strong> <strong>the</strong> project research on <strong>the</strong> demand for money.<br />
While I was making this project inside <strong>the</strong> company, I tried to analyze <strong>the</strong> typology <strong>of</strong> work that is done inside <strong>the</strong><br />
treasury department and compare it with all <strong>the</strong> academic knowledge that I have learned, <strong>the</strong>n I came to <strong>the</strong> <strong>the</strong><br />
conclusion that many sectorial studies attempted to prove <strong>the</strong> existence <strong>of</strong> economies <strong>of</strong> scale in <strong>the</strong> detention <strong>of</strong><br />
liquidity as well as its relationship to <strong>the</strong> rate <strong>of</strong> interest.<br />
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(a) Economies <strong>of</strong> scale in <strong>the</strong> detention <strong>of</strong> liquidity.<br />
By adopting an approach in terms <strong>of</strong> inventory management could think a priori, for any industrial area studied, <strong>the</strong><br />
variance <strong>of</strong> fluctuations in <strong>the</strong> level <strong>of</strong> <strong>cash</strong> should tend to increase less than proportionally to <strong>the</strong> volume <strong>of</strong> sales,<br />
and thus to streng<strong>the</strong>n <strong>the</strong> presumption <strong>of</strong> economies <strong>of</strong> scale. In fact <strong>the</strong> results are quite heterogeneous and cannot<br />
draw any conclusion.<br />
b) The rate <strong>of</strong> interest and <strong>the</strong> detention <strong>of</strong> liquidity.<br />
Most statistical studies find an elasticity <strong>of</strong> <strong>the</strong> demand for money from <strong>the</strong> interest rate. Despite this fact, which<br />
could infer that <strong>the</strong> detention <strong>of</strong> balances is <strong>the</strong> result <strong>of</strong> rational choice, <strong>the</strong>y cannot explain <strong>the</strong> formation <strong>of</strong> <strong>cash</strong><br />
totally or partly non - voluntary. According to how <strong>the</strong> INFLOWS and CASH is managed inside <strong>the</strong> treasury<br />
department, <strong>the</strong> detention <strong>of</strong> <strong>cash</strong> is a much more complex phenomenon that <strong>the</strong> empirical and <strong>the</strong>oretical research<br />
don’t assume<br />
2 – THE COMPLEXITY OF CASH INFLOWS CONCEPT<br />
The failure <strong>of</strong> <strong>the</strong> work to demonstrate <strong>the</strong> existence <strong>of</strong> a rational behavior in determining <strong>the</strong> level <strong>of</strong> <strong>cash</strong> is not<br />
enough to make us reject <strong>the</strong> analysis in terms <strong>of</strong> stocks. Indeed, <strong>the</strong> models claim that define changes in <strong>the</strong> volume<br />
<strong>of</strong> <strong>the</strong> freely chosen portion <strong>of</strong> <strong>the</strong> <strong>cash</strong>. However, certain balances do not result from <strong>the</strong> economic calculation;<br />
<strong>the</strong>se are:<br />
The balances resulting from <strong>the</strong> inertia <strong>of</strong> <strong>the</strong> Treasurer;<br />
The <strong>cash</strong> coming from <strong>the</strong> imperfect synchronization <strong>of</strong> receipts and expenditures;<br />
The balances that exist because money can be spent, or that <strong>the</strong>re are Free <strong>of</strong> engagements;<br />
'Institutional' balances, such as <strong>the</strong> minimum deposit kept with banks.<br />
Many factors determine <strong>the</strong>refore <strong>the</strong> formation <strong>of</strong> <strong>cash</strong>. And even as regards <strong>cash</strong> 'voluntary', although o<strong>the</strong>r<br />
strategic elements that those retained in <strong>the</strong> models, will affect <strong>the</strong> detention <strong>of</strong> liquidity (banking costs, inflation,<br />
exchange rate risk, etc.) It is <strong>the</strong>refore <strong>the</strong> normative value <strong>of</strong> <strong>the</strong> models that should be assessed in <strong>the</strong> light <strong>of</strong> habits<br />
and <strong>cash</strong> management practices, but also possible improvements possible. In fact, <strong>the</strong> practice business shows that<br />
<strong>the</strong> dis-synchronization <strong>of</strong> <strong>flow</strong>s (transaction on <strong>the</strong> one hand pattern), and <strong>the</strong> risk <strong>of</strong> unforeseen expenses<br />
(precautionary pattern) on <strong>the</strong> o<strong>the</strong>r hand, can be compensated by different measures <strong>of</strong> detention <strong>of</strong> <strong>cash</strong>.<br />
1.2- DESYNCHRONIZATION OF CASH FLOW AND LIQUIDITY DETENTION.<br />
The hypo<strong>the</strong>sis <strong>of</strong> <strong>the</strong> company which retains a certain amount <strong>of</strong> money immediately available to deal with all<br />
instant expenditure that it must or wish to achieve at any given time must be reconsidered. Although at first glance<br />
it may be tempting to consider <strong>the</strong> <strong>cash</strong> <strong>flow</strong> <strong>of</strong> a business as a stock <strong>of</strong> goods, <strong>the</strong> logic <strong>of</strong> <strong>the</strong> <strong>cash</strong> management is<br />
ano<strong>the</strong>r. The confusion stems from improper comparison that some authors have made between <strong>the</strong> <strong>cash</strong> <strong>of</strong> a firm<br />
management and <strong>the</strong> management <strong>of</strong> <strong>the</strong> stock <strong>of</strong> currency <strong>of</strong> a financial institution.<br />
As it was mentioned at <strong>the</strong> beginning <strong>of</strong> this project; <strong>the</strong> company “IWACO” built ano<strong>the</strong>r financial part <strong>of</strong> its<br />
activities. This activity’s mission is to handle <strong>the</strong> Cash exchange inside <strong>the</strong> country in a legal frame called “CASH-<br />
PLUS”.<br />
For <strong>the</strong> treasury department, <strong>the</strong> management <strong>of</strong> this activity requires a certain separation between <strong>the</strong> <strong>cash</strong>-<strong>flow</strong>s<br />
available inside <strong>the</strong> company’s Treasury. So for example, a post <strong>of</strong>fice is required to pay to view, to <strong>the</strong> subscribers<br />
whom are registered in this <strong>of</strong>fice, <strong>the</strong> amount <strong>of</strong> bank chrges that are presented. It is same for a bank deposit, or a<br />
company’s savings. For <strong>the</strong> CASH-PLUS activity, at <strong>the</strong> beginning <strong>of</strong> each day, this represents a potential request for<br />
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<strong>cash</strong>; and <strong>the</strong>refore, must be a stock to meet withdrawals <strong>of</strong> <strong>the</strong> day. This <strong>cash</strong> is well comparable to a stock <strong>of</strong> goods.<br />
But extending this idea in terms <strong>of</strong> <strong>cash</strong> management is abusive.<br />
1 - Control <strong>of</strong> <strong>cash</strong> <strong>flow</strong>.<br />
If systematic efforts are underway to obtain <strong>the</strong> highest possible synchronization between revenue and expenditure,<br />
<strong>the</strong> detention <strong>of</strong> <strong>cash</strong> loses its interest. The key to such a policy is <strong>the</strong> close control <strong>of</strong> <strong>the</strong> timing <strong>of</strong> receipts and<br />
payments. Effective objective is <strong>the</strong>refore not to maintain an optimum wheel <strong>of</strong> <strong>cash</strong>, but predict <strong>the</strong> size and date<br />
<strong>of</strong> <strong>the</strong> movements <strong>of</strong> funds resulting from <strong>the</strong> activity <strong>of</strong> <strong>the</strong> firm, in necessary influence <strong>the</strong> occurrence and procure<br />
possibly, on time and at <strong>the</strong> lowest cost, additional availability.<br />
For almost all <strong>of</strong> <strong>the</strong> possible cases <strong>of</strong> management, <strong>the</strong> company IWACO’s <strong>cash</strong> <strong>flow</strong>s are largely predictable. So <strong>the</strong><br />
volume and maturity <strong>of</strong> many large transactions are under <strong>the</strong> direct control decision centers (financial management,<br />
control and management <strong>of</strong> audit...). O<strong>the</strong>r transactions are <strong>the</strong> normal accomplishments <strong>of</strong> past commitments. And<br />
even, in <strong>the</strong> case <strong>of</strong> truly random, it is usually possible to reattach <strong>the</strong>m to some moves at least partially known or<br />
systematic. Searching for an optimum volume <strong>of</strong> liquidity to hold at <strong>the</strong> beginning <strong>of</strong> period, on <strong>the</strong> o<strong>the</strong>r hand, away<br />
from <strong>the</strong> maker <strong>of</strong> one <strong>of</strong> <strong>the</strong> fundamental aspects <strong>of</strong> a genuine policy <strong>of</strong> <strong>cash</strong>: <strong>the</strong> control <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds.<br />
If <strong>the</strong> traditional approach to value, on a purely <strong>the</strong>oretical level <strong>the</strong> intuitive reasons that sometimes push some<br />
companies to hold <strong>cash</strong>, it does not represent necessarily <strong>the</strong> most rational, and in any case <strong>the</strong> most effective<br />
attitude. It confuses what is (or believed to be), with which it should be. Therefore, insurance may be a sufficient tool<br />
to predict <strong>the</strong> <strong>cash</strong> in<strong>flow</strong>s.<br />
1.3 - THE ASSUMPTION OF THE UNEXPECTED AND THE DETENTION OF LIQUIDITY.<br />
Pointing out that presumably, could limit <strong>the</strong> importance <strong>of</strong> precautionary <strong>cash</strong>, and <strong>the</strong>refore to reduce <strong>the</strong> cost <strong>of</strong><br />
detention <strong>of</strong> liquidity by resorting to insurance. However <strong>the</strong> risk management takes in businesses, a place more<br />
increasingly important and contributes to <strong>the</strong> achievement <strong>of</strong> <strong>the</strong> security objective. Insurance is <strong>the</strong> last link in this<br />
strategy <strong>of</strong> risk.<br />
Insurance is an operation by which "<strong>the</strong> insured" is promising, for a fee, "premium", by 'insurer' compensation, in<br />
<strong>the</strong> event <strong>of</strong> occurrence <strong>of</strong> a risk defined in advance. But if insurance unloads <strong>the</strong> firm from <strong>the</strong> financial<br />
consequences <strong>of</strong> random events <strong>of</strong> costs, does nei<strong>the</strong>r totally nor free. Its role is not to support "<strong>the</strong> risk", but risks.<br />
Insurance changes <strong>the</strong> risk from an inknown object into an assured object. Indeed:<br />
Firstly, it transfers to ano<strong>the</strong>r, '<strong>the</strong> insurer', <strong>the</strong> potential financial burden <strong>of</strong> risk, which is <strong>the</strong>n <strong>the</strong> subject<br />
<strong>of</strong> a collective and not individual apprehension;<br />
On <strong>the</strong> o<strong>the</strong>r hand, it enables <strong>the</strong> company to integrate <strong>the</strong> "stabilized" cost <strong>of</strong> risk in <strong>the</strong> cost price <strong>of</strong> <strong>the</strong><br />
production.<br />
It is up to <strong>the</strong> Manager to weigh <strong>the</strong> consequences on <strong>the</strong> life <strong>of</strong> <strong>the</strong> company <strong>of</strong> <strong>the</strong> realization <strong>of</strong> such or such risk.<br />
The final purpose <strong>of</strong> insurance is to transform a possible disaster in constant charge <strong>of</strong> exploitation. It is <strong>the</strong>refore<br />
appropriate to cover <strong>the</strong> risks which can be:<br />
Ei<strong>the</strong>r cause a crisis <strong>of</strong> <strong>cash</strong>;<br />
Ei<strong>the</strong>r create an operating loss;<br />
Ei<strong>the</strong>r compromise <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> investments.<br />
The manager is in all ways called to manage a modest amount <strong>of</strong> INFLOWS CASH coming from <strong>the</strong> result <strong>of</strong> <strong>the</strong><br />
company’s <strong>cash</strong> situations. The role <strong>of</strong> <strong>the</strong> "head <strong>of</strong> <strong>the</strong> risk and insurance management" is to search what are <strong>the</strong><br />
risks to which <strong>the</strong> company may have to face, analyze and evaluate <strong>the</strong>m financially, and <strong>the</strong>n is avoid, reduce,<br />
eliminate if possible, possibly to transfer <strong>the</strong>m to a third part.<br />
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Type <strong>of</strong><br />
Risk<br />
Analyze<br />
<strong>the</strong> Risk<br />
Evaluate<br />
<strong>the</strong> Risk<br />
Itercept<br />
<strong>the</strong> Risk<br />
Reduce<br />
<strong>the</strong> Risk<br />
Eliminate<br />
<strong>the</strong> Risk<br />
Eliminate<br />
<strong>the</strong> Risk<br />
After determining <strong>the</strong> residual risk, it considers that <strong>the</strong> company is not able to assume it, he (Treasury manager)<br />
decides to ensure that risk by adequate coverage. Indifference, negligence or distrust <strong>of</strong> insurance can result in<br />
serious financial difficulties, and even lead to bankruptcy in <strong>the</strong> event <strong>of</strong> major disaster. The insurance is undoubtedly<br />
a financial burden for <strong>the</strong> company. But <strong>the</strong> cost <strong>of</strong> <strong>the</strong> insurance is relatively low compared to <strong>the</strong> guarantees and<br />
benefits it <strong>of</strong>fers. A disaster such as a fire is still very expensive by <strong>the</strong> induced financial consequences. Insurance<br />
changes <strong>the</strong> risk in some reduced cost; It prevents <strong>the</strong> creation <strong>of</strong> expensive idle <strong>cash</strong> and ultimately will prove to be<br />
insufficient in a claim; It allows to limit expenditures for prevention whenever possible; it compensates <strong>the</strong> lack <strong>of</strong><br />
financial resources <strong>of</strong> <strong>the</strong> small and medium enterprises; It is a factor <strong>of</strong> improvement <strong>of</strong> pr<strong>of</strong>itability and liquidity <strong>of</strong><br />
<strong>the</strong> firm.<br />
Statistically impossible to measure, voluntary <strong>cash</strong> is no longer justified if <strong>the</strong> company strives to synchronize <strong>the</strong><br />
inputs and outputs <strong>of</strong> funds, and if <strong>the</strong> protection against <strong>the</strong> risk is through prevention and insurance. In addition, it<br />
is difficult to see in <strong>the</strong> light <strong>of</strong> experience, how a company would retain a voluntary excess <strong>cash</strong> while it is in debt<br />
with its banks: it would maintain an idle <strong>cash</strong> 'funded' by a short-term high-cost credit. With respect to non-voluntary<br />
<strong>cash</strong>, should define <strong>the</strong> actions to take to reduce.<br />
2 – THE TREASURY-CASH FUNDING USING THE STOCK MANAGEMENT.<br />
In this regard, two a priori underlie <strong>the</strong>se models:<br />
Transfer (<strong>cash</strong> - securities) as essential means <strong>of</strong> financing policy;<br />
And <strong>the</strong> homogeneity <strong>of</strong> <strong>the</strong> nature <strong>of</strong> <strong>the</strong> funds.<br />
It is appropriate to assess <strong>the</strong> limits.<br />
2.1 - THE “TRANSFER POLICY” AS AN EQUILIBRIUM TOOL OF CASH-TREASURY: TRANSFER INTER-AGENCIES<br />
In this way <strong>of</strong> managing <strong>the</strong> <strong>cash</strong> in terms <strong>of</strong> inventory management transfer policy has an essential role. It is <strong>the</strong><br />
preferred means <strong>of</strong> deficits and pay <strong>of</strong>f <strong>the</strong> <strong>cash</strong> surplus. In any case it is not in reality <strong>the</strong> central role given to it by<br />
<strong>the</strong> models. This policy is nei<strong>the</strong>r always possible nor always pr<strong>of</strong>itable. For IWACO, such a policy is usually possible<br />
only on periods longer than one month, or in some cases, when <strong>the</strong> Product is needed in a specific area while it is<br />
ignored in ano<strong>the</strong>r one and <strong>the</strong> company can’t make ano<strong>the</strong>r call for <strong>the</strong> mo<strong>the</strong>r company to send <strong>the</strong> product; in<br />
one hand it costs money and takes time. In addition, it is pr<strong>of</strong>itable only under certain conditions. It is necessary:<br />
That a large volume <strong>of</strong> <strong>flow</strong> through <strong>the</strong> company;<br />
That <strong>the</strong> investment period is long enough OR pr<strong>of</strong>itable enough.<br />
However, even when it is not systematic, a policy <strong>of</strong> investment <strong>of</strong> surpluses has its place in <strong>the</strong> <strong>cash</strong> management.<br />
The choice <strong>of</strong> <strong>the</strong> placement <strong>of</strong> <strong>the</strong> <strong>cash</strong> surplus should be based on <strong>the</strong> net <strong>cash</strong> <strong>flow</strong> pr<strong>of</strong>ile. But <strong>the</strong> <strong>cash</strong><br />
management is not limited to establish a transfer policy. It must, on <strong>the</strong> one hand, to provide <strong>the</strong> <strong>cash</strong> requirements,<br />
and, on <strong>the</strong> o<strong>the</strong>r hand, to find <strong>the</strong> best financing <strong>of</strong> <strong>the</strong>se needs. As fur<strong>the</strong>r to now, <strong>the</strong> company has addressed <strong>the</strong><br />
first aspect <strong>of</strong> <strong>the</strong> <strong>cash</strong> policy that we define very briefly. As to <strong>the</strong> second aspect, it has been also used according to<br />
<strong>the</strong> typology <strong>of</strong> <strong>the</strong> need as we’ll explain it:<br />
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2.2 - THE ASSUMPTION OF THE HOMOGENEOUS NATURE OF THE FUNDS.<br />
All <strong>the</strong> management tools consider <strong>cash</strong> <strong>flow</strong> composed <strong>of</strong> units <strong>of</strong> "means <strong>of</strong> Exchange" that <strong>the</strong>y equate to a good<br />
hardware units. The fundamental consequence is that manage <strong>the</strong> <strong>cash</strong> <strong>of</strong> a firm is to maintain a stock <strong>of</strong> currency<br />
to ensure <strong>the</strong> continuity <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds that passes through <strong>the</strong> company. <strong>Optimization</strong> models are essentially<br />
interested in <strong>the</strong> variation in <strong>the</strong> level <strong>of</strong> <strong>cash</strong>; to a certain extent, simulation models seek to assess <strong>the</strong> <strong>flow</strong>s that<br />
contribute to <strong>the</strong> formation <strong>of</strong> this <strong>cash</strong>. All <strong>of</strong> <strong>the</strong>se models focus and overlook <strong>the</strong> nature <strong>of</strong> <strong>the</strong>se <strong>flow</strong>s, or more<br />
accurately, consider it implicitly homogeneous. In o<strong>the</strong>r words it ignores <strong>the</strong>ir causes and <strong>the</strong>ir <strong>flow</strong> mechanisms.<br />
This leads to extract <strong>cash</strong> from its context management and to reduce:<br />
Ei<strong>the</strong>r, to a policy <strong>of</strong> transfer <strong>cash</strong>-securities<br />
Or a caricatured financing policy.<br />
The nature <strong>of</strong> <strong>flow</strong>s is not homogeneous: it depends on <strong>the</strong>ir origin and <strong>the</strong>ir destination, but also <strong>the</strong> length <strong>of</strong> <strong>the</strong><br />
period <strong>of</strong> observation and <strong>the</strong> currency with which <strong>the</strong>y have been evaluated. As many variables whose knowledge<br />
is <strong>the</strong> first condition <strong>of</strong> <strong>the</strong> conduct <strong>of</strong> a genuine policy <strong>of</strong> Treasury, i.e. optimal adaptation between needs and<br />
financial means, gage solvency. Indeed, this adaptation means <strong>the</strong> control <strong>of</strong> <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds and <strong>the</strong> efficient use<br />
<strong>of</strong> banking services; shares depends on <strong>the</strong> nature <strong>of</strong> <strong>the</strong> <strong>flow</strong>.<br />
1 - The nature <strong>of</strong> <strong>flow</strong>s and adaptation between needs and financial means.<br />
No model is highlighting two seizure <strong>of</strong> <strong>cash</strong> <strong>flow</strong> levels:<br />
Firstly, <strong>the</strong> variation <strong>of</strong> <strong>the</strong> bank balance,<br />
Secondly, <strong>the</strong> movements <strong>of</strong> <strong>the</strong> cycle <strong>of</strong> exploitation (or circulating capital).<br />
Almost all models are concerned only with changes in <strong>the</strong> bank balance, without however providing a satisfactory<br />
approach. Some simulation models tend to confuse <strong>the</strong> two movements <strong>of</strong> IWACO’S TREASURY. For <strong>the</strong> treasurer,<br />
<strong>the</strong> control <strong>of</strong> <strong>the</strong>se two operations remains on maintaining <strong>the</strong> “CASH-POOLING” <strong>of</strong> <strong>the</strong> company’s accounts.<br />
However, <strong>the</strong> needs in <strong>the</strong>se two cases are different, and <strong>the</strong>refore involve a specific funding. Indeed, <strong>the</strong> structure<br />
<strong>of</strong> <strong>the</strong> money market is such that any source <strong>of</strong> funds cannot finance any need. It is even certain types <strong>of</strong> competition<br />
strictly tailored to <strong>the</strong> nature <strong>of</strong> <strong>the</strong> action. Revenues <strong>of</strong> <strong>the</strong> company are not composed <strong>of</strong> homogeneous units: <strong>the</strong>ir<br />
structure should condition <strong>the</strong>ir employment in order to protect - and even improve - <strong>the</strong> potential <strong>of</strong> liquidity <strong>of</strong> <strong>the</strong><br />
firm’s turnover.<br />
2 - The nature <strong>of</strong> <strong>the</strong> <strong>flow</strong>s and <strong>cash</strong> treasury movements.<br />
Statistical models, as opposed to ma<strong>the</strong>matical models, insist on <strong>the</strong> importance <strong>of</strong> <strong>the</strong> estimates. But <strong>the</strong>y consider<br />
<strong>the</strong>se <strong>flow</strong>s as data. Now, admittedly, <strong>the</strong> possibility <strong>of</strong> acting on <strong>the</strong>ir behavior, and, <strong>the</strong>refore, to try <strong>the</strong><br />
synchronization <strong>of</strong> input and output <strong>flow</strong>s. Naturally, a perfect master assumes a thorough understanding <strong>of</strong> <strong>the</strong><br />
nature <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s. We will try to draw procedures for reflection and work useful to policy-makers in this field,<br />
student including:<br />
We have seen that it is necessary to think <strong>of</strong> <strong>the</strong> transfer policy. Regards financing policy, we will see later, that it<br />
cannot be reduced to <strong>the</strong> simple needs-means confrontation: <strong>the</strong> needs as <strong>the</strong> means have specific characteristics<br />
which must be considered in order to compare <strong>the</strong>m. For example <strong>the</strong> export credits:<br />
The causes <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>cash</strong>.<br />
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They may have originated an investment, a commitment to operate given or received, a bank credit, etc. In all cases<br />
<strong>the</strong> <strong>flow</strong> will be a particular behavior that should be identified.<br />
It is to analyze:<br />
Techniques <strong>of</strong> movements.<br />
Means <strong>of</strong> payment (case, , bills, transfers, etc.) ins<strong>of</strong>ar as <strong>the</strong>y influence <strong>the</strong> movement <strong>of</strong> <strong>the</strong> <strong>flow</strong>; rules <strong>of</strong><br />
movements <strong>of</strong> funds Bank registration (dates <strong>of</strong> value);<br />
The habits <strong>of</strong> partners (customers, suppliers, etc.);<br />
Time <strong>of</strong> <strong>flow</strong> <strong>of</strong> funds (<strong>the</strong> ' float');<br />
The assessment <strong>of</strong> movements.<br />
The purchasing power <strong>of</strong> <strong>the</strong> currency instability alters <strong>the</strong> value <strong>of</strong> <strong>the</strong> movements. In this regard on account <strong>of</strong> its<br />
variation over time (inflation) and space (exchange rate risk).<br />
The frequency <strong>of</strong> movements.<br />
It will distinguish <strong>the</strong> movements 'permanent' (final as an investment, or repetitive as a business expense-related),<br />
and <strong>the</strong> 'transitional' (at sporadic or seasonal nature) movements, i.e. cyclically activity.<br />
3 - The nature <strong>of</strong> <strong>flow</strong>s and <strong>the</strong> use <strong>of</strong> banking services.<br />
Any monetary problems such as management <strong>of</strong> <strong>the</strong> Treasury <strong>of</strong> <strong>the</strong> company is dependent on <strong>the</strong> institutional factor<br />
that constitutes <strong>the</strong> banking system. Financial institutions ensure <strong>the</strong> <strong>flow</strong> <strong>of</strong> funds between companies <strong>of</strong> groups. In<br />
addition, <strong>the</strong>y have a fundamental role in financing <strong>the</strong> activity <strong>of</strong> firms acting as sponsors, lenders, or 'relay'<br />
temporary. It has been said that <strong>the</strong> <strong>cash</strong> management was closely subject to <strong>the</strong> quality <strong>of</strong> Bank-enterprise relations.<br />
Still need to know and use <strong>the</strong> services that one is entitled to expect <strong>of</strong> its bank.<br />
At best, it will never go beyond a fair compensation <strong>of</strong> <strong>the</strong> net gains that <strong>the</strong> firm allows him to achieve. To be able<br />
to enjoy <strong>the</strong> services rendered and <strong>the</strong> need to negotiate, <strong>the</strong> contractor must, <strong>the</strong>refore, assess <strong>the</strong> gains from <strong>cash</strong><br />
<strong>flow</strong> passing through <strong>the</strong> Bank<br />
The analogy with inventory management models is <strong>the</strong>refore facing serious difficulties. First, we notice that <strong>the</strong><br />
management methods used inside <strong>the</strong> company are not as easy to implement <strong>the</strong>ir simplifying assumptions <strong>of</strong> reality<br />
could leave it hoped. This is due to <strong>the</strong> fact - analytical strength set apart - that <strong>the</strong>y do not correspond to <strong>the</strong> concerns<br />
<strong>of</strong> <strong>the</strong> Treasury’s manager. The transfer policy does not have this central role, and <strong>the</strong> choice <strong>of</strong> a short-term funding<br />
is based on serious forecast. Then, <strong>the</strong> employee approach which consists in extracting <strong>cash</strong> from <strong>the</strong> rest <strong>of</strong> <strong>the</strong> life<br />
<strong>of</strong> <strong>the</strong> company management, if it is attractive and convenient in terms <strong>of</strong> analysis remains not less perfectly arbitrary<br />
and dangerous.<br />
Indeed, managers believe implicitly that a balance exists between <strong>the</strong> <strong>flow</strong>s, and simply <strong>of</strong>fer to make pr<strong>of</strong>itable <strong>the</strong><br />
management in determining what should be retained in <strong>the</strong> form <strong>of</strong> <strong>cash</strong>, and what it takes place. Also, <strong>the</strong>y reduce<br />
<strong>the</strong> <strong>cash</strong> management optimization <strong>of</strong> a species-titles by appropriate transfers stock. This policy is based on <strong>the</strong> idea<br />
that "it is prepared to sacrifice pr<strong>of</strong>its to have a better liquidity situation."<br />
On <strong>the</strong> o<strong>the</strong>r side, we will attach to demonstrate that a policy that makes every effort, to achieve sync stream inputs<br />
and outputs <strong>of</strong> funds, improves both liquidity and pr<strong>of</strong>itability.<br />
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But <strong>the</strong>n, a systematic approach to <strong>the</strong> problem is necessary. Indeed, all <strong>of</strong> <strong>the</strong> shares in <strong>the</strong> company have<br />
consequences in terms <strong>of</strong> <strong>cash</strong>; and conversely <strong>the</strong> <strong>cash</strong> may be a constraint on its activities. This set <strong>of</strong> elements<br />
interacting is a real system. In o<strong>the</strong>r words <strong>the</strong> problem <strong>of</strong> <strong>cash</strong> must be addressed comprehensively. The <strong>cash</strong><br />
management modeling, instead, is just a simplification <strong>of</strong> reality: it defines isolated financial relationships and<br />
