Professional Documents
Culture Documents
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A/R
CGS
SWCP
BEY
DSO
WADSO
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Accounts Receivable
Cost of Goods Sold
Short Term Working Capital Portfolios
Bond Equivalent Yield
Days Sales Outstanding
Weighted Avg. Days of Sale Outstanding
1. INTRODUCTION
Internal Factors
External Factors
Banking services
Sophistication of
working capital
management
Borrowing & investing
position / activities /
capacities
Interest rates
The economy
Competitors
In effective WCM
Adequate cash levels are maintained.
Converting short-term assets into cash.
Controlling outgoing payments to vendors, employees and others.
It is done by investing in:
Short term funds.
Highly liquid securities.
Maintaining credit reserves in bank lines of credit.
Issuing money market instruments like commercial paper.
It requires reliable cash flow forecasts.
SCOPE OF WCM
Transaction
To formulate appropriate
strategies.
Focus
Global view
point.
Strong emphasis
on liquidity
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Measures how many times A/R created & collected on avg. in one fiscal period.
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Measure how many times inventory created / acquired & sold during one fiscal period.
Activity ratios can also be re-arranged to estimate no. of days CA or CL are on hand.
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Alternate name
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Also called cash conversion cycle.
Cycles cash generating ability.
For many companies cash conversion cycle is a period that requires financing.
Necessary task.
Precision in forecasting effectiveness.
Forecast precise may not be accurate.
External uncertainty encourages companies to
maintain minimum level of cash as a buffer.
3.1.1 Minimum Cash Balance
Cash mangers using cash flow history or organizational financial history must identify cash flow elements and collect data about them
regularly.
Real cash flows should be reflected.
Elements includes ;
Inflows
Outflows
Maturing investments
Investments made
Debt repayments.
Tax refunds.
Tax payments.
Data frequency
Format
Techniques
Accuracy
Reliability
Uses
Short Tem
Medium Term
Long Term
Financial manager in charge of managing cash position must know cash balance at real
time basis.
Monitoring cash flow key aspects of cash forecasting system.
It involves knowing of the transactions information in time to tackle with them.
Information should be gathered from principal users and providers of cash along with
cash projections.
Minimum cash level is estimated in advance and steps are taken to determine the target
balance for each bank.
Target balance is applied to one main account (the bank where companys transactions
are concentrated).
Large companies have more concentration banks making cash management more
complex.
Short term investments and borrowing assist in cash management.
Cyclical companies need to focus more on sources of cash in times when they produce
and stock inventory for peak seasons.
Companys cash needs are also influenced by long term investment and financial
activities.
Predicting cyclical and non-operating activity needs is critical in managing cash.
Setting aside too much cash can be costly while setting aside too little can cause penalty
to raise funds quickly either case would be costly; a reliable forecast is necessary.
4.2 Strategies
Typical maturities
13, 26, and 52 weeks
5-30 days
Bank certificates of
deposit (CDs)
14-365 days
Bankers acceptances
(BAs)
30-180 days
1-180 days
1 day
Repurchase agreement
(Repos)
1 day +
1-270 days
Varies
Tax-advantaged securities
Features
Obligation of U.S government (guaranteed), issued at a
discount.
Active secondary market.
Lowest rates for traded securities.
Obligations of U.S federal agencies (e.g., Fannie Mae, Federal
Home Loan Board) issued as interest-bearing.
Slightly higher yields than T-bills.
Bank obligations, issued interest-bearing in $100,000
increments.
Yankee CDs offer slightly higher yields.
Bank obligations for trade transactions (usually foreign), issued
at a discount.
Investor protected by underlying company and trade flow itself.
Small secondary market.
Time deposit with bank off-shore (outside United States, such as
Bahamas)
Can be CDs or straight time deposit (TD).
Interest-bearing investment.
Small secondary market for CDs, but not TDs.
