Current Asset Management

Slides:



Advertisements
Similar presentations
Cash Management Cash Cycle
Advertisements

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 0 Chapter 16 Short-Term Financial Planning.
Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.
Financial Management Liliya N. Zhilina, World Economy and Inrernational Relations Department, Vladivostok State University of Economic and Services (VSUES).
Chapter 6,7&8 Short-term Financing Introduction  Long-term financing is normally used to fund plant and equipment acquisition or other long- term investments.
Chapter 11 – Forecasting and Short-Term Financial Planning  Learning Objectives  Understand how sales forecasts are used to predict cash inflow  Understand.
1 Chapter 14 Working Capital Management and Policies McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts and Skills
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Short-Term Financial Planning Chapter 16.
Key Concepts and Skills
Chapter 19 Cash and Liquidity Management McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
FINANCE IN A CANADIAN SETTING Sixth Canadian Edition Lusztig, Cleary, Schwab.
Current Asset Management (Chapter 7) (Chapter 6 – pages 143 – 145)
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Short-Term Finance and Planning Chapter Nineteen.
Current Asset Management What are Current Assets? Cash Conversion Cycle.
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 0 Chapter 17 Working Capital Management.
Current Asset Management
Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Chapter 7 Working.
Financial Statement Analysis
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Short-Term Finance and Planning Chapter Eighteen Prepared by Anne Inglis, Ryerson University.
1 The Balance-Sheet Model of the Firm How much short- term cash flow does a company need to pay its bills? The Net Working Capital Investment Decision.
McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 16.0 Chapter 16 Short-Term Financial Planning.
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Short-Term Financial Planning Chapter 16.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 19 Short-Term Finance and Planning.
18-1 Short-Term Finance and Planning Chapter 18 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Current Asset Management 7.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Working Capital and the Financing Decision 6.
Cash and Liquidity Management
McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 17.0 Chapter 17 Working Capital Management.
© 2003 McGraw-Hill Ryerson Limited 7 7 Chapter Current Asset Management McGraw-Hill Ryerson©2003 McGraw-Hill Ryerson Limited Prepared by: Terry Fegarty.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Working Capital and the Financing Decision 6.
Chapter 6 Managing Your Money. Copyright ©2014 Pearson Education, Inc. All rights reserved.6-2 Chapter Objectives Provide a background on money management.
Chapter 15 Managing Working Capital © 2003 John Wiley and Sons.
Part Seven Asset Management. Learning Objectives Understand how firms manage cash Understand how to accelerate collections and manage disbursements Understand.
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Working Capital Management Chapter 17.
Current Asset Management 7 Chapter Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Short-Term Finance and Planning Chapter Eighteen Prepared by Anne Inglis, Ryerson University.
Entrepreneurial Finance, 5th Edition Adelman and Marks 5-1 Entrepreneurial Finance, 5th Edition Adelman and Marks PRENTICE HALL ©2010 by Pearson Education,
CDA COLLEGE BUS235: PRINCIPLES OF FINANCIAL ANALYSIS Lecture 10 Lecture 10 Lecturer: Kleanthis Zisimos.
Chapter 30 Principles PrinciplesofCorporateFinance Ninth Edition Working Capital Management Slides by Matthew Will Copyright © 2008 by The McGraw-Hill.
©2009 McGraw-Hill Ryerson Limited 1 of Current Asset Management Prepared by: Michel Paquet SAIT Polytechnic ©2009 McGraw-Hill Ryerson Limited.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 19 Short-Term Finance and Planning.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Current Asset Management 7.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Short-Term Finance and Planning Chapter 26.
Review of Working Capital. Ch. 6 This is concerned with the financing and management of the current assets of the firm. Working Capital.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Current Asset Management 7.
Revise Lecture 23.
17-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Entrepreneurial Finance, 4th Edition By Adelman and Marks PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Chapter 7 Working.
Current Asset Management 7 Chapter Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter 7 Current Asset Management. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-1 FIGURE 7-2 Expanded cash flow.
Chapter 02 Working Capital and Current Assets Management.
Receivables Management and Factoring. Nature of Credit Policy Investment in receivable –volume of credit sales –collection period Credit policy –credit.
Copyright © 2003 Pearson Education, Inc. Slide 14-0 Ch 14 Learning Goals 1.Impact of working capital management on liquidity, profitability and risk. 2.Cash.
Handout Manajemen Keuangan
CHAPTER – TWO Management of Cash and Marketable Securities.
Financial Management Decisions n Investment: What assets to own? n Financing: How to pay for those assets? n Dividend: What to do with Net Income?
Chapter 19 - Cash and Marketable Securities Management.
Short-Term Financial Management
Chapter 20 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.
CHAPTER 18 SHORT-TERM FINANCE AND PLANNING Copyright © 2016 by McGraw-Hill Global Education LLC. All rights reserved.
20- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Chapter 20 McGraw Hill/Irwin.
$$ Entrepreneurial Finance, 5th Edition Adelman and Marks 7-1 Pearson Higher Education ©2010 by Pearson Education, Inc. Upper Saddle River, NJ Chapter.
WORKING CAPITAL MANAGEMENT. Meaning “ The excess of current assets over currents liabilities ” also known as circulating, revolving or fluctuating capital.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Working Capital and the Financing Decision 6.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Current Asset Management 7.
Working Capital Management
Ch. 17: Working Capital Management
Presentation transcript:

