Cash management rules

Cash management rules allow the user to define cash management, or:

all of the information necessary for the system to calculate, on the basis of the daily liquidity defined according to the collection and payment method associated with the various accounts, the net financial position inclusive of short-term financial expenses and income, both at the company and the group level. In fact, the system operates like a completely normal current account and, on a daily basis:
calculates the balance of the managed bank account by applying the credit terms defined for the various accounts
applies the interest rate defined, depending on the sign of that balance, calculating interest receivable or payable accordingly.

Cash management is defined at the Group level by the administrator. Individual companies may have the possibility of customising only the interest rates to be applied.

The management of those rules is accessible from the administrator-user’s web interface by following the path Setup & Admin > Data Processing > Cash Flow Planning > Cash management rules.

Navbar > Data Processing > Cash Flow Planning > Cash management rules.

The setup can be divided into two steps:

definition of the rule
associate the corresponding rule with each entity

Rules¶

Each rule is identified by:

a code
a description

Generally, two different rules are defined; one for the holding entity and one for the subsidiary entities.

Once the rule header, the container of the financial policy, has been created, it is necessary to specify:

the various lines of credit and deposits (main line, deposit and credit line) used by the system for the daily sorting of liquidity, the interest calculation and, if necessary, the calculation of non-covered amounts
the shift between lines of credit and deposits, or the rules for shifting amounts between the various lines (sorting conditions, frequency with which the sorting must take place, etc.).

The management of these details can be accessed directly from the Actions () menu in the cash management rule management window.

Lines of credit / deposits¶

The term “line of credit/deposits” essentially refers to the types of funding and lending necessary for the interest calculation.

The system always needs a main line on which to conduct all liquidity deriving from financial movements of a P&L, balance sheet, investment and L/T financing nature, etc. In addition to this line, it is always necessary to define the technical form of use, and therefore the liquidity line of deposit and the funding line, or line of credit.

The system automatically performs the daily sorting of liquidity from the main line to the line of deposit or credit depending on the condition defined in the financial policy.

Each line is identified by:

a code
a description
a use for direct cash flow. If enabled, this indicates that the line’s liquidity accounts form part of the direct cash flow calculation. If the user wants to customise the category for the direct cash flow calculation, define the Custom cash flow category and the Custom cash flow notional category.
a main account. This is the bank account on which all the entries of the line that is being set up are recorded
a main account: debit/credit variation. This is the variation of the primary account on which shifts between deposit / credit lines are recognised.

If the chart of accounts provided contains no evidence of the Asset or Liability bank account, but only the generic “Bank c/a” account, it will be necessary to create the asset and liability bank accounts (and their variations and the corresponding Balancing Groups) to the extent necessary for the procedure

Once the general information for the line has been defined, namely the bank accounts, it is possible to define the information that the system needs in order to calculate the interest related to the line being set up. The management of this information can be accessed from the Interest tab.

In order to calculate the interest, every line is identified by:

whether to create on preferred currency. If enabled, this means that the interest is capitalised in the entity currency. Otherwise, interest is capitalised in the original currency.
an interest calculation method. This indicates the duration of the year, expressed in days, to be used as the denominator in the interest calculation. The possible values are 360 or 365
an interest account. P&L account on which the interest related to the line are booked.
an interest accrual account: debit/credit variation. This is the accrual variation account (asset or liability) used as the balance sheet contra-entry of the interest account
the capitalization frequency. This indicates the frequency with which interest must be capitalised. It can be monthly, bimonthly, quarterly, four-monthly, six-monthly or annual.
the initial date of capitalization. This indicates the month from which interest must be capitalised
collection / payment days or months. These indicate after how many months the payment / collection of interest must be performed, starting from the interest capitalisation date
a debits/credits for interest: debit/credit variation account. This is the account where the debit and the credit for interest is defined if payment / collection is deferred in respect of the accounting. It only needs to be defined if collection/payment days and months are different from zero.
a bank account: capitalisation variation. This is the bank account of the variation type used for the settlement of capitalised interest
the withholding tax. This indicates the withholding tax percentage to be applied to the collection of interest of the active L/T Financing operations (bank deposits, active L/T Financing, etc.)
a withholding tax account: debit variation. This is the withholding tax account of the variation type used for billing withholding tax
a bank account: capitalisation write off variation. This is the bank account of the variation type for the write-off of the interest capitalisation when recognising the withholding tax.

Therefore, every interest account generates the following “curves”:

an accrual curve: related to the billing of interest
a capitalisation curve: generated based on the capitalisation policy defined for the line
a financial curve: generated based on the credit terms defined for the account specified

If the management of cash pooling, i.e. the transfer of the intercompany bank balance to the holding entity, is required for the interest calculation rule, it is necessary to define the specific accounts involved in this step for every line sensitive to that operation. The management of these accounts can be accessed from the Cash pooling tab. For more information, see the Definition of lines sensitive to cash pooling.

