- Working capital
- Working capital equals current assets minus current liabilities; it measures the short-term liquidity available to fund day-to-day operations.
- Net working capital
- Net working capital is current assets minus current liabilities and represents the funds tied up in or available from short-term operating accounts.
- How is the cash conversion cycle (CCC) calculated?
- Cash conversion cycle = DIO + DSO − DPO, where DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding.
- Days inventory outstanding (DIO)
- DIO is the average number of days inventory is held before being sold, calculated as (average inventory ÷ cost of goods sold) × 365.
- Days sales outstanding (DSO)
- DSO is the average number of days it takes to collect cash from credit sales, calculated as (average accounts receivable ÷ credit sales) × 365.
- Days payable outstanding (DPO)
- DPO is the average number of days a firm takes to pay its suppliers, calculated as (average accounts payable ÷ cost of goods sold) × 365.
- What does a shorter cash conversion cycle indicate?
- A shorter CCC means cash is tied up for less time, improving liquidity; firms shorten it by collecting receivables faster, turning inventory quicker, and extending payables.
- Operating cycle
- The operating cycle is the time from acquiring inventory to collecting cash from its sale, equal to DIO + DSO; it excludes the financing benefit of payables.
- Liquidity management
- Liquidity management ensures a firm has sufficient cash and access to funds to meet obligations as they come due while minimizing idle, non-earning balances.
- Float
- Float is the time difference between when a payment is initiated and when the funds are actually available or settled; it includes mail, processing, and availability float.
- Collection float
- Collection float is the delay between when a customer sends payment and when the funds become available to the receiving company; treasury works to reduce it.
- Disbursement float
- Disbursement float is the time between when a company issues a payment and when funds are actually withdrawn from its account; firms may seek to extend it ethically.
- Mail float
- Mail float is the time a paper payment spends in the postal system between the payer mailing it and the payee receiving it.
- Processing float
- Processing float is the time between receiving a payment and depositing it for collection, driven by internal handling delays.
- Availability float
- Availability float is the time between depositing a check and the funds becoming available for use, based on the bank's availability schedule.
- Lockbox
- A lockbox is a bank-operated service that receives, processes, and deposits a company's mailed customer payments to accelerate collections and reduce float.
- Wholesale lockbox
- A wholesale lockbox processes a low volume of high-dollar business-to-business payments, often with detailed remittance data captured.
- Retail lockbox
- A retail lockbox processes a high volume of low-dollar consumer payments, typically with standardized remittance documents and scanline reading.
- Concentration account
- A concentration account is a central account into which funds from multiple accounts or locations are pooled to optimize control, investing, and borrowing.
- Cash concentration
- Cash concentration is the practice of moving funds from multiple field or subsidiary accounts into a central account to consolidate liquidity.
- Zero balance account (ZBA)
- A ZBA maintains a zero or target end-of-day balance; funds are automatically transferred to or from a master account to fund disbursements as needed.
- What problem does a ZBA solve?
- A ZBA eliminates idle balances scattered across many disbursement accounts by automatically sweeping them to or from a central concentration account.
- Notional pooling
- Notional pooling offsets debit and credit balances across multiple accounts for interest calculation without physically transferring funds between them.
- How does notional pooling differ from physical pooling?
- Notional pooling nets balances only for interest purposes with no actual fund movement, while physical (sweep) pooling transfers funds into one concentration account.
- Sweep account
- A sweep account automatically moves excess funds into an interest-bearing or investment vehicle at day's end and returns them when needed for disbursements.
- Controlled disbursement
- Controlled disbursement is a service providing early-day notification of the total checks that will clear, letting treasury fund the account precisely and invest the rest.
- Target balance account
- A target balance account is automatically funded to a preset non-zero balance each day, sweeping any excess to or shortfall from a master account.
- ACH (Automated Clearing House)
- ACH is a batch-processed electronic network for low-value credit and debit transfers such as payroll, vendor payments, and consumer bill payments in the U.S.
- ACH credit
- An ACH credit pushes funds from the originator's account to the receiver's account, commonly used for direct deposit of payroll and vendor payments.
- ACH debit
- An ACH debit pulls funds from the receiver's account when authorized, commonly used for recurring bill collection and insurance premiums.
- What is the typical settlement timing for standard ACH?
- Standard ACH transactions settle in one to two business days, though same-day ACH is available for eligible payments within published deadlines.
- Same-day ACH
- Same-day ACH allows eligible ACH credits and debits to settle on the same business day within defined dollar limits and processing windows.
- Fedwire
- Fedwire is the Federal Reserve's real-time gross settlement system for high-value, time-critical U.S. wire transfers; payments are final and irrevocable.
- CHIPS
- CHIPS (Clearing House Interbank Payments System) is a privately operated, netting-based large-value U.S. dollar payment system used mainly for international transactions.
- How do Fedwire and CHIPS differ?
- Fedwire settles each payment individually in real time (gross settlement); CHIPS nets payments throughout the day and settles on a multilateral net basis.
- Wire transfer
- A wire transfer is a real-time, individually processed electronic funds transfer that is typically same-day and final once settled, used for large or urgent payments.
- Real-time payments (RTP)
- RTP is an instant payment rail (such as The Clearing House RTP network or FedNow) enabling 24/7 immediate, irrevocable settlement with real-time confirmation.
- FedNow
- FedNow is the Federal Reserve's instant payment service enabling immediate, around-the-clock settlement of credit transfers between participating banks.
- Check clearing
- Check clearing is the process by which a deposited check moves through the banking system to debit the payer's account and credit the payee's account.
- Check 21
- Check 21 is U.S. legislation that allows banks to exchange electronic images of checks (substitute checks), accelerating clearing and reducing paper handling.
