2. WORKING CAPITAL TERMINOLOGY

3. Calculating the Targeted CCC

4. ALTERNATIVE CURRENT ASSET INVESTMENT POLICIES

5. ACCOUNTS RECEIVABLE Account Receivable is a balance due from a customer. Credit Policy is a set of rules that include the firm’s credit period, discounts, credit standards, and collection procedures offered Credit Period is the length of time customers have to pay for purchases Discounts is a price reductions given for early payment

6. Calculation of Write-Offs

7. How to calculate Credit Sale

8. Current Assets CASH AND MARKETABLE SECURITIES When most of us use the term cash, we mean currency (paper money and coins) in addition to bank demand deposits. However, when corporate treasurers use the term, they often mean currency and demand deposits in addition to very safe, highly liquid marketable securities that can be sold quickly at a predictable price and thus be converted to bank deposits. Therefore, “cash” as reported on balance sheets generally includes short-term securities, which are also called “cash equivalents.

9. Marketable Securities Note that a firm’s marketable security holdings can be divided into two categories: (1) Operating short-term securities, which are held primarily to provide liquidity and are bought and sold as needed to provide funds for operations, and (2) other short-term securities, which are holdings in excess of the amount needed to support normal operations. Highly profitable firms such as Microsoft often hold far more securities than are needed for liquidity purposes.

10. INVENTORIES Inventories, which can include (1) supplies, (2) raw materials, (3) work in process, and (4) finished goods, are an essential part of virtually all business operations. Optimal inventory levels depend on sales, so salesmust be forecasted before target inventories can be established.

11. ACCOUNTS RECEIVABLE Account Receivable; Funds due from a customer. Although some sales are made for cash, today the vast majority of sales are on credit. Thus, in the typical situation, goods are shipped, inventories are reduced, and an account receivable is created

12. Credit Terms Firms generally publish their credit terms, defined as a statement of their credit period and discounts policy. Thus, Allied Foods might have stated credit terms of 2/10, net 30, which means that a 2 percent discount is allowed if payment is received within 10 days of the purchase, and if the discount is not taken then the full amount is due in 30 days.

13. ACCOUNTS PAYABLE (TRADE CREDIT) Firms generally make purchases from other firms on credit and record the debt as an account payable. Accounts payable, or trade credit, is the largest single category of short-term debt, representing about 40% of the average corporation’s current liabilities. This credit is a spontaneous source of financing in the sense that it arises spontaneously from ordinary business transactions. For example, if a firm makes a purchase of $1,000 on terms of net 30, it must pay for goods 30 days after the invoice date. This instantly and spontaneously provides $1,000 of credit for 30 days. If the firm purchases $1,000 of goods each day, on average, it will be receiving 30 times $1,000, or $30,000, of credit from its suppliers. If sales, and consequently purchases, double, its accounts payable also will double, to $60,000. So simply by growing, the firm spontaneously generates another $30,000 of financing. Similarly, if the terms under which it buys are extended from 30 to 40 days, its accounts payable will expand from $30,000 to $40,000. Thus, expanding sales and lengthening the credit period generate additional financing.

14. Monitoring Accounts Receivable The total amount of accounts receivable outstanding at any given time is determined by the volume of credit sales and the average length of time between sales and collections. For example, suppose Boston Lumber Company (BLC), a wholesale distributor of lumber products, has credit sales of $1,000 per day, requires payment after 10 days, and has no bad debts or slow-paying customers. Under these conditions, it must have the capital to carry $10,000 of receivables: