NOTE: THE TERMS EXPLAINED IN this glossary are integral to the management of working capital. Acronyms and full-word descriptions are included and are listed in order of general use (i.e., EOQ is listed first before economic order quantity, while application service provider is first listed before the acronym ASP). Other major terms are noted, but no attempt has been made to include every possible financial concept. Two excellent references on finance are QFinance and The Wiley Handbook of Finance, listed in Appendix II.

ACH (Automated Clearinghouse):

The electronic payment mechanism offered by regional organizations that performs interbank clearing of entries for participating financial institutions. ACHs are governed by operating rules and procedures developed by their participating financial institutions. ACHs make it possible for participating financial institutions to offer bill payment, direct payroll deposit, and other services. ACH payments generally move on a next-day basis.

Account analysis:

A commercial bank's invoice for services provided to corporate customers. These statements are produced monthly and contain such details as average daily book balance, average daily float, average available balances, itemized activity charges, earning credit rate (ECR), balances required to compensate for services, and balances available to support credit arrangements and other bank services.

Account maintenance:

A basic charge for a bank account, to cover the overhead costs associated with the various services provided by the bank. Even if an account is idle, a maintenance charge is assessed. Typical charges are about $25 a month for middle market banks.

Account reconciliation:

A bank service used to reconcile corporate bank accounts, providing a serial number listing of items paid (called partial reconciliation), or by matching a list of items issued (from a positive pay transmission) to the actual items paid, producing full reconcilement including outstanding items, balance by date, exceptions, and numerous optional reports.

Accounts payable:

A current liability that involves money owed to creditors representing obligations to pay for goods and services that have been purchased or acquired on credit terms.

Accounts receivable:

A current asset that represents amounts owed or the balance due to a vendor from a company for the goods sold or services rendered but not yet paid for.

Accrual accounting:

A method of keeping accounting records that attempts to match revenues and the accompanying costs incurred. A convention used in accrual accounting is depreciation, which expenses a capital good over its useful life.

Accrued expenses:

Costs that have been incurred as of the date of a balance sheet but not paid.

Activity utilization:

Ratios that indicate how efficiently the business is using its assets. Important working capital utilization ratios are receivables turnover (and its complement, average collection period) and inventory turnover (and its complement, inventory turnover days).

Aging schedule:

An organization of accounts receivable classified by time intervals based on days due or past due; used to identify delinquency patterns.

Amortization:

A convention used in accounting to write down the value of intangible property such as patents, copyrights, and licenses.

Application service provider (ASP):

A business that sells access to software applications through central servers over a communications network; this effectively outsources these information technology activities.

Array:

A listing of the members of a group in either ascending or descending order.

Asset-based financing (asset-based lending):

A method of financing (lending) for rapidly growing and cash-strapped companies to meet their short-term cash needs; current assets (accounts receivable or inventory) are pledged as collateral.

Asset:

Any tangible or intangible valuable resource that a business entity owns, benefits from, or has use of in generating income and that could be converted to cash.

Available balances:

Those collected balances in an account that can be invested, disbursed, or wired out. Available balances are defined as book balances less float.

Availability:

The number of days that elapse between the deposit of checks and their accessibility for disbursement. An “availability schedule” lists drawee points or locations, specifying availability granted in business days. Availability is based on a bank's recent experience in clearing deposited checks.

Bank information (treasury) technology:

Internet-based systems that allow companies to electronically access a full range of financial services and to execute many transactions; contains various modules accessible through a common interface.

Balance reporting:

Systems using a communications network to consolidate daily balance and activity information from one or more banks for the accounts of a specific user corporation. These systems consolidate information prior to opening of business and for report to the customer.

Bank relationship management:

The process of managing the relationships between banks and companies in a comprehensive approach involving the credit and noncredit services offered by a bank and used by a company.

Bank statement:

A periodic statement of a customer's account detailing credits and debits posted to the account during the period and book balance as of the statement cutoff date.

Banker's acceptance:

Endorsement of a draft or bill of exchange by the buyer's bank where the bank is obliged to pay the buyer's bill from a specified creditor when it is due on assurance of the buyer's financial strength and stability, and on payment of acceptance fee; primarily issued to finance international trade.

Basis point (bp):

Market abbreviation for 1/100th of 1 percent, usually used in conjunction with comparisons of interest rates.