- Remote deposit capture (RDC)
- Remote deposit capture lets a company scan checks and transmit the images electronically to its bank for deposit, speeding availability and cutting trips to the branch.
- Money market instruments
- Money market instruments are short-term, highly liquid, low-risk debt securities maturing in one year or less, used for short-term investing and borrowing.
- Treasury bills (T-bills)
- T-bills are short-term U.S. government debt sold at a discount and redeemed at face value, maturing in one year or less, considered virtually risk-free.
- Commercial paper
- Commercial paper is unsecured short-term corporate debt issued at a discount to fund working capital, typically maturing in 270 days or less.
- Repurchase agreement (repo)
- A repo is a short-term collateralized loan in which one party sells securities and agrees to repurchase them at a higher price, with the difference being interest.
- Reverse repo
- A reverse repo is the mirror of a repo from the lender's perspective: buying securities with an agreement to sell them back later at a higher price.
- Banker's acceptance
- A banker's acceptance is a short-term debt instrument guaranteed by a bank, commonly used to finance international trade transactions.
- Certificate of deposit (CD)
- A CD is a time deposit issued by a bank paying a fixed rate over a set term; negotiable CDs can be traded in the secondary money market.
- Money market fund (MMF)
- A money market fund is a mutual fund investing in short-term, high-quality instruments, offering liquidity and diversification for short-term cash.
- Yield on a discount instrument
- A discount instrument is bought below face value and redeemed at par; the difference is the return. Discount yield = (discount ÷ face value) × (360 ÷ days).
- Why is short-term investment policy important?
- An investment policy defines permitted instruments, credit quality, maturity limits, and diversification so treasury balances safety, liquidity, and yield in that order.
- Safety, liquidity, yield
- The hierarchy of short-term investing objectives is safety of principal first, liquidity second, and yield last; capital preservation outranks return.
- Credit policy
- A credit policy sets the terms, limits, and standards a company uses to extend credit to customers, balancing sales growth against collection and default risk.
- Credit terms
- Credit terms specify when payment is due and any discount for early payment, such as 2/10 net 30, meaning a 2% discount if paid within 10 days, otherwise due in 30.
- How do you find the cost of forgoing a 2/10 net 30 discount?
- Approximate annualized cost = (discount % ÷ (100 − discount %)) × (365 ÷ (full period − discount period)), which for 2/10 net 30 is roughly 37%.
- Accounts receivable management
- Receivables management aims to accelerate collections and minimize bad debt through credit standards, billing efficiency, and disciplined collection efforts.
- Accounts payable management
- Payables management optimizes the timing of supplier payments to preserve cash and capture discounts without harming supplier relationships or credit standing.
- Aging schedule
- An aging schedule classifies receivables or payables by how long they have been outstanding, helping identify collection problems and overdue accounts.
- Days cash on hand
- Days cash on hand = cash and cash equivalents ÷ (operating expenses ÷ 365); it shows how many days a firm can cover expenses from existing cash.
- Line of credit
- A line of credit is a flexible, pre-approved borrowing arrangement allowing a firm to draw and repay funds up to a limit as short-term needs arise.
- Committed line of credit
- A committed line obligates the bank to lend up to the limit, usually for a fee, giving the borrower assured access to funds.
- Uncommitted line of credit
- An uncommitted line allows the bank discretion to lend or decline at the time of a draw; it is cheaper but provides no guaranteed availability.
- Revolving credit facility (revolver)
- A revolver is a committed line that can be drawn, repaid, and redrawn over its term, providing ongoing flexible short-term funding.
- Commitment fee
- A commitment fee is charged on the unused portion of a committed credit line to compensate the bank for reserving the funds.
- Bridge loan
- A bridge loan is short-term financing used to cover a funding gap until permanent financing or expected cash inflows are arranged.
- Cash forecasting
- Cash forecasting projects future cash inflows and outflows over a horizon to anticipate surpluses to invest and shortfalls to fund.
- Receipts and disbursements method
- The receipts and disbursements method forecasts cash by directly projecting expected inflows and outflows, ideal for short-term, detailed forecasts.
- Distribution (statistical) forecasting method
- Statistical forecasting uses historical patterns, regression, or moving averages to project cash flows, useful for medium-term forecasts.
- Why is cash forecasting accuracy important?
- Accurate forecasts let treasury invest surpluses, arrange borrowing in advance, avoid overdrafts, and reduce the cost of holding excess idle cash.
- Target cash balance
- The target cash balance is the optimal amount of cash to hold, balancing the opportunity cost of idle cash against the transaction cost of raising funds.
- Baumol model
- The Baumol model determines an optimal cash balance by trading off the transaction cost of converting securities to cash against the opportunity cost of holding cash.
- Miller-Orr model
- The Miller-Orr model sets upper and lower control limits for a fluctuating cash balance, transferring funds to and from investments when limits are breached.
- Positive pay (collection context)
- While primarily a fraud tool, positive pay supports liquidity control by ensuring only validated, authorized disbursements clear the operating account.
- Earnings credit
- Earnings credit is a soft-dollar credit banks apply to collected balances to offset account service fees in lieu of paying interest.
- Ledger balance
- The ledger balance is the end-of-day book balance of an account reflecting all posted transactions, regardless of availability.
- Collected balance
- The collected balance is the portion of the ledger balance for which funds have actually cleared and are available, net of float.
- Available balance
- The available balance is the collected balance adjusted for any holds, representing funds the company can actually use or invest.
- Overdraft
- An overdraft occurs when withdrawals exceed the available balance; treasury manages liquidity to avoid costly overdraft fees and interest.