describes <strong>the</strong>refore only a part <strong>of</strong> all that represents '<strong>the</strong> <strong>cash</strong> system '. Lack <strong>of</strong> models is undoubtedly <strong>the</strong> fact to<br />
have been composed before any critical analysis <strong>of</strong> <strong>the</strong> '<strong>cash</strong>-system '.<br />
Cash management is:<br />
On <strong>the</strong> one hand, to predict and control <strong>cash</strong> <strong>flow</strong>;<br />
Secondly, to search and use <strong>the</strong> means to achieve a balance between <strong>the</strong>se <strong>flow</strong>s.<br />
This action led to two levels:<br />
On <strong>the</strong> level <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>the</strong> bank balance,<br />
On <strong>the</strong> level <strong>of</strong> <strong>the</strong> working capital fluctuations.<br />
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I. PRESENTATION OF THE ANALYSIS MODEL<br />
In this chapter, it is necessary to present <strong>the</strong> model that was elaborated and pre-studied in order to reach <strong>the</strong> main<br />
goal <strong>of</strong> optimizing a treasury, and for our case, <strong>the</strong> IWACO’s treasury. The construction <strong>of</strong> this model allows us to<br />
identify <strong>the</strong> weakness and <strong>the</strong> strength <strong>of</strong> <strong>the</strong> company in many sides <strong>of</strong> its <strong>cash</strong> <strong>flow</strong>s but also to make few<br />
propositions and recommendations <strong>of</strong> how to solve <strong>the</strong> financial difficulties and about its optimization.<br />
In this chapter, we will also reserve space to declare <strong>the</strong> manuals and ways with which we could’ve collect <strong>the</strong><br />
necessary data for our study from <strong>the</strong> inside and <strong>the</strong> outside.<br />
Like announced KHOURY (1999: 164), “There are so many models <strong>of</strong> financial analysis as <strong>the</strong>re are analysts and<br />
analysis concerns almost. The idea that it is important to remember is that any financial analysis must be structured<br />
on <strong>the</strong> basis <strong>of</strong> its purpose no matter <strong>the</strong> model.” There isn’t <strong>the</strong>n anything such as a “Universal” model convenient<br />
to a certain financial situation <strong>of</strong> a firm, nor to its <strong>cash</strong> management. The model that we’re proposing here, describes<br />
<strong>the</strong> steps that we’ve followed to achieve <strong>the</strong> optimization <strong>of</strong> <strong>the</strong> IWACO’s treasury. From what’s previous, <strong>the</strong> model<br />
that we’re proposing is in <strong>the</strong> next page in <strong>the</strong> figure n°2, Research’s Path:<br />
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Page 66 <strong>of</strong> 124
II.<br />
DATA COLLECTION TOOLS<br />
For what is a financial resource, this analysis is more specified in <strong>the</strong> banking sources from an angle where <strong>the</strong><br />
company deals with bankers and financial institutions to manage <strong>the</strong> overdraft and <strong>the</strong> loans seeing that <strong>the</strong>y both<br />
represent <strong>the</strong> main source in finding funds for <strong>the</strong> company.<br />
1. ACCOUNTING DEPARTMENT:<br />
Accounting service is considered as one <strong>of</strong> <strong>the</strong> most important resources for <strong>the</strong> company seeing that <strong>the</strong>y are <strong>the</strong><br />
first people to have <strong>the</strong> legal justifications <strong>of</strong> having funds, spending funds and possible spending. The accounting<br />
service as it’s in mutual contact with <strong>the</strong> treasury, its role is to provide any illegal transaction <strong>of</strong> <strong>the</strong> company. As<br />
for <strong>the</strong>ir function, <strong>the</strong>y’re responsible on doing <strong>the</strong> daily follow <strong>of</strong> <strong>the</strong> financial <strong>flow</strong>s in <strong>the</strong> company’s bank<br />
accounts and treasury, <strong>the</strong>refore, <strong>the</strong>ir mutual contact with <strong>the</strong> <strong>cash</strong> manager is based on verifying ei<strong>the</strong>r <strong>the</strong><br />
transaction have been done on <strong>the</strong> right time with <strong>the</strong> exact amount <strong>of</strong> <strong>cash</strong> in <strong>the</strong> appropriate bank account and<br />
<strong>the</strong>n inform immediately <strong>the</strong> treasury department.<br />
2. TREASURY DEPARTMENT:<br />
The Treasury is on <strong>the</strong> top <strong>of</strong> <strong>the</strong> financial sources for this study or analysis, seeing that <strong>the</strong>y have <strong>the</strong> main role in<br />
ga<strong>the</strong>ring all <strong>the</strong> financial information about <strong>the</strong> existence <strong>of</strong> <strong>flow</strong>s inside <strong>the</strong> company and for how long <strong>the</strong>se <strong>flow</strong>s<br />
could stay stable. As a treasury department; <strong>the</strong>ir main function is to analysis <strong>the</strong> daily fluctuations and variations<br />
<strong>of</strong> <strong>the</strong> financial <strong>flow</strong>s <strong>of</strong> <strong>the</strong> company in order to justify <strong>the</strong> balance at <strong>the</strong> end <strong>of</strong> <strong>the</strong> day. Usually this operation <strong>of</strong><br />
following <strong>the</strong> daily transaction and <strong>cash</strong> <strong>flow</strong>s, depends mostly on <strong>the</strong> relation and information that this department<br />
gets from <strong>the</strong> purchasing department seeing that <strong>the</strong> main activity <strong>of</strong> this company is <strong>the</strong> distribution, and <strong>the</strong> main<br />
pr<strong>of</strong>it is managed or realized by buying <strong>the</strong> most <strong>of</strong> <strong>the</strong> company’s products and goods and sell <strong>the</strong>m on <strong>the</strong> market.<br />
The treasury department is responsible also on <strong>the</strong> elaboration <strong>of</strong> <strong>the</strong> forecast financial study <strong>of</strong> <strong>the</strong> company,<br />
which allows <strong>the</strong>m to have <strong>the</strong> first idea and prediction about <strong>the</strong> amount <strong>of</strong> <strong>the</strong> <strong>flow</strong>s that <strong>the</strong> company might<br />
have by <strong>the</strong> end <strong>of</strong> <strong>the</strong> month or even <strong>the</strong> day. This elaboration gives <strong>the</strong> department <strong>the</strong> priority <strong>of</strong> controlling <strong>the</strong><br />
extra funds or <strong>the</strong> deficit is existed according to <strong>the</strong> financial administration decision. Therefore, this department<br />
is considered as <strong>the</strong> main source <strong>of</strong> knowing <strong>the</strong> nature and variability <strong>of</strong> <strong>the</strong> <strong>flow</strong>s inside <strong>the</strong> company and<br />
<strong>the</strong>refore control <strong>the</strong>se <strong>flow</strong>s.<br />
3. THE FINANCIAL ADMINISTRATION:<br />
The financial Direction is mostly directed by <strong>the</strong> global direction or <strong>the</strong> DG as <strong>the</strong>y call it. Its main role is to contribute<br />
in <strong>the</strong> analysis <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> company or most, managing <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s <strong>of</strong> <strong>the</strong> company in a way<br />
that <strong>the</strong>y get to be managed, controlled, optimized and well organized in <strong>the</strong> short term as for <strong>the</strong> long term. This<br />
direction was a first source information for my study seeing that <strong>the</strong>y are <strong>the</strong> head <strong>of</strong> <strong>the</strong> treasury department that<br />
allowed me to have <strong>the</strong> exact information on <strong>the</strong> treasury and <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s. The ga<strong>the</strong>red information from this<br />
direction were a source <strong>of</strong> elaborating <strong>the</strong> analysis and study <strong>of</strong> <strong>the</strong> direction <strong>of</strong> <strong>the</strong> forecast (global scenarios that<br />
could be elaborated).<br />
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4. THE PURCHASING DEPARTMENT:<br />
The purchasing department was useful for this study in too many ways. The general contribution was on <strong>the</strong> level<br />
<strong>of</strong> ga<strong>the</strong>ring information on <strong>the</strong> sets and basis <strong>of</strong> working for this company, in o<strong>the</strong>r terms, how does <strong>the</strong> company<br />
make pr<strong>of</strong>it from selling. This department was basically <strong>the</strong> key for making this study an exact one for <strong>the</strong> company<br />
seeing that <strong>the</strong> financial decision was taken by <strong>the</strong> financial direction, but <strong>the</strong>n <strong>the</strong> translation <strong>of</strong> <strong>the</strong>se decision<br />
have been taken and done by this department on <strong>the</strong> real field. Therefore, <strong>the</strong> purchasing department represents<br />
for sure a first source <strong>of</strong> <strong>the</strong> company.<br />
Generally, <strong>the</strong> collection <strong>of</strong> information for this study could’ve be done on too many levels and from too many<br />
departments but it all depends on how long and large this study could’ve be taken. Yet, from my point <strong>of</strong> view and<br />
because <strong>of</strong> <strong>the</strong> study should be done in a straight and direct way to achieve exactly how <strong>the</strong> optimization <strong>of</strong> a<br />
treasury could be done, It was based on fore major sources <strong>of</strong> fore major departments: Financial Direction, Treasury<br />
(Cash-Management), Accounting and Purchasing department.<br />
CONCLUSION OF THE FIRST PART:<br />
Reading from books and all this literature allowed us to make our own point <strong>of</strong> view <strong>of</strong> <strong>the</strong> situation <strong>of</strong> this<br />
company’s treasury and to know all <strong>the</strong> objectives and mains to know how to optimize <strong>the</strong> <strong>cash</strong> inside <strong>the</strong> company.<br />
And also, this first part gives us an idea on how to manage <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s <strong>of</strong> <strong>the</strong> company by controlling <strong>the</strong> treasury<br />
<strong>of</strong> <strong>the</strong> firm without changing <strong>the</strong> main stable variables <strong>of</strong> <strong>the</strong> company, or going through a new loan or line credit.<br />
We’ve learned from this reading also that to manage a firm’s treasury doesn’t mean only managing <strong>the</strong> external<br />
<strong>flow</strong>s that a company can have from doing its activity <strong>of</strong> buying and selling but also by taking control <strong>of</strong> <strong>the</strong> inside<br />
<strong>flow</strong>s <strong>of</strong> <strong>the</strong> company that are most <strong>of</strong> <strong>the</strong> time forgotten, not well managed or else.<br />
More than that, we’ve got enlightened by this reading to know <strong>the</strong> right path to follow during <strong>the</strong> practical analysis<br />
in order to achieve <strong>the</strong> optimization <strong>of</strong> <strong>the</strong> treasury.<br />
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Part II: The Practice <strong>of</strong> <strong>the</strong> Cash-<br />
Treasury <strong>Optimization</strong> inside<br />
IWACO’s Company<br />
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In this country, Morocco, <strong>the</strong> telecommunication market is dominated by three major operators; Maroctelecom,<br />
Meditel and recently INWI. These three operators share <strong>the</strong> Moroccan field and share it between a dominator and a<br />
follower, for <strong>the</strong> current moment, Maroctelecom controls most <strong>of</strong> this field, followed by Meditel and now INWI. Yet,<br />
this division is not a long term position <strong>of</strong> <strong>the</strong> classification. Recently, INWI started to dominate <strong>the</strong> field and taking<br />
old part <strong>of</strong> Maroctelecom or Meditel, all that measurement was based on <strong>the</strong> accurate situation and strategies that<br />
INWI makes in order to battle <strong>the</strong> competition. As any o<strong>the</strong>r company that works in <strong>the</strong> telecommunication field,<br />
INWI has at its side fore major distributer to which INWI contributes <strong>the</strong> mission <strong>of</strong> distributing <strong>the</strong> products and<br />
services. Each distributer belongs to its own group or holding and share <strong>the</strong> same producer that is INWI.<br />
IWACO’s a company that belongs to <strong>the</strong> T-MAN HOLDING, located in SIDI MAAROUF near to<br />
CASANEARSHORE. As a telecommunication service distributer, its main activity is based on commercializing<br />
<strong>the</strong> products and services that INWI produces.<br />
I. INTERNAL ENVIRONNMENT:<br />
A. Organizational Structure<br />
The following Diagram represents <strong>the</strong> structure <strong>of</strong> IWACO’s organization and position <strong>of</strong> each department<br />
in <strong>the</strong> company’s structure presented in <strong>the</strong> following figure n° 3, Structure <strong>of</strong> <strong>the</strong> company:<br />
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B. Organization and function<br />
1. Management Control:<br />
Right after <strong>the</strong> general direction, this department’s main role maintains in <strong>the</strong> fact that <strong>the</strong>y manage <strong>the</strong><br />
global management <strong>of</strong> this company. Fur<strong>the</strong>r than that, <strong>the</strong>y verify for each department <strong>the</strong> way <strong>the</strong>y<br />
manage <strong>the</strong> company’s activity with what is contributed for <strong>the</strong>m as tasks, and <strong>the</strong>n, a global report is sent<br />
to <strong>the</strong> GD to make <strong>the</strong>m aware <strong>of</strong> <strong>the</strong> facts about this firm’s management structure in order to keep an eye<br />
open on all departments.<br />
2. Inspection and Audit:<br />
Unlike what <strong>the</strong> MC, this department’s job is to verify if <strong>the</strong> work procedures are done correctly or not,<br />
thou, not all departments are related to this one but mostly those that are in constant contact with <strong>the</strong><br />
field and <strong>the</strong> operational services. Again, a global report is sent after finishing <strong>the</strong> inspection and sent to<br />
<strong>the</strong> GD.<br />
3. Purchase & Logistic Direction:<br />
As a company that deals with daily arrives <strong>of</strong> merchandises and goods, this department’s main role is to<br />
supervise <strong>the</strong>se arrivals according to <strong>the</strong> physical and financial estates. In order to make this task happen,<br />
this department is in daily contact with <strong>the</strong> exploitation and logistic purchase services. Each services is<br />
responsible on a side <strong>of</strong> <strong>the</strong> management <strong>of</strong> <strong>the</strong>se merchandises from <strong>the</strong> arrival until <strong>the</strong> payment.<br />
4. Financial & Administrative Direction:<br />
As <strong>the</strong> most important department, <strong>the</strong> financial administration controls <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s <strong>of</strong> <strong>the</strong> company<br />
and manages <strong>the</strong> way <strong>of</strong> distributing <strong>the</strong> in<strong>flow</strong>s in <strong>the</strong> company’s bank. Generally, <strong>the</strong> global decision about<br />
<strong>the</strong> company’s Cash is made and taken in this department.<br />
5. B to C:<br />
The B to C department is <strong>the</strong> commercial part <strong>of</strong> small clients or as <strong>the</strong>y call <strong>the</strong>m; Grossest and Franchise.<br />
These to client are considered <strong>the</strong> main and principal segment that <strong>the</strong> company obtain on <strong>the</strong> market and<br />
with which <strong>the</strong> company make most <strong>of</strong> <strong>the</strong> pr<strong>of</strong>it. Adding to <strong>the</strong>se two, <strong>the</strong>re is also o<strong>the</strong>r activities that<br />
<strong>the</strong> company created and made <strong>the</strong>m <strong>the</strong>ir own regular clients too.<br />
6. B to B:<br />
The B to B is <strong>the</strong> Business to Business, where <strong>the</strong> company guarantees <strong>the</strong> big head clients that make major<br />
turnover for <strong>the</strong> company. They represents <strong>the</strong> commercial department <strong>of</strong> <strong>the</strong> company.<br />
7. Marketing & Communication:<br />
As a distributer <strong>of</strong> <strong>the</strong> INWI Company, very <strong>of</strong>ten, <strong>the</strong> marketing decision come from <strong>the</strong> producer and be<br />
executed by IWACO (and o<strong>the</strong>r competitors). Therefore, this department is directly related to <strong>the</strong> INWI<br />
marketing service, yet, when in <strong>the</strong> special events, IWACO organize its own events and merchandize <strong>the</strong>m<br />
in cooperation with <strong>the</strong> commercial service.<br />
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8. Development:<br />
Currently, this department is absent, seeing that <strong>the</strong> company work in <strong>the</strong> name <strong>of</strong> <strong>the</strong> group “T-MAN<br />
HOLDING”, and on <strong>the</strong> o<strong>the</strong>r side, works in <strong>the</strong> name <strong>of</strong> <strong>the</strong> producer INWI.<br />
9. Micros<strong>of</strong>t Activity:<br />
In order to reserve <strong>the</strong> company’s information, this part will not be discussed during this research.<br />
10. S.A.V Activity:<br />
Is nothing more than <strong>the</strong> sales administration <strong>of</strong> <strong>the</strong> company.<br />
II.<br />
EXTERNAL ENVIRONMENT:<br />
A. Company’s operating field<br />
1. Market<br />
The company operates in <strong>the</strong> telecommunication market. This market is known as <strong>the</strong> most pr<strong>of</strong>itable<br />
market on which all companies take parts ei<strong>the</strong>r as clients or sponsors or suppliers, and most <strong>of</strong> <strong>the</strong>m are<br />
clients.<br />
Morocco benefits from having one <strong>of</strong> <strong>the</strong> most advanced telecommunications markets in Africa. The sector<br />
is efficiently managed by an independent regulator, and developments within <strong>the</strong> market segments are<br />
<strong>of</strong>ten used as a model in o<strong>the</strong>r countries.<br />
With an effectively competitive mobile sector, Morocco also has one <strong>of</strong> <strong>the</strong> highest penetration rates in <strong>the</strong><br />
region. The three mobile network operators have become <strong>the</strong> main internet service providers through <strong>the</strong>ir<br />
networks, which are expected to be upgraded with LTE technology by <strong>the</strong> end <strong>of</strong> 2014 following <strong>the</strong> auction<br />
<strong>of</strong> suitable spectrum.<br />
Vivendi’s sale <strong>of</strong> its 53% stake in MT in late 2013 to Etisalat is expected to introduce a new dynamic to a<br />
company which has been obliged to reduce <strong>the</strong> number <strong>of</strong> employees in recent years in a bid to cut<br />
operating costs.<br />
The fixed-line market remains underdeveloped despite <strong>the</strong> launch <strong>of</strong> a second and third network operator<br />
to compete with Maroc Telecom. Fixed-line penetration has fallen since 2010 while <strong>the</strong> number <strong>of</strong> lines is<br />
expected to fall to about 2.9 million by <strong>the</strong> end <strong>of</strong> 2014. This reflects consumers’ preference for mobile<br />
services.<br />
A similar trend is seen in <strong>the</strong> broadband market, where <strong>the</strong> dominance <strong>of</strong> Maroc telecom’s ADSL service<br />
has waned dramatically in recent years. Having once accounted for over 90% <strong>of</strong> <strong>the</strong> market, by <strong>the</strong> end <strong>of</strong><br />
2013 ADSL represented only 15% <strong>of</strong> internet subscribers, with 3G representing almost 85%. Never<strong>the</strong>less,<br />
fixed-line infrastructure is being upgraded as part <strong>of</strong> <strong>the</strong> government’s ten-year National Broadband Plan<br />
which aims to provide fixed or mobile broadband access to <strong>the</strong> entire population by 2022.<br />
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Some Market highlights:<br />
Majority stake in Maroc Telecom sold to Etisalat;<br />
Commercial LTE services expected in late 2014 or early 2015;<br />
New terabit international fiber optic cable lands;<br />
Fixed-mobile convergence streng<strong>the</strong>ns;<br />
Mobile broadband accounting for 85% <strong>of</strong> all internet connections;<br />
National Broadband Plan 2012-2022;<br />
Mobile subscriptions continue to grow at 8%.<br />
2. Suppliers: WANA Corporate<br />
Initially founded by Karim Zaz, Maroc Connect started marketing its Internet services representing <strong>the</strong><br />
brand Wanadoo, using <strong>the</strong> name Wana for a few years. The company was later controlled by <strong>the</strong> Moroccan<br />
conglomerate ONA, with <strong>the</strong> Zain <strong>of</strong> Kuwait holding about 32% <strong>of</strong> equity since 2009. Following an<br />
agreement with <strong>the</strong> consortium Kuwaiti Zain / Ajial, 2.85 billion were invested in exchange for 32% <strong>of</strong> <strong>the</strong><br />
new company. On February 24, 2010, <strong>the</strong> former ONA WANA brand was given a face-lift, change <strong>of</strong> name,<br />
corporate identity and strategy.<br />
Internet:<br />
Initially, in order to avoid <strong>the</strong> high cost <strong>of</strong> wiring and installations and to quickly serve <strong>the</strong> commercial<br />
market, INWI used Last Mile Wireless Delivery Systems) to provide internet connection to <strong>the</strong> market.<br />
Claims to have EDGE and 2G coverage in 45% <strong>of</strong> <strong>the</strong> country, with prepaid and contract After Sales 200DH<br />
(18 €) 1MG.<br />
Mobile phones:<br />
The service was started on February 7, 2007 breaking a record <strong>of</strong> subscriptions to its services: 24000 in one<br />
day. With about 2 million customers, is <strong>the</strong> third operator with 3G license. With an <strong>of</strong>fer <strong>of</strong> "Tic Tac" INWI<br />
introduced per second billing from <strong>the</strong> first second. Fur<strong>the</strong>rmore, <strong>the</strong> rate is only 0.07 cents per second for<br />
all operators and at any time. The prepaid BlackBerry services in <strong>the</strong> SIM card to 20 dirhams, or access to<br />
MSN Messenger 5 dirhams per hour are all exclusive INWI.<br />
Branches:<br />
More than 50.000 in all Morocco.<br />
3. Clients<br />
IWACO as a delegated distributor for INWI knows as WANA CORPORATE earlier, is fixing <strong>the</strong> eyes on <strong>the</strong><br />
typology <strong>of</strong> clients that INWI has studied. In first beginnings, <strong>the</strong> clients were <strong>the</strong> small customers and<br />
particular clients, and by <strong>the</strong> time goes, <strong>the</strong> zone took a bigger size to ga<strong>the</strong>r Small and Big companies.<br />
The segments <strong>of</strong> clients are divided into types; <strong>the</strong> small clients are represented in <strong>the</strong> grossest and <strong>the</strong><br />
franchise, that usually play <strong>the</strong> role <strong>of</strong> intermediate between <strong>the</strong> producer and <strong>the</strong> final clients, yet, <strong>the</strong>y<br />
also form a type <strong>of</strong> clients. But <strong>the</strong> final clients also represents <strong>the</strong>mselves in <strong>the</strong> area <strong>of</strong> <strong>the</strong> company’s<br />
environment from a side where <strong>the</strong> producer and <strong>the</strong> distributer has <strong>the</strong> possibility <strong>of</strong> doing <strong>the</strong> direct<br />
selling as <strong>the</strong> indirect (through distributers). And <strong>the</strong>n, <strong>the</strong>re are <strong>the</strong> big and small companies, <strong>the</strong>se clients<br />
are considered as <strong>the</strong> most important clients since <strong>the</strong>y represent <strong>the</strong> biggest part <strong>of</strong> <strong>the</strong> turnover.<br />
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B. Dynamical competition<br />
While <strong>the</strong> Moroccan telecoms market remains under-saturated, its three mobile operators have<br />
experienced robust growth in recent years, both at home and abroad. Meditel, which received a mobile<br />
license in 2000, is <strong>the</strong> kingdom's first private operator, holding 36.69% <strong>of</strong> <strong>the</strong> market. While <strong>the</strong> company<br />
performed strongly last year, registering a 17% growth in client base (to 7.4m) over <strong>the</strong> first three quarters<br />
<strong>of</strong> 2008, it began to falter as consumer spending slowed, resulting in a 1% annual increase in turnover for<br />
Q2 2009. Meditel's focus on lower-income markets impacted <strong>the</strong>ir average revenue per user, which fell by<br />
16%, but <strong>the</strong> resulting expansion <strong>of</strong> <strong>the</strong> customer base helped drive up <strong>the</strong> country's mobile penetration<br />
rate from 65.7% in 2007 to 74% in 2008. Meditel's biggest competitor is Maroc Telecom, holding 60.71% <strong>of</strong><br />
<strong>the</strong> market. A former state monopoly now controlled by French entertainment giant Vivendi, Maroc<br />
Telecom is one <strong>of</strong> <strong>the</strong> region's fastest-growing multinational telecoms operators, actively pursuing<br />
expansion across northwest Africa, including Gabon, Mauritania and Burkina Faso. MT has announced plans<br />
to create a fibre-optic network connecting <strong>the</strong> Moroccan cities Laâyoune and Dakhla to Nouadhibou, which<br />
would ultimately be extended to o<strong>the</strong>r North African countries.<br />
Meditel and MT operated a duopoly until 2008, when <strong>the</strong> state regulator Agence Nationale de<br />
Réglementation des Télécommunications waved in Wana, owned by Morocco's Omnium Nord Africain.<br />
Though holding a tiny share (2.6%) <strong>of</strong> <strong>the</strong> voice market, this new player has captured a majority <strong>of</strong><br />
<strong>the</strong> 3G market (69.11%). Total subscribers for this new technology increased 527% in 2008. Earlier this year,<br />
Wana sold a 31% stake for €228m to <strong>the</strong> partnership <strong>of</strong> two Kuwaiticompanies, mobile operator Zain and<br />
Al Ajial Investment Fund Holding, to help finance <strong>the</strong> roll out <strong>of</strong> its 15-year 2G GSM network at <strong>the</strong> end <strong>of</strong><br />
2009. Moroccans pay a very high rate for Internet access but <strong>the</strong> connection is slower than dial-up. This is<br />
because Moroccan consumers are not protected, nor do <strong>the</strong>y know that Americans pay half <strong>the</strong> rate and<br />
receive high speed internet access.<br />
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SECTION 1: INFLOWS GLOBAL MANAGEMENT<br />
Excess <strong>cash</strong> translates into <strong>cash</strong> idle source <strong>of</strong> opportunity costs. Moreover, sleeping money involves financial costs.<br />
It is financed by funds that have a cost to <strong>the</strong> company. When <strong>cash</strong> is on deficit, is generally filled by bank credits.<br />
Manage its <strong>cash</strong> <strong>flow</strong> is to strive to make <strong>the</strong> balances <strong>of</strong> <strong>the</strong> company in each store also nearby zero as possible. As<br />
for <strong>the</strong> company, IWACO’s considered a first distributer for <strong>the</strong> INWI mobile operator, for which activity, <strong>the</strong> company<br />
benefits from two credit lines, one in <strong>the</strong> BMCE bank and ano<strong>the</strong>r one in AWB bank; yet <strong>the</strong> problem arrives when<br />
<strong>the</strong> company compares <strong>the</strong> INFLOWS stocked in <strong>the</strong> two banks and come out with <strong>the</strong> conclusion that <strong>the</strong> banks<br />
which benefits from <strong>the</strong> more than 50% <strong>of</strong> <strong>the</strong> IWACO’s turnover is <strong>the</strong> same bank that <strong>of</strong>fers less credit in <strong>the</strong><br />
company’s bank account , For this purpose <strong>the</strong> financial manager must:<br />
Firstly, detect and remove all waste through better knowledge <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s;<br />
Secondly, assess <strong>the</strong> conditions granted by <strong>the</strong> banks to <strong>the</strong> company and enter into any new negotiations.<br />
I- The control <strong>of</strong> <strong>cash</strong> <strong>flow</strong> and cost savings.<br />
Treasurers few know precisely <strong>the</strong> value and <strong>the</strong> behavior <strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s. This ignorance leads to <strong>the</strong> formalization<br />