Basel 2/3:

A set of standards and regulations recommended by the Basel Committee on Bank Supervision that regulates banking and financing activities internationally; determines specific amounts of capital that financial institutions must hold to reduce the risks associated with lending and investing practices.

Benchmarking:

Compares the processes of a business and selected performance metrics to industry best practices or those from other industries.

Beta:

Often denoted using the Greek letter β. The amount of systematic risk present in a particular asset relative to an average, usually defined as the Standard & Poor 500 stock index. Systematic risk is a risk that affects a large number of assets (such as the financial system credit crisis of 2008–2009).

Bill of lading:

A document issued by a carrier to a shipping company that specified goods have been received on board as cargo for transporting to a named place to a recipient (usually the purchaser).

Book balance:

The balance in a bank account that represents the net of debits and credits and before any consideration for availability, reserve requirements or other deductions.

Capital Asset Pricing Model (CAPM):

A securities evaluation model that establishes the fair value of an investment by relating risk and expected return to the market as a whole; based on the theory that markets are efficient and prices of securities represent all known information about the security.

Capital budgeting:

Refers to the analytical process of making long-term planning decisions by comparing the expected discounted cash flows with the internal rates of return (IRR) to determine the return from a capital investment; an alternative capital budgeting technique is net present value (NPV).

Cash accounting:

In contrast to accrual accounting, cash accounting is a method where revenues are recorded when they are received and expenses when they are actually paid; no attempt is made to match revenues and costs incurred as in accrual accounting.

Cash budget:

An estimate of cash receipts and disbursements for a future period, usually calculated daily by large companies and semi-weekly or weekly by middle market companies.

Cash conversion cycle:

The number of days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.

Cash discount:

A reduction in the base price for the buyer by the seller where the buyer agrees to pay immediately or in a period shorter than the conventional period as set by the credit terms of sale; an example is 2/10, net 30, where the cash discount is 2 percent if the invoice is paid within 10 days of receipt, with payment due in full within 30 days.

Cash letter:

A batch of checks, accompanied by a letter detailing transit routings, amounts and totals, sent directly to a bank or to another check clearing site, containing items drawn on that bank.

Category killer:

Megastores with the size and general appearance of warehouses; they dominate their industry.

Check:

A negotiable instrument or a written order instructing a bank to pay or draw against deposited funds for a specific amount of money to a designated person on a demand by the person who draws the instrument.

Clearing (of checks):

A period of time between the deposit of a check by a payee to the receipt of the check by the drawee bank. Checks are cleared through the Federal Reserve System, Clearinghouses, and bank Direct Send Programs following presentation at the drawee bank.

Clearinghouse:

A location where banks exchange and settle paper and electronic checks (e.g., ACHs) and where mutual claims are settled between the accounts of member depository institutions.

Commercial paper:

A negotiable discount note issued by investment-grade issuers on an unsecured basis for up to a nine-month maturity. The yield on commercial paper normally exceeds the yield on U.S. Treasury Bills by 30–50 basis points given the additional risk of default.

Commodities futures:

A contract to buy or sell a commodity at a specific price on or before a certain date. Futures contracts are traded on organized exchanges (e.g., the Chicago Board of Trade) for a wide variety of agricultural, energy, foreign exchange, precious metal, interest rate, and other assets.

Common stock:

A security that provides an investor with ownership and voting rights with limited liability; the owner is entitled to dividends (if declared) to share in a company's profits after taxes; these securities are often traded on organized stock exchanges (e.g., the New York Stock Exchange).

Comprehensive payables (or receivables):

The outsourcing of all or a major portion of a disbursement or collection activity. Comprehensive payables usually involves the company resolving all payment decisions and sending a transmission to a bank or vendor that processes the payment, including issuing checks or electronic payments and remittances advice, mailing payments, and reconciling clearing checks. Comprehensive receivables usually involve a bank or vendor receiving all remittances, depositing the items, and accounts receivable updating.

Concentration bank:

A term that is no longer in general use. Such banks are referred to in the text as “principal banks,” serving as the central point for all incoming or outgoing movement of funds from other corporate accounts. Generally this account is funded by deposits of incoming wire transfers, collection account transfers, and branch deposit concentrations. The account furnishes funds for outgoing wire transfers, disbursing account transfers, and charges for ACH.

Controlled disbursement:

A checking account service capable of providing a total of the checks that will be charged to the customer's account(s) early each business day.

Corporate governance:

Administration of a business through rules, processes, or laws regarding responsible behavior as referenced by the ownership, management, employees, customers, and other stakeholders; required of public companies operating in the United States as mandated in the Sarbanes–Oxley Act of 2002.

Cost of capital (weighted average cost of capital [WACC]):

The weighted average of a firm's cost of debt (after tax) and cost of equity (common stock and retained earnings). The WACC is expressed as a percentage.

Cost of goods sold:

An income statement account that includes all the expenses associated with the manufacturing costs of a company's products including its raw materials, work-in-process, finished goods, and shipping expenses.

Credit reporting:

Procedures that review the credit history of a company or a person using detailed information on credit accounts and loans, payment history, and other recent financial data.

Counterparty:

An entity with whom one negotiates for a particular transaction, with the counterparty on the opposite side of the transaction.

Country risk assessment (CRA):

The quantification of the possibility that transactions with international counterparties may be interrupted by the interference of the foreign government or due to local conditions; measured through the analysis of political and economic risks.

Current assets:

The total of cash and other assets that are readily converted to cash within one year, helping to satisfy liquidity needs for daily operations. Assets with a life of greater than one year are fixed assets.

Current liabilities:

The funds owed by a company that are to be settled or paid off within a year.

Current ratio:

A financial ratio that measures the capability of the firm to pay its debt over the next year; defined as current assets divided by current liabilities.

Days' sales outstanding (DSO):

A company's average collection period in days. The calculation is 360 days divided by receivables turnover. Receivables turnover is credit sales divided by accounts receivable.

Debt collection agency:

An independent business that pursues payments on unpaid debts owed by individuals or businesses, usually for balances older than 90 days past due.

Debit:

An accounting entry on the left side in a double-entry accounting system. The parallel right-side entry is called a “credit.“

Demand deposit account (DDA):

Deposited funds that are available to the customer at any time during regular business hours, and that require no advance notice of withdrawal. They are usually accessed by writing a check. Checking accounts are the most common form of demand deposit. The required reserve against time deposits is 10 percent.

Deposit reporting service (DRS):

A service that mobilizes funds in local depository accounts to the concentration account.

Depreciation:

A convention used in accrual accounting that attempts to match the expense of a fixed asset for a specific reporting period with the revenue it produces.

Deregulation, financial:

The elimination of restrictions on interstate banking and lines of business in financial services in the 1990s, allowing U.S. financial institutions to enter any activity in finance in any geographic location.

Direct deposit:

An ACH service that permits a company to pay its employees without writing checks. The company generates credit entries representing deposits and delivers them to its financial institution before each payday, which posts them to employee bank accounts on payday.

Discount rate:

The rate of interest charged by the Federal Reserve on loans it makes to member banks. This rate influences the rates banks then charge their customers.

Distribution method:

A forecasting technique that estimates the distribution of cash flow by day of the week and day of the month.

Dividend yield:

A percentage indicating the amount a company pays out as a dividend each year; measured by dividing the annual dividend payment by the stock price.

Drawee bank:

The bank on which an item is drawn and to which it must be presented to collect cash.

Dynamic discounting:

The situation when vendors offer prorated cash discounts based on days paid prior to the due date.

Earnings credit rate (ECR):

A rate used by a bank to determine the earnings allowance associated with a customer's demand deposit balances. Depending upon the bank, the rate may be arbitrarily set or tied to some market rate, such as federal funds.

Electronic commerce (or e-commerce):

The exchange of business information in an electronic format in an agreed-upon standard.

Encoding:

An amount that is MICR (magnetic ink character recognition) encoded in the lower right corner with the check amount, using special MICR printing equipment.

Enterprise resource planning system (ERP):

An integrated system that manages internal and external company resources including tangible assets, financial resources, and materials purchasing. ERP systems are based on a centralized computing platform, consolidating all significant business operations into a uniform environment.

EOQ (economic order quantity):

The optimal quantity to order from a supplier that minimizes the total costs of processing orders and the cost of holding inventory.

Equity:

A stock or any security that represents ownership interest in a corporation.

Factoring:

The sale or transfer of title to accounts receivable to a third party, the factor.

Fed funds (Federal funds):

Reserves traded among banks for overnight investment and to fund a bank's deficit position with the Federal Reserve System. Most U.S. interest rate transactions (such as bank credit arrangements) are quoted as an increment from federal funds.