- Daylight overdraft
- A daylight overdraft is an intraday negative balance created when outgoing payments precede incoming funds; it must be covered by day's end.
- Intraday liquidity
- Intraday liquidity is the cash and credit available during the business day to settle payments as they occur, critical for real-time gross settlement systems.
- Multilateral netting
- Multilateral netting consolidates intercompany payables and receivables among many entities into a single net settlement, cutting transaction volume and FX costs.
- In-house bank
- An in-house bank is a centralized treasury structure that provides banking services such as lending, FX, and pooling to subsidiaries, reducing external bank reliance.
- Payment factory
- A payment factory centralizes the processing of outgoing payments across the organization to standardize formats, improve control, and reduce costs.
- Shared service center (SSC)
- A shared service center consolidates routine finance functions such as payables and receivables into one unit to gain efficiency and standardization.
- Disbursement methods
- Common disbursement methods include checks, ACH, wires, real-time payments, and commercial cards; each has trade-offs in cost, speed, and control.
- Purchasing card (p-card)
- A purchasing card is a corporate card used to streamline low-value purchases, reducing purchase-order and invoice processing costs while providing spend data.
- Commercial card
- A commercial card program (purchasing, travel, or virtual cards) can extend payables float and earn rebates while improving expense control and data capture.
- Virtual card
- A virtual card is a single-use or limited-use card number generated for a specific payment, enhancing control and reducing fraud in B2B payments.
- Trade credit
- Trade credit is short-term financing extended by suppliers when they allow a buyer to pay after delivery; it is a key and often free source of working-capital funding.
- Factoring
- Factoring is the sale of accounts receivable to a third party at a discount to obtain immediate cash and transfer collection responsibility.
- Supply chain finance
- Supply chain finance lets suppliers receive early payment on approved invoices through a financier, often at the buyer's stronger credit rate, while the buyer keeps standard terms.
- Dynamic discounting
- Dynamic discounting allows a buyer to pay suppliers early in exchange for a sliding-scale discount funded from the buyer's own cash.
- Asset-based lending
- Asset-based lending provides financing secured by current assets such as receivables and inventory, with borrowing capacity tied to a borrowing base.
- Borrowing base
- A borrowing base is the value of eligible collateral (typically receivables and inventory) against which a lender will advance funds, after applying advance rates.
- Compensating balance (liquidity view)
- A compensating balance is a minimum deposit a borrower must keep with a bank as a condition of a loan or service, which raises the effective borrowing cost.
- Stretching payables
- Stretching payables means delaying supplier payments beyond terms to conserve cash; it can harm supplier relations and credit standing if overused.
- Cash position
- The cash position is the net amount of available funds across accounts at a point in time, the starting point for daily liquidity decisions.
- Cash positioning
- Cash positioning is the daily process of determining current balances, anticipated flows, and funding or investing actions to optimize the cash position.
- Bank balance reporting
- Balance reporting delivers prior-day and intraday account information so treasury can determine its cash position and make funding decisions.
- Prior-day reporting
- Prior-day reporting provides finalized balance and transaction data for the previous business day, used to reconcile and position cash.
- Intraday reporting
- Intraday reporting provides current-day transaction and balance updates, enabling real-time cash positioning and funding decisions.
- Why hold precautionary cash balances?
- Precautionary balances buffer against unexpected outflows or forecast errors, ensuring obligations are met without emergency borrowing.
- Transaction motive for holding cash
- Firms hold cash for the transaction motive to meet routine, predictable operating payments such as payroll and supplier invoices.
- Speculative motive for holding cash
- The speculative motive is holding cash to take advantage of unexpected bargains or favorable investment opportunities.
- Float neutrality
- Float neutrality is a banking arrangement where availability schedules and ledger postings are aligned so float does not distort balances used for analysis.
- Why minimize idle cash?
- Idle cash earns little or no return; minimizing it through pooling, sweeps, and investing improves yield while preserving needed liquidity.
- Liquidity ratio (current ratio) for treasury
- Current ratio = current assets ÷ current liabilities; treasury monitors it as a quick gauge of short-term obligation coverage.
- Quick ratio (acid-test)
- Quick ratio = (current assets − inventory) ÷ current liabilities; it measures the ability to meet short-term obligations without selling inventory.
- Wholesale vs. retail collections
- Wholesale collections handle large-value B2B receipts emphasizing remittance detail, while retail collections handle high-volume consumer receipts emphasizing throughput.
- Electronic data interchange (EDI)
- EDI is the structured electronic exchange of business documents such as invoices and remittances, enabling straight-through processing of payments.
- Remittance information
- Remittance information is the data accompanying a payment that identifies which invoices it covers, essential for efficient cash application.
- Cash application
- Cash application is the process of matching incoming payments to open invoices and posting them to receivables, often automated using remittance data.
- Days cash forecast horizon
- Treasury typically maintains short-term daily forecasts for liquidity and longer rolling forecasts for funding strategy, refreshing them as actuals arrive.
- Capital structure
- Capital structure is the mix of debt and equity a firm uses to finance its assets and operations, chosen to minimize cost of capital and maximize value.
- Weighted average cost of capital (WACC)
- WACC is the blended required return on a firm's financing. WACC = (wd × rd × (1 − tax)) + (we × re), weighting after-tax debt cost and equity cost by their proportions.
- Why use after-tax cost of debt in WACC?
- Interest is tax-deductible, so the relevant cost is after tax: after-tax cost of debt = rd × (1 − tax rate), reflecting the interest tax shield.
- Cost of debt
- The cost of debt is the effective interest rate a firm pays on its borrowings, usually estimated from the yield to maturity on its outstanding or comparable bonds.
