Fin Valu thru Capital
Fin Valu thru Capital BA 318
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This 6 page Class Notes was uploaded by Pinkie Zboncak Jr. on Tuesday September 8, 2015. The Class Notes belongs to BA 318 at University of Oregon taught by Staff in Fall. Since its upload, it has received 27 views. For similar materials see /class/187230/ba-318-university-of-oregon in Business Administration at University of Oregon.
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Date Created: 09/08/15
Chapter 16 Short Term Business Financing OPERATING AND CASH CONVERSION CYCLES 0 Two important concepts in managing shortterm finances are 0 Operating Cycle Time between ordering materials and collecting cash from receivables F iGUF 15 Thu Optradii guilt Mancriuh Orders allllL CllHI l unml Mzmuincmring I mccss Sclling lt Ulmt 0 Cash Conversion Cycle Time between a firm paying its suppliers for inventory and collecting cash from customers on a sale of the finished product FlGURE 152 7 Tlmelinus m the Upl lililllil mull Mi quotonrcrsmn L ytlvs Raw Finisher Malarian Guuds Cash Ordered Kold Received Accounts 7 nvcnlury Period 7 aiR Receivable Period 4 Timu Accounts Payablc Period Cash Paid Cash Conversmn Cycle 4l 7 7 Operating Cyulc 1 Chapter 16 Short Term Business Financing Determining the Length of the Operating Cycle and Cash Conversion Cycle 0 The length of a firm s operating and cash conversion cycles can be estimated by a firm s income statement and balance sheet 3 ratios need to be calculated 0 Inventory Conversion Period Inventory Inventory Cost of Cost of Goods Sold Good Sold 365 Per Day 0 Accounts Collection Period Account Receivable Net Sales 365 0 Average Payment Period Accounts Payable Cost of Goods Sold 365 CASH BUDGETS 0 Cash Budget Tool the treasurer uses to forecast future cash ows and estimate future short term borrowing needs 0 3 sets of information are needed to construct a cash budget 0 Minimum Desired Cash Balance Some cash is needed to pay the month s bills but extra cash also may be desired because the forecasts of cash in ows and out ows will not be perfect I Cash Buffer To protect against lower than expected cash in ows or higher than expected cash out ows 0 Cash Inflows Estimates of cash in ows are driven by 2 factors I Sales Forecast Affected by seasonal patterns I Customer Payment Patterns Chapter 16 Short Term Business Financing 0 Cash Outflows Bills to suppliers need to be paid monthly as well as payroll interest dividends taxes and capital expenditures MANAGEMENT OF CURRENT ASSETS 0 Management of current assets involves the administration of cash and marketable securities accounts receivable and inventories 0 Financial managers should strive to minimize the investment in current assets because of the cost of financing them 0 But adequate cash and marketable securities are necessary for liquidity purposes acceptable credit terms are necessary to maintain sales and appropriate inventory levels must be kept to avoid running out of stock and losing sales Cash and Marketable Securities Management 0 Minimize cash holdings because businesses cannot earn interest in their checking accounts 0 Transactions Motive Demand for cash needed to conduct day to day operations 0 Marketable Securities must be highly liquid it must be readily convertible to cash without large loss of value are held for I Precautionary Motive Holding funds to meet unexpected demands I Speculative Motive Holding funds to take advantage of unusual cash discounts for needed materials I US Treasury Bills Sold at a discounted rate through competitive bidding in a weekly auction Actively traded in secondary money markets Essentially risk free Chapter 16 Short Term Business Financing I Federal Funds Excess reserves that are loaned on a day to day basis to other depository institutions that are temporarily short on reserves I Commercial Paper Short term unsecured notes of well known business firms such as IBM or GE I Negotiable Certificates of Deposit A receipt issue by a bank in exchange for a deposit of funds 0 Getting and Keeping the Cash I Reducing the accounts receivable period and lengthening the accounts payable period I Float The delay in the payment system between when funds are sent by a payer and credited to the payee s bank account and deducted from the payer s bank account 0 To speed up cash collections from customers firms use 0 Lockbox Payments are sent to a PO Box and proceed by a bank to reduce collection oat o Preauthorized Checks Regular typically monthly deductions by a vendor from a customer s checking account 0 Float may disappear soon due to Electronic Data Interchange The use of communications and computer systems to convey ordering invoice and payment information between suppliers and customers Chapter 16 Short Term Business Financing 0 To slow down disbursement o Zerobalance Account An arrangement between a banks and a firm to transfer sufficient funds to a disbursement account to cover the day s checks presented to the bank for payment Accounts Receivable Management The management of receivables involves conducting credit analysis setting credit terms and carrying out collection efforts Credit Analysis Involves appraising the creditworthiness or quality of a potential customer Decision is made on the applicants 5 Cs 0 O 0 Character Provides the corporate name indicates the intended business activities provides names and address of directors and indicates how a firm will be capitalized with stock Capacity Ability to pay bills Capital Adequacy of owners equity relative to existing liabilities Collateral Whether assets are available to provide security for the potential credit Conditions Current economic climate and state of the business cycle Chapter 16 Short Term Business Financing CreditReporting Agencies 0 Credit Bureau Source of credit information about business firms and individuals 0 Nonprofit institutions established and supported by the businesses they serve o Dun amp Bradstreet Report Private Firm 0 Rating and Summary 0 Trade Payments 0 Financial Information 0 Operation and Location 0 History Credit Terms and Collection Efforts 0 Trade Credit Credit extended on purchases to a firms customers Inventory Management 0 Inventory administration is primarily a production management function 0 The length of the production process and the production manager s willingness to accept delays will in uence the amount invested in raw materials and work in progress 0 Close relations between buyers and vendors can help firms better track inventory and plan for their needs 0 Technology is fast improving the ability of firms to control inventory manage receivables and cash and connect with customers and suppliers more efficiently
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