Current Asset Management Chapter 7 McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Outline Introduction to management of current assets Cash management and its importance Management of marketable securities Management of accounts receivable – credit policy decisions for maximizing profitability Inventory management – determining the level of inventory to enhance sales and profitability Liquidity and required return

Introduction Companies that manage their current assets well, establish a competitive advantage Helps increase their market share Creates an increase in shareholder value through a rising stock price Requires a careful allocation of resources among the current assets of the firm: Cash Marketable securities Accounts receivable Inventory.

Introduction (cont’d) In managing cash and marketable securities Primary concern should be for safety and liquidity Secondary attention should be placed on maximizing profitability In managing accounts receivable and inventory, a stiffer profitability test must be met Investment level should not be a result of happenstance or historical determination Must meet the same return-on-investment criteria applied to any decision. Different decision techniques are applied to the various forms of current assets.

Cash Management Financial managers actively attempt to keep cash (non-earning asset) to a minimum It is critical to have sufficient cash to assuage emergencies To improve overall profitability of a firm: Minimize cash balances Have accurate knowledge of when cash moves in and out of the firm

Reasons for Holding Cash Balances Transactions motive Payments towards planned expenses Compensating balances for banks Compensate a bank for services provided rather than paying directly for them Precautionary needs Emergency purposes

Cash Flow Cycle Cash moves through a firm in a cycle Cash flow relies on: Payment pattern of customers Speed at which suppliers and creditors process checks Efficiency of the banking system Inflows and outflows of cash are to be synchronized properly for transaction purposes.

Cash Flow Cycle (cont’d) Selling on the internet generates cash flow much faster than sales using retailer’s own credit card Financial managers must pay close attention to the percentage of sales generated by: Cash Outside credit cards Company’s own credit cards

Cash Flow Cycle (cont’d) Cash inflows are driven by sales and influenced by the: Customers’ geographical location Product being sold Industry Type of customers Firms use cash to make various payments to: Suppliers Lenders Stockholders Government Workers When cash is needed for current assets, firms generally: Sell the marketable securities Borrow from short-term lenders

Expanded Cash Flow Cycle

Float The time period between the mailing of a check and the collection period Difference between firm’s recorded amount and amount credited to the firm by a bank Two types of float: Mail float: Occurs because of the time a mail takes before it gets delivered. Clearing float: Occurs because of the time a check takes before it gets cleared. For large corporations these floats do not exist anymore because of electronic payments (permissible under Check 21 Act) Check Clearing for the 21st Century Act (Check 21) Allows banks and others to electronically process a check

Improving Collections and Extending Disbursements Setting up multiple collection centers at different locations Adopt lockbox system for expeditious check clearance at lower costs Extending disbursement: General trend: Speedup processing of incoming checks Slow down payment procedures Extended disbursement float – allows companies to hold onto their cash balances for as long as possible

Cost-Benefit Analysis Costs associated with an efficiently maintained cash management program must be compared to the benefits that it provides

Cash Management Network

Electronic Funds Transfer Funds are moved between computer terminals without the use of a ‘check’ Automated clearinghouses (ACH): Transfers information between financial institutions and between accounts using computer tape International fund transfer is carried out through SWIFT (Society for Worldwide Interbank Financial Telecommunications) Uses a proprietary secure messaging system Encrypts each message Authenticates every money transaction by a code using smart card technology Assumes financial liability for the accuracy, completeness, and confidentiality of transaction

International Cash Management Factors differentiating international cash management from domestic based systems: Differing payment methods and/or higher popularity of electronic funds transfer Subject to international boundaries, time zone differences, currency fluctuations, and interest rate changes Differing banking systems and check clearing processes Differing account balance management and information reporting systems Cultural, tax, and accounting differences