- Cost of equity
- The cost of equity is the return shareholders require for the risk of owning the stock, often estimated with the capital asset pricing model or dividend discount model.
- Capital asset pricing model (CAPM)
- CAPM estimates cost of equity as: re = risk-free rate + beta × (expected market return − risk-free rate), the market risk premium scaled by beta.
- Beta
- Beta measures a stock's sensitivity to overall market movements; a beta above 1 means the stock is more volatile than the market, below 1 means less.
- Market risk premium
- The market risk premium is the extra return investors expect for holding the market portfolio over the risk-free rate.
- Marginal cost of capital
- The marginal cost of capital is the cost of raising one additional dollar of new financing, which rises as a firm exhausts its lowest-cost sources.
- Optimal capital structure
- The optimal capital structure is the debt-equity mix that minimizes WACC and thereby maximizes firm value, balancing the tax benefits of debt against financial distress risk.
- Interest tax shield
- The interest tax shield is the tax saving from deducting interest expense, equal to interest paid × the tax rate, which lowers the effective cost of debt.
- Financial leverage
- Financial leverage is the use of fixed-cost debt financing; it magnifies returns to equity when earnings exceed borrowing costs but increases risk.
- Operating leverage
- Operating leverage is the degree to which a firm uses fixed operating costs; high operating leverage magnifies the effect of sales changes on operating income.
- Degree of financial leverage (DFL)
- DFL measures how a percentage change in operating income (EBIT) affects earnings per share; it is higher when fixed financing costs are larger.
- Trade-off theory of capital structure
- Trade-off theory holds that firms balance the tax advantages of debt against the costs of financial distress to find an optimal leverage level.
- Pecking order theory
- Pecking order theory states firms prefer internal financing first, then debt, and issue equity only as a last resort, due to information asymmetry costs.
- Financial distress costs
- Financial distress costs are the direct and indirect costs (legal fees, lost customers, fire-sale asset values) that arise as a firm's default risk rises with leverage.
- Capital budgeting
- Capital budgeting is the process of evaluating and selecting long-term investment projects that are expected to generate returns over multiple years.
- Net present value (NPV)
- NPV is the present value of a project's expected cash inflows minus the initial investment, discounted at the required rate; a positive NPV adds value.
- NPV decision rule
- Accept a project if its NPV is positive and reject it if negative; among mutually exclusive projects, choose the one with the highest positive NPV.
- Internal rate of return (IRR)
- IRR is the discount rate that makes a project's NPV equal to zero; a project is acceptable if its IRR exceeds the required rate of return.
- IRR decision rule
- Accept a project when its IRR is greater than the hurdle rate (cost of capital) and reject it when the IRR is below the hurdle rate.
- Why can NPV and IRR conflict?
- For mutually exclusive projects with different sizes or cash-flow timing, NPV and IRR can rank projects differently; NPV is preferred because it measures dollar value added.
- Payback period
- The payback period is the time required for a project's cumulative cash inflows to recover its initial investment; it ignores time value and post-payback cash flows.
- Discounted payback period
- The discounted payback period is the time to recover the initial investment using discounted cash flows, improving on simple payback by accounting for time value.
- Profitability index (PI)
- The profitability index is the present value of future cash flows divided by the initial investment; a PI greater than 1 indicates a value-adding project.
- Hurdle rate
- The hurdle rate is the minimum acceptable rate of return on a project, typically the firm's WACC adjusted for project-specific risk.
- Mutually exclusive projects
- Mutually exclusive projects are alternatives where accepting one means rejecting the others; selection should be based on the highest NPV.
- Independent projects
- Independent projects can be accepted or rejected on their own merits; all positive-NPV independent projects should be undertaken if capital permits.
- Capital rationing
- Capital rationing is the allocation of limited capital among competing positive-NPV projects to maximize total value when funds are constrained.
- Sunk cost
- A sunk cost is a past expenditure that cannot be recovered and should be excluded from capital budgeting decisions.
- Opportunity cost (capital budgeting)
- Opportunity cost is the value of the best forgone alternative use of a resource and must be included as a relevant cash flow in project analysis.
- Incremental cash flows
- Incremental cash flows are the additional after-tax cash flows that result directly from accepting a project; only these are relevant to its evaluation.
- Terminal value
- Terminal value is the estimated value of a project or business beyond the explicit forecast period, often capturing the majority of a valuation.
- Sensitivity analysis
- Sensitivity analysis examines how changes in one input variable affect a project's NPV, identifying which assumptions most influence the outcome.
- Scenario analysis
- Scenario analysis evaluates project outcomes under different sets of assumptions (such as best, base, and worst cases) to assess risk.
- Bond
- A bond is a long-term debt security obligating the issuer to pay periodic coupon interest and repay the face (par) value at maturity.
- Coupon rate
- The coupon rate is the fixed annual interest the bond pays as a percentage of its face value, set at issuance.
- Yield to maturity (YTM)
- YTM is the total annualized return earned if a bond is held to maturity, equating the present value of all cash flows to its current price.
- Inverse price-yield relationship
- Bond prices move inversely to yields: when market interest rates rise, existing bond prices fall, and when rates fall, prices rise.
- Par, premium, and discount bonds
- A bond trades at par when its coupon equals the market yield, at a premium when its coupon exceeds the yield, and at a discount when its coupon is below the yield.
- Duration
- Duration measures a bond's price sensitivity to interest-rate changes; a longer duration means greater price change for a given shift in yields.
- Modified duration
- Modified duration estimates the percentage change in a bond's price for a 1% change in yield, equal to Macaulay duration ÷ (1 + yield per period).
- Convexity
- Convexity measures the curvature in the price-yield relationship, improving duration's estimate of price change for large rate moves.