Let us look in detail at the accounts used in the various types of entry generated by the interest calculation

Shift between lines

Main account: variation for shifting the ‘lines from’ between lines (debit or credit)
Main account: variation for shifting the ‘lines to’ between lines (debit or credit)

Recognition of accrued interest

Interest Account
Interest accrual account: debit (or credit) variation

Interest capitalisation

Interests accrual account: credit (or debit) variation
Bank Account: capitalization variation

Interest capitalisation in cases of deferred collection / payment

Interests accrual account: credit (or debit) variation
Debits / credits account for interest: debit (or credit) variation

Deferred collection / payment

Debits / credits account for interest: credit (or debit) variation
Bank Account: capitalization variation

Cash pooling shift between lines from the child entity to the parent entity: entry on the parent entity

Bank account for cash pooling: debit (or credit) variation
IC account for cash pooling: credit (or debit) variation

(the child entity entry is the standard shift between lines entry)

Cash pooling recognition of the child entity’s accrued interest to the parent entity: entry on the parent entity

IC interests Account
IC interest accrual account: credit (or debit) variation

(the child entity entry is the standard entry to recognise accrued interest)

Cash pooling interest capitalisation from the child entity to the parent entity: entry on the parent entity

IC interest accrual account: debit (or credit) variation
Bank Account: IC interest capitalization variation

(the child entity entry is the standard interest capitalisation entry)

Cash pooling interest capitalisation from the child entity to the parent entity: entry on the parent entity in the event of deferred collection / payment

IC interest accrual account: debit (or credit) variation
Debits / credits account for IC interest: credit (or debit) variation

(the child entity entry is the standard interest capitalisation entry)

Cash pooling deferred collection / payment from the child entity to the parent entity

Debits / credits account for IC interest: debit (or credit) variation
Bank Account: IC interest capitalization variation

(the child entity entry is the standard interest collection / payment entry)

Liquidity accounts for a line of credit / deposit¶

In all cases in which the user wants to have several actual liquidity accounts transferred to a single line it is necessary to enter the liquidity accounts as well as the main account. For example, consider a case in which several current bank accounts are present in the initial balance sheet, but they are not managed with the same detail in the planning process. All of the actual current accounts will therefore be defined as liquidity accounts of the main line, the main account of which will be the only one to incur entries in the forecasting phase.

The management of liquidity accounts can be accessed directly from the Liquidity accounts tab in the lines of credit/deposits management window.

Interest rates of a line of credit/deposit¶

To complete the definition of the line of credit/deposit, it is necessary to indicate the relative interest rate to be applied, for every currency. Typically, the interest rate is not necessary on the main line since the latter tends to be zero following the shift of the amounts onto another two lines, while it is necessary in the line of credit/deposit in order to be able to calculate interest.

The management of interest rates can be accessed directly from the Interest rates tab in the lines of credit/deposits management window.

The following types of rate can be used:

Fixed. In this case the system applies the specified rate to the line in question’s daily liquidity;
Variable by month. In this case the system applies the interest rate specified in the list of rates, potentially increased by a spread, to the line in question’ daily liquidity.

If cash management is calculated by counterparty entity, the system allows the user to manage exceptions to the specified interest rates for counterparty entities. This management can be accessed from the Customise for CTP link. To manage those exceptions, it is necessary to specify:

the counterparty entity to which the “override” must be applied
the currency to which the “override” must be applied
the rate type, variable or fixed. If the rate is fixed, its percentage. If the rate is variable, any spread.

Lines of credit / deposit shift¶

Once the details of the lines (main, deposit and credit) have been defined, the user can manage the cash management itself, which specifies the rules for shifting amounts between the various lines, indicating their order of execution.

Cash management is generally represented by two sorting rules:

one related to the shift from the main line to the deposit line
one related to the shift from the main line to the credit line

However, cash management set up is completely customisable; therefore, depending on the needs of each company, more or less detailed cash management options can be defined. Below we will illustrate the standard cash management setup which consists of the sorting from one line to another in order for the system to carry the balance initially present on the main line to the correct line. In essence, it is necessary to tell the system the condition under which the sorting from the main link to the deposit and credit line must take place. Since all P&L and balance sheet entries take place on the main line, values must be sorted from the latter to the deposit line when the main line is greater than zero (condition) and to the line of credit when the main line is less than zero. Thus, the system is able to define the line of deposit or credit and because this has a certain interest rate and a certain P&L interest entry associated, it can calculate the amount of the interest entry and position it on the correct P&L account.

As well as having to define the sorting condition (sort to the deposit line when the main line is greater than zero, sort to the credit line when it is less than zero), the user must specify the frequency with which that sorting must be carried out (daily or on certain dates) and the amount of time after which to perform the write off from the main line in favour with the deposit or credit line. This could take place because, for example, the user wants to sort liquidity to the child lines daily, but showing the shift with the respective main line write off may take place after several days/months.

