1. Receivables Management and Factoring

2. Nature of Credit Policy Investment in receivable –volume of credit sales –collection period Credit policy –credit standards –credit terms –collection efforts

3. Goals of Credit Policy Marketing tool Maximisation of sales Vs. incremental profit –production and selling costs –administration costs –bad-debt losses

4. Optimum Credit Policy Estimation of incremental profit Estimation of incremental investment in receivable

5. Credit Policy Variables Credit standards Credit analysis –collection period –default rate character capacity condition capital collateral

6. Credit Policy Variables Credit terms –credit period –cash discount Collection policy and procedures –regularity of collections –clarity of collection procedures –responsibility for collection and follow-up –case-by-case approach –cash discount for prompt payment

7. Credit Evaluation of Customers Credit information –financial statements –bank references –trade references Credit investigation and analysis –analysis of credit file –financial analysis –analysis of business and management Credit limit Collection efforts

8. Monitoring Receivable Collection period Aging schedule Collection experience matrix

9. Inventory Management

10. Nature of Inventory Stocks of manufactured products and the material that make up the product. Components: –raw materials –work-in-process –finished goods –stores and spares (supplies)

11. Need for Inventories Transaction motive Precautionary motive Speculative motive

12. Objectives of Inventory Management Ensure a continuous supply of raw materials to facilitate uninterrupted production Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes Maintain sufficient finished goods inventory for smooth sales operations and efficient customer service Control inventory investment by maintaining optimum inventory

13. Inventory Management Techniques Economic order quantity (EOQ) –ordering costs: requisitioning, order placing, transportation, receiving, inspecting and storing, administration –carrying costs: warehousing, handling, clerical and staff, insurance, depreciation and obsolescence –ordering and carrying costs trade-off:

14. Inventory Management Techniques Reorder point under certainty –lead time –average usage Reorder point = Lead time x average usage Reorder point under uncertainty –safety stock Reorder point = (Lead time x average usage) + safety stock

15. Inventory Investment Analysis Estimation of incremental operating profit Estimation of incremental investment in inventory Estimation of the incremental rate of return (IRR) Comparison of the incremental rate of return with the required rate of return (RRR) Optimum inventory: IRR = RRR

16. Selective Inventory Control ABC analysis –classify inventory into three categories according to value –control by importance and exception: maximum attention to “A” items

17. Inventory Management Process Explicitly state the inventory policy Create an inventory monitoring cell Management group for controlling purchases Periodic meetings between purchase, materials planning and production executives Monthly reviews of total inventory at plant/corporate level Detail inventory control to the total budgeting system Identify critical inventory items for closer scrutiny

18. Cash Management

19. Cash management is concerned with the managing of: – cash flows into and out of the firm, –cash flows within the firm, and –cash balances held by the firm at a point of time by financing deficit or investing surplus cash

20. Facets of Cash Management Cash planning Managing the cash flows Optimum cash level Investing surplus cash

21. Motives for Holding Cash The transactions motive The precautionary motive The speculative motive

22. Cash Planning Cash planning is a technique to plan and control the use of cash. Cash Forecasting and Budgeting –Cash budget is the most significant device to plan for and control cash receipts and payments. –Cash forecasts are needed to prepare cash budgets.

23. Managing Cash Collections and Disbursements Accelerating Cash Collections –Decentralised Collections –Lock-box System Controlling Disbursements –Disbursement or Payment Float

24. Investing Surplus Cash in Marketable Securities Selecting Investment Opportunities: –safety, –Maturity, and –marketability.

25. Short-term Investment Opportunities: –Treasury bills –Commercial papers –Certificates of deposits –Bank deposits –Inter-corporate deposits –Money market mutual funds