- Callable bond
- A callable bond lets the issuer redeem it before maturity, usually when rates fall; it carries a higher yield to compensate investors for call risk.
- Convertible bond
- A convertible bond can be exchanged for a set number of the issuer's shares, blending fixed-income features with equity upside and usually paying a lower coupon.
- Credit rating
- A credit rating is an agency's assessment of an issuer's creditworthiness; investment-grade ratings lower borrowing costs while speculative ratings raise them.
- Investment grade vs. high yield
- Investment-grade debt (BBB-/Baa3 and above) carries lower default risk and cost; high-yield (junk) debt is below that threshold and pays higher interest.
- Indenture
- An indenture is the legal contract specifying a bond's terms, including coupon, maturity, covenants, and the rights of bondholders.
- Covenant
- A covenant is a condition in a debt agreement requiring the borrower to take or avoid certain actions; breaching one can trigger default.
- Private placement
- A private placement is the sale of securities directly to a limited group of qualified investors without a public offering, offering speed and confidentiality.
- Syndicated loan
- A syndicated loan is a large loan provided by a group of lenders, arranged by one or more lead banks, to spread the credit exposure.
- Initial public offering (IPO)
- An IPO is the first sale of a company's shares to the public, raising long-term equity capital and creating a public market for the stock.
- Seasoned equity offering (SEO)
- A seasoned (secondary) equity offering is the issuance of additional shares by an already-public company to raise more equity capital.
- Rights offering
- A rights offering gives existing shareholders the right to buy new shares, usually at a discount, in proportion to their holdings to avoid dilution.
- Retained earnings
- Retained earnings are cumulative profits reinvested in the business rather than paid as dividends; they are an internal source of equity financing.
- Dividend policy
- Dividend policy is the firm's approach to how much profit to distribute to shareholders versus retain, balancing investor preferences and reinvestment needs.
- Dividend payout ratio
- The dividend payout ratio = dividends ÷ net income; it shows the share of earnings distributed to shareholders.
- Residual dividend policy
- Under a residual dividend policy, the firm funds all acceptable capital projects first and pays dividends from any leftover earnings.
- Stable dividend policy
- A stable dividend policy keeps dividends steady or growing gradually to signal financial health and meet income-seeking investors' expectations.
- Share repurchase (buyback)
- A share repurchase returns cash to shareholders by buying back stock, reducing shares outstanding and often boosting earnings per share.
- Dividends vs. buybacks
- Both return cash to shareholders; dividends provide steady income and signal stability, while buybacks offer flexibility and tax-timing advantages for investors.
- Dividend discount model (DDM)
- The DDM values a stock as the present value of its expected future dividends; the Gordon growth version is price = D1 ÷ (re − g).
- Gordon growth model
- The Gordon growth model values a stock with constantly growing dividends as P = D1 ÷ (r − g), where g is the perpetual dividend growth rate.
- Cost of preferred stock
- The cost of preferred stock = annual preferred dividend ÷ net issue price; preferred dividends are not tax-deductible.
- Flotation costs
- Flotation costs are the fees and expenses of issuing new securities; they raise the effective cost of newly raised external capital.
- Capital markets vs. money markets
- Capital markets trade long-term securities (stocks and bonds over one year), while money markets trade short-term instruments maturing in one year or less.
- Underwriting
- Underwriting is the process by which investment banks purchase a securities issue from the issuer and resell it to investors, bearing or sharing placement risk.
- Bank relationship management
- Bank relationship management is the practice of selecting, monitoring, and optimizing banking partners to ensure service quality, fair pricing, and adequate credit access.
- Account analysis statement
- An account analysis statement is a monthly bank report detailing the services used, their volumes and fees, balances maintained, and any earnings credit applied.
- Earnings credit rate (ECR)
- The earnings credit rate is a notional interest rate banks apply to a customer's collected balances to offset service fees rather than pay cash interest.
- How does the earnings credit offset fees?
- The bank multiplies the average collected balance (less reserves) by the ECR to produce an earnings credit that reduces or eliminates monthly service charges.
- Compensating balance
- A compensating balance is a minimum deposit a customer keeps to compensate the bank for services or credit; it raises the effective cost of those services.
- Hard-dollar vs. soft-dollar fees
- Hard-dollar fees are paid in cash, while soft-dollar fees are offset by earnings credits on balances; treasury compares them to choose the cheaper method.
- Request for proposal (RFP)
- An RFP is a formal document a company sends to banks soliciting detailed proposals for treasury services, used to compare capabilities, service, and pricing.
- Request for information (RFI)
- An RFI is a preliminary inquiry gathering general capability information from providers to narrow the field before issuing an RFP.
- Service level agreement (SLA)
- An SLA is a documented commitment defining the performance standards, response times, and accountability a bank or vendor must meet.
- Relationship pricing
- Relationship pricing offers more favorable rates and fees based on the overall value of the client's deposits, credit, and fee business with the bank.
- AFP service codes
- AFP service codes are a standardized coding system that lets companies compare bank service charges consistently across institutions on account analysis statements.
- Wallet share
- Wallet share is the portion of a company's total banking business allocated to a given bank, often used to reward credit providers with fee revenue.
- Why diversify banking relationships?
- Maintaining multiple banks ensures backup access to credit and services, reduces dependence on one provider, and supports geographic and operational coverage.
- Treasury's role in the organization
- Treasury safeguards liquidity, manages financial risk, funds the business, oversees banking and investments, and supports strategic financial decisions.
- Segregation of duties
- Segregation of duties divides responsibilities (such as initiating, approving, and reconciling payments) among different people to prevent fraud and error.
