2. HFT 3431 Chapter 11 Cash Management

3. What Is the Difference Between Income and Cash Flow?What Is the Difference Between Income and Cash Flow? What Is Contained in a Cash Budget?What Is Contained in a Cash Budget? How Are Cash Receipts Forecasted?How Are Cash Receipts Forecasted? How Do Short-Term and Long-Term Cash Budgeting Approaches Differ?How Do Short-Term and Long-Term Cash Budgeting Approaches Differ?

4. Cash Management What Are the Relevant Factors to Consider When Investing Working Capital Funds?What Are the Relevant Factors to Consider When Investing Working Capital Funds? What Are Compensating Balances?What Are Compensating Balances? How Does a Lockbox System Speed up Cash Flow?How Does a Lockbox System Speed up Cash Flow?

5. Cash Management Why Is Depreciation Expense Irrelevant in Cash Flow Considerations?Why Is Depreciation Expense Irrelevant in Cash Flow Considerations? Why Are Investors Interested in Cash Flows?Why Are Investors Interested in Cash Flows? How Are Non-Cash Current Assets Related to Cash Flows?How Are Non-Cash Current Assets Related to Cash Flows?

6. Cash Petty Cash Funds - Minor Purchases, Replenished Periodically by Amount Disbursed (Imprest Basis)Petty Cash Funds - Minor Purchases, Replenished Periodically by Amount Disbursed (Imprest Basis) Cash on Hand - House Banks and Undeposited ReceiptsCash on Hand - House Banks and Undeposited Receipts Cash in Bank - Demand Deposits, Time Deposits, Certificates of DepositCash in Bank - Demand Deposits, Time Deposits, Certificates of Deposit

7. Cash Transaction Motive - The Maintenance of Minimum Cash Balances to Cover Checks DrawnTransaction Motive - The Maintenance of Minimum Cash Balances to Cover Checks Drawn Compensating Balances - Amount Required to Remain on Deposit Without Interest to Cover Bank ServicesCompensating Balances - Amount Required to Remain on Deposit Without Interest to Cover Bank Services Integrated Cash ManagementIntegrated Cash Management

8. Is Net Income Different From Cash Flows? Net Income - Summarizes Revenues and ExpensesNet Income - Summarizes Revenues and Expenses Accrual Accounting Non-Cash Revenue Non-Cash Expenses Ignores Transactions Related to LTD and Fixed Assets

9. Is Net Income Different From Cash Flows? Cash Flow - Analyzes Cash Account From Receipts and DisbursementCash Flow - Analyzes Cash Account From Receipts and Disbursement Cash Account Only Cash Basis Accounting Includes All Cash Usages/Receipts

10. Cash Budgeting Most Information Is From the Operations BudgetMost Information Is From the Operations Budget Cash/Credit SplitCash/Credit Split Estimated Other ReceiptsEstimated Other Receipts Estimated Other DisbursementsEstimated Other Disbursements Receipt/Payment HistoryReceipt/Payment History

11. Cash Budgeting Cash Receipts and Disbursements ApproachCash Receipts and Disbursements Approach Up to Six Months Direct Sources/Uses of Cash Based on Operations Budget

12. Cash Budgeting Adjusted Net Income ApproachAdjusted Net Income Approach Periods Longer Than Six Months Emphasizes External Sources Uses an Indirect Approach

13. Other Cash Management Float - Time Between the Addition or Subtraction to a Company’s Books and the Actual Addition or Subtraction (Disbursement Float and Collection Float)Float - Time Between the Addition or Subtraction to a Company’s Books and the Actual Addition or Subtraction (Disbursement Float and Collection Float)

14. Other Cash Management Lockbox System - Speeds the Flow of Cash Into the Bank’s Account. Payments of A/R Go Directly to the Bank. There Is a Breakeven Point for This.Lockbox System - Speeds the Flow of Cash Into the Bank’s Account. Payments of A/R Go Directly to the Bank. There Is a Breakeven Point for This. Breakeven = Bank Charge Per Item Divided by the Daily Interest Rate Times the Change in TimeBreakeven = Bank Charge Per Item Divided by the Daily Interest Rate Times the Change in Time

15. Other Cash Management Working Capital - Current Assets Less Current LiabilitiesWorking Capital - Current Assets Less Current Liabilities Trade Credit - Suppliers Don’t Charge Current Interest From Delivery to a Date.Trade Credit - Suppliers Don’t Charge Current Interest From Delivery to a Date.

16. Effective Interest Rate Calculation Annual Interest Paid on a Loan Divided byAnnual Interest Paid on a Loan Divided by Loan Amount Less Any Compensating Balance RequirementLoan Amount Less Any Compensating Balance Requirement Interest Paid = Principal X Rate X TimeInterest Paid = Principal X Rate X Time

17. Effective Interest Rate Calculation Example: $100,000 Loan at 8% Annual Interest With a $10,000 Compensating Balance RequirementExample: $100,000 Loan at 8% Annual Interest With a $10,000 Compensating Balance Requirement I = $100,000 X 8% X 1 Year = $8,000I = $100,000 X 8% X 1 Year = $8,000 EIR = $8,000 / ($100,000 - $10,000)EIR = $8,000 / ($100,000 - $10,000) EIR = 8.88%EIR = 8.88%

18. Purchase Discount Effective Interest Rate - Compute to Determine If It Is Advantageous to Take ItEffective Interest Rate - Compute to Determine If It Is Advantageous to Take It Purchase Term Example - 2/10, N/30Purchase Term Example - 2/10, N/30 2% Discount off the Invoice Price If Paid Within 10 Days, Otherwise the Balance Is Due Within 30 Days.

19. Purchase Discount Effective Interest Rate Equals Cash Discount Divided by the (Invoice Amount Less Cash Discount) Times Days in Year Divided by the Difference Between End of Discount Period and Final Due DateEffective Interest Rate Equals Cash Discount Divided by the (Invoice Amount Less Cash Discount) Times Days in Year Divided by the Difference Between End of Discount Period and Final Due Date If Money Can Be Borrowed at Less Than the EIR - Take the DiscountIf Money Can Be Borrowed at Less Than the EIR - Take the Discount

20. Effective Interest Rate Calculation Purchase or Trade Credit Example: terms are 2/10, N/30 Invoice for $1,000 ( (1,000 *.02) * ( (365 / (30-10) ) ( 1,000 - 20) ( 20 / 980 ) * ( 365 / 20).0204081 * 18.25 = 37.24478%

21. Lockbox Breakeven Calculation B = breakeven;B = breakeven; C = charge per item;C = charge per item; I = daily interest rate;I = daily interest rate; T = change in timeT = change in time Formula B = C / (I * T)

22. Lockbox Breakeven Example Bank Charges $0.20 per item, Annual Interest is 12% and the lockbox speeds up processing by 2 daysBank Charges $0.20 per item, Annual Interest is 12% and the lockbox speeds up processing by 2 days B = 0.20 / ( (.12/365) * 2 ) B = 0.20 / ( (0.0003287) * 2 ) B = 0.20 / (0.0006574) B = $304.23 per item