Fedwire (Federal wire transfer):

The Federal Reserve System's electronic communications network used in transferring member bank reserve account balances and government securities as well as other related information. This network interconnects the Federal Reserve offices, the Treasury, various government agencies, and the member banks.

Financial leverage:

The degree to which borrowed money is utilized to increase volume in production, sales, and earnings; generally, the higher the amount of debt, the greater the financial leverage.

Fiscal year:

The accounting period chosen by a company for its reporting period. Any year-end may be chosen by management, although companies usually choose a quiet period when sales activity is at a seasonal low.

Fixed assets:

Long-term assets with lives greater than one year that cannot be easily converted into cash, including manufacturing equipment, furniture, office equipment, or any other tangible assets held for business use; contrast fixed assets to current assets.

Float:

Refers to the status of funds in the process of collection or disbursement. Float has the dimensions of money and interest and thus is computed as the product of funds being collected or disbursed and the applicable interest rate. This product is expressed in dollars (or other currency).

Foreign exchange (FX):

The buying and selling of currencies worldwide, which consists of the currencies themselves, the transfer mechanisms, and the information needed to make sound multicurrency decisions. FX services are needed when more than one currency is involved in an international business transaction. Most of the European Union transacts its business in the euro , which replaced national currencies (except for the British pound , the Danish krone, and the Swedish krona).

Forward foreign exchange rates:

Hedging the delivery of a foreign currency on a specified later date by arranging with a bank to “lock in” a guaranteed rate when it is likely that an international transaction will settle at a future time.

Freight payments:

The auditing and payment of bills from transportation carriers. Freight invoices are reviewed for excessive charges such as misclassifications, incorrect discount levels, incorrect mileage calculations, extension mistakes, and other errors.

Funds (cash) mobilization:

Where multiple collection and disbursement accounts exist, cash needs to be mobilized into and funded from a principal bank relationship. This process is known as funds or cash mobilization.

Full reconciliation:

A bank product that takes the issued and cleared item files and matches them monthly.

Futures contracts:

Hedging vehicles based on standard-sized contracts available through U.S. commodities exchanges. Futures are similar to forwards in that the FX is for delivery at a later date.

Gross profit (or gross margin):

The income statement account that is calculated by subtracting cost of goods sold from sales (revenues).

Growth yield (capital gain):

The component of a business's cost of equity capital that calculates investor expectations for an increase in the stock price, usually measured for the period of one year. The other component of the cost of equity capital is the dividend yield.

Hedge (hedging):

A transaction that mitigates exposure to a risk by taking a position opposite to the initial position; hedging instruments include forwards, options, swaps, and futures contracts.

Imaging:

The capture of an electronic picture of the check and/or the remittance document received, which can be archived, retrieved, and transmitted to the company.

Interest yield:

The expected return on a debt security measured by dividing the interest paid for one year by the price of the debt security. Except for tax-free municipal bonds, the final cost to a business is then reduced by the appropriate tax deduction (calculated as 1 less the tax rate).

Interquartile range:

The area in an array of results from the 25th to the 75th percentiles (or the first to the third quartiles).

IRR (internal rate of return):

A capital budgeting procedure; it is the discount rate that forces the net present value of a proposed capital investment equal to zero.

Intrabank transfer:

A transfer of funds within a bank between accounts; an example is the funding of a bank's controlled disbursement account from a concentration account in that bank.

Inventory financing:

Asset-based financing used to gain working capital, with a company's inventory functioning as the collateral for the loan.

Inventory turnover:

A ratio calculated as cost of goods sold divided by inventory, showing the utilization of that asset as compared to a peer group of companies.

Just-in-time (JIT):

A method of managing inventory levels to minimize working capital. Successful implementation depends on strict production planning/control techniques and integrated communications with suppliers and customers.

Letter of credit (LC):

An instrument primarily used in international business transactions; issued by a bank to an individual or corporation that allows the bank to substitute its own credit for that of the individual or corporation.

Liabilities:

A major portion of a balance sheet showing amounts owed to vendors and lenders. The current portion shows amount due to be paid within one year; the long-term portion shows the amounts due beyond one year.

LIBOR:

The London Interbank Offering Rate on funds traded between banks. Some interest rate transactions (such as bank credit arrangements) are quoted as an increment from LIBOR, although most transactions in the United States are based on federal funds.

Lien:

A legal claim that attaches to property owned by a debtor. A creditor who holds a lien often can have property sold to satisfy the lien.