<strong>of</strong> idle <strong>cash</strong> hardly noticeable at first sight. The company supports "<strong>the</strong> unnecessary cost <strong>of</strong> money who sleeps” by<br />
<strong>the</strong> fear <strong>of</strong> <strong>the</strong> “Overdraft” or <strong>the</strong> Credit Line. These funds are at <strong>the</strong> origin <strong>of</strong> a huge waste <strong>of</strong> financial expenses. To<br />
improve <strong>the</strong> management <strong>of</strong> its <strong>cash</strong> in <strong>the</strong> short term, <strong>the</strong> company shall keep accounts "in value dates.<br />
A - FORMALIZATION OF IDLE CASH.<br />
The bank balances too approximate knowledge coupled with <strong>the</strong> fear <strong>of</strong> <strong>the</strong> debit balance causes <strong>the</strong> formalization<br />
<strong>of</strong> idle <strong>cash</strong>.<br />
1 - THE LACK OF BANK BALANCES.<br />
Banking movement’s accounts held by <strong>the</strong> company 'in dates <strong>of</strong> operation" mask <strong>the</strong> existence <strong>of</strong> funds unused <strong>cash</strong><br />
and transit ("float"), generating costs.<br />
1.1 - Accounting is held "in dates <strong>of</strong> operation”.<br />
Indeed, <strong>the</strong> Treasurer records in its books variations bank balances at <strong>the</strong>ir date <strong>of</strong> posting and not <strong>of</strong> occurrence.<br />
Thus in <strong>the</strong> case <strong>of</strong> a supplier paid by check, <strong>the</strong> check issued a given day will be counted in spending at its date <strong>of</strong><br />
issuance. In fact, <strong>the</strong> Bank will discharge <strong>the</strong> company’s account unless two days pass after presenting <strong>the</strong> check to<br />
<strong>the</strong> bank 'two days <strong>of</strong> Bank": this is <strong>the</strong> value <strong>of</strong> <strong>the</strong> transaction date. Fur<strong>the</strong>rmore, usually <strong>the</strong> creditor doesn’t<br />
present immediately this check for collection; this will increase <strong>the</strong> gap between <strong>the</strong> trade date and <strong>the</strong> value date;<br />
yet, for <strong>the</strong> IWACO case, <strong>the</strong> suppliers present immediately <strong>the</strong> check for discharge in banks and <strong>the</strong>n same do <strong>the</strong>m.<br />
The Treasurer <strong>of</strong> <strong>the</strong> company <strong>the</strong>refore tends to underestimate constantly balance Bank. The first phenomenon led<br />
to "oversize" its use <strong>of</strong> bank financing and let develop idle <strong>cash</strong>. The importance <strong>of</strong> <strong>the</strong> "float" exacerbates this<br />
situation.<br />
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1.2 - The existence and <strong>the</strong> importance <strong>of</strong> <strong>the</strong> "float".<br />
We understand, from what has just been said, that <strong>the</strong> "float" represents all <strong>of</strong> <strong>the</strong> funds in transit. They are indeed<br />
at <strong>the</strong> company, but cannot be used because <strong>the</strong>y are temporarily stuck in <strong>the</strong> banking system during <strong>the</strong> recovery<br />
process.<br />
Figure n° 4, shows <strong>the</strong> formation <strong>of</strong> <strong>the</strong> "float".<br />
The amount <strong>of</strong> <strong>the</strong> "float" can be calculated in <strong>the</strong> following way; ei<strong>the</strong>r:<br />
F <strong>the</strong> amount <strong>of</strong> float,<br />
T <strong>the</strong> recovery time means (for <strong>the</strong> debtor or creditor) in days,<br />
CA annual turnover,<br />
F = T x (CA / 365)<br />
In percentage <strong>of</strong> <strong>the</strong> Turnover:<br />
F = (T / 365) x 100<br />
For example, if <strong>the</strong> time <strong>of</strong> <strong>the</strong> average recovering is up to 8 days:<br />
F = (8 / 365) x 100<br />
Equals to 2.19 % <strong>of</strong> <strong>the</strong> Turnover.<br />
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2 - THE FEAR OF THE DEBIT BALANCE.<br />
A second generator cause <strong>of</strong> unused funds lies in <strong>the</strong> attitude <strong>of</strong> <strong>the</strong> company with regard to <strong>the</strong> overdraft. Fear <strong>of</strong><br />
<strong>the</strong> overdraft is for <strong>the</strong>se companies to three main reasons:<br />
The fear <strong>of</strong> being forced to use <strong>the</strong> more expensive short-term credit because it’s <strong>the</strong> quicker;<br />
The fear <strong>of</strong> antagonizing his banker by this unexpected funding requirement;<br />
The fear, ultimately giving birth to rumors about <strong>the</strong> financial soundness <strong>of</strong> <strong>the</strong> firm.<br />
These concerns are so vivid that <strong>the</strong>y grow to stop after have mobilized <strong>the</strong>m, <strong>of</strong> large <strong>cash</strong> surplus. This behavior is<br />
sometimes erected in <strong>the</strong> company where retain permanently a bank balance very much positive. In any case, it is a<br />
sign <strong>of</strong> poor control <strong>of</strong> <strong>cash</strong>: <strong>the</strong> person in charge will cover, as a security, well beyond its real needs, it cannot assess<br />
with rigor. In <strong>the</strong>se circumstances it is for <strong>the</strong> company to borrow money from his bank and to put free part at its<br />
disposal. In addition to <strong>the</strong> shortfall, in opportunity cost, <strong>the</strong>se bank balances cost weighted average rate <strong>of</strong> <strong>the</strong><br />
capital, or "cost <strong>of</strong> capital".<br />
3 - THE IMPORTANCE OF UNUSED FUNDS AND ITS CONSEQUENCES.<br />
Any unspent funds affect <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> firm. In addition, <strong>the</strong>y do not represent a sufficient guarantee <strong>of</strong><br />
solvency.<br />
1 - Statistical Evaluation <strong>of</strong> unused funds.<br />
This is to give an order <strong>of</strong> magnitude <strong>of</strong> <strong>the</strong> phenomenon in terms <strong>of</strong> proper idle <strong>cash</strong> as <strong>the</strong> "float".<br />
a) Assessment <strong>of</strong> idle <strong>cash</strong>.<br />
We can appreciate <strong>the</strong> importance <strong>of</strong> <strong>the</strong> sums <strong>of</strong> money on <strong>the</strong> company’s account, "banks and postal check", and<br />
<strong>the</strong>refore unnecessarily financed, by examining <strong>the</strong> value <strong>of</strong> this position on <strong>the</strong> balance sheet syn<strong>the</strong>tic and<br />
summary <strong>of</strong> <strong>the</strong> accounting data <strong>of</strong> IWACO subject to <strong>the</strong> regime <strong>of</strong> <strong>the</strong> actual pr<strong>of</strong>it.<br />
Can also measure <strong>the</strong> importance <strong>of</strong> unnecessarily funded funds by looking at <strong>the</strong> balance sheets <strong>of</strong> major French<br />
banks <strong>of</strong> deposit, under <strong>the</strong> heading in <strong>the</strong> passive: "accounts <strong>of</strong> enterprises. Table 10 below, brings toge<strong>the</strong>r <strong>the</strong><br />
accounts <strong>of</strong> <strong>the</strong> company, contained liability side <strong>of</strong> <strong>the</strong> balance sheet <strong>of</strong> <strong>the</strong> Bank <strong>of</strong> <strong>the</strong> company. These idle<br />
balances properly say, ads "float". The percentage presents <strong>the</strong> amount <strong>of</strong> <strong>the</strong> account from <strong>the</strong> global amount <strong>of</strong><br />
in<strong>flow</strong>s that <strong>the</strong> company had in its in<strong>flow</strong>s. The BMCE is not <strong>of</strong>ficially activated. The following table gives example<br />
<strong>of</strong> <strong>the</strong> company’s In<strong>flow</strong>s during 2014-2015, Table n°9: In<strong>flow</strong>s <strong>of</strong> IWACO during 2014-15<br />
PERIOD AWB BMCI BMCE<br />
January – 2014 0,00 DH 1 198 960,66 DH Not Yet<br />
February – 2014 184 572,00 DH 1 688 230,79 DH Not Yet<br />
March – 2014 0,00 DH 3 836 491,74 DH Not Yet<br />
April – 2014 0,00 DH 2 721 775,26 DH Not Yet<br />
Mai – 2014 0,00 DH 2 016 630,32 DH Not Yet<br />
June – 2014 0,00 DH 1 277 555,14 DH Not Yet<br />
July – 2014 0,00 DH 669 941,79 DH Not Yet<br />
August – 2014 0,00 DH 2396 546,75 DH Not Yet<br />
September – 2014 0,00 DH 2 159 968,79 DH Not Yet<br />
October – 2014 0,00 DH 1 817 837,55 DH Not Yet<br />
November – 2014 0,00 DH 957 697,73 DH Not Yet<br />
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December – 2014 0,00 DH 1 599 918,69 DH Not Yet<br />
January – 2015 1 225 382,50 DH 1 934 877,27 DH Not Yet<br />
February – 2015 0,00 DH 1 832 762,91 DH Not Yet<br />
March – 2015 0,00 DH 1 784 262,03 DH Not Yet<br />
April – 2015 37 711 489,31 DH 1 908 717,17 DH Not Yet<br />
Mai – 2015 5 600 000,00 DH 1 589 353,22 DH Not Yet<br />
June – 2015 0,00 DH 1 647 097,19 DH Not Yet<br />
July – 2015 250 000,00 DH 2 411 563,82 DH Not Yet<br />
August – 2015 0,00 DH 3 264 040,43 DH Not Yet<br />
September – 2015 0,00 DH 1 761 230,68 DH Not Yet<br />
October – 2015 0,00 DH 4 387 229,87 DH Not Yet<br />
November – 2015 0,00 DH 1 344 279,52 DH Not Yet<br />
December – 2015 0,00 DH 1 553 395,28 DH Not Yet<br />
b) Assessments <strong>of</strong> <strong>the</strong> « float ».<br />
In our country <strong>the</strong> average time <strong>of</strong> recovery <strong>of</strong> funds is <strong>of</strong> <strong>the</strong> order <strong>of</strong> 7 calendar days.<br />
2 - Unused funds affect <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> firm without ensuring <strong>the</strong> solvency.<br />
It is obvious that for a given benefit, <strong>the</strong> volume <strong>of</strong> <strong>cash</strong> is important and more <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> company is<br />
low. Added to this is <strong>the</strong> value <strong>of</strong> <strong>the</strong> "float" which, although not recorded, inflates <strong>the</strong> volume <strong>of</strong> unused funds,<br />
and thus decreases <strong>the</strong> real rate <strong>of</strong> return. Thus, by 2015, <strong>the</strong> company being subject to <strong>the</strong> regime <strong>of</strong> <strong>the</strong> actual<br />
pr<strong>of</strong>it had total assets <strong>of</strong> 906 385 876, 60 million dirhams. With a rate <strong>of</strong> return largely exceeds 15%.<br />
In fact, <strong>the</strong> real rate <strong>of</strong> return, taking into account <strong>the</strong> "float", was to:<br />
F = 7 x (906 385 876, 60 / 365) = 17 382 742, 84<br />
Therefore, <strong>the</strong> main objective <strong>of</strong> evaluating <strong>the</strong> “float” <strong>of</strong> a company, is to evaluate how fast <strong>the</strong> money <strong>of</strong> <strong>the</strong><br />
company circulate inside and outside <strong>the</strong> market. Never<strong>the</strong>less, we <strong>of</strong>ten take for granted having liquidity inside <strong>the</strong><br />
company as a symbol <strong>of</strong> security, pr<strong>of</strong>itability and solvency. Yet, having money stocked just like that inside <strong>the</strong><br />
company’s treasury is <strong>the</strong> same messing opportunities <strong>of</strong> recycling <strong>the</strong>se money inside a good business running<br />
outside in <strong>the</strong> market.<br />
The evaluation <strong>of</strong> <strong>the</strong> market is same as evaluating <strong>the</strong> market’s opportunities for making pr<strong>of</strong>it. Although, this<br />
evaluation wouldn’t be compatible to this project if it wasn’t ga<strong>the</strong>red with <strong>the</strong> company’s money study and<br />
evaluation. Though, ga<strong>the</strong>ring both means that <strong>the</strong> company is a positive situation to catch <strong>the</strong> god opportunities<br />
that <strong>the</strong> market can give and be aware <strong>of</strong> <strong>the</strong> positivity and negativity <strong>of</strong> <strong>the</strong> market, and it is for this specific reason<br />
that we’re going to study <strong>the</strong> costs that <strong>the</strong> “Sleeping money” could take on charge on <strong>the</strong> next paragraph.<br />
Finally, as we mentioned earlier, note that <strong>the</strong> existence <strong>of</strong> a positive <strong>cash</strong> cannot be regarded as <strong>the</strong> pledge <strong>of</strong> <strong>the</strong><br />
solvency <strong>of</strong> <strong>the</strong> firm. Indeed, <strong>the</strong> concept <strong>of</strong> <strong>cash</strong> is a static, while <strong>the</strong> liquidity <strong>of</strong> a business depends on <strong>the</strong> conditions<br />
in which <strong>the</strong> availability and liabilities will arise <strong>the</strong> relation to each o<strong>the</strong>r in time. Cash management is essentially<br />
dynamic and requires an analysis in terms <strong>of</strong> <strong>flow</strong>. It is <strong>the</strong> potential to restore liquidity <strong>of</strong> <strong>the</strong> firm, determined by its<br />
pr<strong>of</strong>itability and solvency, which is <strong>the</strong> only guarantor <strong>of</strong> its solvency and to its security.<br />
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B - THE UNNECESSARY COST OF IDLE FUNDS.<br />
So <strong>the</strong>refore, <strong>the</strong> manager (financial manager or treasury manager) is obliged to leave too many funds without<br />
employment as a result <strong>of</strong> <strong>the</strong> difficulties <strong>the</strong>y have to control <strong>cash</strong> <strong>flow</strong>s. So to assess <strong>the</strong> cost <strong>of</strong> this behavior.<br />
1 - THE STRUCTURE OF THE COST OF MONEY.<br />
The study <strong>of</strong> <strong>the</strong> composition <strong>of</strong> financial expenses lets us know to what extent <strong>the</strong>y can be compressed.<br />
1 - The composition <strong>of</strong> financial expenses.<br />
Financial expenses in <strong>the</strong> short term can be broken down into two parts.<br />
a) The first and most important, stems from <strong>the</strong> cost <strong>of</strong> <strong>the</strong> Bank loans needed to fill <strong>the</strong> shortage <strong>of</strong> <strong>cash</strong> resulting<br />
from <strong>the</strong> lag in time between revenue and expenditure.<br />
This part <strong>of</strong> financial costs is virtually inevitable and incompressible, at least in <strong>the</strong> short term, since <strong>the</strong> head <strong>of</strong> <strong>the</strong><br />
Treasury cannot influence, or received commitments and conditions <strong>of</strong> sale (loans to customers), or commitments<br />
given and <strong>the</strong> conditions <strong>of</strong> purchases (loans granted by suppliers). He <strong>the</strong>refore suffered <strong>the</strong> decisions taken<br />
previously by o<strong>the</strong>r <strong>of</strong>ficials, and is forced to bear <strong>the</strong>m. The case is not uncommon a Treasurer where, without<br />
immediate availability, in <strong>the</strong> need to cover an urgent regulation which would not be notified. He will have to appeal<br />
to <strong>the</strong> more expensive solutions because <strong>the</strong> fastest.<br />
b) The second part <strong>of</strong> <strong>the</strong> financial costs, though generally less important, is far from negligible in many companies<br />
and comes from <strong>the</strong> mode <strong>of</strong> use <strong>of</strong> bank credit in <strong>the</strong> short term.<br />
Unlike <strong>the</strong> previous this part <strong>of</strong> <strong>the</strong> financial costs can be, perfectly in principle at least, reduced to zero. Indeed, it<br />
essentially stems from <strong>the</strong> quality <strong>of</strong> short-term forecasts: receipts and disbursements on <strong>the</strong> one hand, and <strong>the</strong><br />
effectiveness <strong>of</strong> <strong>the</strong> rules <strong>of</strong> choice <strong>of</strong> financial assistance, on <strong>the</strong> o<strong>the</strong>r hand.<br />
Any credit balance can mean two things:<br />
Ei<strong>the</strong>r <strong>the</strong> company, at a given date has overstated its expenses or underestimated its revenues, and that,<br />
<strong>the</strong>refore, it has mobilized through <strong>the</strong> discount more claims than it needed;<br />
Or that <strong>the</strong> company has financed its <strong>cash</strong> requirements properly assessed by unsuitable paper: for<br />
example she covered a need for 20 days with 30-day paper.<br />
On <strong>the</strong> o<strong>the</strong>r hand, a debit balance can also mean two things:<br />
Ei<strong>the</strong>r that <strong>the</strong> firm, at a given date, underestimated its expenses or overestimated its revenues, and<br />
<strong>the</strong>refore has not sufficiently expected;<br />
Ei<strong>the</strong>r that it has financed its <strong>cash</strong> requirements with too short paper. This is <strong>the</strong> case for example <strong>of</strong> <strong>the</strong><br />
company which would have filled a need for 20 days with 15 days paper: it would o<strong>the</strong>rwise, I5 days later in<br />
front <strong>of</strong> a deficit <strong>of</strong> 5 days, not 'fundable' in <strong>the</strong> best <strong>of</strong> cases, only by overdraft.<br />
2 - Reduction <strong>of</strong> financial costs in <strong>the</strong> short term.<br />
To reduce financial expenses need to know <strong>the</strong>ir origins and ensure <strong>the</strong> possibility and desirability <strong>of</strong> <strong>the</strong> action.<br />
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(a) Four sources <strong>of</strong> costs can be identified:<br />
1. The company knows in principle fairly badly <strong>of</strong> banking conditions: interest rate, real cost <strong>of</strong> credit application<br />
clauses that accompany a loan (days <strong>of</strong> values, Bank Charges, various commissions, etc.).<br />
2. The underutilization <strong>of</strong> banking services: <strong>the</strong> company ignores generally all services that can <strong>of</strong>fer him his<br />
bank.<br />
3. The poor coordination <strong>of</strong> banking activities: <strong>the</strong> company owns several bank accounts, more precisely in AWB<br />
and <strong>the</strong> BMCI and soon BMCE.<br />
The Treasurer can’t know at any moment and simultaneously <strong>the</strong> status <strong>of</strong> each account where <strong>the</strong> appearance <strong>of</strong><br />
frequent setbacks in <strong>the</strong> management <strong>of</strong> entries and exits <strong>of</strong> funds that are <strong>the</strong> cause <strong>of</strong> unnecessary financial costs.<br />
Moreover, <strong>the</strong> costs in some cases, multiply. For example <strong>the</strong> existence <strong>of</strong> <strong>the</strong> overdraft commission can greatly<br />
increase <strong>the</strong> “Bank Charges”, where <strong>the</strong> company has several bankers. So let us analyze that <strong>the</strong> company is located<br />
in <strong>the</strong> following situation:<br />
Its account at <strong>the</strong> Bank AWB has accused a tip <strong>of</strong> 30 million dirhams <strong>of</strong> discovered in <strong>the</strong> month; his account at Bank<br />
BMCI, a hint <strong>of</strong> 3 million; his account Bank BMCE, a peak <strong>of</strong> 8 million. The overdraft commission <strong>the</strong>refore amounts<br />
to:<br />
(30 + 3 + 8) x 1/20 % = 205 DH.<br />
While a single banker would have retained <strong>the</strong> tip <strong>of</strong> 30 million, which would have increased <strong>the</strong> overdraft<br />
commission to:<br />
(30) 1/20% = 150 DH.<br />
4. The company, finally, suffers <strong>the</strong> consequences <strong>of</strong> financial <strong>flow</strong>s. : The passive attitude <strong>of</strong> <strong>the</strong> firm results<br />
from <strong>the</strong> accounting practice that class products and charges by nature. However, <strong>the</strong> uncertainty <strong>of</strong> <strong>the</strong><br />
movement <strong>of</strong> <strong>flow</strong>s does not depend on nature <strong>of</strong> his case, but downtown decision that generated it and <strong>the</strong><br />
means used. For good control randomness, it is necessary to think in terms <strong>of</strong> "means <strong>of</strong> regulation" (<strong>cash</strong>,<br />
check, promissory notes, bills <strong>of</strong> Exchange, currencies, etc.).<br />
In middle <strong>of</strong> all <strong>the</strong>se dull, <strong>the</strong> <strong>cash</strong> management problem can be solved only by:<br />
Improved knowledge <strong>of</strong> <strong>cash</strong> receipts and disbursements in value date;<br />
A decrease <strong>of</strong> <strong>the</strong> financial needs by reforms on procedures <strong>of</strong> receipts and disbursements in order to reduce<br />
<strong>the</strong> "float";<br />
Suppression <strong>of</strong> idle <strong>cash</strong> by blocking funds in paid accounts, or even investment (production capacity) or<br />
financial participation;<br />
A constant search for <strong>the</strong> financing best suited method to <strong>the</strong> needs (avoid unnecessary or insufficient<br />
mobilization);<br />
Perfect knowledge <strong>of</strong> Bank conditions that should always be able to discuss.<br />
(b) In practice, <strong>the</strong>re are two simple but reliable criteria for judging <strong>the</strong> possibility <strong>of</strong> compressing <strong>the</strong> financial costs<br />
in <strong>the</strong> short term. First, check that financial costs do not exceed 1% <strong>of</strong> <strong>the</strong> total turnover. Then ensure that <strong>the</strong> daily<br />
bank balance <strong>of</strong> <strong>the</strong> company in each <strong>of</strong> its banks does not fluctuate too strongly around zero.<br />
This is not to reduce "at all costs" financial costs to 1% <strong>of</strong> <strong>the</strong> turnover, but wonder if <strong>the</strong> gain is worth <strong>the</strong> cost.<br />
Indeed, below this threshold, it is likely that economies <strong>of</strong> Bank Charges compensate rationalization <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
management costs. Sometimes <strong>the</strong> company is in-between 1 and 2% uncertainty. If we took for example <strong>the</strong> year<br />
2015; <strong>the</strong> achieved Turnover was around 814 490 004, 7 DH and <strong>the</strong> Financial Costs were equal to: 9 634 318.4 DH.<br />
As we take <strong>the</strong>se data as a base we’ll have:<br />
(9 634 31, 70 DH / 814 490 004, 70 DH) = 1%<br />
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However, when <strong>the</strong> company found in a report "financial charges on turnover" exceeding 2%, at this stage it is not<br />
necessarily a <strong>cash</strong> <strong>flow</strong> difficulties. Therefore <strong>the</strong> Treasurer may have o<strong>the</strong>r immediate concerns than to reduce<br />
financial costs. It is mainly <strong>the</strong> case <strong>of</strong> <strong>the</strong> company with <strong>cash</strong> "broad", without maturity problem.<br />
Yet, a rationalization <strong>of</strong> <strong>the</strong> management <strong>of</strong> <strong>the</strong> <strong>cash</strong> to take advantage <strong>of</strong> this situation, by increasing <strong>the</strong> pr<strong>of</strong>itability<br />
<strong>of</strong> funds. Indeed, an improvement in <strong>the</strong> <strong>cash</strong> <strong>flow</strong> forecast can meet <strong>the</strong> triple question:<br />
Do you want to place Cash?<br />
How much <strong>cash</strong> can we place?<br />
For how long?<br />
What form (temporary or permanent employment)?<br />
In <strong>the</strong> case <strong>of</strong> <strong>the</strong> company where it is very 'tight' <strong>cash</strong> where it is important first <strong>of</strong> all to deal with deadlines, <strong>the</strong><br />
problem is quite different. An improvement in <strong>the</strong> <strong>cash</strong> <strong>flow</strong> forecast will naturally to identify better <strong>the</strong> financial<br />
needs and prevent time his banker's difficult passages.<br />
The study <strong>of</strong> financial expenses does not alone diagnose <strong>the</strong> nature and <strong>the</strong> importance <strong>of</strong> liquidity difficulties.<br />
Moreover, it must consider fluctuations <strong>of</strong> bank balances.<br />
1 ° <strong>the</strong> fluctuations <strong>of</strong> bank balances.<br />
The daily bank balance <strong>of</strong> a business in each <strong>of</strong> its banks should not fluctuate too strongly around zero. Fluctuations<br />
<strong>of</strong> bank balances come from a bad estimate inputs and outputs <strong>of</strong> funds, i.e. <strong>cash</strong> <strong>flow</strong> forecast absent or incorrect,<br />
or mistakes in <strong>the</strong> choice <strong>of</strong> short-term funding, or two both as is <strong>the</strong> most common case. «Quarterly interest scales»<br />
a business banks allow, on <strong>the</strong> one hand, to appreciate <strong>the</strong> quality <strong>of</strong> <strong>the</strong> forecast <strong>cash</strong>, and on <strong>the</strong> o<strong>the</strong>r hand, to<br />
assess <strong>the</strong> waste <strong>of</strong> financial expenses.<br />
2 - SCALES OF INTEREST QUARTERLY.<br />
Should specify <strong>the</strong> nature <strong>of</strong> this instrument poorly known even for companies, before being able to appreciate its<br />
use<br />
1 - Nature <strong>of</strong> <strong>the</strong> 'quarterly interest scales.<br />
Called 'quarterly interest scales', a table prepared by <strong>the</strong> Bank on which were likely bank balances classified by value<br />
date. As its name suggests, this table is established by quarter, and to calculate interest expense as well as various<br />
commissions due, if any, by <strong>the</strong> company to its bank. The company which refer to quarterly interest scales,<br />
information on <strong>the</strong> fluctuation <strong>of</strong> its bank accounts, can evaluate its possible waste <strong>of</strong> bank charges, and finally will<br />
appreciate <strong>the</strong> more or less good coordination <strong>of</strong> its operations with banks.<br />
2 - The interpretation <strong>of</strong> <strong>the</strong> quarterly interest scales.<br />
Representing changes in bank balances by curves, can more easily assess <strong>the</strong> effectiveness <strong>of</strong> <strong>the</strong> <strong>cash</strong> management.<br />
(a) Trace <strong>the</strong> graph <strong>of</strong> daily balances as <strong>the</strong>y appear in <strong>the</strong> books <strong>of</strong> <strong>the</strong> company (date <strong>of</strong> operation) and on <strong>the</strong><br />
scales <strong>of</strong> interest (dated value). This work is done for each Bank and by quarter. In <strong>the</strong> first following figure, figure<br />
n°5: Iwaco’s in<strong>flow</strong>s in <strong>the</strong> BMCI Account during 2015. And <strong>the</strong> next figure n°6: IWACO’s in<strong>flow</strong>s in <strong>the</strong> AXB account<br />
during 2015<br />
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20 000 000,00 DH<br />
Figure n°5: INFLOWS OF THE COMPANY YEAR 2015 / BMCI BANK<br />
10 000 000,00 DH<br />
0,00 DH<br />
CHEQUES EFFETS Effets/Encaissement Effets/Escompte<br />
* Espèce Siége * VERSEMENT AGENCES * Espèce déplacé : GROSSISTES * Espèce déplacé : DRC<br />
* Espèce déplacé : CARAVANES * Espèce déplacé : FRANCHISES *VIR Grand Compte *VIR Etranger<br />
*Autres VIR Rachat SICAV AUTRES<br />
50 000 000,00 DH<br />
Figure n°6: INFLOWS OF THE COMPANY YEAR 2015 / AWB BANK<br />
0,00 DH<br />
Janv.-15 Févr.-15 Mars-15 Avr.-15 Mai-15 Juin-15 Juil.-15 Août-15 Sept.-15 Oct.-15 Nov.-15 Déc.-15<br />
CHEQUES EFFETS Effets/Encaissement<br />
Effets/Escompte ESPECE * Espèce Siége<br />
* VERSEMENT AGENCES * Espèce déplacé : GROSSISTES * Espèce déplacé : DRC<br />
* Espèce déplacé : CARAVANES * Espèce déplacé : FRANCHISES VIREMENTS<br />
*VIR Grand Compte *VIR Etranger *Autres VIR<br />
These two previous charts give example <strong>of</strong> <strong>the</strong> kind <strong>of</strong> presentations that <strong>the</strong> treasurer make to analyze <strong>the</strong><br />
company’s financial <strong>cash</strong> <strong>flow</strong>s and banks’ balances.<br />
(b) The approximation <strong>of</strong> curves <strong>of</strong> <strong>the</strong> scales <strong>of</strong> interest allows three observations:<br />
1 ° <strong>the</strong> approximate knowledge <strong>of</strong> bank balances leads to errors <strong>of</strong> financial management. The gap between <strong>the</strong> date<br />
<strong>of</strong> operation curve and <strong>the</strong> curve in value date comes from what <strong>the</strong> Treasurer reason in date <strong>of</strong> operation and banker<br />
in value date. Thus, <strong>the</strong> Treasurer is brought permanently to underestimate or overestimate <strong>the</strong> true value <strong>of</strong> <strong>the</strong><br />
accounts <strong>of</strong> <strong>the</strong> company. Thus it overstates or understates its financial needs, and so its use <strong>of</strong> funds. In o<strong>the</strong>r words,<br />
it ignores both <strong>the</strong> real discovered that it uses and <strong>the</strong> existence <strong>of</strong> idle <strong>cash</strong>. Referring to <strong>the</strong> scales <strong>of</strong> interest<br />
curves, <strong>the</strong> head <strong>of</strong> <strong>the</strong> Treasury can measure <strong>the</strong> degree <strong>of</strong> accuracy <strong>of</strong> its knowledge <strong>of</strong> <strong>the</strong> movement <strong>of</strong> <strong>the</strong> bank<br />
