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Chapter 16 Short Term Financial Planning (Unsecured loans (line of credit,…
Chapter 16 Short Term Financial Planning
sources and uses of cash
Use: Increase in assets; Reduce in liabilities
source: reduce in assets; increase in liabilities
Operating Cycle
time required to receive inventory, sell it, and collect on the receivables generated from the sale of inventory.
Formulae:
[365 / Inventory turnover] + [365 / Receivable Turnover]
Cash Cycle
the time between payment for inventory and receipt from the sale of inventory
Formulae:
Operating cycle - [365 / Payable Turnover]
Short term financial policy
flexible
large amount of cash and marketable securities
large amount of inventory
large account receivable
low short term liabilities
Advantages
no difficulty to meet short term obligation
cash available for emergencies
low storage cost
disadvantages
liquid securities; lower return
financing short term assets with long term debt is risky
restrictive
low cash and marketable securities
low inventory level
low account receivable
high short term liabilities
Advantages
higher return on long term assets
lower carrying costs
short term liabilities can be decreased easily in case economic downturn
disadvantages
less liquidity for emergencies
higher storage cost
Carrying cost
opportunity cost of owning current assets; cost of storing larger amount of inventory
Shortage cost
order cost: cost of ordering additional inventory or transfer cash
stock out cost: cost of lost sales; lost customers due to lack inventory
Temporary current assets
additional current assets added when sales expected to increase on seasonal basis
Permanent current asset
the level of current assets retains regardless any seasonality in sales
Cash budget
to identify the short term needs and opportunities
to identify when short term financing required
Steps:
identify sales and cash collections
identify various cash outflow (disbursement)
substract disbursement from collection
determine cash balance; to identify investing or financing needed
Unsecured loans
line of credit
committed
non-committed
revolving credit
Secured loans
Receivable financing
inventory loans