- Dual control
- Dual control requires two authorized individuals to complete a sensitive transaction, reducing the risk of fraud or unauthorized action.
- Corporate governance
- Corporate governance is the system of rules, oversight, and controls by which a company is directed and held accountable to shareholders and stakeholders.
- Code of ethics
- A code of ethics sets the standards of integrity and professional conduct expected of employees, including treasury staff handling sensitive financial decisions.
- Fiduciary duty
- A fiduciary duty is the legal obligation to act in the best interest of another party, requiring loyalty, care, and avoidance of conflicts of interest.
- Three primary financial statements
- The income statement reports profitability over a period, the balance sheet shows financial position at a point in time, and the cash flow statement tracks cash movements.
- Accrual accounting
- Accrual accounting recognizes revenues when earned and expenses when incurred, regardless of cash timing, matching income with related costs.
- Cash vs. accrual accounting
- Cash accounting records transactions when cash changes hands, while accrual accounting records them when earned or incurred, giving a fuller picture of performance.
- GAAP
- GAAP (Generally Accepted Accounting Principles) is the standardized U.S. framework of accounting rules that govern how financial statements are prepared.
- IFRS
- IFRS (International Financial Reporting Standards) is the globally used accounting framework set by the IASB, applied in many countries outside the U.S.
- Balance sheet equation
- The balance sheet equation is Assets = Liabilities + Shareholders' equity, the fundamental identity that keeps the statement in balance.
- Statement of cash flows
- The statement of cash flows classifies cash movements into operating, investing, and financing activities, reconciling net income to the change in cash.
- Return on equity (ROE)
- Return on equity = net income ÷ shareholders' equity; it measures how efficiently a firm generates profit from owners' capital.
- Return on assets (ROA)
- Return on assets = net income ÷ total assets; it measures how efficiently a firm uses its assets to produce profit.
- Debt-to-equity ratio
- Debt-to-equity = total debt ÷ shareholders' equity; it gauges financial leverage and the relative reliance on borrowed versus owner financing.
- Interest coverage ratio
- Interest coverage = EBIT ÷ interest expense; it shows how comfortably operating earnings cover interest obligations.
- Stakeholder communication
- Treasury communicates with internal stakeholders (FP&A, AP, AR, executives) and external parties (banks, investors, rating agencies) to align liquidity and risk decisions.
- Enterprise risk management (ERM)
- ERM is a firm-wide framework for identifying, assessing, prioritizing, and managing risks across the organization in alignment with strategy and risk appetite.
- Risk appetite
- Risk appetite is the amount and type of risk an organization is willing to accept in pursuit of its objectives, guiding risk limits and decisions.
- Risk tolerance
- Risk tolerance is the acceptable level of variation around specific objectives, operationalizing risk appetite into measurable limits.
- Financial risk
- Financial risk is the potential for loss from market movements or counterparty failure, including foreign exchange, interest-rate, commodity, credit, and liquidity risk.
- Foreign exchange (FX) risk
- FX risk is the potential for loss from changes in currency exchange rates affecting the value of cash flows, assets, or liabilities denominated in foreign currencies.
- Transaction exposure
- Transaction exposure is FX risk from the impact of exchange-rate changes on the home-currency value of specific contractual cash flows before they settle.
- Translation exposure
- Translation exposure is the accounting impact of exchange-rate changes when foreign subsidiary financial statements are consolidated into the parent's reporting currency.
- Economic exposure
- Economic exposure is the longer-term effect of exchange-rate changes on a firm's competitive position, future cash flows, and market value.
- Spot rate
- A spot rate is the current exchange rate for immediate delivery of one currency for another, typically settling within two business days.
- Forward contract
- A forward contract is a customized agreement to exchange a set amount of currency or commodity at a fixed rate on a future date, used to lock in pricing.
- Futures contract
- A futures contract is a standardized, exchange-traded agreement to buy or sell an asset at a set price on a future date, marked to market daily.
- Forwards vs. futures
- Forwards are customized, over-the-counter, and settled at maturity; futures are standardized, exchange-traded, marked to market daily, and carry less counterparty risk.
- Option (financial)
- An option gives the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a set strike price, for a premium paid upfront.
- Call option
- A call option gives the holder the right to buy an asset at the strike price; it is used to hedge against rising prices or currency appreciation.
- Put option
- A put option gives the holder the right to sell an asset at the strike price; it is used to hedge against falling prices or currency depreciation.
- Swap
- A swap is an agreement to exchange cash flows over time, such as fixed-for-floating interest payments (interest-rate swap) or two currency streams (currency swap).
- Interest-rate swap
- An interest-rate swap exchanges fixed-rate interest payments for floating-rate payments on a notional principal, used to manage interest-rate exposure.
- Currency swap
- A currency swap exchanges principal and interest payments in one currency for those in another, used to manage long-term FX and funding exposure.
- Hedging
- Hedging is the use of offsetting positions or financial instruments to reduce or eliminate the risk of adverse price, rate, or currency movements.
- Natural hedge
- A natural hedge offsets exposure through operations rather than instruments, such as matching foreign-currency revenues with foreign-currency costs.
- Netting (risk view)
- Netting offsets payables against receivables (or long against short positions) so only the net exposure remains, reducing settlement and FX risk.
- Interest-rate risk
- Interest-rate risk is the potential for loss from changes in interest rates affecting borrowing costs, investment returns, or the value of rate-sensitive assets and liabilities.
- Commodity risk
- Commodity risk is the exposure to losses from price changes in raw materials or inputs, often hedged with futures, forwards, or options.
- Credit (counterparty) risk
- Credit risk is the potential that a borrower or counterparty fails to meet its obligations, causing financial loss.