balances <strong>of</strong> its undertaking.<br />
2 ° The poor coordination <strong>of</strong> banking results in unnecessary costs. A comparative analysis <strong>of</strong> <strong>the</strong> curves <strong>of</strong> <strong>the</strong> scales<br />
<strong>of</strong> interest <strong>of</strong> <strong>the</strong> various banks <strong>of</strong> a firm can appear simultaneously deficits in some banks and surpluses in o<strong>the</strong>rs.<br />
The Treasurer has <strong>the</strong>refore in this case by ignorance <strong>of</strong> <strong>the</strong> amount <strong>of</strong> its availability on <strong>the</strong> day <strong>the</strong> day, paid<br />
unnecessary costs: it has at <strong>the</strong> same time supported <strong>the</strong> cost <strong>of</strong> an overdraft and funded surpluses.<br />
3 ° Funding and investment decisions can be optimized.<br />
The establishment <strong>of</strong> scales <strong>of</strong> interest forecast allows three fundamental improvements from <strong>the</strong> point <strong>of</strong> view <strong>of</strong><br />
<strong>the</strong> <strong>cash</strong> management:<br />
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First, to assess more than just <strong>the</strong> financial needs and, thus, save Bank Charges by an optimal choice <strong>of</strong> shortterm<br />
financing;<br />
Then, in <strong>the</strong> case <strong>of</strong> structurally credit companies over a long duration, to establish <strong>the</strong> possibilities <strong>of</strong><br />
blocking <strong>of</strong> funds in volume and duration, in <strong>the</strong> most appropriate jobs;<br />
Finally, in <strong>the</strong> case <strong>of</strong> companies structurally debtor for <strong>the</strong> coming period, to measure <strong>the</strong> lack <strong>of</strong> permanent<br />
capital.<br />
The problem for <strong>the</strong> company now is to assess <strong>the</strong> cost <strong>of</strong> its mismanagement <strong>of</strong> <strong>cash</strong>.<br />
3 - THE ASSESSMENT OF COSTS IN THE TRADITIONAL CASH MANAGEMENT.<br />
By ignorance <strong>of</strong> <strong>the</strong> amounts actually available, <strong>the</strong> company has paid unnecessary costs because it has supported<br />
one discovered and funded from surpluses. In addition, through <strong>the</strong> days <strong>of</strong> value formed <strong>the</strong> "float". Float and idle<br />
<strong>cash</strong> create chances for more costs.<br />
1) - Evaluation <strong>of</strong> unnecessarily paid charges.<br />
The minimum amount <strong>of</strong> “Bank Charges”* can save by improving <strong>cash</strong> management can be calculated as follows. It<br />
totals for all banks and on throughout <strong>the</strong> year, <strong>the</strong> value <strong>of</strong> <strong>the</strong> balances on <strong>the</strong> one hand, and <strong>the</strong> value <strong>of</strong> receivable<br />
balances, on <strong>the</strong> o<strong>the</strong>r hand. Each result is affected by its cost: <strong>the</strong> rate <strong>of</strong> discount for balances; <strong>the</strong> difference<br />
between overdraft rates and rates <strong>of</strong> discount for debit balances.<br />
TOTAL COST =<br />
∑ TOTAL CREDITOR X (THE DISCOUNT RATE / 36.000) +<br />
∑ TOTAL DEBTOR (THE OVERDRAFT RATE – THE DISCOUNT RATE) +<br />
∑ 1/20% X<br />
(STRONGEST OVERDRAFT OF THE MONTH USING A UNSUFFISANT DISCOUNT) –<br />
(STRONGEST OVERDRAFT THAT DOESN’T AVOID STRICT MANAGEMENT)<br />
Yet, this formulate is still considered as <strong>the</strong>oretical on <strong>the</strong> realistic field <strong>of</strong> companies and financial management; <strong>the</strong><br />
reason behind, is that <strong>the</strong> company’s financing condition are too different to be managed by such a complex<br />
formulate, from ano<strong>the</strong>r side, <strong>the</strong> activities <strong>of</strong> <strong>the</strong> company are too sensitive to any fluctuation <strong>of</strong> <strong>flow</strong>s or time, for<br />
that, <strong>the</strong> management goes with a simple arbitrage that <strong>the</strong> company does when <strong>the</strong>y compare between <strong>the</strong> financial<br />
costs paid on <strong>the</strong> behalf <strong>of</strong> <strong>the</strong> loan lines in few banks that <strong>the</strong>y contracted, and <strong>the</strong> amount <strong>of</strong> financial pr<strong>of</strong>it that<br />
<strong>the</strong>y make from paying <strong>the</strong>ir suppliers in <strong>cash</strong>. Therefore, <strong>the</strong> company works on covering <strong>the</strong> financial costs <strong>of</strong> <strong>the</strong><br />
bank overdraft. And it works as <strong>the</strong> following example:<br />
In <strong>the</strong> BMCI and AWB accounts, <strong>the</strong> company has in total 33.000.000 DHS <strong>of</strong> Overdraft. While <strong>the</strong> company makes<br />
0.5% <strong>of</strong> <strong>the</strong> <strong>cash</strong> paid amount to <strong>the</strong> supplier INWI (that is considered as <strong>the</strong> main supplier <strong>of</strong> <strong>the</strong> company since it<br />
represents 99% <strong>of</strong> <strong>the</strong> company’s turnover<br />
The company gains in <strong>the</strong> financial costs: 0.5% <strong>of</strong> <strong>the</strong> paid amount (when it’s Cash). And <strong>the</strong>y pay 5.35% <strong>of</strong> financial<br />
costs when <strong>the</strong>y use <strong>the</strong> Permanent Overdraft (authorized). Knowing that <strong>the</strong> 0.5% is a daily rate, <strong>the</strong> annual rate<br />
will be equals to 6%, and <strong>the</strong> daily rate that <strong>the</strong> company use to pays its costs will be <strong>the</strong>n: 5.35%<br />
Annual Rate = Daily Rate x 12. And Daily rate = Annual rate / 12.<br />
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Therefore; when <strong>the</strong> company realize an investment <strong>of</strong> buying 33.000.000 DHS <strong>of</strong> goods from <strong>the</strong> company INWI or<br />
WANA as called, <strong>the</strong>y face two situation:<br />
33.000.000 DHS x 5.35% = 1 765 500 / 360 days = 4 909.167 DHS.<br />
Yet, <strong>the</strong> company could pay with <strong>the</strong> same amount paid in <strong>cash</strong>:<br />
33.000.000 DHS x 0.5% = 165 000 DHS<br />
We could realize from this calculation that with 4 909.167 DHS that <strong>the</strong> company pay using <strong>the</strong> overdraft, it could<br />
gain at <strong>the</strong> same day: 165 000 DHS if <strong>the</strong>y pay in <strong>cash</strong>. A financial revenue equals to:<br />
= 160 090.83 DHS (165 000 DHS – 4 909.167 DHS)<br />
By this way, <strong>the</strong> company gets to cover <strong>the</strong> financial costs paid when <strong>the</strong> company pays using <strong>the</strong> overdraft.<br />
As a financial decision, we could’ve take this decision by comparing <strong>the</strong> annual rates that <strong>the</strong> company gets from<br />
paying in <strong>cash</strong> to <strong>the</strong> supplier or from paying by overdraft.<br />
Balances total and <strong>the</strong> total <strong>of</strong> <strong>the</strong> balances are calculated from <strong>the</strong> scales <strong>of</strong> quarterly interest that can provide on<br />
request, <strong>the</strong> banks <strong>of</strong> <strong>the</strong> enterprise in question. This assessment <strong>of</strong> <strong>the</strong> minimum amount <strong>of</strong> paid unnecessarily,<br />
bank charges form <strong>the</strong> calls <strong>the</strong> following remarks:<br />
The first term assumes that any credit balance results from an excessive discount. However this is not always<br />
true: <strong>the</strong>re can be an "overfunding" permanent capital, or credit providers, compared to <strong>the</strong> capital fixed and<br />
capital needs circulating, as in <strong>the</strong> previous example.<br />
The second term assumes that any debtor balance comes from a funding challenge that leads to expect<br />
enough discount. The company <strong>of</strong>ten experiences periods where <strong>the</strong>ir discount opportunities are limited. In<br />
addition, it can be a sign <strong>of</strong> a financially too weak or inadequate. The reason behind this for <strong>the</strong> company is<br />
that, <strong>the</strong> majority <strong>of</strong> funds are deposited in a certain bank account, while <strong>the</strong> company does not benefit from<br />
all financial advantages <strong>of</strong> <strong>the</strong> company. Therefore, <strong>the</strong> company required <strong>of</strong>ten to increase <strong>the</strong> amount <strong>of</strong><br />
<strong>the</strong> authorized overdraft seeing that most <strong>of</strong> <strong>the</strong> Turnover is deposited inside this bank account.<br />
The calculation <strong>of</strong> <strong>the</strong> third term is made difficult by <strong>the</strong> assessment <strong>of</strong> <strong>the</strong> second member. However, it can<br />
fix <strong>the</strong> minimum value: at a minimum, for a company using an overdraft constant throughout <strong>the</strong> year, <strong>the</strong><br />
commission <strong>of</strong> 1/20 is 0.60% <strong>of</strong> <strong>the</strong> total amount <strong>of</strong> <strong>the</strong> overdraft.<br />
Despite its limitations, this formula has no o<strong>the</strong>r ambition than to quickly assess whe<strong>the</strong>r a more detailed analysis <strong>of</strong><br />
<strong>the</strong> management <strong>of</strong> <strong>the</strong> enterprise in question is necessary.<br />
Added to this waste <strong>of</strong> bank charges is an opportunity cost.<br />
The reducing process <strong>of</strong> <strong>the</strong> company’s costs is based on <strong>the</strong> daily following that <strong>the</strong> company apply based on <strong>the</strong><br />
daily report that <strong>the</strong>y receive from <strong>the</strong>ir banks, BMCI, AWB, or BMCE. Therefore, <strong>the</strong>re’s an example <strong>of</strong> <strong>the</strong> bank<br />
sheet related to <strong>the</strong> company’s movements received every morning and analyzed by <strong>the</strong> treasurer:<br />
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DATE OF<br />
OPERATION<br />
Table n°10: Bank account movements in <strong>the</strong> D.O.O<br />
OPERATIONS DEBIT CREDIT<br />
« APPARENT »<br />
BALANCE<br />
30 / 01 CASH POOLING 4000 + 4000<br />
31 / 01 Versement Espèce 2000<br />
Idem Emmission de chèques 2000 + 4000<br />
01 / 02 Avis de Debit (échéance de 31/1) 4000 0<br />
02 / 02 Remise à l’escompte 1980 + 1980<br />
03 / 02 Émission de chèques 1500 + 480<br />
Table n°11 : Bank account movement in <strong>the</strong> D.O.V<br />
VALUE DATE OPERATIONS DEBIT CREDIT<br />
« Real »<br />
BALANCE<br />
30 / 01 Règlement des traites 4000 - 4000<br />
01 / 01 Virement de compte à compte 4000 0<br />
01 / 02 Versement en espèces 2000 + 2000<br />
03 / 02 Remise à l’escompte 1980<br />
Idem Règlement de chèques (présentés le 5/02) 1000 + 2980<br />
Figure n°7: Quarterly Interest Rate showing <strong>the</strong> bank account movement<br />
While a balance <strong>of</strong> + 4,000 appears for two days in <strong>the</strong> account "Bank" <strong>of</strong> <strong>the</strong> company, an ignored overdraft formed<br />
January 30: <strong>the</strong> transfer <strong>of</strong> 30 January was made too late. However <strong>the</strong> <strong>cash</strong> from 31st <strong>of</strong> <strong>the</strong> same month and <strong>the</strong><br />
discount <strong>of</strong> 2 February release could be delayed. If <strong>the</strong> company had sufficient knowledge <strong>of</strong> forecasting movements<br />
his bank balance, it could adjust with discernment <strong>the</strong> inputs and outputs <strong>of</strong> funds and avoid both discovered and<br />
surpluses. Thus can we say a <strong>cash</strong> management based on a value date accounting manages to an optimum, because<br />
it ensures <strong>the</strong> liquidity and safety <strong>of</strong> <strong>the</strong> firm while improving pr<strong>of</strong>itability.<br />
It’s all about <strong>the</strong>se conditions <strong>of</strong> Bank, <strong>the</strong>ir implementing rules and <strong>the</strong>ir negotiation that we’ll be analyzed in this<br />
next chapter.<br />
2) Negotiate <strong>the</strong> terms and conditions <strong>of</strong> Bank.<br />
When talking about <strong>the</strong> banking conditions, it is not only <strong>the</strong> ones related to <strong>the</strong> interest rates <strong>of</strong> <strong>the</strong> different types<br />
<strong>of</strong> short-term credit or placed in escrow account balances, but a number <strong>of</strong> clauses whose content and <strong>the</strong><br />
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implementing rules are poorly known for <strong>the</strong> company. The Treasurer who ignores or neglects <strong>the</strong> conditions <strong>of</strong> Bank<br />
can nei<strong>the</strong>r predict nor control <strong>the</strong> cost <strong>of</strong> its management and solvency <strong>of</strong> <strong>the</strong> case. There is no mandatory clause:<br />
apart from <strong>the</strong> current interest rates everything is negotiable in terms <strong>of</strong> Bank between <strong>the</strong> head <strong>of</strong> company and its<br />
bankers.<br />
3.1. The analysis <strong>of</strong> <strong>the</strong> conditions <strong>of</strong> bank.<br />
Bank conditions can be grouped into four types: those that are expressed in rates; those that are denominated in<br />
days; those that are evaluated in franc; those, finally, that correspond to special benefits<br />
3.1.1 - EXPRESSED AS A PERCENTAGE OF BANKING CONDITIONS: RATES.<br />
Most <strong>of</strong> <strong>the</strong>se clauses are not editable.<br />
1 - The mode for setting <strong>the</strong> rates.<br />
The prize money depends on its cost for <strong>the</strong> Bank.<br />
(a) The determination <strong>of</strong> <strong>the</strong> basic rate.<br />
Banks derive <strong>the</strong>ir resources <strong>of</strong> three origins mainly:<br />
Deposits at sight<br />
Of <strong>the</strong> mobilization <strong>of</strong> effects from <strong>the</strong> Bank <strong>of</strong> France<br />
And, finally, money market.<br />
Each resource has a specific cost that depends, for <strong>the</strong> first time, charges collection and management <strong>of</strong> <strong>the</strong> deposits<br />
for <strong>the</strong> second, <strong>the</strong> rate discount practiced by <strong>the</strong> Central Bank, and for <strong>the</strong> third, <strong>the</strong> law <strong>of</strong> supply and demand.<br />
From <strong>the</strong>se multiple costs be calculated a weighted average rate for <strong>the</strong> whole <strong>of</strong> <strong>the</strong> pr<strong>of</strong>ession in which are<br />
subsequently applied a factor to take into account overhead and pr<strong>of</strong>it margin. You <strong>the</strong>n reach a "base rate". The<br />
rate <strong>of</strong> each type <strong>of</strong> credit is obtained by multiplying <strong>the</strong> basic rate by a coefficient which varies according to each <strong>of</strong><br />
<strong>the</strong> techniques <strong>of</strong> credit risk. Is obtained for each credit formula applicable minimum rate. Of course, every company<br />
wants to apply <strong>the</strong> minimum rate.<br />
(b) The rate applicable to each company.<br />
The Bank applies, where appropriate, at <strong>the</strong> minimum rate increase which <strong>the</strong> magnitude is directly related to <strong>the</strong><br />
assessment <strong>of</strong> <strong>the</strong> risk presented by a certain client.<br />
In practice, <strong>the</strong> cost <strong>of</strong> credit is <strong>the</strong> inverse function <strong>of</strong> <strong>the</strong> size <strong>of</strong> <strong>the</strong> company. But large companies are not always<br />
those that pose <strong>the</strong> lowest risk. Also this system has been temperate, ins<strong>of</strong>ar as <strong>the</strong> interest rate depends on <strong>the</strong><br />
judgment that deals <strong>the</strong> Bank with his client. These rates are generally little changed. It is not <strong>the</strong> same conditions<br />
for <strong>the</strong>ir application.<br />
The real reason behind evaluating <strong>the</strong> <strong>cash</strong> for <strong>the</strong> company by managing <strong>the</strong> bank <strong>flow</strong>s compared to <strong>the</strong> company’s<br />
<strong>flow</strong>s, resists in <strong>the</strong> fact that <strong>the</strong> company and bank works based on two different calendars. Usually banks work five<br />
day on 7 <strong>of</strong> <strong>the</strong> week, from Monday till Friday. And in <strong>the</strong>se days <strong>the</strong> company doesn’t work permanently all <strong>the</strong> days<br />
in a full way. Some days <strong>the</strong> company work half day which we call <strong>the</strong>m “Jour non Ouvré” or “Non-Opened Days” in<br />
which <strong>the</strong> company works half days, or when <strong>the</strong>y work all <strong>the</strong> day we call it “Jour Ouvré” or “Opened Day”.<br />
Therefore, <strong>the</strong> treasurer should be always aware <strong>of</strong> <strong>the</strong>se days so that <strong>the</strong> equilibrium between <strong>the</strong> in<strong>flow</strong>s and <strong>the</strong><br />
out<strong>flow</strong>s stays always on <strong>the</strong> right level. As <strong>the</strong> previous table and graphic show, <strong>the</strong> appropriate management and<br />
Page 87 <strong>of</strong> 124
<strong>the</strong> good following system <strong>of</strong> <strong>the</strong> company’ accounts inside <strong>the</strong> bank get for <strong>the</strong> treasurer a plus value that allows for<br />
<strong>the</strong> treasurer to work on extra <strong>cash</strong> or Idle <strong>cash</strong> as previously explained when it comes to paying <strong>the</strong> supplier earlier<br />
or on <strong>cash</strong> to have <strong>the</strong> financial advantage aside. For that, <strong>the</strong> company’s relations are based on <strong>the</strong> bank’s account<br />
and <strong>the</strong> way <strong>the</strong>y are managed.<br />
The fact that a small change or difference between <strong>the</strong> days <strong>of</strong> <strong>the</strong> in<strong>flow</strong>s and out<strong>flow</strong>s could influence <strong>the</strong> whole<br />
system <strong>of</strong> <strong>the</strong> company, a small space <strong>of</strong> negotiation is allowed between <strong>the</strong> company and its banks. Although, <strong>the</strong><br />
negotiation is not allowed for all kind and types <strong>of</strong> companies more that it’s allowed only for few ones that make<br />
pr<strong>of</strong>it on <strong>the</strong> field or make high movement on <strong>the</strong> market. A process like that, is not easy to make, especially when<br />
<strong>the</strong> company such as IWACO; a distributer <strong>of</strong> o<strong>the</strong>r company. The reason behind, is that <strong>the</strong> company gain more<br />
pr<strong>of</strong>it than <strong>the</strong> contracted called (commission) when <strong>the</strong>y get to pay on <strong>the</strong> right time by <strong>cash</strong>, and to make that<br />
possible to happen, <strong>the</strong>y get <strong>the</strong>ir management on a high level but too risky and sensitive for any kind <strong>of</strong> movement.<br />
But <strong>the</strong>n. The financial managers are quiet to be asked on <strong>the</strong> WHY than <strong>the</strong> HOW.<br />
Negotiating with banks new extra lines obliged <strong>the</strong> company to make more pr<strong>of</strong>it and to show on <strong>the</strong> market field<br />
stronger and solid. Yet, to make such a thing possible to happened is by moving inside <strong>the</strong> bank’s account all <strong>cash</strong><br />
that <strong>the</strong> company needs, but <strong>the</strong>n such a decision should be taken based on <strong>the</strong> financial studied well before getting<br />
into <strong>the</strong> negotiating with <strong>the</strong> banker.<br />
3.2 - THE COSTS OF BANKING SERVICES.<br />
It is necessary that each bank is remunerated according to <strong>the</strong> reality <strong>of</strong> <strong>the</strong> services it renders to <strong>the</strong> company in its<br />
<strong>cash</strong> management. A global balance <strong>of</strong> transactions between <strong>the</strong> company and each <strong>of</strong> its bankers is <strong>the</strong> way to<br />
ensure that <strong>the</strong> balance is reasonable for both interested parties.<br />
3.2.1 - OFFER OF THE COMPANY TO THE BANKERS.<br />
There are two ways to work with banks:<br />
The company deals with each separately, pulling <strong>the</strong> best out <strong>of</strong> competition.<br />
Alternatively, <strong>the</strong> company forms around it a kind <strong>of</strong> "club" <strong>of</strong> banks complying with certain standards, with<br />
which it develops toge<strong>the</strong>r its financial policy, which is <strong>the</strong> case for <strong>the</strong> IWACO Company.<br />
The first solution does not expect a lot <strong>of</strong> <strong>the</strong> banking system, particularly in times <strong>of</strong> hardship. On <strong>the</strong> o<strong>the</strong>r hand,<br />
<strong>the</strong> second solution provides more effective support to company.<br />
The 'Bank pool' is considered to be a group <strong>of</strong> banks familiar with <strong>the</strong> company and its problems that under <strong>the</strong><br />
umbrella <strong>of</strong> a 'leader', <strong>of</strong>fers a range <strong>of</strong> served as wide as possible at all times. Here virtually, <strong>the</strong> company works<br />
both with a 'pool' and banks 'non pool ". Moreover, <strong>the</strong> entry or exit <strong>of</strong> a partner is always possible depending on <strong>the</strong><br />
services that it can or can no longer make to society. Similarly, <strong>the</strong> relative shares <strong>of</strong> each bank inside <strong>the</strong> pool remain<br />
not fixed once and for all, but change for <strong>the</strong> same reason. The assignment <strong>of</strong> operations between banks BMCI,<br />
bmce Bank and AWB's 'pool' and 'outside pool can be two systems:<br />
<br />
<br />
Assignment to each bank a percentage <strong>of</strong> corporate (movements <strong>of</strong> <strong>flow</strong>) costs, or,<br />
Allocation to each store a percentage <strong>of</strong> revenues for <strong>the</strong> company (credit movements).<br />
From <strong>the</strong> point <strong>of</strong> view <strong>of</strong> <strong>cash</strong> <strong>the</strong>se two systems are equivalent, because ultimately <strong>the</strong> expense movements are<br />
always equal income movements, and vice versa.<br />
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Regardless <strong>of</strong> <strong>the</strong> method chosen, it has yet to define <strong>the</strong> key <strong>of</strong> transactions between banks. Therefore, <strong>the</strong> Chief<br />
Financial Officer must, for each store (BU1’s or BU2’s), compare <strong>the</strong> services rendered to <strong>the</strong> benefits that removed<br />
<strong>the</strong> Bank from its relationship with <strong>the</strong> company. According to <strong>the</strong> nature and volume <strong>of</strong> <strong>the</strong> movements <strong>of</strong> <strong>the</strong> Bank<br />
will be naturally different. The company will better measure what to expect from its banks that it would know what<br />
it <strong>of</strong>fers. Therefore comparison and negotiation <strong>of</strong> Bank conditions necessarily through <strong>the</strong> evaluation <strong>of</strong> <strong>the</strong> benefit<br />
that removes every banker <strong>of</strong> its activities with <strong>the</strong> company. To monitor <strong>the</strong> level <strong>of</strong> remuneration <strong>of</strong> each store,<br />
<strong>the</strong> Chief Financial Officer will establish a "trading account".<br />
3.2.2 - OPERATING ACCOUNT MEASURES THE COMPANY'S OFFER TO ITS BANKERS.<br />
This account determines <strong>the</strong> balance <strong>of</strong> <strong>the</strong> transactions between <strong>the</strong> company and each <strong>of</strong> its bankers. After setting<br />
out <strong>the</strong> general outline <strong>of</strong> <strong>the</strong> establishment <strong>of</strong> such an account <strong>of</strong> operation.<br />
1 - Theoretical establishment <strong>of</strong> <strong>the</strong> banks-to-business transactions operating account.<br />
This account is established from <strong>the</strong> journal <strong>of</strong> Bank, excerpts, scales <strong>of</strong> <strong>the</strong>oretical banking conditions and quarterly<br />
interest.<br />
(a) The preliminary operations <strong>the</strong>re are five:<br />
1. Inventory and analysis <strong>of</strong> <strong>the</strong> existing conditions in effect.<br />
2. Assessment <strong>of</strong> <strong>the</strong> realized movements (or realize).<br />
3. Determination <strong>of</strong> <strong>the</strong> number <strong>of</strong> operations actually resulting in charge handling fees incurred by <strong>the</strong> banker<br />
(treatment manual or automated operations).<br />
4. Average calculation <strong>of</strong> <strong>the</strong> credit balance reporting period (sum <strong>of</strong> balances divided by <strong>the</strong> number <strong>of</strong> days<br />
in <strong>the</strong> period).<br />
5. The inventory <strong>of</strong> all <strong>the</strong> fees paid to <strong>the</strong> banker during <strong>the</strong> same period (bank charges <strong>of</strong> discounted, bank<br />
charges on financial notes, interest expense, commission <strong>of</strong> movements, etc.).<br />
(b) The establishment <strong>of</strong> <strong>the</strong> account itself.<br />
The essence is not to quantify <strong>the</strong> exact cost <strong>of</strong> an operation (manipulation <strong>of</strong> a check, bank transfer or o<strong>the</strong>r...), no<br />
more than to precisely assess <strong>the</strong> average cost <strong>of</strong> <strong>the</strong> Bank's resources, but to reach a mutual agreement to a<br />
reasonable compromise to get an idea <strong>of</strong> <strong>the</strong> pr<strong>of</strong>it margin <strong>of</strong> <strong>the</strong> Bank and monitor future developments. This<br />
assessment can be made by only three assumptions:<br />
<br />
<br />
<br />
The cost <strong>of</strong> a transaction for <strong>the</strong> Bank (<strong>cash</strong>ing <strong>of</strong> a check, issuance <strong>of</strong> a transfer,...);<br />
Average cost <strong>of</strong> capital for <strong>the</strong> Bank (cost <strong>of</strong> a ready franc);<br />
The average interest rate applied to <strong>the</strong> uses <strong>of</strong> funds (average selling price).<br />
From <strong>the</strong>se assumptions <strong>the</strong> construction <strong>of</strong> operating account becomes possible:<br />
<br />
<br />
Side <strong>of</strong> <strong>the</strong> revenue <strong>of</strong> <strong>the</strong> Bank, it includes all charges, charges various fixed, as well as income resulting from<br />
<strong>the</strong> float from <strong>the</strong> days <strong>of</strong> value and those corresponding to <strong>the</strong> re-use <strong>of</strong> <strong>the</strong> balances <strong>of</strong> <strong>the</strong> company;<br />
On <strong>the</strong> side <strong>of</strong> <strong>the</strong> expenditure incurred by <strong>the</strong> Bank, found <strong>the</strong> costs <strong>of</strong> financing <strong>of</strong> appropriations used by<br />
<strong>the</strong> company (discount, discovered, etc.) as well as expenses arising from <strong>the</strong> processing <strong>of</strong> transactions<br />
(<strong>cash</strong>ing check transfer, etc.).<br />
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The total balance <strong>of</strong> transactions between <strong>the</strong> company and each <strong>of</strong> its bankers said <strong>the</strong> gain (or loss) that latter<br />
derive. This is <strong>the</strong> starting point for <strong>the</strong> negotiation <strong>of</strong> Bank conditions.<br />
2 - Practical preparation <strong>of</strong> transactions undertaken banks operating account.<br />
SECTION 2: CASH FLOW FORECASTING<br />
The forecast <strong>of</strong> revenue and expenditure is to determine variations in <strong>the</strong> bank balance and <strong>the</strong>refore needs or<br />
potential financial surpluses in <strong>the</strong> very short term. This forecast allows to draw a "<strong>cash</strong> line" in value date thus<br />
defining actions to be taken on <strong>the</strong> basis <strong>of</strong> <strong>the</strong> objective "zero-<strong>cash</strong>. The maintenance <strong>of</strong> a balance person in different<br />
banks is <strong>the</strong> way to minimize financial costs while ensuring <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> firm.<br />
In practice this policy develops in two stages:<br />
<br />
<br />
Is, on <strong>the</strong> one hand, <strong>the</strong> development and implementation <strong>of</strong> a system <strong>of</strong> analysis <strong>of</strong> <strong>cash</strong> receipts and<br />
disbursements dated value. The Treasurer thus determine <strong>the</strong> importance and duration <strong>of</strong> possible financial<br />
needs. It ensures, in addition, <strong>the</strong> solvency <strong>of</strong> <strong>the</strong> firm;<br />
It is, on <strong>the</strong> o<strong>the</strong>r hand, action on regulation and recovery procedures to reduce <strong>the</strong> needs or surplus funding<br />
