Chapter 17 Working Capital Management

Float

Difference between cash balance in cash account and recorded in the bank

disbursement float: generated when writes checks

collection float: check received increase book balance before the bank credits the account

Net Float = Disbursement float - collection float

Managing Float

Mailing time

Processing delay

Availability delay

Float Issues

"Kiting" : systematic overdrafting

Electronic data interchange

Cash Collection Methods

Over the counter collection

Preauthorised payment system

Payement via mailed checks

Lock Boxes & Cash Concentration

customer checks mailed to post office box

local bank pick up checks several times per day

firms may have many lockbox arrangement around the country

cash concentration: procedure to gather fund into firm main accounts

Cash Disbursement

slowing down payments can increase disbursement float

controlling disbursements

zero balance account

controlled disbursement account

Investing Idle Cash

money market: financial instrument with maturity less than one year

temporary surplus

seasonal activities

planned expenditures

convert back to cash when deficits occur

accumulate securities for upcoming expenses

Characteristic Short Term Securities

Maturity: up to 90days to avoid loss of principal

default risk: avoid securities with significant default risk

Marketability: ease of converting to cash

Taxability: consider different tax characteristics when make decision

Component of credit policy

Term of sales

Credit analysis

collection policy

Delinquency letter

Credit period determinants

Value of goods

consumer demand

cost/profitability/standardization

credit risk

size of amount

compettion

customer type

Character

capacity

capital

collateral

conditions

telephone call

collection agency

legal action

Inventory

EOQ Model

Total Carrying cost = (Q/2)(CC)

Total Restocking cost = F (T/Q)

Total Cost = (Q/2)(CC) + F (T/Q)

Optimal Ordering Quantity

image

Safety stock

minimum level of inventory kept on hand

Reordering points

inventory level at which you place an order to account for delivery time

derived-demand inventories

material requirement planning

just in time inventory

works backwards from set finished goods level to establish levels of work in progress required.

reorder and restock frequently.