Every sorting rule is identified:

by the sequence of execution of the rule being defined
by the line from which the liquidity is intended to be sorted (From). Typically identified as the main line
by the line to which the liquidity is intended to be sorted (To). Typically identified as one of the main line’s two child lines
by the shift frequency. This indicates how frequently sorting is carried out. The possible values are:
every day (default value)
every week
every 15 days
every month

The frequency is typically daily.

If the calculation is not performed with daily frequency, then it is necessary to define the Days field by specifying in which specific date the sorting must be performed, that is:

if the defined frequency is every week, then it is necessary to select one from days of the week (Monday to Sunday)
if the defined frequency is every fifteen days, then it is necessary to select from the days of the fifteen-day period (1^st day of the fortnight to the 15^th day of the fortnight)
if the defined frequency is every month, then it is necessary to select from the days of the month (1 to 31)
by the write off after months/days. This indicates the period of time (days, months, months/days) after which the write off entry of the line from which to sort is generated, in favour of the line to which to sort. Generally 0 month and 1 day is specified. In this way, the system completely re-executes the rule every day without taking account of what it did on previous days. In particular cases (for lines representing investments in government securities, for example), it is possible to override the write off after N months (to simulate the maturity of said securities)
by the condition upon the occurrence of which the system performs the sorting.

Generally, all the P&L and balance sheet entries that take place on the main line are sorted on the basis of the following conditions:

if the main line liquidity is greater than zero, it is entirely shifted to the deposit line
if the main line liquidity is less than zero, it is entirely shifted to the credit line

Therefore, if the lines defined are:

main line (1)
deposit line (2)
credit line (3)

for a sorting rule from the main line to the deposit line, the following formula will be indicated:

{S,'1'}>0

while for a sorting rule from the main line to the credit line, the following formula will be indicated:

{S,'1'}<0

where:

S stands for line
‘1’ indicates the main line
by the amount if the condition is verified, i.e. the amount to be shifted to the “to line” if the specified condition occurs.

Generally, the same amount present on the “from line” is indicated, and therefore the following formula will have to be indicated in the field:

{S,'1'}

by the amount if the condition is not verified, i.e. the amount to be shifted to the “to line” if the specified condition does not occur. A value equal to zero is generally shown, and therefore 0 will have to be indicated in the field

The “condition”, “amount if the condition is verified” and “amount if the condition is not verified” fields cannot be edited; to complete said fields it is necessary to activate the formula management window using the “...” button. The formula may contain:

references to the balances of standard balance sheet accounts and other stock accounts
references to the value of the liquidity of the lines
a mathematical expression

The following must also be indicated for every sorting rule defined:

whether the amount to be shifted to the “to line” must be calculated in the original currency or the entity currency, specifying this information in the Amounts in field
whether the sorting must also apply to initial balance sheet amounts, by activating the Apply sorting to balance sheet date option. This option is activated in order to calculate the interest on the first day of the simulation, based on the balance as at 31/12, otherwise the system calculates interest not based on the 31/12 balance, but on the restored balance as at 1/1.
whether the rule is valid for all currencies or certain currencies only. In the latter case, it is necessary to specify the currencies to which the sorting rule being defined must be applied in the Filter by currency tab.

Cash management by counterparty entity¶

The standard cash management calculation does not take account of the individual counterparty entity balances; therefore, regardless of those values, it is transferred to the deposit line if the balance present on the main line is greater than zero, and to the credit line when it is less than said balance.

In order for the calculation to take account of counterparty entity balances when sorting from one line to another, it is necessary to activate the “Cash management calculation by CTP entity” information in the general cash flow planning rules associated with the process.

Thus, if the balance of the main line is positive in total, but there is also even just one single negative balance with a counterparty, that balance will be shifted to the line of credit.

Obviously, this has an impact on the interest calculation.

However, cash management by counterparty entity is incompatible with cash pooling. In fact, in cases of cash pooling, when the system performs the line shifts and generates interest, it always defines the counterparty entity as the parent entity. Therefore, when calculating cash management by counterparty, the system checks that none of the lines involved in the sorting has the “Cash pooling” option enabled, and if they have, it returns a blocking error.

Entity/cash management rules relationships¶

Once the cash management rules have been defined, it is necessary to associate them with each entity so that the system can process cash management for those entities, according to the methods and scheduled specified by the rule.

The management of entity/cash management rules relationships can be accessed from Setup & Admin > Data Processing > Cash Flow Planning > Cash Management Rules > Entity/cash management rules relationships

Navigation panel> Data Processing > Cash Flow Planning > Cash Management Rules > Entity/cash management rules relationships

These relationships can be defined by individual entity - entity hierarchy nodes.

The attribute to be managed is the cash management rule.

From the Definition result link, the system displays the relationships defined in detail.