in <strong>the</strong> short term. The Treasurer 'smooth <strong>cash</strong> <strong>flow</strong> curve", and improves by <strong>the</strong> fact even <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong><br />
<strong>the</strong> company.<br />
I. ANALYSIS OF CASH FLOW.<br />
The company must take a 'daily tracking card' by Bank. A daily tracking sheet is an array <strong>of</strong> situation in value which<br />
includes <strong>the</strong> expected revenue and expenditure broken down by mode <strong>of</strong> regulation for <strong>the</strong> days to come. Familiar<br />
with <strong>the</strong> movement <strong>of</strong> funds, <strong>the</strong> Treasurer is able to take financing decisions or optimal investment, but also to<br />
consider procedural reforms handing thus questioned <strong>the</strong> spontaneous conduct <strong>of</strong> operations.<br />
Implement such a monitoring system, to solve three problems:<br />
Systematically capture information,<br />
know <strong>the</strong> structure <strong>of</strong> <strong>cash</strong> receipts and disbursements,<br />
Reduce <strong>the</strong> risks that weigh in <strong>the</strong> short term on <strong>the</strong> inputs and outputs <strong>of</strong> funds.<br />
A – Treasury-Data collection system<br />
The quality <strong>of</strong> <strong>the</strong> predictions depends to a large extent by <strong>the</strong> quality <strong>of</strong> <strong>the</strong> input information. To receive revenue<br />
and costs in <strong>the</strong> coming days will result in vast majority <strong>of</strong> previous decisions. These decisions are generally known<br />
by some in <strong>the</strong> company: <strong>the</strong> Treasurer may <strong>the</strong>refore know <strong>the</strong>m; <strong>the</strong> problem is to inform. Officials <strong>of</strong> <strong>the</strong> company<br />
whose actions or decisions directly translates into disbursements or <strong>of</strong> receipts can provide a relatively certain<br />
information. The Treasurer must <strong>the</strong>refore require <strong>the</strong>ir production estimates <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s, or, put in <strong>the</strong> main<br />
services a "corresponding - treasurer" responsible for collecting <strong>the</strong> information<br />
In addition to traditional accounting will be developed some specific to <strong>the</strong> <strong>cash</strong> management documents.<br />
Movements <strong>of</strong> funds may give rise to a presentation based on <strong>the</strong>ir behavior (fixed or variable), <strong>the</strong>ir periodicity, or<br />
<strong>the</strong>ir importance. They can also be summarized by mode <strong>of</strong> regulation, by period <strong>of</strong> regulation or place <strong>of</strong> payment.<br />
Similarly, it will be much more effective to post in value date. The system can only work if standards have been<br />
established to characterize each stream according to <strong>the</strong> criteria <strong>of</strong> analysis concerning.<br />
Thus <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> will be divided into four classes:-movements are known to some, including <strong>the</strong><br />
completion date and <strong>the</strong> amount (for example, <strong>the</strong> payment <strong>of</strong> wages generally); -<strong>the</strong> uncertain movements on <strong>the</strong>ir<br />
Page 90 <strong>of</strong> 124
date, but whose amount is known (e.g. operations by check); -movements uncertain as to <strong>the</strong>ir amount, but whose<br />
date is known (payment <strong>of</strong> VAT for example); -<strong>the</strong> uncertain movements as <strong>the</strong>ir date and <strong>the</strong>ir amount, finally (for<br />
example, <strong>the</strong> transfer <strong>of</strong> assets). Appropriate <strong>the</strong>n to quantify this classification, and to deduce <strong>the</strong> implementation<br />
<strong>of</strong> an information system.<br />
Thus <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> will be divided into four classes:<br />
<br />
<br />
<br />
<br />
Movements are known to some, including <strong>the</strong> completion date and <strong>the</strong> amount (for example, <strong>the</strong> payment<br />
<strong>of</strong> wages generally);<br />
The uncertain movements on <strong>the</strong>ir date, but whose amount is known (e.g. operations by check);<br />
Movements uncertain as to <strong>the</strong>ir amount, but whose date is known (payment <strong>of</strong> VAT for example);<br />
The uncertain movements as <strong>the</strong>ir date and <strong>the</strong>ir amount, finally (for example, <strong>the</strong> transfer <strong>of</strong> assets).<br />
It is appropriate <strong>the</strong>n to quantify this classification, and to deduce <strong>the</strong> implementation <strong>of</strong> an information system.<br />
Ainsi les mouvements de liquidités seront répartis en quatre classes :<br />
<br />
<br />
<br />
<br />
les mouvements certains, dont la date de réalisation et le montant sont connus (par exemple le versement<br />
des salaires généralement) ;<br />
les mouvements incertains quant à leur date, mais dont le montant est connu (par exemple les opérations<br />
par chèques) ;<br />
les mouvements incertains quant à leur montant, mais dont la date est connue (le paiement de la T.V.A. par<br />
exemple) ;<br />
les mouvements incertains quant à leur date et à leur montant, enfin (par exemple la cession d’actif).<br />
Il conviendra alors de quantifier cette classification, et d’en déduire l’implantation d’un système d’information.<br />
Une méthode de la gestion de la trésorerie » appliqué au sein de la trésorerie a porté sur le classement les postes «<br />
dépenses » d'une entreprise. L'analyse a été faite en considérant comme fixe :<br />
<br />
<br />
An amount that varies in an interval defined by more or less 3% around <strong>the</strong> average for <strong>the</strong> period;<br />
A date that fits in a range defined by plus or minus two days around <strong>the</strong> average date. This method<br />
manages <strong>the</strong> following findings (see table below):<br />
Table 12: Funding’s distribution<br />
Date Amount Fix Amount Variable Amount Total<br />
Fix Date 20% 50% 70%<br />
Variable Date 0% 30% 30%<br />
Total 20% 80% 100%<br />
The implementation <strong>of</strong> <strong>the</strong> <strong>cash</strong> management-specific information processing methods allows <strong>the</strong> Treasurer to make<br />
efficient decisions. In addition, it makes possible <strong>the</strong> use <strong>of</strong> statistical forecasting methods. However, <strong>the</strong> control <strong>of</strong><br />
<strong>the</strong> effectiveness <strong>of</strong> <strong>the</strong> designed information system is necessary. The control documents used are essentially<br />
comparison charts between <strong>the</strong> movements <strong>of</strong> entry and exit <strong>of</strong> funds planned and carried out; documents prepared<br />
in day to day and value date<br />
The Treasury curve is <strong>the</strong> syn<strong>the</strong>sis <strong>of</strong> <strong>the</strong> <strong>cash</strong> control document. Discrepancies between forecasts and work to<br />
assess <strong>the</strong> quality <strong>of</strong> each circuit and each source <strong>of</strong> information. Here’s an example <strong>of</strong> <strong>the</strong> 2016’s estimated treasury,<br />
based on <strong>the</strong> forecasted losses:<br />
Page 91 <strong>of</strong> 124
F I G U R E N ° 8 : E E S T I M AT E D I N F LO W S O F T R E A S U RY 2 0 1 5<br />
0,25<br />
0,2<br />
0,15<br />
0,1<br />
0,05<br />
0<br />
-0,05<br />
-0,1<br />
B - KNOWLEDGE OF THE STRUCTURE OF CASH RECEIPTS AND DISBURSEMENTS.<br />
The development <strong>of</strong> <strong>the</strong> Treasury curve is based on intimate knowledge <strong>of</strong> <strong>cash</strong> receipts and disbursements <strong>of</strong> <strong>the</strong><br />
company structure.<br />
1-THE STRUCTURE OF RECEIPTS OF THE FIRM.<br />
Knowledge <strong>of</strong> <strong>the</strong> structure <strong>of</strong> <strong>cash</strong> provides us with a first series <strong>of</strong> causes <strong>of</strong> variations in <strong>the</strong> <strong>cash</strong> balance.<br />
A relatively simple technique derived from processes Markov and applied inside <strong>the</strong> company, 'analysis by age <strong>of</strong> <strong>the</strong><br />
receivables', significantly improves <strong>the</strong> quality <strong>of</strong> projected <strong>cash</strong>. At one point is conceded a certain percentage <strong>of</strong><br />
receivables arising from past sales. For example, examination <strong>of</strong> <strong>the</strong> source <strong>of</strong> <strong>the</strong> receipts recorded during <strong>the</strong> last<br />
five periods allows us to draw <strong>the</strong> following table: To reserve <strong>the</strong> confidentiality <strong>of</strong> <strong>the</strong> firm, <strong>the</strong>se are approximately<br />
<strong>the</strong> numbers achieved by <strong>the</strong> company in similar periods<br />
PERIOD TO WHICH THE SALES GIVING RISE TO<br />
PAYMENT, OCCURRED<br />
Table n°13: Structure <strong>of</strong> receipts <strong>of</strong> <strong>the</strong> firm<br />
PERIOD DURING WHICH THE PAYMENT OCCURS<br />
1 2 3 4 5<br />
1 30 39 25 20 10<br />
2 - 27 40 25 20<br />
3 - - 30 35 23<br />
4 - - - 23 37<br />
5 - - - - 30<br />
In each box figure <strong>the</strong> percentage <strong>of</strong> <strong>the</strong> turnover achieved in <strong>the</strong> period i (line number) and <strong>cash</strong>ed in <strong>the</strong> period j<br />
(column number). Thus <strong>the</strong> receipts for <strong>the</strong> period 5 come from:<br />
<br />
<br />
<br />
<br />
10% <strong>of</strong> <strong>the</strong> Turnover at <strong>the</strong> first period<br />
20% <strong>of</strong> <strong>the</strong> Turnover in <strong>the</strong> second period;<br />
23% <strong>of</strong> <strong>the</strong> Turnover in <strong>the</strong> third period;<br />
37% <strong>of</strong> <strong>the</strong> Turnover in <strong>the</strong> fourth period;<br />
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30% <strong>of</strong> <strong>the</strong> Turnover in <strong>the</strong> fifth period.<br />
Using a mass <strong>of</strong> large enough information collected from <strong>the</strong> historical events <strong>of</strong> <strong>the</strong> firm, it becomes possible:<br />
First, to determine <strong>the</strong> average percentage <strong>of</strong> <strong>the</strong> turnover <strong>of</strong> a period i, <strong>cash</strong>ed a period j;<br />
Then project this outcome in <strong>the</strong> future considering that <strong>the</strong>se percentages represent validly probable share<br />
<strong>of</strong> <strong>the</strong> turnover <strong>of</strong> a period coming k that will be earned during each <strong>of</strong> <strong>the</strong> periods that follow k.<br />
Thus was able to establish that, on average, receipts consequential to <strong>the</strong> turnover <strong>of</strong> a period n are spread as<br />
follows:<br />
And so at this same time, we get to know <strong>the</strong> average <strong>of</strong> Turnover that <strong>the</strong> company achieve each period.<br />
2 - THE STRUCTURE OF THE DISBURSEMENT OF THE IWACO.<br />
Fixed charges generally pose no particular problem <strong>of</strong> prediction: <strong>the</strong>y are known with certainty. Variable costs, on<br />
<strong>the</strong> contrary, are difficult to assess. However using <strong>the</strong> statistical technique <strong>of</strong> "correlation", a significant<br />
improvement in <strong>the</strong> prediction <strong>of</strong> disbursements is possible. By definition <strong>the</strong> varying loads depend on <strong>the</strong> level <strong>of</strong><br />
activity <strong>of</strong> <strong>the</strong> firm. There is thus a connection between variable costs and turnover <strong>of</strong> <strong>the</strong> same period than <strong>the</strong><br />
correlation allows to quantify. Graphic representation <strong>of</strong> <strong>the</strong> phenomenon occurs very classically on a system <strong>of</strong><br />
perpendicular axes, relating to any category <strong>of</strong> expenditure considered, observed monthly, and on <strong>the</strong> o<strong>the</strong>r <strong>the</strong><br />
turnover, also monthly, corresponding. If <strong>the</strong> various points are grouped around a line, called 'straight regression',<br />
<strong>the</strong>re is a correlation between <strong>the</strong> two variables and this correlation is linear.<br />
The highlight <strong>of</strong> a close relationship between two variables to express one <strong>of</strong> <strong>the</strong>se variables depending on <strong>the</strong> o<strong>the</strong>r.<br />
Accordingly, if one knows <strong>the</strong> evolution <strong>of</strong> one it can foresee <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> o<strong>the</strong>r. Gold turnover level forecasts<br />
prove to be accurate enough in <strong>the</strong> short term. Thus, it becomes possible to estimate expenditure from <strong>the</strong> forecast<br />
turnover when a significant relationship could be established.<br />
If this calculation is always possible, some remarks are however required. First such an analysis requires <strong>the</strong> collection<br />
<strong>of</strong> important statistical series; that does not generally raise problems. Then, it should be noted that it is essential to<br />
revise periodically used coefficients which lose <strong>the</strong>ir meaning over time. Finally, a thorough study <strong>of</strong> <strong>the</strong> operating<br />
cycle must assess <strong>the</strong> temporal shifts, if <strong>the</strong>y exist, between variables, in order to identify <strong>the</strong> closest possible.<br />
The study <strong>of</strong> <strong>the</strong> structure <strong>of</strong> <strong>the</strong> inputs and outputs <strong>of</strong> funds is still insufficient to allow <strong>the</strong> Treasurer Forecast curve<br />
<strong>of</strong> <strong>cash</strong> value date. Both in what concerns income than expenses <strong>the</strong>re are independent uncertainties in <strong>the</strong><br />
Organization <strong>of</strong> <strong>the</strong> company, its activity and its conditions <strong>of</strong> Bank. These uncertainties are related to <strong>the</strong> behavior<br />
<strong>of</strong> customers, suppliers and in General <strong>of</strong> third parties. However, using classical statistical methods can significantly<br />
reduce <strong>the</strong> uncertainties that exist in this area.<br />
C - THE REDUCTION OF UNCERTAINTY IN CERTAIN MOVEMENTS OF FUNDS.<br />
The most <strong>of</strong>ten encountered uncertainties concern <strong>the</strong> date <strong>of</strong> realization <strong>of</strong> <strong>the</strong> movement. Thus <strong>the</strong>re is mainly<br />
following hesitation:<br />
On <strong>the</strong> side <strong>of</strong> revenues, <strong>the</strong> company knows <strong>the</strong> total amount <strong>of</strong> invoices giving rise to a <strong>cash</strong> payment but does not<br />
necessarily know <strong>the</strong> dates to which customers are actually going to pay. In <strong>the</strong> same way it ignores always or almost<br />
dates which will return <strong>the</strong> treaties sent to acceptance or promissory notes issued by clients.<br />
On <strong>the</strong> side <strong>of</strong> spending, it's <strong>the</strong> <strong>cash</strong>ing <strong>of</strong> <strong>the</strong> check by creditors which is random. A cheque issued today is hosted<br />
by its beneficiary in x days.<br />
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Regardless <strong>of</strong> <strong>the</strong> type <strong>of</strong> uncertainty facing <strong>the</strong> Treasurer, he will always find in <strong>the</strong> statistical arsenal <strong>the</strong> adequate<br />
methodology, or classic, is more elaborate. But <strong>the</strong> Manager must ask itself if it is important to know <strong>the</strong> actual date<br />
<strong>of</strong> <strong>the</strong> expenditure or <strong>the</strong> upcoming recipe today.<br />
1 - SENSITIVITY ANALYSIS.<br />
It comes to know if knowledge <strong>of</strong> <strong>the</strong> date <strong>of</strong> completion <strong>of</strong> an undertaking would change how ei<strong>the</strong>r <strong>the</strong> decision to<br />
be taken today. A "sensitivity analysis" allows to know if an optimal decision is affected by an interval <strong>of</strong> uncertainty<br />
related to <strong>the</strong> value <strong>of</strong> a parameter <strong>of</strong> <strong>the</strong> template. If <strong>the</strong> optimal decision is sensitive to extreme values <strong>of</strong> <strong>the</strong><br />
parameter should be approaching <strong>the</strong> exact value <strong>of</strong> <strong>the</strong> random factor. In all cases it should be to balance <strong>the</strong> cost<br />
<strong>of</strong> obtaining more accurate information and <strong>the</strong> pr<strong>of</strong>its or savings it is hoped to remove.<br />
Two characteristic examples <strong>of</strong> many situations experienced by corporate treasurers will allow us to illustrate this.<br />
1.1 - Analysis <strong>of</strong> relative sensitivity to <strong>the</strong> <strong>cash</strong>ing <strong>of</strong> checks issued.<br />
This example deals with <strong>the</strong> impact <strong>of</strong> uncertainty as to <strong>the</strong> date <strong>of</strong> receipt <strong>of</strong> a check issued on <strong>the</strong> decision to supply<br />
timely bank account. So a company that goes or comes to issue a check in favor <strong>of</strong> one <strong>of</strong> its creditors has two possible<br />
attitudes: ei<strong>the</strong>r supply his bank account in an amount equal to <strong>the</strong> value <strong>of</strong> <strong>the</strong> cheque, or wait for overdraft notice<br />
to complete <strong>the</strong> transfer.<br />
The cost <strong>of</strong> <strong>the</strong> first solution can be expressed simply as a function <strong>of</strong> <strong>the</strong> form y = an x. In effect, if <strong>the</strong> amount <strong>of</strong> <strong>the</strong><br />
cheque is 100 SFR and <strong>the</strong> average interest on <strong>the</strong> 10% market rate <strong>the</strong> opportunity cost <strong>of</strong> idle <strong>cash</strong> thus formed is:<br />
C = 33.000.000 (1+5.35%) / 360 = 96570.83333 DHS<br />
Where x is <strong>the</strong> number <strong>of</strong> days between <strong>the</strong> issuance <strong>of</strong> <strong>the</strong> cheque for his collection (admit that x ranges from 0 to<br />
30 days). The graph below illustrates this feature:<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
10 20 30<br />
Figure n°9: The variations <strong>of</strong> Idle <strong>cash</strong>’s Costs over periods<br />
The second solution at <strong>the</strong> fixed costs proven as followed: The Company while waiting <strong>the</strong> overdraft <strong>of</strong> 33.000.000<br />
DHS, supports by <strong>the</strong> gaming <strong>of</strong> Value dates and deadlines <strong>of</strong> 6 to 10 days <strong>of</strong> financial costs. If we considered an<br />
average or 7 days at 14%:<br />
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OVERDRAFT’S COSTS = [33.000.000 DHS (1 + 0.07) /360] x 7 = 2.08<br />
Next graphical presentation highlights <strong>the</strong> opportunity cost and <strong>the</strong> cost <strong>of</strong> <strong>the</strong> resulting overdraft <strong>of</strong> uncertainty as<br />
to <strong>the</strong> date <strong>of</strong> receipt <strong>of</strong> a checks issued. Immediately we see <strong>the</strong> need for sharing between <strong>the</strong> checks <strong>cash</strong>ed in 7<br />
days to come and o<strong>the</strong>rs. Which implies an approximate knowledge <strong>of</strong> <strong>the</strong> habits <strong>of</strong> <strong>cash</strong>ing checks by creditors <strong>of</strong><br />
<strong>the</strong> firm.<br />
10<br />
8<br />
Cost <strong>of</strong> Opportunity<br />
Cost <strong>of</strong> <strong>the</strong> Overdraft<br />
6<br />
4<br />
2<br />
0<br />
7 10 20 30<br />
Figure n°10: Opportunity and Overdraft costs’ graphical presentation<br />
The first category <strong>of</strong> check control <strong>the</strong> concomitant supply <strong>of</strong> bank account. On <strong>the</strong> o<strong>the</strong>r hand, for those presented<br />
for payment beyond one week it is cheaper to wait <strong>the</strong> overdraft. If this second category is important, <strong>the</strong> Treasurer<br />
will have no doubt same interest in fur<strong>the</strong>r analysis later. In <strong>the</strong> example, if he knows that <strong>the</strong> creditor will collect<br />
<strong>the</strong> check around <strong>the</strong> twentieth day, it may practically cancel <strong>the</strong> cost <strong>of</strong> <strong>the</strong> overdraft. Managed to reduce <strong>the</strong> costs<br />
<strong>of</strong> overdraft related to <strong>the</strong> <strong>cash</strong>ing <strong>of</strong> <strong>the</strong> checks after 7 days <strong>of</strong> issuance, it will <strong>the</strong>n address <strong>the</strong> case <strong>of</strong> checks <strong>of</strong><br />
<strong>the</strong> first category.<br />
2 - THE STREAMLINING OF PROCEDURES FOR BILLING AND RECOVERING<br />
We <strong>of</strong>ten encounter companies whose receivables from customers are greater than <strong>the</strong>ir net fixed assets. But while<br />
investment operations are carried out meticulously, delays in payment are made without any calculation <strong>of</strong><br />
pr<strong>of</strong>itability. Now, if <strong>the</strong> duration <strong>of</strong> loans to customers is difficult if not impossible to reduce, at least companies<br />
should restrict to <strong>the</strong> minimum delays caused by poor organization. This action should be at two levels:<br />
The Organization <strong>of</strong> customer credit,<br />
The Organization <strong>of</strong> credit-customer service.<br />
2.1 - The Organization <strong>of</strong> <strong>the</strong> customer credit.<br />
IWACO should measure <strong>the</strong> risk taken by granting payment facilities to be able to protect itself. It must also strive<br />
to accelerate <strong>the</strong> recovery <strong>of</strong> funds. Finally, it must organize a customer credit control.<br />
a) Measure <strong>of</strong> risk 'credit-customer<br />
The taken risk with each client assessment is carried out ei<strong>the</strong>r with <strong>the</strong> help <strong>of</strong> organizations external specialized, or<br />
from publications. These external agencies are <strong>of</strong> three types:<br />
Services companies specializing in <strong>the</strong> measurement <strong>of</strong> risk,<br />
Banks <strong>of</strong> <strong>the</strong> client (although <strong>the</strong>y do not always have interest to point out <strong>the</strong> weaknesses <strong>of</strong> <strong>the</strong>ir client in<br />
order to avoid filing for <strong>the</strong> bankruptcy) and <strong>the</strong> Bank <strong>of</strong> Morocco;<br />
Pr<strong>of</strong>essional associations, and chambers <strong>of</strong> Commerce.<br />
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Analyses from publications <strong>of</strong> assessments can also be interesting (sheets DAFSA; Minutes <strong>of</strong> <strong>the</strong> General meetings;<br />
Grafts <strong>of</strong> <strong>the</strong> courts <strong>of</strong> commerce in France; <strong>of</strong>ficial newspapers in Belgium), especially if <strong>the</strong>re are pr<strong>of</strong>essional<br />
standards such as those published by <strong>the</strong> Central <strong>of</strong> <strong>the</strong> balance sheets <strong>of</strong> <strong>the</strong> Bank <strong>of</strong> France.<br />
b) The reduction <strong>of</strong> <strong>the</strong> administrative deadlines for recovery<br />
The aim is to shorten <strong>the</strong> period that elapses between <strong>the</strong> sale and <strong>the</strong> time <strong>of</strong> <strong>the</strong> company’s receiving funds. Any<br />
delay costs money for <strong>the</strong> company: fees are equal to <strong>the</strong> product <strong>of</strong> <strong>the</strong> amount <strong>of</strong> <strong>the</strong> invoices by <strong>the</strong> cost <strong>of</strong> capital,<br />
during <strong>the</strong> days <strong>of</strong> waiting, all stages <strong>of</strong> <strong>the</strong> deed <strong>of</strong> sale must be considered, including two:<br />
1 ° - The reduction <strong>of</strong> “<strong>the</strong> submission for payment’s deadlines<br />
It is common to see that sometimes more than one month elapses between submission <strong>of</strong> a check by a client and<br />
<strong>the</strong> <strong>flow</strong> <strong>of</strong> his account. To shorten this period should be to establish a 'selection <strong>of</strong> mail-regulation' procedure upon<br />
arrival in order to appropriate hand over payment titles to <strong>the</strong> Bank <strong>the</strong> same day. We can go up to send a courier -<br />
even by air - seek a check when <strong>the</strong> amount is worth. Generally avoid transfers <strong>of</strong> titles <strong>of</strong> amount by <strong>the</strong> postal<br />
circuit. Mail losses are relatively rare, but <strong>the</strong>y exist. Add that <strong>the</strong> reduction <strong>of</strong> <strong>the</strong> time limits for submission for<br />
payment implies a concomitant decrease <strong>of</strong> <strong>the</strong> accounting recording time.<br />
However at IWACO, effective tool to make such an easy to run is <strong>the</strong> "Cash Pooling"; It facilitates <strong>the</strong> transfer if <strong>cash</strong><br />
from one company to ano<strong>the</strong>r knowing that <strong>the</strong> two belong to <strong>the</strong> same group.<br />
2 ° - The reduction <strong>of</strong> <strong>the</strong> deadlines for <strong>cash</strong>ing.<br />
It may result from a Bank-business negotiation, and is based on techniques developed in <strong>the</strong> Moroccan commercial<br />
banks. With regard to <strong>the</strong> case <strong>of</strong> IWACO society, involving generally three core banks: La Banque Populaire, BMCI,<br />
and Attijari Wafa Bank.<br />
«Area concentration» system: The Company has a number important distribution center has an interest to<br />
group <strong>the</strong>m in strategic areas <strong>of</strong> recovery. Customers <strong>of</strong> a specific area are invited to send <strong>the</strong>ir payments to<br />
<strong>the</strong> center <strong>of</strong> recovery <strong>of</strong> this area that drop <strong>the</strong>m <strong>of</strong>f at <strong>the</strong> local bank <strong>of</strong> <strong>the</strong> company. The recovery <strong>of</strong> funds<br />
has accelerated since <strong>the</strong> securities received in each area are generally earned on <strong>the</strong> accounts <strong>of</strong> <strong>the</strong> banks<br />
<strong>of</strong> <strong>the</strong> region. Surplus funds are transferred from local banks to a Bank <strong>of</strong> centralization.<br />
Area<br />
Concentration<br />
Distributer n°1<br />
Distributer n°2<br />
Distributer n°3<br />
Distributer n°4<br />
Figure n°11: Area <strong>of</strong> Concentration<br />
"Lock-box" system: it is a refinement <strong>of</strong> <strong>the</strong> system above where <strong>the</strong> company asks customers to send <strong>the</strong>ir<br />
regulations not to a recovery center, but a box mailing. Each regional bank notes titles several times per day<br />
and credits on <strong>the</strong> behalf <strong>of</strong> <strong>the</strong> company. Checks are sent to banks related to. At <strong>the</strong> same time <strong>the</strong> company<br />
receives a credit notice and documents reproduction. This system accelerates <strong>the</strong> receipts <strong>of</strong> several days<br />
and releases <strong>the</strong> undertaking <strong>of</strong> <strong>the</strong> work <strong>of</strong> handling <strong>of</strong> checks<br />
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3 ° - The Customer-Loan Control<br />
Control <strong>of</strong> customer credit is an activity that can be separate in practice <strong>of</strong> debt collection operations. The 'balancecustomer'<br />
is <strong>the</strong> essential document. Established for each client allows to control <strong>the</strong> importance <strong>of</strong> reliance, to<br />
ensure that <strong>the</strong> ceiling is not exceeded. «Schedule <strong>of</strong> customer receivables», meanwhile, resumed each claim a client<br />
and allows its control. This document reveals <strong>the</strong> possible delays to <strong>the</strong> date <strong>of</strong> payment. A system <strong>of</strong> "automatic<br />
raises" must be organized in order to combat such delays. Beyond a certain period, or a certain amount <strong>of</strong> debt <strong>the</strong><br />
Treasurer will send individualized reminders, if necessary even it call <strong>the</strong> defaulting debtor.<br />
2.1 - The Organization <strong>of</strong> "credit-client.<br />
A company always has advantage, regardless <strong>of</strong> its size, to arrange a specific 'credit-customer '. Commercial and<br />
financial share responsibility for this activity. It is toge<strong>the</strong>r that <strong>the</strong>y must establish credit limits by customer and by<br />
way <strong>of</strong> regulation. Thus, on <strong>the</strong> one hand <strong>the</strong> commercial service can streamline its business strategy, and on <strong>the</strong><br />
o<strong>the</strong>r hand financial <strong>of</strong>ficer can accurately assess <strong>the</strong> investment in this type <strong>of</strong> need in working capital. This last<br />