Line of credit (credit line):

A prearranged amount of credit a lender will extend to a company over a specified period of time, usually one year.

Liquidity:

The cash used in a normal business environment, including operating cash flow and short-term investments and credit sources.

Loan covenants:

Restrictions established by lenders on borrowers that apply to lines of credit and other types of credit agreements, requiring a certain level of performance.

Lockboxing:

A collection mechanism in which mail containing payments bypasses corporate offices, going directly to a post office box maintained by the bank of deposit, thereby reducing collection float. After deposit of the check, remittance advices, photocopies of the check, and other supporting material are forwarded to the corporate credit department. Wholesale processing provides check copies and original remittance documents to the client; retail processing captures encoded MICR and/or OCR information on the bottom of the check and/or remittance documents and transmits it to the client in a data file.

Long-term liabilities:

See “liabilities”; includes loans (e.g., mortgages payable) and bonds payable.

Mean:

The arithmetic average of the total of all items divided by the number of items.

Median:

The middle item in an array is the median (the 50th percentile).

MICR (also OCR):

Acronyms for magnetic ink character recognition and optical character recognition; a set of unique characters printed on a check or remittance advice that is scannable by reader-sorter equipment.

Money market mutual funds (MMMFs):

Pools of various types of short-term investments that offer shares to corporate (and individual) investors through the format of mutual funds.

Mortgage payable:

A loan taken to acquire real property (land and buildings).

Multicurrency account:

A single international bank account with the capability to receive deposits and withdrawals of major currencies; used to simplify the management of foreign exchange.

Munis (municipal securities):

State and local government municipal securities that have their interest payment exempt from federal taxes; yields are less than those of other investment instruments.

NACHA:

The electronic payments association that establishes rules for ACH transactions.

NAICS:

The North American Industry Classification System, used to classify business establishments according to type of economic activity (process of production). The Department of Commerce and the Office of Management and Budget (OMB) are the principal sponsoring federal agencies.

Netting:

A system used to reduce the number of counterparty payments by summing debits and credits and transferring the resulting balance. Netting systems are used in cross-border payments and in industries where there are many individual transactions, such as in broker-dealer activities.

Net worth:

The accounting determination of a company's value based on its total assets less total liabilities.

NPV (net present value):

A capital budgeting technique that calculates the difference between the cost of an investment and the present value of all predictable future cash inflows. Also, see IRR.

NSF (not sufficient funds):

The situation when a check is presented for clearing and sufficient funds are not in the maker's bank account. The bank may reject (bounce) the check unless the maker has arranged overdraft protection.

Outsourcing:

Bank or vendor processing of a business activity not considered as core or critical to profitability. Examples include cash handling activities, certain information processing, and other functions.

Owners' equity:

A balance sheet account that shows the amount of a business that has been paid in by the shareholders for their stock; the other major category in net worth is retained earnings.

Partial reconciliation:

A list of paid or cleared items, including check numbers and dollar amounts that the company must then reconcile against its own ledgers.

Payback method:

A capital budgeting procedure that calculates the time required by an investment to generate sufficient cash flows to recover the initial cost.

Paycard:

ATM cards specifically issued for payroll. An employee receiving a paycard need not have an account at the payroll bank. Instead, the card is issued along with a PIN number, allowing access through any ATM machine or at merchants that accept the card family (e.g., Visa or MasterCard).

Payment stream matrix:

A road map that lists working capital flows by name, dollar volume, and manager.

PO (purchase order):

A commercial document indicating types, quantities, and prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a contract between the buyer and seller.

Pooling:

A product offered by international financial institutions that aggregates the debit and credit balances of a company's separate bank accounts to calculate a net balance, with interest paid or charged on the net debit or credit.

Positive pay:

A bank service used to reduce disbursement fraud, with the issuer sending an issued file to its bank of serial numbers and check amounts. Only those checks that match this listing are paid.

Prepaid expenses:

Assets paid in advance of expenses as incurred; an example is insurance paid in advance of the incurrence of the expense.

Presort (for postage discount):

A discount to regular first class postage provided by the USPS based on a minimum quantity of letters presorted by zip code.

Preferred stock:

Ownership shares in a business with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.

Presentment:

The actual delivery of a negotiable instrument by a holder to the drawee bank for payment or acceptance.

Prime rate:

A benchmark rate used by banks to determine loan pricing for their best small- and middle-market corporate customers.

