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ACF W6 CASH BUDGETING AND WORKING CAPITAL MANA (short term financing…
ACF W6
CASH BUDGETING AND WORKING CAPITAL MANA
(short term financing decision)
current asset financing policy
maturity matching approach
match assets and debt with similar maturity
relative aggressive policy
use short-term debt to finance long-term asset -> risky but less costly
conservative policy`
use long-term debt to finance short term asset
Cash Conversion Cycle
CCC = ICP + ACP - PDP
ICP
= days sales outstanding (DSO)
turnover period of inventory
cash inflow
(inventory/COGS) * 365
365 / inventory turnover
ACP
(Accounts receivable/sales) * 365
cash inflow
what does it mean?
PDP
how long you pay to your suppliers
cash outflow
formular
compare CCC with the same industry/country benchmark. CCC itself is inexplanatory
inventory
components
raw materials
work in progress
finished goods
goal
minimize amount of cash tied up in inventory
tool
just-in-time
strike a balance between order cost and carrying cost =>
optimal order size
optimal order size (each time) = squareroot(2
sales
(cost per order/carrying cost))
credit mana
manage account receivable with your customers
questions
how long for customers to pay bills? offer cash discount for prompt payment
require formal IOU (i owe you) from buyer or buyer just sign a receipt
determine which customers are likely to pay bills
how much credit to extend to each customer (how long)? play safe by turn down doubtful prospects? accept risk of fw bad debts to build regular client
how to collect money when its due
terms of sale
credit
discount
payment terms offered on a sale
ex
2/10, net 30
2% discount
pay within 10 days for discount
net 30 basis what???
credit terms
perishable goods
decrease payment terms
goods are not rapidly resold
payment terms increase
goods sold to high-risk firms
decrease payment terms
to receive money as fast as possible
credit analysis
determine the likelihood a customer will pay its bills
credit agencies
show potential customer's
creditworthiness
financial ratios
quick ratios
current ratios
interest coverage ratio
customers'
ability to pay bills
Bloomberg provide ratio, asm doesn't ask about ratios
credit decision
credit policy
credit scoring
banks give credit score
extending credit gives you probability of making profit, but there's chance of default
break-even profitability
p = PV(COST) / PV(REV)
expected profit if offering credit:
p x PV (REV - COST) - (1 - p) x PV (COST)
credit allocation involves judgement
concentrate on dangerous accounts
look beyond immediate order
maximize profit
collection policy
procedures to collect and monitor receivables
factoring
financial institution buys a company's
account receivable
and collect debt
cash
cash doesn't pay interest/dividend if put into a normal account
make money from cash
move to short-term securities
sweep programs = concentration banking but financial analyst helps with the prior and you control the latter
lockbox system
cash budget
use tools to forecast cash flow in the future (daily/weekly/monthly)
step
forecast monthly/daily sales (rev)
estimate when sales rev occur
determine required material purchase
forecast payments for purchase and timing of
WHAT????