point should be noted: a procedure <strong>of</strong> investment demand should be organized in <strong>the</strong> case <strong>of</strong> a change in <strong>the</strong> terms<br />
<strong>of</strong> settlement with a client.<br />
3 - THE CENTRALISATION OF LIQUIDITY MANAGEMENT.<br />
Complementary techniques to streamline <strong>the</strong> procedures for billing and collection, centralization <strong>of</strong> <strong>the</strong> management<br />
<strong>of</strong> <strong>the</strong> <strong>company's</strong> <strong>cash</strong> <strong>flow</strong> appears as a necessity. Indeed, give financial autonomy to each geographic or productive<br />
unit leads to <strong>the</strong> multiplication <strong>of</strong> idle balances, funds transfer and administrative and financial costs.<br />
Decentralization in this field led by leng<strong>the</strong>ning <strong>of</strong> <strong>the</strong> circuits and waste time.<br />
It is for this reason that <strong>the</strong> company has adopted a system <strong>of</strong> management <strong>of</strong> <strong>the</strong> <strong>cash</strong> very centralized. A central<br />
bank account is fed daily by transfers <strong>of</strong> all revenue collected (AWB) <strong>the</strong> day before by different accounts <strong>of</strong> <strong>the</strong> subcenters<br />
(franchises, wholesalers, agencies, deposits etc.), even if it has an autonomy <strong>of</strong> management. The bank<br />
account <strong>of</strong> each center is thus brought back permanently to zero. To pay local expenses, accounts <strong>of</strong> secondary<br />
centers are in turn fed to <strong>the</strong> nearest penny according to specific needs and payment authorization by Headquarters.<br />
Before addressing this second point, should quickly describe a last method to shorten <strong>the</strong> delays. This company has<br />
daily telephone contact with its bankers. It can thus knowing its position or having received or given such information<br />
guide its action. We meet at <strong>the</strong> present time <strong>of</strong> many cases where <strong>the</strong>re is a permanent link between <strong>the</strong> company<br />
and those <strong>of</strong> its banks - telematics. At any time can <strong>the</strong>refore be obtained a detailed statement <strong>of</strong> operations that<br />
could modify <strong>the</strong> <strong>cash</strong> position. This is all <strong>the</strong> more useful as many bank accounts. This system permits to remove <strong>the</strong><br />
time elapsing between <strong>the</strong> moment where a <strong>cash</strong> (or disbursement) is done to <strong>the</strong> Bank and its notification to <strong>the</strong><br />
company.<br />
II - THE REASONED SLOWDOWN OF THE SETTLEMENT OF DEBTS.<br />
It is not systematically delay <strong>the</strong> payment <strong>of</strong> debts at <strong>the</strong> risk <strong>of</strong> tainting <strong>the</strong> reputation <strong>of</strong> <strong>the</strong> firm, but <strong>the</strong> dates <strong>of</strong><br />
deadlines in a timely manner.<br />
A - THE RATIONAL ESTABLISHMENT OF DUE DATES.<br />
It is admitted that revenues and expenses are unevenly distributed over time. But rarely <strong>the</strong> chance to compensate<br />
timely disbursements by in<strong>flow</strong>s. Any company is experiencing periods <strong>of</strong> negative <strong>cash</strong> that staffing in <strong>the</strong> best <strong>of</strong><br />
cases by bank credit.<br />
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These <strong>cash</strong> difficulties due to <strong>the</strong> lack <strong>of</strong> synchronization between <strong>the</strong> revenue and expenditure are accentuated<br />
because <strong>of</strong> <strong>the</strong> concentration <strong>of</strong> <strong>the</strong> maturities on a very brief, very <strong>of</strong>ten at <strong>the</strong> end <strong>of</strong> month. If due date used to<br />
set suppliers coincides with <strong>the</strong> date <strong>of</strong> payment <strong>of</strong> wages and VAT, <strong>the</strong> imbalance <strong>of</strong> <strong>the</strong> <strong>cash</strong> will be fur<strong>the</strong>r<br />
delivered. Two companies <strong>of</strong> <strong>the</strong> same kind and <strong>the</strong> same volume <strong>of</strong> activity which must regulate wages and V.A.T.<br />
at month-end will have needs quite different funds as providers deadline lies for one 30, and <strong>the</strong> o<strong>the</strong>r 10<br />
To reduce <strong>the</strong>se fluctuations in need <strong>of</strong> liquidity, <strong>the</strong> Treasurer <strong>the</strong>refore spread payments. In o<strong>the</strong>r words:<br />
Chooses as <strong>the</strong> settlement date <strong>of</strong> <strong>the</strong> expenditure which he has control <strong>of</strong> execution, a distant date that<br />
outputs mandatory funds (salaries, VAT, taxes, etc.),<br />
And distribute regulations suppliers’ receivables on <strong>the</strong> basis <strong>of</strong> <strong>the</strong> movement <strong>of</strong> <strong>cash</strong> receipts.<br />
The dates <strong>of</strong> settlement <strong>of</strong> suppliers must <strong>the</strong>refore be laid down taking into account o<strong>the</strong>r spending and revenue.<br />
In order to maximize <strong>cash</strong>, debts must be honored at <strong>the</strong>ir maturity date, nei<strong>the</strong>r before nor after. The question<br />
arises whe<strong>the</strong>r one has interest in paying more sooner to take advantage <strong>of</strong> a <strong>cash</strong> discount. It is difficult to give a<br />
general response, practices vary greatly according to <strong>the</strong> various branches <strong>of</strong> activities and situations. However we<br />
describe <strong>the</strong> approach <strong>of</strong> <strong>the</strong> analysis to follow, from a concrete example.<br />
If we supposed that a 2% discount is given if <strong>the</strong> payment is made within 10 days <strong>of</strong> <strong>the</strong> billing or <strong>the</strong> full amount is<br />
due within 30 days. The cost <strong>of</strong> <strong>the</strong> waiver <strong>of</strong> <strong>the</strong> <strong>cash</strong> discount is:<br />
(0.02 / 0.98) x (360 / 20) = 36.73%<br />
The discount, must be that <strong>the</strong> alternative use <strong>of</strong> funds corresponding to <strong>the</strong> amount <strong>of</strong> <strong>the</strong> debt is paid at a rate<br />
higher than 36% year for <strong>the</strong> duration <strong>of</strong> <strong>the</strong> "onerous" credit (20 days in <strong>the</strong> example). It remains to select <strong>the</strong><br />
instrument <strong>of</strong> payment<br />
B - THE CHOICE OF THE PAYMENT INSTRUMENT.<br />
The retained payment instrument must possess three qualities for <strong>the</strong> company when it’s debtor:<br />
First, allow sprawl <strong>of</strong> payments, i.e. to avoid <strong>the</strong> pointed output and important liquidity, still expensive;<br />
Allow <strong>the</strong>n <strong>the</strong> limitation <strong>of</strong> <strong>the</strong> formalization <strong>of</strong> outstanding floating ("float"), also expensive;<br />
Finally, enable to remove waste that are idle <strong>cash</strong><br />
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Pr<strong>of</strong>itability is <strong>the</strong> guarantee <strong>of</strong> <strong>the</strong> credit term. In o<strong>the</strong>r words <strong>the</strong> fundamental financial choices - investments and<br />
<strong>the</strong>ir funding - condition <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> company.<br />
SECTION 1: THE CONDITIONS OF THE COMPANY’S LIQUIDITY.<br />
Any personnel responsible for <strong>the</strong> enterprise must be aware <strong>of</strong> <strong>the</strong> implications <strong>of</strong> its activity on <strong>the</strong> <strong>cash</strong> position <strong>of</strong><br />
<strong>the</strong> company, it belongs to <strong>the</strong> Directorate General <strong>of</strong>:<br />
Promote <strong>the</strong> formation <strong>of</strong> <strong>cash</strong> <strong>flow</strong> and controlling its use;<br />
Maintain <strong>the</strong> potential for reconstruction <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> firm.<br />
I - THE MANAGEMENT OF CASH FLOW.<br />
Cash <strong>flow</strong> that passes through <strong>the</strong> company determines <strong>the</strong> potency <strong>of</strong> man oeuvre <strong>of</strong> <strong>the</strong> firm to provided,<br />
however, that <strong>the</strong> contractor controls <strong>the</strong> training and assignment.<br />
A - CONTROL OF THE FORMALIZATION OF THE CASH FLOWS.<br />
This control is based on <strong>the</strong> knowledge <strong>of</strong> <strong>the</strong> conditions <strong>of</strong> formalization <strong>of</strong> <strong>the</strong> stream as well as knowledge <strong>of</strong> <strong>the</strong><br />
effects <strong>of</strong> investment on <strong>the</strong> <strong>cash</strong> <strong>flow</strong>.<br />
1 - THE CONDITIONS OF FORMALIZATION OF CASH FLOW.<br />
The investment is <strong>the</strong> source <strong>of</strong> revenues for <strong>the</strong> firm. Gold investment decisions are conditioned by:<br />
The importance <strong>of</strong> <strong>the</strong> funds committed in <strong>the</strong> operating cycle.<br />
Changes in <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> company<br />
1.1 - The importance <strong>of</strong> <strong>the</strong> funds committed in <strong>the</strong> operating cycle.<br />
The company has from its creation <strong>of</strong> a mass <strong>of</strong> capital to finance fixed assets and <strong>the</strong> values <strong>of</strong> working capital<br />
necessary for its operation. The share <strong>of</strong> funds at all times throughout <strong>the</strong> life <strong>of</strong> <strong>the</strong> firm operating cycle limit its<br />
future investment opportunities and <strong>the</strong>refore its future income. This action is exercised through two means has<br />
any case to obtain monetary availabilities:<br />
Self-financing, with one hand,<br />
The foreign financing.<br />
(a) Restrictions on <strong>the</strong> formation <strong>of</strong> savings, i.e. <strong>the</strong> ability to self-finance.<br />
All things being equal elsewhere (production capacity not used in full, and, sufficient demand to absorb production),<br />
<strong>the</strong> <strong>cash</strong> <strong>flow</strong> <strong>of</strong> a period is limited by <strong>the</strong> volume <strong>of</strong> circulating capital that <strong>the</strong> company can stop. Indeed, this "<strong>cash</strong><br />
constraint" determines <strong>the</strong> importance <strong>of</strong> <strong>the</strong> figure <strong>of</strong> business so <strong>the</strong> result <strong>of</strong> operation and <strong>the</strong> possibilities <strong>of</strong><br />
self-financing <strong>of</strong> <strong>the</strong> coming period. As a result, <strong>the</strong> investment is reduced accordingly. For example, if <strong>the</strong> company<br />
can affect only that 150 to <strong>the</strong> financing <strong>of</strong> circulating capital, C = 20 + 5 x is <strong>the</strong> function <strong>of</strong> production, <strong>the</strong> maximum<br />
production will be 26 units, and, taking into account <strong>the</strong> income R = 10 x function, <strong>the</strong> maximum <strong>cash</strong> <strong>flow</strong> allowed<br />
by <strong>the</strong> available working capital fund will be:<br />
If <strong>the</strong> company gave 150 as <strong>the</strong> Capital capacity; we would write <strong>the</strong> function <strong>of</strong> Distribution as followed:<br />
F (D) C = 20 + 5x<br />
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There we’ll have as a maximum <strong>of</strong> <strong>the</strong> company’s Distribution capacity:<br />
Max (D) 150 = 20 + 5x<br />
Where:<br />
X = 26 Unit<br />
And with considering that Revenue takes this form:<br />
R = 10x<br />
The Cash-Flows will be equals to:<br />
CF = R – C = 10x – (20 + 5x)<br />
CF = 110<br />
X = 26 Unit<br />
b) The limitation <strong>of</strong> funding possibilities by external resources.<br />
Usually bankers get to be motivated for business when <strong>the</strong> <strong>company's</strong> situation is under a good working capital fund,<br />
because on <strong>the</strong> one hand it must normally have a healthy <strong>cash</strong> <strong>flow</strong>, and secondly because it resists <strong>the</strong> best in<br />
adversity. We have seen here inside IWACO that in reality this criterion is seriously flawed and that <strong>the</strong> banker will<br />
always prompt <strong>the</strong> rationale justifications for <strong>the</strong> reimbursement <strong>of</strong> any competition sought by <strong>the</strong> provision <strong>of</strong> a<br />
capital plan and <strong>of</strong> a <strong>cash</strong> plan.<br />
Thus, <strong>the</strong> possibilities <strong>of</strong> <strong>the</strong> company for having loans depend on its forecasting <strong>cash</strong>. Yet, <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> <strong>cash</strong><br />
position also determines its debt capacity.<br />
1.2 - Changes in <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> firm.<br />
Investment decisions are influenced by changes in <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> companies. Fears <strong>of</strong> a <strong>cash</strong> crisis, even<br />
temporary, can <strong>of</strong>ten impede investment. However, <strong>the</strong> existence <strong>of</strong> significant liquidity could lead <strong>the</strong> contractor to<br />
take any opportunity to invest.<br />
(a) The adverse effect.<br />
The adverse effect <strong>of</strong> this relationship has been highlighted in <strong>the</strong> preparation <strong>of</strong> <strong>the</strong> financial statements that allow<br />
<strong>the</strong> company to analyze its financial situation present or forecast. The main causes <strong>of</strong> imbalance <strong>of</strong> <strong>cash</strong> are <strong>the</strong><br />
rigidity <strong>of</strong> selling prices and especially <strong>the</strong> increase in operating expenses.<br />
It would seem that <strong>the</strong>re is a parallel evolution between changes in <strong>the</strong> percentage <strong>of</strong> businesses who believe that<br />
<strong>the</strong>ir <strong>cash</strong> has become more difficult and <strong>the</strong> number <strong>of</strong> those who have delayed <strong>the</strong>ir investment expenditures.<br />
Besides <strong>the</strong> essential tool used to improve <strong>the</strong> State <strong>of</strong> <strong>the</strong> treasuries is precisely slowing spending in fixed assets<br />
(investment orders) and capital circulating (purchases, production costs, staff costs).<br />
Reverse evolution is less clear-cut. Analysis <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> company. On <strong>the</strong> o<strong>the</strong>r hand, reveals <strong>the</strong><br />
existence <strong>of</strong> a relationship <strong>of</strong> cause and effect between improvement <strong>of</strong> <strong>the</strong> <strong>cash</strong> and <strong>the</strong> decrease <strong>of</strong> short-term<br />
debt. Also, one may wonder to what extent this reduction in debt does not correspond to an increase in own funds<br />
locked in circulating capital. Anyway <strong>the</strong> favorable effect <strong>of</strong> <strong>the</strong> appearance <strong>of</strong> liquidity on <strong>the</strong> decision to invest is<br />
certain.<br />
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(b) The Positive Effect.<br />
Swelling <strong>of</strong> <strong>cash</strong> usually causes a reflex <strong>of</strong> investment. It may be that <strong>the</strong> presence <strong>of</strong> liquidity creates from scratch<br />
<strong>the</strong> decision to invest, or allows investments. The contractor may seems to grasp all possible investment<br />
opportunities, once its <strong>cash</strong> situation is evolving favorably.<br />
2 - THE EFFECTS OF INVESTMENT ON THE CASH FLOW.<br />
Any investment is a potential source <strong>of</strong> revenue and pr<strong>of</strong>its that will swell <strong>the</strong> <strong>flow</strong> <strong>of</strong> <strong>cash</strong> available to <strong>the</strong> company.<br />
2.1 - The effects <strong>of</strong> investment on <strong>the</strong> income <strong>of</strong> <strong>the</strong> firm.<br />
The investment increases <strong>the</strong> production capacity <strong>of</strong> <strong>the</strong> firm, and, all o<strong>the</strong>r things being equal, its production and<br />
turnover.<br />
This increase is less proportional because it is always a part <strong>of</strong> <strong>the</strong> investment that is intended to cover <strong>the</strong><br />
depreciation <strong>of</strong> <strong>the</strong> capital assets. The template 'benefit-cost-volume', or neutral, leads to <strong>the</strong> operating leverage<br />
effect that provides <strong>the</strong> foundations for a policy <strong>of</strong> investment designed not only based on <strong>the</strong> imperative <strong>of</strong><br />
pr<strong>of</strong>itability, but also on <strong>the</strong> basis <strong>of</strong> imperative <strong>of</strong> liquidity. You can refine by proposing a neutral to <strong>cash</strong> more<br />
directly linked to <strong>the</strong> <strong>cash</strong> position <strong>of</strong> <strong>the</strong> company.<br />
(a) Operational leverage and <strong>cash</strong> <strong>flow</strong> value.<br />
If we admit <strong>the</strong> three situations <strong>of</strong> IWACO as follows:<br />
The company is fully automated to a higher fixed costs. Thanks to this automation variable costs increase slowly. The<br />
importance <strong>of</strong> overhead costs is that <strong>the</strong> company reached neutral to a higher activity than TENOR and GOCOM.<br />
Figure n°12 : Death-Center <strong>of</strong> Tenor<br />
Figure n°13 : Death-Center <strong>of</strong> Gocom<br />
Page 101 <strong>of</strong> 124
However, once IWACO achieved neutral (dead<br />
center), it sees its <strong>cash</strong> <strong>flow</strong> increase faster than<br />
those <strong>of</strong> <strong>the</strong> o<strong>the</strong>r two companies.<br />
(b) Death-point <strong>of</strong> <strong>cash</strong> and risk <strong>of</strong> insolvency.<br />
Figure n°14 : Death-Center <strong>of</strong> IWACO<br />
All fixed costs <strong>of</strong> a business do not correspond to<br />
outputs <strong>of</strong> Fund; same as a share <strong>of</strong> income may stay<br />
a while in <strong>the</strong> form <strong>of</strong> credit-clients. Thus,<br />
depreciation expense are not output cases. The<br />
following chart shows for example that if on <strong>the</strong> total<br />
amount <strong>of</strong> <strong>the</strong> fixed costs, 30 000, represent<br />
allocations to amortization <strong>of</strong> <strong>cash</strong> neutral is located<br />
at a level <strong>of</strong> production <strong>of</strong> 12 500 units.<br />
Figure n°14 : Death-Center <strong>of</strong> IWACO<br />
Neutral <strong>of</strong> <strong>cash</strong> does not replace a <strong>cash</strong> budget but can appreciate <strong>the</strong> risks <strong>of</strong> insolvency arising from <strong>the</strong> operation.<br />
Thus, <strong>the</strong> company would have a volume <strong>of</strong> fixed costs as it would suffer losses in period <strong>of</strong> low activity but would<br />
realize significant benefits during periods <strong>of</strong> high activity where it can be solvent during <strong>the</strong>se losses, as long as <strong>the</strong><br />
outputs «fixed» <strong>cash</strong> are small enough to allow <strong>the</strong> company to cross <strong>the</strong> dead point <strong>of</strong> <strong>cash</strong> or as we call it “Dead<br />
Center” or “Neutral”. Therefore, <strong>the</strong> assessment <strong>of</strong> <strong>the</strong> risk <strong>of</strong> insolvency by neutral <strong>of</strong> <strong>cash</strong> indicates a business<br />
conditions to achieve greater benefits (and <strong>the</strong>refore a higher <strong>cash</strong> <strong>flow</strong>), is automating and increasing its leverage<br />
effect without running <strong>the</strong> danger <strong>of</strong> a <strong>cash</strong> crisis.<br />
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2.2 - The influence <strong>of</strong> investment on <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s through depreciation.<br />
In <strong>the</strong>ory; <strong>the</strong> depreciation is a privileged tool to finance <strong>the</strong> <strong>company's</strong> expansion. Specifically it is <strong>the</strong> most<br />
important <strong>of</strong> <strong>the</strong> two sources <strong>of</strong> self-financing, <strong>the</strong> second being <strong>the</strong> undistributed pr<strong>of</strong>its. Any new investment will<br />
contribute to grow <strong>cash</strong> <strong>flow</strong> available to <strong>the</strong> company through additional appropriations to depreciation.<br />
(a) Tax depreciation and <strong>cash</strong> <strong>flow</strong>.<br />
Depreciation is an element <strong>of</strong> taxes’ <strong>cash</strong> <strong>flow</strong>s, and can <strong>the</strong>refore be used to finance investments. However, it can<br />
be shown that <strong>the</strong> practice <strong>of</strong> ‘depreciation” allows <strong>the</strong> company to have a monetary mass replacement <strong>of</strong> technical<br />
capital needs.<br />
Representing an investment <strong>of</strong> price P, in 10 years in a linear fashion, and value depreciable residual zero at <strong>the</strong> end<br />
<strong>of</strong> <strong>the</strong> tenth year. If revenues are sufficient, <strong>the</strong> available money supply will be:<br />
P/10 during <strong>the</strong> second year, 2P/10 during <strong>the</strong> third…etc., 9/10 for <strong>the</strong> tenth.<br />
These funds may be used for any use in fixed capital or circulating. Everything happens as if <strong>the</strong> company "could<br />
borrow from itself" an amount equal to:<br />
Apart from any consideration <strong>of</strong> updating, <strong>the</strong> money available to <strong>the</strong> firm for 10 years will be:<br />
P/10 + 2 P/10 + 3 P/10 +... + 9 P/10 = 4, 5 P.<br />
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(b) The improvement <strong>of</strong> pr<strong>of</strong>itability is a Cash Generator<br />
Investment should improve <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> firm and thus <strong>the</strong> liquidity term. The report 'ROI' (return on<br />
investment) reveals <strong>the</strong> cause <strong>of</strong> changes in <strong>cash</strong> <strong>flow</strong>:<br />
Change to margin, and<br />
Speed <strong>of</strong> investment.<br />
Therefore, <strong>the</strong> equation is written like this:<br />
ROI = ((BENEFIT / TURNOVER) X (TURNOVER / INVESTMENT (ASSETS))<br />
Finally, note that <strong>the</strong> simple growth <strong>of</strong> <strong>the</strong> turnover may be beneficial where <strong>the</strong> company can use even temporarily<br />
surplus liquidity on an interim basis at its disposal.<br />
These phenomena occur regardless <strong>of</strong> <strong>the</strong> size <strong>of</strong> <strong>the</strong> company. But in <strong>the</strong> group T-man Holding and like any o<strong>the</strong>r<br />
group <strong>of</strong> companies, <strong>the</strong> distribution <strong>of</strong> dividends comes fur<strong>the</strong>r inflate <strong>the</strong> available <strong>cash</strong> <strong>flow</strong>.<br />
c) Self-Financing in <strong>the</strong> Group <strong>of</strong> Company IWACO / T - MAN HOLDING.<br />
The distribution <strong>of</strong> dividends is a source <strong>of</strong> liquidity at <strong>the</strong> level <strong>of</strong> a group. Indeed self-financing <strong>of</strong> a parent<br />
corporation not only his only activity results but also distributions <strong>of</strong> pr<strong>of</strong>its that its subsidiaries were granted to him.<br />
In a group <strong>of</strong> companies <strong>the</strong>re is a 'facelift' dividends at <strong>the</strong> end <strong>of</strong> each fiscal year. It may be interesting to 'govern<br />
<strong>the</strong> distribution <strong>of</strong> dividends' so that <strong>the</strong> desired sum is <strong>the</strong> place wanted at <strong>the</strong> time.<br />
Once formed, <strong>the</strong> <strong>cash</strong> <strong>flow</strong> is immediately reinvested in various jobs for a shorter or longer period. Any misallocation<br />
translates into reduced <strong>the</strong> pr<strong>of</strong>itability but also by <strong>cash</strong> <strong>flow</strong> at more or less short term. It is <strong>the</strong>refore for <strong>the</strong><br />
company to control this "permanent investment's <strong>cash</strong> <strong>flow</strong>.<br />
B. INVESTMENT OF CASH FLOWS<br />
1. Cash-Treasury and Investment Policies, BU1 and BU2<br />
1.1 The influence <strong>of</strong> <strong>the</strong> firm’s activity on <strong>the</strong> circulated capital<br />
Few companies escape a variation seasonal or cyclical activity. For IWACO, this translates ei<strong>the</strong>r <strong>cash</strong> in <strong>the</strong> narrow,<br />
or sometimes by a bloated <strong>cash</strong>. Seeing <strong>the</strong> typology, amount and variations, <strong>the</strong> company with very large annual<br />
variations in <strong>the</strong> activity benefits from effective banking support campaign credits as was explained earlier. Yet, <strong>the</strong><br />
company when it handles <strong>the</strong>se simulated variations, <strong>the</strong>y have interest to study variations in <strong>the</strong> mass <strong>of</strong> circulating<br />
capital to better manage <strong>the</strong>ir financial resources and avoid any difficulty <strong>cash</strong>. Understanding fluctuations in<br />
circulating capital, is to know <strong>the</strong> evolution over time <strong>of</strong> <strong>the</strong> elements that make it up. These elements evolve as <strong>the</strong><br />
case may be, ei<strong>the</strong>r according to seasonality <strong>of</strong> activity (as measured by <strong>the</strong> monthly variations <strong>of</strong> turnover), or<br />
depending on <strong>the</strong> seasonality <strong>of</strong> supply (measured by <strong>the</strong> monthly pace <strong>of</strong> purchases).<br />
For that, it is recommended to calculate <strong>the</strong> seasonality <strong>of</strong> <strong>the</strong> sales and <strong>the</strong> purchase and <strong>the</strong>n assess <strong>the</strong>ir impact<br />
on <strong>the</strong> different components <strong>of</strong> <strong>the</strong> circulating capital. These indices can be calculated as follows:<br />
*The sales seasonality Index:<br />
TSI = [(Turnover x 12 / Annual Turnover)]<br />
*The Purchasing Seasonality Index<br />
PSI = [(Monthly Purchase x 12 / Annual Purchasing)]<br />
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There are thus two sets <strong>of</strong> 12 monthly indices which can refine <strong>the</strong> accuracy taking <strong>the</strong> average over several<br />
months. The analysis <strong>of</strong> <strong>the</strong>ir impact on <strong>the</strong> volume <strong>of</strong> circulating capital will be analyzed for 2016 year. The<br />
company has fixed <strong>the</strong> following conditions for both providers and clients:<br />
‣ Clients: 30% pay in <strong>cash</strong>, 10% at 30 days end <strong>of</strong> month, 60% at 60 days end <strong>of</strong> month.<br />
‣ Suppliers: 50% are paid in 15 days, 33% at 30 days end <strong>of</strong> month and 17% in 45 days end <strong>of</strong> month.<br />
‣ The provisional figures sales and purchases for <strong>the</strong> next 12 months, contained in table 32 below, to<br />
calculate necessary seasonal indices:<br />
Months Jan Feb. Mar. Apr. May Juin Juil. Aug. Sept. Oct. Nov. Dec. TOTAL AVERAGE<br />
Sales<br />
(millions 2,4 1,7 2,45 2,1 2 1,7 2,5 2,15 2,1 2,45 2 2 25,55 2,13<br />
<strong>of</strong> DH)<br />
SIT 13,53 9,58 13,81 11,84 11,27 9,58 14,09 12,12 11,84 13,81 11,27 11,27<br />
Purchase<br />
(million 0 0 15 0 8 8 4 8 11 8 8 8 78 6,5<br />
de DH)<br />
SIP 0,00 0,00 27,69 0,00 14,77 14,77 7,38 14,77 20,31 14,77 14,77 14,77<br />
Table n° 14: Monthly sales and seasonal indices <strong>of</strong> turnover (SIT); Monthly<br />
purchases and Seasonal Indices <strong>of</strong> Purchases (SIP).<br />
We assume that <strong>the</strong> circulating capital consists <strong>of</strong> three elements: credit customer, supplier credit and<br />
stock <strong>of</strong> goods.<br />
Let’s calculate <strong>the</strong> impact <strong>of</strong> seasonal variation <strong>of</strong> activity on <strong>the</strong> 'Credit-clients' (next figure) position:<br />
MONTHS<br />
SIT<br />
PAYMENT<br />
Cash 30 Days 60 Days<br />
TOTAL<br />
INFLOWS<br />
CREDIT BALANCE<br />
ACCUMULATION<br />
Jan. 1,13 0,34 - - - - - - -<br />
Feb 0,8 0,24 0,11 - - - - - -<br />
Mar 1,15 0,35 0,08 0,68 2,25 - -1,10 -1,10 -<br />
Apr 0,99 0,30 0,12 0,48 1,88 - -0,89 -1,99 -<br />
May 0,94 0,28 0,10 0,69 2,01 - -1,07 -3,06 -<br />
Jun 0,8 0,24 0,09 0,59 1,73 - -0,93 -3,99 -<br />
Jul 1,17 0,35 0,08 0,56 2,17 - -1,00 -4,99 -<br />
Aug 1,01 0,30 0,12 0,48 1,91 - -0,90 -5,89 -<br />
Sep 0,99 0,30 0,10 0,70 2,09 - -1,10 -6,99 -<br />
Oct 1,15 0,35 0,10 0,61 2,20 - -1,05 -8,04 -<br />
Nov 0,94 0,28 0,12 0,59 1,93 - -0,99 -9,03 -<br />
Dec 0,94 0,28 0,09 0,69 2,01 - -1,07 -10,09 -<br />
Jan - - 0,09 0,56 - - - - -<br />
Feb - - - 0,56 - - - - -<br />
Table 15: Impact <strong>of</strong> seasonality <strong>of</strong> turnover on <strong>the</strong> balance 'clients '.<br />
Page 105 <strong>of</strong> 124
Let’s calculate <strong>the</strong> impact <strong>of</strong> <strong>the</strong> seasonal variation in <strong>the</strong> supply on <strong>the</strong> «credits-supplier» (next figure)<br />