Processing expenses (costs):

Each transaction along a working capital timeline has a cost that directly impacts profitability. These costs may be internal and/or paid to a bank or vendor.

Procurement (purchasing) cards:

A payment mechanism involving the use of credit cards by authorized company employees for routine purchases.

Profitability:

A measure of a business's net income after taxes, either as a sheer calculation or compared to owners' equity or sales.

Pro forma statement:

A financial statement prepared on the basis of assumptions of future events that affect the expected condition of the company as a result of those events or actions. For example, assumptions as to future sales levels generally enable a company to project anticipated income.

Quick ratio:

A liquidity ratio with current assets less inventory in the numerator and current liabilities in the denominator.

Ratio analysis:

A financial technique that allows the examination of a company's financial statements. It compares a numerator and a denominator to changes over time and/or against its competitors.

Receivables turnover:

A calculation of receivables efficiency, calculated as credit sales divided by accounts receivable.

Reinvoicing center:

A central financial subsidiary used by a multinational company to reduce transaction exposure by billing all home-country exports in the home currency and reinvoicing to each operating affiliate in that affiliate's local currency.

Remittance advice:

Information on a document attached to the check (such as an invoice) by the drawer, which tells the payee why a payment is being made.

Repo (repurchase agreement):

A holder of securities sells securities (usually U.S. Treasuries) to an investor with an agreement to repurchase them at a fixed price on a fixed date, usually overnight. The security “buyer” effectively lends the “seller” money for the period of the agreement.

Reserve requirement:

A portion of financial institution deposits that must be kept on deposit by member banks at the Federal Reserve.

Retail lockbox:

A lockbox based on automated processing of scanlines (known as magnetic character ink recognition or MICR-lines) of documents; used primarily for consumer payments.

Retained earnings:

The accumulation on a company's balance sheet of net profits after taxes not paid out in dividends.

Revolving term loan:

Loans for periods longer than one year (sometimes called “revolvers”) and lasting for up to five years.

RFP (request for proposal):

A formal document soliciting responses to specific questions in several areas. The typical RFP begins with a description of the organization, including its locations, the number of transactions, banks and vendors currently used, and other pertinent data. A statement is provided regarding the specific requirements to be addressed by the proposal, including the timing of the selection process and of implementation.

Risk:

The possibility of loss or injury. The measurement of risk has traditionally been through the frequency of human or property loss in specific categories, such as death or disability by age, sex, and occupation or the frequency of fire damage to specific types of construction at various locations. Newer techniques have been used to manage business risk.

Risk-free return:

The return from an investment without risk, usually defined as the rate on U.S. Treasury bills. This rate reflects the absence of default risk and inflation risk.

Risk management:

The attempt to identify, prioritize, and quantify the risks from sources that threaten the working capital and strategic objectives of the corporation. This effort can be directed to individual risks or to risks that transcend company operations.

Risk premium:

The excess return required from an investment in a risky asset over that required from a risk-free investment. Used in the calculation of the CAPM.

Sales financing:

Lending money for the purpose of selling capital goods through a contractual installment sales agreement. Companies provide loans to businesses where the collateral of the loan is the goods purchased.

SCM (supply chain management):

An integrated system to optimize all of the components of a manufacturing process, including purchasing, inventory management, and transportation-logistics. Two key concepts in SCM are EOQ and JIT.

Securitization:

A financing technique in which a company issues securities backed by packages of assets with regular income flows, such as mortgages or car payments.

Spot foreign exchange rates:

The standard format for commercial foreign exchange transactions, with delivery in two business days.

Statement of cash flows:

A required financial statement for public companies that uses balance sheet accounts and income that affects cash and cash equivalents, and analyzes operating, investing, and financing activities.

Sweep:

A bank account from which all the funds above a specified figure are automatically transferred out of the account for investment overnight, and then returned to the bank account next day.

Tax-advantaged centers:

A service offered in several countries offering low corporate taxes and other benefits to attract multinational companies; the host country anticipates that corporations will establish offices for the management of their various business functions. In return, the local economy receives economic activity and employment.

Term loan:

Loans for periods of greater than one year, known as revolving term loans (sometimes called “revolvers”) for periods of up to five years. These types of loans are not appropriate for working capital; instead, they are used for capital budgeting needs.

Terms of sale:

The length of time allowed before payment on a commercial invoice is expected. Terms are stated as “net” and the number of days, usually beginning on the date of the receipt of the invoice or statement, as in “net 30” or “n30.”