- Liquidity risk
- Liquidity risk is the risk a firm cannot meet short-term obligations because it lacks cash or cannot convert assets to cash without significant loss.
- Value at risk (VaR)
- Value at risk estimates the maximum expected loss over a set time horizon at a given confidence level, summarizing market risk in a single figure.
- Stress testing
- Stress testing evaluates how extreme but plausible scenarios would affect a firm's financial position, complementing models like VaR.
- Operational risk
- Operational risk is the risk of loss from failed internal processes, people, systems, or external events, including fraud and human error.
- Internal controls
- Internal controls are the policies and procedures that safeguard assets, ensure accurate records, promote compliance, and prevent and detect fraud and error.
- Sarbanes-Oxley Act (SOX)
- SOX is U.S. legislation requiring management and auditors to assess and report on the effectiveness of internal controls over financial reporting.
- Payments fraud
- Payments fraud is the unauthorized or deceptive initiation of payments; treasury defends against it with controls such as positive pay, dual control, and authentication.
- Positive pay
- Positive pay matches checks presented for payment against a company-issued file of authorized checks (number, amount, and payee), flagging mismatches for review.
- Payee positive pay
- Payee positive pay adds verification of the payee name to standard positive pay, detecting altered or counterfeit checks where the payee has been changed.
- Reverse positive pay
- Reverse positive pay shifts the burden to the company, which reviews a daily list of checks presented and instructs the bank to pay or return each one.
- ACH debit filter
- An ACH debit filter allows only pre-authorized originators to debit an account, automatically blocking or flagging unauthorized ACH debits.
- ACH debit block
- An ACH debit block prevents all ACH debits from posting to a designated account, used to fully protect accounts that should never be debited electronically.
- UCC Article 3
- UCC Article 3 governs negotiable instruments such as checks and promissory notes, defining the rights and liabilities of parties to those instruments.
- UCC Article 4
- UCC Article 4 governs bank deposits and collections, setting the rules for how banks handle checks and allocate liability in the collection process.
- UCC Article 4A
- UCC Article 4A governs commercial wholesale funds transfers (such as wires), allocating liability and defining security-procedure responsibilities between banks and customers.
- Insurance (risk transfer)
- Insurance transfers specified risks to an insurer in exchange for premiums, protecting against losses such as property damage, liability, and certain crimes.
- Self-insurance
- Self-insurance is retaining risk and funding potential losses internally (such as a captive or reserve) rather than transferring it to an insurer.
- Captive insurance company
- A captive is an insurer owned by the company it insures, used to retain and manage risk, gain coverage flexibility, and potentially reduce costs.
- Surety bond
- A surety bond is a three-party guarantee in which a surety promises to compensate an obligee if the principal fails to perform a contractual obligation.
- Business continuity planning (BCP)
- Business continuity planning prepares an organization to maintain or quickly resume critical operations after a disruption such as a disaster or system outage.
- Disaster recovery
- Disaster recovery is the set of plans and procedures to restore IT systems and data after a major disruption, a key part of business continuity.
- Know your customer (KYC)
- KYC is the regulatory process of verifying the identity and assessing the risk of clients to prevent fraud, money laundering, and terrorist financing.
- Anti-money laundering (AML)
- AML comprises laws and controls designed to detect and prevent the disguising of illicitly obtained funds as legitimate income.
- Bank Secrecy Act (BSA)
- The Bank Secrecy Act requires financial institutions to keep records and file reports (such as suspicious activity reports) that help detect money laundering.
- OFAC compliance
- OFAC compliance requires screening transactions and counterparties against U.S. sanctions lists to avoid prohibited dealings with sanctioned parties.
- Risk identification
- Risk identification is the first ERM step of systematically recognizing the events and exposures that could affect the achievement of objectives.
- Risk assessment
- Risk assessment analyzes identified risks by likelihood and potential impact to prioritize which exposures require treatment.
- Risk mitigation strategies
- The main responses to risk are avoidance, reduction (control), transfer (insurance or hedging), and acceptance (retention) of the residual exposure.
- Counterparty limits
- Counterparty limits cap the exposure a firm will accept to any single bank or trading partner, diversifying credit risk across institutions.
- Settlement risk
- Settlement risk is the danger that one party delivers its side of a transaction while the counterparty fails to deliver, common in FX trades (Herstatt risk).
- Wire fraud (BEC)
- Business email compromise is a fraud where attackers impersonate executives or vendors to trick staff into sending wire payments to fraudulent accounts; callback verification mitigates it.
- Callback verification
- Callback verification confirms a payment instruction or account change by contacting the requester through a known, independent phone number before processing.
- Treasury management system (TMS)
- A TMS is software that centralizes treasury functions such as cash positioning, forecasting, payments, bank reporting, debt, investments, and risk management.
- Core functions of a TMS
- A TMS supports cash and liquidity management, bank communication and reporting, payments, in-house banking, debt and investment tracking, FX and risk, and reporting.
- Enterprise resource planning (ERP)
- An ERP is integrated software managing core business processes such as accounting, procurement, payables, and receivables across the organization.
- TMS-ERP integration
- Integrating the TMS with the ERP synchronizes payment, accounting, and cash data, reducing manual entry, errors, and reconciliation effort.
- Software as a service (SaaS)
- SaaS delivers software over the internet on a subscription basis, with the vendor hosting and maintaining the application, reducing in-house IT burden.
- Cloud computing
- Cloud computing provides on-demand computing resources over the internet, offering scalability, lower upfront cost, and remote access for treasury applications.
- On-premise vs. cloud TMS
- An on-premise TMS is installed and run on the company's own servers, while a cloud (SaaS) TMS is hosted by the vendor and accessed online with lower IT overhead.
