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
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.