position:<br />
Months PSI<br />
PAYMENT<br />
Total In<strong>flow</strong>s Credit Balance Accumulation<br />
15 Days 30 Days 45 Days<br />
Jan. 0,00 0,00 - - - - - - -<br />
Feb 0 0,00 0,00 - - - - - -<br />
Mar 2,31 1,16 0,00 0,00 3,47 - -1,16 -1,16 -<br />
Apr 0 0,00 0,76 0,00 0,76 - -0,76 -1,92 -<br />
May 1,23 0,62 0,00 0,39 2,24 - -1,01 -2,93 -<br />
Jun 1,23 0,62 0,41 0,00 2,25 - -1,02 -3,95 -<br />
Jul 0,62 0,31 0,41 0,21 1,55 - -0,93 -4,87 -<br />
Aug 1,23 0,62 0,20 0,21 2,26 - -1,03 -5,90 -<br />
Sep 1,69 0,85 0,41 0,11 3,05 - -1,36 -7,26 -<br />
Oct 1,23 0,62 0,56 0,21 2,61 - -1,38 -8,64 -<br />
Nov 1,23 0,62 0,41 0,29 2,54 - -1,31 -9,95 -<br />
Dec 1,23 0,62 0,41 0,21 2,46 - -1,23 -11,18 -<br />
Jan - - 0,41 0,21 - - - - -<br />
Feb - - - 0,21 - - - - -<br />
Table 16: Impact <strong>of</strong> seasonality <strong>of</strong> <strong>the</strong> acts on <strong>the</strong> balance providers.<br />
<br />
Calculate <strong>the</strong> impact <strong>of</strong> seasonal variations in activity and supply on <strong>the</strong> stock <strong>of</strong> goods<br />
Month<br />
Purchases <strong>of</strong> <strong>the</strong> Sales <strong>of</strong> <strong>the</strong> month with<br />
month (1)<br />
p.c = 80% (2)<br />
(1) - (2) Starting Stock Accumulated<br />
Jan. 0,00 0,90 -0,90 - -0,90<br />
Feb 0,00 0,64 -0,64 - -1,54<br />
Mar 2,31 0,92 1,39 - -0,15<br />
Apr 0,00 0,79 -0,79 - -0,94<br />
May 1,23 0,75 0,48 - -0,47<br />
Jun 1,23 0,64 0,59 - 0,12<br />
Jul 0,62 0,94 -0,32 - -0,19<br />
Aug 1,23 0,81 0,42 - 0,23<br />
Sep 1,69 0,79 0,90 - 1,13<br />
Oct 1,23 0,92 0,31 - 1,44<br />
Nov 1,23 0,75 0,48 - 1,92<br />
Dec 1,23 0,75 0,48 - 2,39<br />
Table 17: Changes in <strong>the</strong> index <strong>of</strong> <strong>the</strong> stock balance.<br />
The fluctuations in <strong>the</strong> volume <strong>of</strong> stock are <strong>the</strong> result <strong>of</strong> changes in <strong>the</strong> <strong>flow</strong>s <strong>of</strong> entries (purchases) and <strong>the</strong> stream<br />
output (sales). Therefore <strong>the</strong> stock balance can be obtained in <strong>the</strong> absence <strong>of</strong> permanent inventory by <strong>the</strong><br />
following calculation:<br />
*p.c: Purchases Capacity<br />
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S = The starting stock (possibly)<br />
+ Purchases <strong>of</strong> <strong>the</strong> month<br />
- Month expressed at <strong>the</strong> purchase price sales.<br />
Let’s assume that <strong>the</strong> margin is 20% <strong>of</strong> <strong>the</strong> selling price.<br />
The next figure summarizes <strong>the</strong>se results and gives <strong>the</strong> forecast evolution <strong>of</strong> <strong>the</strong> capital circulating for <strong>the</strong> year<br />
2016.<br />
Balance Jan. Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average<br />
Stocks -0,9 -1,54 -0,15 -0,94 -0,47 0,12 -0,19 0,23 1,13 1,44 1,92 2,39 0,25<br />
- - - -<br />
0 0 -1,1 -1,99 -3,06 -3,99 -4,99 -5,89<br />
Clients<br />
6,99 8,04 9,03 10,09<br />
-4,60<br />
- - - -<br />
0 0 -1,16 -1,92 -2,93 -3,95 -4,87 -5,9<br />
Suppliers<br />
7,26 8,64 9,95 11,18<br />
-4,81<br />
Working<br />
Capital<br />
-0,9 -1,54 -0,21 -0,87 -0,34 0,16 -0,07 0,22 0,86 0,84 1 1,3 0,04<br />
Table 18: Monthly Forecast Evolution <strong>of</strong> capital circulating for <strong>the</strong> year 2016.<br />
This next chart, reproduces fluctuations <strong>of</strong> <strong>the</strong> mass <strong>of</strong> capital circulating in <strong>the</strong> fiscal year 2016.<br />
1,5<br />
1<br />
0,5<br />
0<br />
-0,5<br />
-1<br />
-1,5<br />
1 2 3 4 5 6 7 8 9 10 11 12<br />
Seasonal Variation <strong>of</strong> Working<br />
Capital<br />
The average <strong>of</strong> Working<br />
Capital<br />
-2<br />
Figure 15: Seasonal variation <strong>of</strong> <strong>the</strong> Working Capital<br />
This presentation <strong>of</strong> <strong>the</strong> problem <strong>of</strong> circulating capital investment allows a double simulation: first on <strong>the</strong><br />
components <strong>of</strong> circulating capital, <strong>the</strong>n on <strong>the</strong> forecast monthly turnover.<br />
So can we determine <strong>the</strong> volume <strong>of</strong> <strong>the</strong> funds to invest in capital <strong>flow</strong>ing to cope with expansion. Then, given its own<br />
financial possibilities, those <strong>of</strong> <strong>the</strong> monetary and financial markets, <strong>the</strong> company can determine <strong>the</strong> pace <strong>of</strong> growth<br />
it can assume and <strong>the</strong> rate <strong>of</strong> inflation that it can bear. Finally, this method <strong>of</strong> analysis <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong><br />
circulating capital during <strong>the</strong> operating cycle reveals: on one hand, <strong>the</strong> amount <strong>of</strong> permanent capital, <strong>the</strong> amount<br />
Page 107 <strong>of</strong> 124
and duration <strong>of</strong> <strong>the</strong> necessary transitional capital. Indeed, <strong>the</strong> fixed part <strong>of</strong> <strong>the</strong> circulating capital must be financed<br />
by stable resources; and <strong>the</strong> variable part requires funding for its duration.<br />
2 – DEFINITION OF THE BU1 AND THE BU2:<br />
Since <strong>the</strong> existence <strong>of</strong> <strong>the</strong> company on <strong>the</strong> market, <strong>the</strong>y used to be distributer <strong>of</strong> one telecommunication operator<br />
that is INWI or WANA CORPORATE earlier. Since <strong>the</strong>n, all type <strong>of</strong> transaction and commercial businesses were related<br />
to this only supplier for two reasons, for being <strong>the</strong> o<strong>the</strong>r supplier full from having new distributers, and two, <strong>the</strong><br />
contract that has been signed by <strong>the</strong> two part was clear in <strong>the</strong> fact that any distributer <strong>of</strong> WANA CO. has no right to<br />
add an extra supplier to his pocket especially <strong>the</strong> competition.<br />
From that time until now, IWACO based all <strong>the</strong>ir investments and pr<strong>of</strong>its on <strong>the</strong> BU1. But <strong>the</strong>n when <strong>the</strong> activity<br />
started to <strong>flow</strong> up a bit, and like any o<strong>the</strong>r company, <strong>the</strong>y decided to add an extra investor or producer to which<br />
<strong>the</strong>y’ll play <strong>the</strong> same role <strong>of</strong> being a distributer that is BU2. These fact ga<strong>the</strong>r <strong>the</strong> definition and analysis <strong>of</strong> <strong>the</strong><br />
IWACO’s nature in <strong>the</strong> telecommunication market. To conserve <strong>the</strong> confidentiality <strong>of</strong> <strong>the</strong> company to its inside<br />
information, <strong>the</strong> BU1 and BU1 will be used as <strong>the</strong> two nick names given to <strong>the</strong> two suppliers.<br />
SECTION 2: EVALUATION OF THE CASH TREASURY’S SITUATION OF THE FIRM:<br />
A. ARBITRATION OF THE FINANCIAL POSITION OF THE COMPANY<br />
The company’s investment policy is related to <strong>the</strong> legal conditions that relate <strong>the</strong> whole firm to <strong>the</strong> suppliers. The<br />
fact behind is that each supplier avoids competition through though <strong>the</strong> contracted distributer, for that, <strong>the</strong> decisions<br />
related to <strong>the</strong> investment part are most <strong>of</strong>ten tight or limited to small activities or even more, activities presented in<br />
<strong>the</strong> market under <strong>the</strong> suppliers’ image.<br />
The existence <strong>of</strong> INWI as an <strong>of</strong>ficial supplier and provider was for quite a long time. The only supplier, and <strong>the</strong> over<br />
than 80% <strong>of</strong> <strong>the</strong> company’s turnover, that made <strong>the</strong> firm’s life and surviving key <strong>of</strong> <strong>the</strong> market depends on that<br />
supplier. For a different fact and actions, this decision <strong>of</strong> keeping it <strong>the</strong> only one was on <strong>the</strong> best regard <strong>of</strong> <strong>the</strong><br />
company’s financial return and on <strong>the</strong> o<strong>the</strong>r side; reputation on <strong>the</strong> market as <strong>the</strong> third operator.<br />
The company’s financial situation depends on <strong>the</strong> sales that <strong>the</strong> company realizes from selling <strong>the</strong> INWI’s products,<br />
ei<strong>the</strong>r <strong>the</strong> High-Tech. products or <strong>the</strong> telecommunication service. In fact, financial situation is represented as <strong>the</strong><br />
<strong>cash</strong> treasury <strong>of</strong> <strong>the</strong> company that is managed through <strong>the</strong> financial direction or <strong>the</strong> company’s Treasurer. The<br />
following chart will represent <strong>the</strong> form and definition <strong>of</strong> <strong>the</strong> Cash <strong>flow</strong>s inside <strong>the</strong> firm.<br />
Table 19: Simulated Treasury’s Cash plan 2016<br />
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This chart is reserved to make clear <strong>the</strong> composition <strong>of</strong> <strong>the</strong> company’s turnover and how it’s formalized. As explained<br />
in <strong>the</strong> previous chapters, <strong>the</strong> company makes pr<strong>of</strong>it from selling high-technologies product and telecommunication<br />
services. Although, this financial equilibrium is <strong>the</strong> result <strong>of</strong> a financial study, <strong>the</strong>refore, we’ll work on explaining <strong>the</strong><br />
financial composition <strong>of</strong> this capital:<br />
Used Overdraft<br />
Days<br />
Starting Balance<br />
Turnover<br />
In<strong>flow</strong>s<br />
WANA Commission<br />
Exploitation Charges<br />
INWI Purchases<br />
INWI Purchases : Cash<br />
Final Balance<br />
Interest Amount<br />
Cash Gain<br />
Overdraft : Credit Line<br />
The company contracts loans’ lines from banks or as we call it<br />
<strong>the</strong> overdrafts with which <strong>the</strong>y execute <strong>the</strong>ir activities. As it<br />
was mentioned in <strong>the</strong> previous chapters, this operation <strong>of</strong><br />
buying products from <strong>the</strong> supplier by loans makes <strong>the</strong><br />
company pay extra financial charges on a rate <strong>of</strong> 5.35% <strong>of</strong><br />
interests’ rate, and <strong>the</strong> amount <strong>of</strong> <strong>the</strong>se financial charges is<br />
calculated on <strong>the</strong> Final Balance.<br />
The final balance is calculated on <strong>the</strong> in<strong>flow</strong>s minus <strong>the</strong><br />
out<strong>flow</strong>s. The in<strong>flow</strong>s are generally <strong>the</strong> Turnover, WANA<br />
Commissions, and all <strong>the</strong> incomes that <strong>the</strong> company makes<br />
from <strong>the</strong> activity (sales and all…). The out<strong>flow</strong>s are <strong>the</strong><br />
exploitation charges (taxes, added value, salaries, CNSS…),<br />
INWI purchases; which is <strong>the</strong> major part and essential one <strong>of</strong><br />
<strong>the</strong> company’s activity, it allows <strong>the</strong><br />
Company to have 0.5% gained <strong>cash</strong> on <strong>the</strong> paid amount <strong>of</strong> <strong>the</strong>se purchases, o<strong>the</strong>rwise <strong>the</strong> company pays 5.35% <strong>of</strong><br />
<strong>the</strong> amount as financial charges that are interest, and under a credit line (overdraft) <strong>of</strong> 33.000.000 DHS in both<br />
contracted banks <strong>of</strong> <strong>the</strong> company. Knowing that <strong>the</strong> bank doesn’t work on vacation nor in <strong>the</strong> weekends, which leads<br />
to conclude that <strong>the</strong> company pas sometimes extra charges for <strong>the</strong> unworked days.<br />
The graphical presentation <strong>of</strong> <strong>the</strong> balance allows to <strong>the</strong> financial manager to analyze <strong>the</strong> situation <strong>of</strong> <strong>the</strong> overdraft’s<br />
consumption for <strong>the</strong> company. The result is, more <strong>the</strong> company uses <strong>the</strong> overdraft to cover its charges <strong>the</strong> more it<br />
gains financial advantages from banks and vice versa. The disadvantage is when <strong>the</strong> company doesn’t used <strong>the</strong> whole<br />
overdraft during a transaction in a month or less means that <strong>the</strong> company is supporting extra financial charges for<br />
no reason. The thing is, each time <strong>the</strong> company tries to maximize <strong>the</strong> consumption <strong>of</strong> <strong>the</strong> overdraft for more than<br />
once in a month, and <strong>the</strong> result is that <strong>the</strong> company realizes more pr<strong>of</strong>it than it could do in normal cases. This<br />
following chart will show us <strong>the</strong> situation <strong>of</strong> <strong>the</strong> company’s financial <strong>flow</strong>s using <strong>the</strong> company’s bank overdraft.<br />
5 000 000,00 DH<br />
0,00 DH<br />
-5 000 000,00 DH<br />
-10 000 000,00 DH<br />
-15 000 000,00 DH<br />
-20 000 000,00 DH<br />
-25 000 000,00 DH<br />
-30 000 000,00 DH<br />
-35 000 000,00 DH<br />
-40 000 000,00 DH<br />
Figure 16: IWACO'S DAILY BALANCE<br />
Page 109 <strong>of</strong> 124
After many simulations <strong>of</strong> making <strong>the</strong> company consume <strong>the</strong> global overdraft each time, this chart represents <strong>the</strong><br />
final result <strong>of</strong> how <strong>the</strong> company’s financial <strong>flow</strong>s and balance would be like. A full consummation <strong>of</strong> <strong>the</strong> overdraft,<br />
remembering that <strong>the</strong> company can use <strong>the</strong> overdraft to pay <strong>the</strong> supplier in Cash and <strong>the</strong>n do a sort <strong>of</strong> arbitration<br />
between <strong>the</strong> gained <strong>cash</strong> and <strong>the</strong> financial <strong>flow</strong>s. Still, <strong>the</strong> company has gaps in January, June, July, October,<br />
December, where <strong>the</strong>y can increase <strong>the</strong> amount <strong>of</strong> <strong>cash</strong> and INWI purchases. The fact is that <strong>the</strong> company faces new<br />
investment opportunities, but before jumping into ant new business, <strong>the</strong> company has to verify if <strong>the</strong> company<br />
manages its current <strong>cash</strong> treasury or not, and <strong>the</strong> key to do <strong>the</strong> perfect evaluation is by controlling and managing <strong>the</strong><br />
financial charges or <strong>cash</strong> gain ga<strong>the</strong>red from <strong>the</strong> payment <strong>of</strong> <strong>the</strong> supplier.<br />
Based on <strong>the</strong> previous table; <strong>the</strong> company’s financial costs’ situation was represented as followed:<br />
Table n°20 : Company’s Fianancial<br />
Costs with BU1<br />
The financial analysis <strong>of</strong> this results shows that <strong>the</strong> company, according to <strong>the</strong> 2016 elaborated simulation, was able<br />
to make an annual financial product up to 3 063 945,03 DHS with 1 190 383,84 DHS <strong>of</strong> financial costs paid as an<br />
interest amount for <strong>the</strong> both <strong>the</strong> contracted banks. Yet, <strong>the</strong> financial challenge for <strong>the</strong> firm is to have <strong>the</strong> biggest part<br />
<strong>of</strong> <strong>the</strong> paid amount paid in Cash; which in this case is represented in 66% <strong>of</strong> <strong>cash</strong> and 34% using <strong>the</strong> overdraft. The<br />
right definition <strong>of</strong> this division is that both are held into <strong>the</strong> same treasury with different rates; <strong>cash</strong> money on 0.5%<br />
financial gain and 5.35% interest rate for <strong>the</strong> overdraft, which leaves <strong>the</strong> company with beneficial margin that allows<br />
it to cover <strong>the</strong> financial charges and make pr<strong>of</strong>it at <strong>the</strong> same time.<br />
The elaborated simulation could take many forms, and all depends on how much <strong>the</strong> company looks for covering <strong>the</strong><br />
financial charges, squeeze <strong>the</strong> overdraft line, use <strong>the</strong> global amount <strong>of</strong> <strong>the</strong> credit line in o<strong>the</strong>r terms, and make<br />
financial pr<strong>of</strong>it. The goal behind paying in <strong>cash</strong> is so that <strong>the</strong> company could gain 0.5% <strong>of</strong> <strong>the</strong> paid amount, but also<br />
it would allow <strong>the</strong> firm to have <strong>the</strong> ability <strong>of</strong> negotiating <strong>the</strong> INWI’s line <strong>of</strong> purchases or <strong>the</strong> “Objective” as we call it<br />
using <strong>the</strong> firm’s terms, and in <strong>the</strong> o<strong>the</strong>r hand, gain rate points in <strong>the</strong> suppliers’ classification <strong>of</strong> <strong>the</strong> distributers.<br />
Bank, firm and financial direction, take <strong>the</strong> responsibility <strong>of</strong> <strong>the</strong> controlling and managing <strong>the</strong> company’s financial<br />
<strong>flow</strong>s, but <strong>the</strong> only obstacle in this game is that <strong>the</strong> company doesn’t get <strong>the</strong> authority over <strong>the</strong> bank’s decision to<br />
increase or decrease <strong>the</strong> overdraft line, so <strong>the</strong> only way to make it happen is to represent at <strong>the</strong> best position <strong>the</strong><br />
company’s Cash-Plan and increase <strong>the</strong> company’s financial image in front <strong>of</strong> <strong>the</strong> banks. Such a decision <strong>of</strong> negotiating<br />
<strong>the</strong> overdraft line, ei<strong>the</strong>r to increase, decrease or to close definitely <strong>the</strong> account is <strong>of</strong>ten related to <strong>the</strong> company’s<br />
realized in<strong>flow</strong>s or out<strong>flow</strong>s; where using <strong>the</strong> in<strong>flow</strong>s is to prove <strong>the</strong> amount <strong>of</strong> <strong>cash</strong> deposits that <strong>the</strong> company realize<br />
inside <strong>the</strong> company’s bank account or <strong>the</strong> out<strong>flow</strong>s to show how <strong>the</strong> company use <strong>the</strong> bank’s overdraft line to pay<br />
<strong>the</strong> charges. All in all, <strong>the</strong> arbitration between <strong>the</strong> lines obliged <strong>the</strong> company to maximize at <strong>the</strong> best <strong>the</strong> consumption<br />
<strong>of</strong> <strong>the</strong> overdraft line in one hand and on <strong>the</strong> o<strong>the</strong>r hand to minimize <strong>the</strong> costs that <strong>the</strong> company face or to increase<br />
<strong>the</strong> use <strong>of</strong> <strong>the</strong> overdraft during <strong>the</strong> week, month or year in order to show to <strong>the</strong> bank that <strong>the</strong> overdraft <strong>of</strong> <strong>the</strong> bank<br />
account is not enough to cover all <strong>the</strong> company’s charges.<br />
The company faced a new opportunity <strong>of</strong> investing, and as it’s known, every opportunity <strong>of</strong> investing comes with <strong>the</strong><br />
chances <strong>of</strong> paying double or extra charges, <strong>the</strong> thing that requires for <strong>the</strong> company to elaborate a financial study<br />
before implanting any new financial <strong>flow</strong>s inside <strong>the</strong> company, for that, <strong>the</strong> company added a new treasury<br />
independent <strong>of</strong> <strong>the</strong> o<strong>the</strong>r but based on <strong>the</strong> financial current situation <strong>of</strong> <strong>the</strong> company. The new investment <strong>of</strong> <strong>the</strong><br />
company wouldn’t make <strong>the</strong> company stable financially only, but it could also break <strong>the</strong> trust with banks if <strong>the</strong><br />
Page 110 <strong>of</strong> 124
operation wasn’t beneficial enough for <strong>the</strong> company. As it looks, <strong>the</strong> impact <strong>of</strong> having this new investment inside <strong>the</strong><br />
company wouldn’t let <strong>the</strong> company’s financial <strong>flow</strong>s as <strong>the</strong>y look inside <strong>the</strong> treasury, but <strong>the</strong>y would also change<br />
forma when extra <strong>flow</strong>s are added to <strong>the</strong> account. Therefore, <strong>the</strong> first step to evaluate <strong>the</strong> company’s new<br />
investment chance was to evaluate its treasury, but before doing that, we had to create an independent <strong>cash</strong>treasury<br />
for its own and analyze <strong>the</strong> financial impact <strong>of</strong> it inside <strong>the</strong> firm.<br />
1. Creation <strong>of</strong> a new treasury: BU2’s treasury<br />
The new investment <strong>of</strong> <strong>the</strong> company will be named as BU2, and in this chapter we will analyze <strong>the</strong> financial situation<br />
<strong>of</strong> <strong>the</strong> BU2 treasury <strong>cash</strong> without integrating <strong>the</strong> BU1 (original activity) in it. The following chapter will have <strong>the</strong><br />
important details <strong>of</strong> creating <strong>the</strong> new treasury <strong>of</strong> <strong>the</strong> BU2.<br />
Table n°21: Simulated sales <strong>of</strong> merchandises for BU2<br />
Since BU2 is adding a commercial activity for IWACO, <strong>the</strong> treasury was based on few major variables that would give<br />
<strong>the</strong> certain estimated results in case <strong>the</strong> treasury was stable.<br />
a. Estimated purchases:<br />
Based on <strong>the</strong> company’s financial situation and ability <strong>of</strong> selling, <strong>the</strong> amounts <strong>of</strong> this treasury were generated<br />
according to <strong>the</strong> contracted condition with <strong>the</strong> BU2 supplier for what concerns Quantities, Qualities, Duration,<br />
Delivery and Overdraft line. Therefore, <strong>the</strong> result <strong>of</strong> <strong>the</strong> estimated amount were as represented in an estimated<br />
amount between 8.000.000.000 DHS and 15.000.000.000 DHS =.<br />
b. Months:<br />
The months, or <strong>the</strong> deadlines <strong>of</strong> buying products depends usually on <strong>the</strong> contract and negotiated condition <strong>of</strong> <strong>the</strong><br />
BU2 supplier, but generally, we based our study on <strong>the</strong> whole month’s average.<br />
c. Amount T.T.C:<br />
This amount isn’t different than <strong>the</strong> one in <strong>the</strong> first point. The difference is that <strong>the</strong> first one’s based on estimated<br />
contracted conditions, and <strong>the</strong> second one concerns <strong>the</strong> personalized amount <strong>of</strong> <strong>the</strong> product during <strong>the</strong> month,<br />
basically, this one is decided a day before <strong>the</strong> start <strong>of</strong> <strong>the</strong> month less or more.<br />
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d. Clients’ modalities:<br />
This case concerns <strong>the</strong> condition <strong>of</strong> payment that <strong>the</strong> firm IWACO discuss with its clients in order to have <strong>the</strong> <strong>cash</strong><br />
available before <strong>the</strong> deadline <strong>of</strong> paying <strong>the</strong> BU2 supplier. Also, in order to get <strong>the</strong> attraction <strong>of</strong> clients and to facility<br />
<strong>the</strong> pr<strong>of</strong>it for <strong>the</strong> firm, <strong>the</strong> payment wasn’t decided in one shot but more like many shots, reserving <strong>the</strong> minimum<br />
amount in <strong>the</strong> short period in order to facility <strong>the</strong> transactions for <strong>the</strong> company.<br />
30% on <strong>the</strong> same day, not more than 24 hours.<br />
10% in ten days in order to reserve to trust with clients and to insure <strong>the</strong> financial liquidity inside <strong>the</strong><br />
firm.<br />
60% and <strong>the</strong> reason behind is to eliminate <strong>the</strong> pressure on <strong>the</strong> clients and in o<strong>the</strong>r hand to insure <strong>the</strong><br />
company’s liquidity on <strong>the</strong> exact date before paying <strong>the</strong> big supplier; BU2 supplier.<br />
e. Beneficial margin:<br />
Like with any supplier, a beneficial margin is reserve for <strong>the</strong> distributers that work on selling <strong>the</strong> mo<strong>the</strong>r company’s<br />
products, and <strong>the</strong> reason behind is that <strong>the</strong> prices are usually different and not similar in order to avoid <strong>the</strong><br />
destruction between supplier and client.<br />
For what is related to <strong>the</strong> supplier’s payment modalities, <strong>the</strong> condition are different but still related to <strong>the</strong> one <strong>of</strong><br />
clients. The following chart will represent <strong>the</strong> conditions contracted with <strong>the</strong> BU2 supplier:<br />
Table n°22: Simulated purchases merchandises for BU2 and <strong>the</strong> financial Gain <strong>of</strong> supplier’s payment<br />
Similar conditions <strong>of</strong> <strong>the</strong> clients but different in terms <strong>of</strong> date and period. The criteria <strong>of</strong> <strong>the</strong>se condition are based<br />
on being in earlier date than <strong>the</strong> one contracted with clients, <strong>the</strong> fact that <strong>the</strong> company should have liquidity before<br />
<strong>the</strong> deadlines <strong>of</strong> paying <strong>the</strong> suppliers. Therefore <strong>the</strong> contracted conditions were like following:<br />
a. Amount T.T.C.:<br />
These amounts are generally fixed a month before selling to clients, and so that <strong>the</strong> company could have <strong>the</strong><br />
merchandise a month before <strong>the</strong> day f selling it.<br />
b. Supplier modalities:<br />
The basis <strong>of</strong> restructuring <strong>the</strong> data inside this angle <strong>of</strong> <strong>the</strong> operation is so that <strong>the</strong> company could have liquidity<br />
reserved in <strong>the</strong> <strong>cash</strong>-treasury <strong>of</strong> <strong>the</strong> company.<br />
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50% is paid to <strong>the</strong> supplier 14 days after buying <strong>the</strong> merchandises<br />
33% is paid in 30 days.<br />
17% is paid in a month and two weeks.<br />
c. Financial gain:<br />
The new contracted supplier “BU2”, allows <strong>the</strong> company to collect a financial margin if <strong>the</strong> paid amount were paid<br />
in <strong>cash</strong> also, but this time, <strong>the</strong> gain is 3 types:<br />
1.5% if <strong>the</strong> company paid in <strong>cash</strong> in 14 days after buying <strong>the</strong> products<br />
1% if <strong>the</strong> company paid in case in 33 days after buying<br />
0.5% if <strong>the</strong> company paid in 45 days<br />
The second step after elaborating <strong>the</strong> basic conditions <strong>of</strong> <strong>the</strong> company, we’re required to elaborate a financial<br />
situation or a plan treasury <strong>of</strong> <strong>the</strong> BU2 activity, and <strong>the</strong> result is as followed:<br />
Table n°23: Cash Treasury Balance <strong>of</strong> BU2<br />
This chart is a sample <strong>of</strong> <strong>the</strong> treasury balance that we could have at <strong>the</strong> end <strong>of</strong> elaborating <strong>the</strong> <strong>cash</strong> treasury <strong>of</strong> BU2,<br />
and <strong>the</strong> calculation were based on <strong>the</strong> two previous tables. Yet, this final balance should give an approximate image<br />
<strong>of</strong> <strong>the</strong> company in order to have an idea <strong>of</strong> <strong>the</strong> real estate <strong>of</strong> <strong>the</strong> company’s financial estate, <strong>the</strong>refore, <strong>the</strong> following<br />
chart is a graphical presentation <strong>of</strong> <strong>the</strong> final balance <strong>of</strong> <strong>the</strong> BU2 treasury in order to evaluate its financial situation<br />
inside <strong>the</strong> company. In <strong>the</strong> next paragraph we’ll work on analyzing <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> company’s new<br />
treasury BU2.<br />
2. Evaluation <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> firm after BU2<br />
Add to <strong>the</strong> elaboration <strong>of</strong> <strong>the</strong> final balance, <strong>the</strong> evaluation <strong>of</strong> <strong>the</strong> company’s new treasury must be evaluated using<br />
<strong>the</strong> financial charges that <strong>the</strong> company pays for <strong>the</strong> overdraft that allows it to have <strong>the</strong> purchases in first place, and<br />
<strong>the</strong>n resolving <strong>the</strong> difference between <strong>the</strong> financial charges and <strong>the</strong> pr<strong>of</strong>it.<br />
15 000 000,00 DH<br />
10 000 000,00 DH<br />
5 000 000,00 DH<br />
0,00 DH<br />
-5 000 000,00 DH<br />
-10 000 000,00 DH<br />
Figure n°17: Daily Balance <strong>of</strong> BU2<br />
Page 113 <strong>of</strong> 124
The <strong>cash</strong> treasury <strong>of</strong> BU2 shows a strong variation <strong>of</strong> <strong>the</strong> balance; which refers to <strong>the</strong> stabilization <strong>of</strong> <strong>the</strong> same<br />