- Bank connectivity
- Bank connectivity is the set of channels (host-to-host, SWIFT, APIs, portals) through which a company exchanges payment and reporting data with its banks.
- Host-to-host connectivity
- Host-to-host is a direct, automated file-transfer link between a company's system and a bank, used to exchange high volumes of payment and statement files securely.
- Bank portal
- A bank portal is a web-based interface a company uses to view balances, initiate payments, and access services with one bank, suitable for lower volumes.
- SWIFT
- SWIFT is a global member-owned cooperative providing a secure messaging network banks and corporates use to exchange standardized financial messages.
- SWIFT for Corporates
- SWIFT for Corporates lets companies connect to many banks through a single secure channel, standardizing multi-bank payments and reporting.
- BIC (SWIFT code)
- A BIC, or SWIFT code, is a standardized identifier for a specific bank, used to route international payments to the correct institution.
- BAI / BAI2 format
- BAI2 is a standardized bank reporting file format that delivers balance and transaction data for automated cash positioning and reconciliation.
- BTRS
- BTRS (Balance and Transaction Reporting Standard) is the modernized successor to BAI2, providing enhanced, standardized bank balance and transaction reporting.
- ISO 20022
- ISO 20022 is a global standard for rich, structured XML financial messaging used across payments and reporting, improving data quality and interoperability.
- Why is ISO 20022 important?
- ISO 20022 carries far more structured remittance and party data than legacy formats, enabling better straight-through processing, reconciliation, and compliance screening.
- MT vs. MX messages
- MT messages are SWIFT's legacy free-format message types, while MX messages are the newer ISO 20022 XML-based messages with richer structured data.
- Application programming interface (API)
- An API is a software interface that lets systems exchange data in real time, enabling instant balance inquiries, payment initiation, and status updates with banks.
- How do APIs change treasury connectivity?
- APIs enable real-time, on-demand data exchange (balances, payments, status) rather than batch files, supporting instant payments and live cash visibility.
- Straight-through processing (STP)
- STP is the automated end-to-end handling of a transaction from initiation to settlement without manual intervention, reducing errors, cost, and delay.
- Electronic bank account management (eBAM)
- eBAM automates the opening, closing, and maintenance of bank accounts and signatory changes electronically, improving control and audit trails.
- Data security
- Data security protects financial information from unauthorized access, alteration, or theft using controls such as encryption, access management, and monitoring.
- Encryption
- Encryption converts data into an unreadable form decipherable only with a key, protecting sensitive payment and account information in transit and at rest.
- Multifactor authentication (MFA)
- MFA requires two or more independent credentials (such as a password plus a token or biometric) to verify identity, strengthening access security.
- Tokenization
- Tokenization replaces sensitive data such as account numbers with non-sensitive substitute tokens, reducing exposure if data is breached.
- Fraud-detection technology
- Fraud-detection tools use rules, analytics, and machine learning to flag anomalous payment patterns and potential fraud in real time.
- Robotic process automation (RPA)
- RPA uses software bots to automate repetitive, rule-based treasury tasks such as reconciliation and data entry, improving speed and accuracy.
- Artificial intelligence in treasury
- AI and machine learning enhance treasury through improved cash forecasting, anomaly and fraud detection, and analytics on large volumes of transaction data.
- Machine learning forecasting
- Machine learning improves cash forecasting by learning patterns from historical data and many variables, often outperforming traditional statistical methods.
- Fintech
- Fintech refers to technology-driven financial services and providers that deliver innovative tools for payments, lending, connectivity, and treasury operations.
- Blockchain (distributed ledger)
- A blockchain is a shared, tamper-resistant distributed ledger that records transactions across a network without a central intermediary.
- Distributed ledger technology (DLT)
- DLT is a decentralized database shared across participants that records and verifies transactions, offering potential for faster, transparent settlement.
- Smart contract
- A smart contract is self-executing code on a distributed ledger that automatically enforces terms when predefined conditions are met.
- Central bank digital currency (CBDC)
- A CBDC is a digital form of a country's fiat currency issued by its central bank, with potential implications for payments and liquidity management.
- Stablecoin
- A stablecoin is a cryptocurrency designed to hold a stable value by pegging to a reference asset such as a fiat currency or a basket of assets.
- Data analytics in treasury
- Treasury data analytics turns transaction and market data into insights for forecasting, working-capital optimization, risk monitoring, and decision support.
- Dashboard (treasury)
- A treasury dashboard visually consolidates key metrics such as cash position, exposures, and forecasts to support real-time monitoring and decisions.
- Single sign-on (SSO)
- Single sign-on lets users access multiple applications with one set of credentials, improving security control and user convenience.
- Cybersecurity in treasury
- Treasury cybersecurity protects payment systems and data from threats such as phishing, malware, and business email compromise through layered technical and procedural controls.
- System integration
- System integration connects treasury, banking, ERP, and market-data systems so information flows automatically, eliminating manual rekeying and silos.
- Cloud data redundancy
- Cloud providers replicate data across multiple locations to ensure availability and recovery, supporting business continuity for treasury systems.
- Vendor due diligence (technology)
- Technology vendor due diligence assesses a provider's security, financial stability, compliance, and service reliability before adopting its treasury solution.
- Real-time visibility
- Real-time visibility is the ability to see current cash balances and positions across all accounts and banks instantly, enabled by API and modern connectivity.
- Format mapping (payments)
- Format mapping translates payment instructions between internal formats and the various standards banks require (such as ISO 20022 or NACHA), enabling automation.
- NACHA file format
- The NACHA file format is the standardized record layout for originating ACH transactions in the United States, governing how ACH payment files are structured.