International Cash Management (cont’d) Financial managers try to keep cash in a country with a strong currency Sweep account: Allows companies to maintain zero balances Excess cash is swept into an interest-earning account

Marketable Securities Funds held for other than immediate transaction purposes should be invested in interest-earning securities Types of short term investments: Treasury bills Federal agency securities Certificate of deposit Commercial paper Banker’s acceptances Eurodollar certificate of deposit. Passbook savings account Money market fund Money market accounts

An Examination of Yield and Maturity Characteristics

Types of Short-Term Investments

Management of Accounts Receivable Accounts receivable as an investment Should be based on whether the level of return earned on such investment equals or exceeds the potential gain from other investments Credit policy administration Credit standards Terms of trade Collection policy

Credit Standards Determine the nature of credit risk based on: Prior records of payment and financial stability, current net worth, and other related factors 5 Cs of credit: Character Capital Capacity Conditions Collateral

Credit Standards (cont’d) Dun & Bradstreet Information Services (DBIS): Produces business information analysis tools Publishes reference books Provides computer access to information Assigns Data Universal Number System (D-U-N-S) - a unique nine-digit code to each business in its information base

Dun & Bradstreet Report – An Example

Terms of Trade Stated term of credit extension: Has a strong impact on the eventual size of accounts receivable balance Creates a need for firms to consider the use of cash discounts

Collection Policy A number of quantitative measures are applied to asses credit policy: Average collection period An increase would indicate poor credit administration Ratio of bad debts to credit sales An increasing ratio may indicate too many weak accounts or an aggressive market expansion policy Aging of accounts receivable

An Actual Credit Decision Brings together various elements of accounts receivable management Accounts receivable = Sales = $10,000 = $1,667 Turnover 6 An average investment of $1,667 is fetching a post tax profit of $480, which is approximately 28.8%.

Inventory Management Inventory has three basic categories: Raw materials Work in progress Finished goods Amount of inventory is affected by sales, production, and economic conditions As inventory is the least liquid of current assets, it should provide the highest yield

Level versus Seasonal Production Level production Allows maximum efficiency in manpower and machinery usage May result in high inventory buildup particularly in seasonal business Seasonal production Eliminates inventory buildup problems May result in unused capacity during slack periods May result in overtime wages and inefficiencies arising out of overused equipments

Inventory Policy in Inflation (and Deflation) Inventory position can be protected in an environment of price instability by: Taking moderate inventory positions Hedging with a futures contract to sell at a stipulated price some months from now Rapid price movements in inventory may have a major impact on the reported income of the firm

The Inventory Decision Model Carrying costs Interest on funds tied up in inventory Cost of warehouse space, insurance premiums, and material handling expenses Implicit cost associated with the risk of obsolescence and perishability Ordering costs Cost of ordering Cost of processing inventory into stock

Determining the Optimum Inventory Level

Economic Ordering Quantity EOQ = 2SO ; C Where, S = Total sales in units O = Ordering cost for each order C = Carrying cost per unit in dollars Assuming: S= 2000 units; O=$8; C= $0.20; EOQ = 2SO = 2 X 2,000 X $8 = $32,000 = 160,000 C $0.20 $0.20 = 400 units

Safety Stocks and Stock Outs Stock out occurs when a firm is: Out of a specific inventory item Unable to sell or deliver the product Safety stock reduces the risk of losing sales Increases cost of inventory due to a rise in carrying costs This cost should be offset by: Eliminating lost profits due to stockouts Increased profits from unexpected orders

Safety Stocks and Stock Outs (cont’d) Assuming that; EOQ = 400 units and safety stock = 50 units Average inventory = EOQ + Safety stock 2 Average inventory = 400 + 50 The inventory carrying costs will now increase to $50 Carrying costs = Average inventory in units × Carrying cost per unit = 250 × $0.20 = $50

Just-in-Time Inventory Management Basic requirements for JIT: Quality production that continually satisfies customer requirements Close ties between suppliers, manufactures, and customers Minimization of the level of inventory Cost Savings from lower inventory: On an average, JIT has reduced inventory to sales ratio by 10% over the last decade

Advantages of JIT Reduction in space due to reduced warehouse space requirement Reduced construction and overhead expenses for utilities and manpower Better technology with the development of electronic data interchange systems (EDI) EDI reduces rekeying errors and duplication of forms Reduction in costs from quality control Elimination of waste

Areas of Concern for JIT Integration costs Parts shortages could lead to lost sales and slow growth Un-forecasted increase in sales: Inability to keep up with demand Un-forecasted decrease in sales: Inventory can pile up during recession A revaluation may be needed in high-growth industries fostering dynamic technologies