Time deposit:

An interest-bearing deposit at a banking institution, either with a specified maturity (a “certificate of deposit” or CD) or open-ended (a “savings account”). Time deposits by regulation require notification to the institution for redemption, although in practice they will honor requests for savings accounts distributions on demand.

Time value of money:

The calculation of the present value of a future sum, or the future value of a present sum.

Times interest earned:

A ratio that measures the amount of interest paid against earnings before interest and taxes, or EBIT divided by interest expense.

Transaction exposure:

A risk that results from the movement in foreign exchange rates between the time a transaction is booked and the time it settles.

Transit routing number (TRN or ABA [American Banking Association] number):

A series of machine-readable digits on a check that facilitate the routing for collection of funds from the drawee bank by the Federal Reserve. The TRN appears in the MICR line at the bottom of the instrument as well as in the fraction in the upper-right-hand corner. The number represents the Federal Reserve District of the drawee bank, the Federal Reserve Bank head office, or branch through which the item should be cleared, and the bank-specific address. A ninth digit may be present, which is a verification of the logic of the TRN.

Translation exposure:

The balance sheet exposure that results when a company consolidates its financial statements and is required to report the change in the net value of its foreign currency assets. The exposure results from fluctuations in FX, which change the rate at which the net assets are valued.

Transparency:

The concepts of ethical behavior and enhanced financial disclosure, mandated in law and regulation because of situations arising from Enron, WorldCom, and other incidents of corporate corruption and malfeasance.

Uniform Commercial Code (UCC):

A set of regulations covering commercial transactions adopted by the individual states. The UCC defines the rights and duties of the parties in commercial transactions and provides a statutory definition of commonly used business practices.

Value-at-risk (VaR):

An approach to determining the risk exposure in a portfolio of assets. Although certain risks (e.g., financial instruments, credit, commodity prices) can be forced into the VaR model, it is a process that is heavily dependent on historical patterns.

Value dating:

The determination of a future date on which payment will be credited in a bank; used in some countries instead of availability (but not in the United States).

Wholesale lockbox:

The original form of lockbox services, established to handle low-volume, high-dollar checks.

WIP (work-in-process):

A category of inventory that represents materials that are in the process of being manufactured into salable finished goods.

Working capital:

The difference between a firm's current assets and current liabilities, measured in dollars or another currency. Working capital is also the amount of money available for use in operating the business.

Working capital flow:

An activity of the organization that generates a cash inflow or outflow.

U.S. LEGISLATION SIGNIFICANT TO WORKING CAPITAL MANAGEMENT

Check Clearing for the 21st Century Act of 2004 (Check 21):

Allows the electronic delivery of check images, significantly speeding the processing, and allows the recipient of an original check to create a digital version, which eliminates the need for further handling of the physical document.

Federal Reserve Act of 1913:

Widespread bank failures and panics continued from the end of the Civil War until the Panic of 1907. As a result, Congress adopted the Federal Reserve Act in 1913. The Act established the Federal Reserve System as the central bank of the United States. The purpose was to provide a stable currency, to improve supervision of banking, and to stabilize interest rates and the money supply.

Glass-Steagall Act of 1933:

This legislation separated commercial and investment banking activities, forcing such firms as J.P. Morgan to separate into Morgan Guaranty Bank and Morgan Stanley. Congress believed that such a separation was necessary to prevent the types of transactions that may have caused the stock market crash in October 1929.

Gramm-Leach-Bliley Act of 1999:

This law creates the concept of the financial holding company, authorizing these organizations to engage in underwriting and selling insurance and securities; conduct both commercial and merchant banking; and invest in and develop real estate and other activities. The act repealed the Glass-Steagall Act (see previous entry).

McFadden Act of 1927:

Restricted commercial banks to doing business within the state in which they were chartered (with certain exceptions).

Riegle-Neal Act of 1994:

This legislation deregulated banks permitting mergers across state lines provided they were adequately capitalized and managed. Prior to Riegle-Neal, banks were limited to doing business within the states in which they were chartered as mandated by the McFadden Act of 1927.

Sarbanes-Oxley Act of 2002:

Enacted as a reaction to a number of major corporate and accounting scandals. These losses cost investors billions of dollars when the share prices of affected companies collapsed, shaking public confidence in the securities markets. Two important sections of Sarbanes-Oxley deal with corporate responsibility and enhanced financial disclosures.