Service offered by banks that essentially provides interest on
checking account balance (usually over a minimum level).
Large numbers of sweeps are for overnight.
Sale of securities with the agreement of the dealer (seller) to
buy them back at a future time.
Typically over-collateralized at 102 percent.
Often done for very short maturities (< 1 week).
Unsecured obligations of corporations and financial institutions,
issued at discount.
Secondary market for large issuers
CP issuers obtain short-term credit ratings
Money market mutual funds commonly used by smaller
businesses.
Low yields but high liquidity for money market funds; mutual
fund liquidity dependent on underlying securities in fund.
Can be linked with bank sweep arrangement
Preferred stock in many forms including adjustable rate
preferred stocks (ARPs), auction rate preferred stocks, (AURPs),
and convertible adjustable preferred stocks (CAPs).
Dutch auction often used to set rate.
Offer higher yields
Risks
Virtually no risk
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Though BEY is relevant for investment decisions but discount basis is often quoted.
Key Attributes
Safety Measures
Minimize amount
Keep maturities short
Watch for
questionable names
Emphasize government
securities
Keep maturities short
Keep portfolio diverse in
terms of maturity,
issuers.
Liquidity
Foreign exchange
Passive
Active
Matching Strategy
Mismatching Strategy
Ladder strategy
For portfolios which are not large or diversified use spread sheet models.
For diversified portfolios more expensive treasury workstations.
Investment returns must be expressed on BEY to allow comparability.
Overall portfolio return must be weighted according to the size of the
investment.
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6. MANAGING INVENTORY
6. Managing Inventory
Necessary for working capital management
Careful balance is required;
more inventories can lead to obsolete inventory and losses
on selling through discount liquidity squeeze.
Fewer inventories (shortage) can lead to lost sales &
companys inability to avoid price increase by suppliers.
Motive to hold inventory
a) Transaction motive need for inventory as a part of
routine.
b) Precautionary stocks amount maintained to avoid stock
out losses.
c) Speculative motive if costs to in future then benefit
can be achieved. Assumption storage cost < savings from
in price.
Trade credit spontaneous form of credit in which purchaser finances its purchases by delaying payments.
Discount may be given by the supplier for early payment.
Usually a specific time is given in which discount can be earned.
Inefficient payable management could be costly in terms of real and opportunity cost.
Company must ensure payable practice is organized, consistent and cost-effective.
Factors need to be taken care off while devising guidelines for managing accounts payable include;
Organizations centralization / decentralization.
Number, size & location of vendors
Trade credit, cost of borrowing.
Controls of disbursement float (time for clearing a check).
Inventory management.
E-commerce and electronic data interchange (electronic supply chain management)
Stretching payables extending time to pay dues during grace period provided by suppliers.
Careful balance is required if paying too early is costly and delaying may deteriorate companys perceived
credit-worthiness.
discount .
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1 discount
2/10 net 30 2% discount in 10 days & net amount due on 30th day.
Cost of funds during discount period = 0% beneficial to pay near to discount periods end.
Customers short term investment rate < calculated rate discount offers a better return over companys short-term borrowing rate.
7.2 Managing Cash Disbursements
Companys delay funding bank accounts until the day checks clear.
Pay electronically when it is cost effective.
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Users
Uncommitted line
Large corporations
Regular line
All sizes
Overdraft line
Rate Base
Compensation
Other
None
Commitment fee
Common everywhere
All sizes
Commitment fee
Revolving credit
agreement
Larger corporations
Collateralized loan
Base +
Collateral
Common everywhere
Discounted receivables
Large companies
Varies
Extra fees
Bankers acceptances
International companies
None
Small volume
Factoring
Smaller
Prime + +
Service fees
Special industries
Users
Rate Base
Compensation
Other
Nonbank finance
companies
Prime + +
Service fees
Weak credits
Commercial paper
Largest corporations
Cost =
Cost =
Interest
Net Proceeds
Cost =