1. Managing Short-Term Resources Lecture 3 September 13, 2005 PA 546 Constantine Hadjilambrinos

2. Working capital: Current assets – Current liabilities Current assets: Cash and highly liquid assets (money market accounts, very short term bonds, etc.) Liquidity has a “cost”: High liquidity means that investment opportunities offering better rates of return cannot be utilized. PA 546 Constantine Hadjilambrinos

3. Cash Management Safety Investment Cash reserves Line of credit PA 546 Constantine Hadjilambrinos

4. Short-term cash investments Checking account Checking account Savings account Savings account Certificate of deposit Certificate of deposit Treasury notes Treasury notes US Govt. bonds US Govt. bonds Other govt. notes Other govt. notes Other govt. bonds Other govt. bonds Corporate notes Corporate notes Corporate bonds Corporate bonds PA 546 Constantine Hadjilambrinos LiquidityCapital risk

5. Cash budgeting Match projected expenditures with projected revenues Match projected expenditures with projected revenues Estimate appropriate level of emergency funds Estimate appropriate level of emergency funds Balance safety with investment opportunities Balance safety with investment opportunities PA 546 Constantine Hadjilambrinos

6. Bank Services Account services Account services Processing deposits, checks, and reconciling accounts Concentration/zero balance accounts Daily account notification Electronic funds transfer Collection services Collection services Wire transfers Lockboxes Night depository Armored cars Counting depositing funds PA 546 Constantine Hadjilambrinos

7. Bank Services Safeguarding services Safeguarding services Safe deposit boxes Storage of stocks, bonds, and cancelled checks Credit services Credit services Lines of credit Note purchases Lease-purchase financing Long-term bond underwriting Investment services Investment services Investment instruments Investment advice Sweep facility Registration of bonds PA 546 Constantine Hadjilambrinos

8. Marketable securities Debt Debt Money market, notes, bonds — principal risk yield risk Equity Equity Stock — principal risk yield risk Derivatives Derivatives Options — principal risk PA 546 Constantine Hadjilambrinos

9. Accounts Receivable Invoice issued PA 546 Constantine Hadjilambrinos Invoice received Invoice paid Payment received Payment deposited Payment clears

10. Value of speed in billing/collection process Value of collections = 300 million per year r = 9% (0.09) Increase speed of billing/collection by 3 days PA 546 Constantine Hadjilambrinos So, for 3 days:

11. Short Term Obligations Accounts payable Accounts payable Get discounts for early payment Avoid penalties for late payments (pay on time) *Typical terms 2/10 N/30 (No penalty if paid in 30 days and 2% discount if paid in 10 days or less. Payroll payable Payroll payable Consider reducing frequency of payroll Delay in payment (when do benefits get paid?) Short term debt Short term debt Interest = Loan amount X Interest rate/yr X Fraction of yr. Taxes payable Taxes payable PA 546 Constantine Hadjilambrinos