objective that BU2 required for <strong>the</strong> company and to <strong>the</strong> same estimated charges, and also, shows <strong>the</strong> reliance that<br />
exists between <strong>the</strong> company and its supplier. Therefore, for what is <strong>the</strong> financial charges or as called <strong>the</strong> interest<br />
rates, <strong>the</strong> amount was generated as followed:<br />
Table n°24: Treasury’s balance for BU2<br />
This figure represents a sample <strong>of</strong> how <strong>the</strong> interest charges look like on <strong>the</strong> BU2 <strong>cash</strong> treasury, with an amount <strong>of</strong><br />
7 408, 29 DHS <strong>the</strong> company generated a high rate interest for <strong>the</strong> new business.<br />
The major question that we’re supposed to be asking is wi<strong>the</strong>r <strong>the</strong> company can support that amount <strong>of</strong> <strong>cash</strong> on<br />
every transaction knowing that <strong>the</strong>y already have o<strong>the</strong>rs on <strong>the</strong> scales interest rate for <strong>the</strong> first activity? Usually, <strong>the</strong><br />
two activities are similar with each one’s effect on <strong>the</strong> o<strong>the</strong>r, which leads to discover <strong>the</strong> effect <strong>of</strong> one treasury on<br />
ano<strong>the</strong>r after merging both in <strong>the</strong> company. Thus, <strong>the</strong> management <strong>of</strong> <strong>cash</strong> at this timing would be executed <strong>the</strong><br />
same way it has been done all <strong>the</strong> previous year, but instead <strong>of</strong> controlling one <strong>cash</strong>-policy we’ll manage both, or<br />
make it one big policy with 2 different suppliers; after all, <strong>the</strong> principle has stood <strong>the</strong> same, but <strong>the</strong> only change in<br />
this would be <strong>the</strong> execution <strong>of</strong> this charges on <strong>the</strong> field knowing that instead <strong>of</strong> having one financial cost on <strong>the</strong><br />
operation <strong>of</strong> transaction or o<strong>the</strong>r, we’ll have two, and instead <strong>of</strong> paying two banks we’ll be in front <strong>of</strong> three banks,<br />
but <strong>the</strong> simulation’s major role is to give <strong>the</strong> optimal and rational image <strong>of</strong> perfect treasury that make <strong>the</strong> company<br />
ga<strong>the</strong>r <strong>the</strong> both suppliers under <strong>the</strong> same treasury <strong>cash</strong> management without losing <strong>the</strong> financial advantages that<br />
are given on both activities. The next paragraph will clarify more this operation <strong>of</strong> merging and its impact on <strong>the</strong><br />
company’s financial situation.<br />
3. The merging <strong>of</strong> <strong>the</strong> two treasuries, BU1 and BU2:<br />
After having <strong>the</strong> first graphic <strong>of</strong> IWACO’s financial situation without merging <strong>the</strong> both treasuries, where we noticed<br />
that <strong>the</strong> company could’ve achieved <strong>the</strong> most optimized situation in which <strong>the</strong>y managed <strong>the</strong> use <strong>of</strong> <strong>the</strong> overdraft<br />
over <strong>the</strong> whole year 2016 (estimated), this merging, means <strong>the</strong> extra add <strong>of</strong> a new treasury on a new one would have<br />
definitely an effect (positive or negative) on <strong>the</strong> original treasury and on <strong>the</strong> use <strong>of</strong> <strong>the</strong> overdraft over <strong>the</strong> year.<br />
The merging was by adding <strong>the</strong> new condition <strong>of</strong> BU2 in <strong>the</strong> original treasury <strong>of</strong> <strong>the</strong> company with <strong>the</strong> same<br />
company’s financial situation. This operation was done by adding <strong>the</strong> purchases and sales amount <strong>of</strong> <strong>the</strong> company<br />
BU2 supplier to <strong>the</strong> original treasury plan, and <strong>the</strong>n <strong>the</strong> evaluation was based on final balance that <strong>the</strong> company<br />
could get from <strong>the</strong> operation <strong>of</strong> merging. The following graphic is <strong>the</strong> representation <strong>of</strong> this new financial balance<br />
based on <strong>the</strong> merging operation:<br />
Page 114 <strong>of</strong> 124
Figure n°18: Daly Balance <strong>of</strong> IWACO and BU2<br />
5 000 000,00 DH<br />
0,00 DH<br />
-5 000 000,00 DH<br />
-10 000 000,00 DH<br />
-15 000 000,00 DH<br />
-20 000 000,00 DH<br />
-25 000 000,00 DH<br />
-30 000 000,00 DH<br />
-35 000 000,00 DH<br />
-40 000 000,00 DH<br />
-45 000 000,00 DH<br />
-50 000 000,00 DH<br />
As we could see, <strong>the</strong> treasury after having more than 8 months overused <strong>the</strong> overdraft, now <strong>the</strong> company achieved<br />
only two times full use <strong>of</strong> <strong>the</strong> overdraft, which means that <strong>the</strong> first effect <strong>of</strong> <strong>the</strong> merging operation is <strong>the</strong> extra<br />
space <strong>of</strong> using <strong>cash</strong> or overdraft.<br />
B. CONSEQUENCES OF MERGING THE TWO TREASURIES; BU1 AND BU2<br />
1. Effect <strong>of</strong> synergy<br />
The merging <strong>of</strong> <strong>the</strong> two suppliers in <strong>the</strong> same treasury has, indeed impacted <strong>the</strong> company’s financial situation and<br />
<strong>the</strong>refore <strong>the</strong>ir decisions. Although, <strong>the</strong> financial environment on which <strong>the</strong> company appears force <strong>the</strong> it to behave<br />
according to <strong>the</strong> final statement that <strong>the</strong> company presents for <strong>the</strong> high authorities in order to keep a certain balance<br />
outside <strong>the</strong> firm, especially with <strong>the</strong> existence <strong>of</strong> o<strong>the</strong>r competitors on <strong>the</strong> market. The high rate on which this<br />
company is active is up to 5.35% <strong>of</strong> <strong>the</strong> interest rate, and <strong>the</strong> interests are <strong>the</strong> most valuable charges that <strong>the</strong><br />
company calculates before jumping into any kind <strong>of</strong> business.<br />
The <strong>cash</strong> treasury manager has a first role in <strong>the</strong> control and optimization <strong>of</strong> <strong>the</strong> financial charges. In order to have<br />
an insider equilibrium <strong>of</strong> <strong>the</strong> company, <strong>the</strong> company’s <strong>of</strong>ten called to make <strong>the</strong> contracted banks <strong>of</strong> <strong>the</strong> company<br />
satisfied <strong>of</strong> <strong>the</strong> company’s financial situation. In <strong>the</strong> previous chapter, we’ve seen how <strong>the</strong> bank charges are<br />
calculated and how <strong>the</strong>y’re important for <strong>the</strong> bank’s accounts. As a first recall, <strong>the</strong>se charges are maintained in a high<br />
level <strong>of</strong> <strong>the</strong> calculations that is divided into two part: <strong>the</strong> first one back to <strong>the</strong> used overdraft; an amount <strong>of</strong> <strong>cash</strong> that<br />
<strong>the</strong> bank allows <strong>the</strong> company to use in order to make its casual activities ON and also to maintain <strong>the</strong> security level<br />
<strong>of</strong> staying alive on <strong>the</strong> market, although, <strong>the</strong> company up grade sometime this overdraft in order to expand its activity<br />
or to maintain <strong>the</strong> financial equilibrium inside <strong>the</strong> company with <strong>the</strong> given amount <strong>of</strong> purchases <strong>of</strong> <strong>the</strong> first supplier<br />
BU1. The charges <strong>of</strong> this overdraft are established based on a rate <strong>of</strong> 5.35% interest rate, and <strong>the</strong> challenge <strong>of</strong> <strong>the</strong><br />
company’s financial administration is to completely use <strong>the</strong> overdraft; in one, hand that allows <strong>the</strong> company to<br />
maintain its pr<strong>of</strong>it from purchases with every transaction, and from <strong>the</strong> o<strong>the</strong>r hand, more <strong>the</strong> company use totally<br />
<strong>the</strong> overdraft <strong>the</strong> more it guaranty chances <strong>of</strong> negotiating <strong>the</strong> up-grade <strong>of</strong> <strong>the</strong> overdraft line. Second level is related<br />
to <strong>the</strong> <strong>cash</strong> money; as it’s known for <strong>the</strong> company, one <strong>the</strong> financial policies that give <strong>the</strong> company opportunities to<br />
gain financial advantages is that when <strong>the</strong> company buys from <strong>the</strong> supplier purchases and pay it on <strong>the</strong> due time in<br />
<strong>cash</strong>, it gains 0.5% <strong>of</strong> <strong>the</strong> paid amount; means that if <strong>the</strong> company paid 20.000.000 DHS <strong>of</strong> <strong>cash</strong>, 100.000 DHS <strong>of</strong> this<br />
amount stays at <strong>the</strong> company’s treasury, while if <strong>the</strong>y pay it using <strong>the</strong> overdraft, <strong>the</strong> company get to pay 2 972.22<br />
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DHS and by that we realize that <strong>the</strong> company is able to cover <strong>the</strong> financial charges <strong>of</strong> <strong>the</strong> overdraft if <strong>the</strong>y get to pay<br />
<strong>the</strong> amount in <strong>cash</strong>.<br />
After merging <strong>the</strong> new treasury with <strong>the</strong> old one, this equilibrium situation <strong>of</strong> <strong>the</strong> company changes its behaviors and<br />
fact; a sort <strong>of</strong> synergy appears when <strong>the</strong> two treasuries ga<strong>the</strong>r one financial policy. The synergy between <strong>the</strong> two<br />
treasuries appears when we re-calculate <strong>the</strong> two financial charges <strong>of</strong> <strong>the</strong> both treasuries. The BU1 treasury has a<br />
financial costs <strong>of</strong> almost 1 873 561.19 DHS, although, with <strong>the</strong> integration <strong>of</strong> <strong>the</strong> new treasury BU2, this amount will<br />
increase seeing that <strong>the</strong> company will need an extra overdraft line so that <strong>the</strong> company could make transactions. In<br />
fact, <strong>the</strong> extra charges <strong>of</strong> this new supplier will be supported on <strong>the</strong> behalf <strong>of</strong> <strong>the</strong> old activity <strong>of</strong> <strong>the</strong> company but in<br />
return, a financial gain will be added to <strong>the</strong> company’s account.<br />
2. Global treasury’s issue: <strong>Optimization</strong><br />
The previous chapters explained how <strong>the</strong> company confronts two financial facts in order to make new treasury inside<br />
<strong>the</strong> company active and well managed. Though, this integration <strong>of</strong> each treasury inside <strong>the</strong> company’s financial<br />
treasury requires from <strong>the</strong> company a high level <strong>of</strong> <strong>cash</strong> management in a way that <strong>the</strong> company would manage<br />
both; he banks and suppliers.<br />
IWACO contracts two banks for managing <strong>the</strong> original activity; BU1, two banks to manage <strong>the</strong> company’s <strong>cash</strong> <strong>flow</strong>s<br />
outside and inside bank accounts (<strong>cash</strong> or overdraft). Also, <strong>the</strong> financial gain <strong>the</strong> company realizes from its supplier<br />
should be manage in a way that both <strong>the</strong> banks and <strong>the</strong> supplier stay a financial equilibrium without disturbing <strong>the</strong><br />
company’s financial stability. The following chart explains how <strong>the</strong> company’s situation in front <strong>of</strong> this situation:<br />
Figure n°19: Treasury’s Issue after BU1 and BU2 merged<br />
The company, in order to solve <strong>the</strong> optimization problem <strong>of</strong> treasury, is called to establish a certain financial strategy<br />
that could realize <strong>the</strong> equilibrium inside <strong>the</strong> company. When <strong>the</strong> o<strong>the</strong>r bank was added to <strong>the</strong> company’s accounts;<br />
a specific account for <strong>the</strong> BU2, extra charges were added for <strong>the</strong> company, and so <strong>the</strong> company has to make an<br />
arbitration between <strong>the</strong> two treasuries.<br />
An extra analysis shows that after comparing <strong>the</strong> two companies’ treasuries, we could notice that with BU2 added;<br />
<strong>the</strong> company was able to realize some extra pr<strong>of</strong>it and have space for more purchases and overdraft lines. Although,<br />
<strong>the</strong> arbitration in this term is based on <strong>the</strong> decision that <strong>the</strong> company will make to compare between <strong>the</strong> purchases<br />
between suppliers BU1 or BU2, and that is how <strong>the</strong> company could optimize its treasury.<br />
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Regarding <strong>the</strong> previous chapters, and <strong>the</strong> explanations <strong>of</strong> how <strong>the</strong> company could financially optimize its treasury,<br />
such an operation doesn’t fixe a situation without leaving impacts behind. Therefore, <strong>the</strong> next chapter will explain in<br />
details <strong>the</strong> impacts <strong>of</strong> <strong>the</strong> optimization <strong>of</strong> <strong>the</strong> treasury and <strong>the</strong> merging operation.<br />
3. Impacts <strong>of</strong> <strong>the</strong> merging BU1 and BU2:<br />
Like any o<strong>the</strong>r company, a financial situation has a negative impact as it has a positive one. In this case, <strong>the</strong> company<br />
faces both impacts and each one with its own way <strong>of</strong> resolving it:<br />
a. Positive Impacts:<br />
Overdrawn <strong>the</strong> company: The addition <strong>of</strong> a new supplier <strong>of</strong> <strong>the</strong> company put it a situation <strong>of</strong> full use<br />
<strong>of</strong> <strong>the</strong> overdraft which is beneficial for <strong>the</strong> company in case <strong>of</strong> up grading <strong>the</strong> overdraft line and it<br />
helps in <strong>the</strong> bank negotiations for extra funds.<br />
Alleviate <strong>the</strong> <strong>cash</strong> treasury: A side <strong>the</strong> exhaustion <strong>of</strong> <strong>the</strong> overdraft, <strong>the</strong> company gets space for having<br />
more purchases transaction with <strong>the</strong> supplier and <strong>the</strong>n more pr<strong>of</strong>it.<br />
Dis-balance <strong>of</strong> <strong>the</strong> financial situation <strong>of</strong> charges: The increase <strong>of</strong> <strong>the</strong> financial charges in <strong>the</strong> BU2<br />
account is make on <strong>the</strong> behalf <strong>of</strong> <strong>the</strong> new supplier account BU2 which is called: Synergy<br />
Increase bank charges: Instead <strong>of</strong> creating a new bank account and <strong>the</strong>n support <strong>the</strong> financial<br />
charges, <strong>the</strong> company merge it with <strong>the</strong> old activity and <strong>the</strong>n reduce <strong>the</strong> financial charges<br />
b. Negative Impact:<br />
The balance dependencies: The <strong>cash</strong>’s treasury management requires for <strong>the</strong> company to make a<br />
certain reliance between <strong>the</strong> daily balances <strong>of</strong> <strong>the</strong> year, which means, that in one exceptional<br />
situation <strong>of</strong> purchases, <strong>the</strong> company get <strong>the</strong> threat <strong>of</strong> misbalancing <strong>the</strong> whole year balance, and this<br />
dependency is <strong>the</strong> basis <strong>of</strong> work for <strong>the</strong> company’s effectiveness on <strong>the</strong> field.<br />
<br />
C. RECOMMENDATIONS:<br />
In this chapter, we try to make few suggestions <strong>of</strong> how <strong>the</strong> company could solve <strong>the</strong> negative impacts <strong>of</strong> <strong>the</strong> merging<br />
operations <strong>of</strong> BU1 and BU2. The recommendation are as follow:<br />
1. Arbitration between <strong>the</strong> BU1 and <strong>the</strong> BU2 purchases: When <strong>the</strong> company realizes a certain<br />
space for having more and extra purchases chances and increases <strong>the</strong> overdraft line, this<br />
opportunities should be taken as an occasion for arbitrating between <strong>the</strong> BU1buying<br />
products and <strong>the</strong> BU2 ones. Usually, such a decision is taken based on <strong>the</strong> market’s situation;<br />
prices, tendencies, consumption, reputation, value…etc. where <strong>the</strong> company chose <strong>the</strong> one<br />
with <strong>the</strong> most important advantages.<br />
2. Increase <strong>the</strong> BU1 overdraft: The Company can have <strong>the</strong> chance <strong>of</strong> negotiating <strong>the</strong> overdraft<br />
in order to increase it for a higher level. Yet, this step as much as is important, it is impossible<br />
or extremely unreachable, because <strong>the</strong> green light <strong>of</strong> making such a negotiation with <strong>the</strong><br />
banks is limited and related to <strong>the</strong> Board <strong>of</strong> <strong>the</strong> company.<br />
3. Negotiate <strong>the</strong> supplier’s overdraft: This decision is basically related to <strong>the</strong> second one, where<br />
<strong>the</strong> company is able to make such a decision only if <strong>the</strong> bank allowed <strong>the</strong>m <strong>the</strong> increase <strong>the</strong>ir<br />
overdraft, but when it is not possible, <strong>the</strong> company could face more dangerous financial<br />
cases and supports extra financial charges that could overdrawn <strong>the</strong> company into a deep<br />
loss.<br />
Page 117 <strong>of</strong> 124
CONCLUSION OF THE SECOND PART:<br />
The objective <strong>of</strong> this study was to help <strong>the</strong> company to minimize its charges and maximize its financial gain, based on<br />
<strong>the</strong> financial facts <strong>of</strong> <strong>the</strong> company, adding a new investor <strong>of</strong> <strong>the</strong> company or a new supplier changes for <strong>the</strong> company<br />
all <strong>the</strong> financial facts and equilibrium. For that, analyzing <strong>the</strong> <strong>cash</strong> treasury <strong>of</strong> <strong>the</strong> company refers to <strong>the</strong> fact that<br />
treasury controls all <strong>the</strong> financial <strong>flow</strong>s inside <strong>the</strong> company and outside with banks, <strong>the</strong>refore, any sort <strong>of</strong> optimizing<br />
<strong>the</strong> treasury wouldn’t leave behind an extra effects that could influence negatively or positively <strong>the</strong> company’s <strong>cash</strong><br />
<strong>flow</strong>s.<br />
Page 118 <strong>of</strong> 124
THE CONCLUSION<br />
Page 119 <strong>of</strong> 124
When <strong>the</strong> company is able to predict with certainty its timelines in a way that it corresponds exactly to its forecast<br />
<strong>of</strong> receipts, <strong>the</strong> Treasury management may be optimal. Indeed, <strong>the</strong> costs could be reduced to a minimum since it will<br />
not need to hold liquid assets low performance - <strong>cash</strong>-, or have means <strong>of</strong> long-term financing exceeding those which<br />
are essential - <strong>the</strong> Working Capital Fund. However, <strong>the</strong> forecasts are in reality, uncertain. Combining with forecasts<br />
<strong>of</strong> <strong>cash</strong> a probability, managers can estimate <strong>the</strong> risk <strong>of</strong> technical insolvency and deduce a safety margin. This safety<br />
margin is composed <strong>of</strong> a steering wheel <strong>of</strong> <strong>cash</strong> and a positive working capital fund. The value <strong>of</strong> <strong>the</strong> Working Capital<br />
Fund and <strong>the</strong> level <strong>of</strong> <strong>cash</strong> are interdependent. A company that finances all its current assets net <strong>of</strong> <strong>the</strong> liabilities by<br />
long-term capital less will need <strong>cash</strong> if it had financed with short-term credit.<br />
The choice <strong>of</strong> <strong>the</strong> means <strong>of</strong> financing <strong>of</strong> current assets and <strong>the</strong> share <strong>of</strong> liquid to maintain assets are closely linked.<br />
As well as in <strong>the</strong>ory. The volume <strong>of</strong> permanent funds for <strong>the</strong> financing <strong>of</strong> current assets affects <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong><br />
company: working capital is <strong>the</strong> expression <strong>of</strong> this liquidity. However, over <strong>the</strong> restraint <strong>of</strong> funds is important and<br />
less <strong>the</strong> deal is pr<strong>of</strong>itable, ceteris paribus. Similarly, more detained <strong>cash</strong> is strong and more <strong>company's</strong> security is<br />
guaranteed, but <strong>the</strong> return on assets is weakened even. The objective <strong>of</strong> <strong>the</strong> financial manager is <strong>the</strong>refore to define<br />
a balance between liquidity and pr<strong>of</strong>itability.<br />
Also, to increase <strong>the</strong> margin <strong>of</strong> safety <strong>of</strong> <strong>the</strong> company, it can only increase <strong>the</strong> proportion <strong>of</strong> its <strong>cash</strong>, or extending<br />
<strong>the</strong> maturity <strong>of</strong> its debt. These two actions affect <strong>the</strong> pr<strong>of</strong>itability <strong>of</strong> <strong>the</strong> company. This vision’s resulted in <strong>the</strong> level<br />
<strong>of</strong> <strong>the</strong> <strong>cash</strong> management to find an optimum balance guarantee <strong>of</strong> solvency. Financial balance, on <strong>the</strong> one hand,<br />
between jobs and <strong>the</strong> resources <strong>of</strong> <strong>the</strong> Working Capital Fund is <strong>the</strong> essential criterion <strong>of</strong> analysis. Monetary balance,<br />
on <strong>the</strong> o<strong>the</strong>r hand, between input and output <strong>of</strong> <strong>cash</strong> <strong>flow</strong>s whose <strong>cash</strong> is <strong>the</strong> warranty.<br />
In fact, <strong>the</strong> problem <strong>of</strong> <strong>the</strong> <strong>cash</strong> management arises in o<strong>the</strong>r words. Contrary to common opinion <strong>the</strong> objective <strong>of</strong><br />
pr<strong>of</strong>itability does not preclude <strong>the</strong> maintenance <strong>of</strong> liquidity. The optimum lies in <strong>the</strong> joint improving <strong>the</strong> security and<br />
pr<strong>of</strong>it, which represents <strong>the</strong> contents <strong>of</strong> <strong>the</strong> policy's <strong>cash</strong>. Cash policy combines <strong>the</strong> constraints <strong>of</strong> safety and<br />
pr<strong>of</strong>itability by minimizing <strong>the</strong> volume <strong>of</strong> monetary assets. A company whose <strong>cash</strong> fluctuates continuously slightly<br />
around zero indicates, all o<strong>the</strong>r things being equal, than those responsible:<br />
The good management <strong>of</strong> Cash-Flows<br />
Integrate with efficiency <strong>the</strong> pr<strong>of</strong>itable stable funds applied<br />
Evaluate with exactitude <strong>the</strong> needs <strong>of</strong> financing<br />
Best negotiation <strong>of</strong> bank’s conditions<br />
We have shown that without disappearing totally uncertainty receipts and disbursements can be significantly<br />
reduced and is no longer warranted, at any rate, <strong>the</strong> detention <strong>of</strong> a "mattress" <strong>of</strong> liquidity. Knowledge <strong>of</strong> <strong>the</strong> behavior<br />
<strong>of</strong> <strong>the</strong> <strong>cash</strong> <strong>flow</strong>s that pass through <strong>the</strong> undertaking, i.e. changes in <strong>the</strong> bank balance, is above all a problem <strong>of</strong><br />
information. The search for this information is available to all firms.<br />
The bank loans <strong>of</strong> “Repairs” for urgencies; short term and small amount, correct <strong>the</strong> mistakes taken on <strong>the</strong> level <strong>of</strong><br />
<strong>the</strong> predictions related to <strong>the</strong> synchronization <strong>of</strong> <strong>the</strong> In<strong>flow</strong>s and Out<strong>flow</strong>s <strong>of</strong> funds. The rational uses <strong>of</strong> <strong>the</strong>se loans<br />
need a special attention in a way that <strong>the</strong>y could be adapted to <strong>the</strong> needs <strong>of</strong> <strong>the</strong> company, in addition <strong>of</strong> <strong>the</strong><br />
conditions <strong>of</strong> <strong>the</strong> bank account.<br />
Cash policy, moreover, confirms that pr<strong>of</strong>itability is <strong>the</strong> pledge <strong>of</strong> liquidity for a certain due term. The <strong>cash</strong> balance is<br />
unstable. The business daily questioned its solvency. Such small business that hires a framework "too expensive" will<br />
adversely affect its liquidity. Such o<strong>the</strong>r average firm will file its balance sheet for having accepted a too ambitious<br />
contract, in <strong>the</strong> view <strong>of</strong> its possibilities. Such large firm will be absorbed to have exaggerated <strong>the</strong> use <strong>of</strong> suppliercredit.<br />
The deadline is daily. We have tried to show that <strong>the</strong> control <strong>of</strong> this situation is not only by <strong>the</strong> control <strong>of</strong> changes in<br />
<strong>the</strong> bank balance but also monitoring <strong>of</strong> <strong>the</strong> operative events for <strong>cash</strong> <strong>flow</strong>s:<br />
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Investment and its financing,<br />
Training and <strong>the</strong> allocation <strong>of</strong> <strong>cash</strong> <strong>flow</strong><br />
Control <strong>the</strong> variation <strong>of</strong> <strong>the</strong> value <strong>of</strong> <strong>the</strong> currency.<br />
We <strong>the</strong>refore meet <strong>the</strong> objectives <strong>of</strong> <strong>the</strong> financial function:<br />
Ensure <strong>the</strong> collection <strong>of</strong> <strong>the</strong> resources needed for <strong>the</strong> operation and development <strong>of</strong> <strong>the</strong> firm<br />
Control <strong>the</strong> allocation <strong>of</strong> funds and<br />
Results policy<br />
The imperative <strong>of</strong> pr<strong>of</strong>itability originates from <strong>the</strong> cost <strong>of</strong> holding capital. Any applied fund, regardless <strong>of</strong> <strong>the</strong> nature,<br />
fixed or circulating involves immobilization <strong>of</strong> funds, own or borrowed for a shorter or longer duration. Thou, any<br />
capital funds has costs: explicit costs whenever <strong>the</strong> company needs to service <strong>the</strong> corresponding capital providers<br />
and opportunity costs to <strong>the</strong> product that <strong>the</strong> company could have made <strong>the</strong> alternative employment. The<br />
entrepreneurial activity <strong>the</strong>refore has meaning only if it earns its jobs sufficient resources to cover its costs. In o<strong>the</strong>r<br />
words, pr<strong>of</strong>itability is <strong>the</strong> condition <strong>of</strong> <strong>the</strong> liquidity <strong>of</strong> <strong>the</strong> company. Pr<strong>of</strong>itability and liquidity vary in <strong>the</strong> same<br />
direction.<br />
The detention <strong>of</strong> significant liquidity, not more than a positive working capital, is not a guarantee <strong>of</strong> safety. Being<br />
insolvent means controlling all aspects <strong>of</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> financial position and results in a simultaneous<br />
maximizing pr<strong>of</strong>itability. Thus <strong>the</strong> optimal <strong>cash</strong> management businesses leads to <strong>the</strong> syn<strong>the</strong>sis <strong>of</strong> all <strong>the</strong> financial<br />
problems facing <strong>the</strong> firm. This global view <strong>of</strong> financial activity leads to a system approach to <strong>cash</strong>.<br />
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THE BIBLIOGRAPHY<br />
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BOOKS:<br />
http://tel.archives-ouvertes.fr: Cash <strong>Optimization</strong> <strong>of</strong> Jean-Claude Juhel<br />
“La Finance d’Entreprise”, Company’s Finance <strong>of</strong> BELKAHIA Rachid and OUDAD Hassan<br />
INTERNAL RESOURCES:<br />
<br />
Company’s documents related to <strong>the</strong> financial situation <strong>of</strong> <strong>the</strong> company from different departments:<br />
Financial Direction<br />
Accounting<br />
Treasury<br />
Purchases<br />
Logistics<br />
Central Distribution Deposit<br />
Management Control<br />
EXTERNAL RESOURCES:<br />
Telecommunication Market Rapport <strong>of</strong> 2015, 2014 and 2012<br />
ANRT Financial Report <strong>of</strong> <strong>the</strong> Telecommunication market<br />
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